Q4 2019 Earnings Call
Good day and welcome to the Neal Photonics, 2019 fourth quarter and yearend conference call.
This call is being webcast live on the company's website at Www Dot Neil Photonics Dot com only events page of the Investor Relations section.
This call is the property, Neil Photonics, and any marketing reproduction or transmission of this call without the express written consent of Neophotonics is prohibited.
I would now like to turn the call overtime, Erica Mannion at Sapphire Investor Relations. Please go ahead.
Good afternoon. Thank you for joining us to discuss Neophotonics operating results for the fourth quarter of 2019 and outlook for the first part of 2020 with me today or Tim Jenks, Chairman and CEO and that's the beach CFO.
Well begin with a review of our business progress in the fourth quarter and a discussion of business drivers in products that will then provide financial results for the fourth quarter before providing the outlook for the first quarter of 2020 and opening the call for questions.
The company's press release in management's statements. During this call include discussions a certain non-GAAP financial measures and information.
Putting all income statement and balance sheet amounts and percentages I live in revenue unless otherwise noted.
These non-GAAP financial measures are not prepared in accordance with gap and they're not a substitute for or superior to measures of performance prepared in accordance with gap.
These financial measures and a reconciliation of GAAP to non-GAAP results I provided in the company's press release unrelated form 8-K being filed today with the FCC and can be found in the Investor Relations section on the Neophotonics website.
Material contained in the webcast is sold property in copyright of Neophotonics with all rights reserves certain statements in this conference call, what you're not historical facts, maybe considered forward looking statements that involve risks and uncertainties and include statements regarding future business results product and technology development customer demand inventory levels economic.
As an industry projections and subsequent events.
[laughter] various factors could cause actual results to differ materially some of these risk factors have been shut for sports in our press release dated February 27, 2020, and I've described Atlanta, and our annual and quarterly ask you see filings.
Now I'll turn the call over to CEO, Tim Jenks.
Thank you Erika and good afternoon.
We're all aware of the Corona virus situation and our first priority is the health of our employees and those of our supply partners in China, which represents less than half of our manufacturing footprint. We were closed for an extra week during the Chinese new year, but now are trying to factories are running at about two.
Surge of normal capacity in our increasing.
Our China suppliers are recovering steadily but remain below capacity at this point, we believe very few suppliers are at risk of not being able to meet our current demand for cash.
Our manufacturing outside of China, again is more than half our manufacturing footprint and is not directly impacted.
Moving to our business Neophotonics delivered a very strong fourth quarter with revenue of $103 million above the top end of our outlook range with non-GAAP gross margin at 31%.
This is revenue growth of 12% from the prior quarter in 13% from the same quarter last year driving these results was a combination of strong and customer demand in China as well as from Metro and Dci markets and our continued leadership and 400 gig and faster solutions.
Hi speed products were 92% of revenue, which was up 22% in revenue terms from the same period last year, driven by our leading coherents products.
Tronc fourth quarter performance reflects our focus on high speed products, serving industry leaders in DC I as well as the transition of cloud and Hyperscale Datacenters to coherent technologies plus the ongoing development deployment of coherent technologies in telecom and datacenter networks.
Within China and under the Department of Commerce denial order on walk away carriers are deploying network capacity by utilizing 100 gig and 200 gig coherent solutions that are not otherwise curtailed under entities list regulations, our Chinese customers represented 55% of revenue in the fourth quarter.
Compared to 48% in the previous quarter, well way made up 41% of the total up from 37%. Our next four customers were essentially flat in dollar terms in Q4, which is lower in percentage terms due to our overall strength.
Neophotonics has been investing in high speed coherent technologies for a decade, and we have achieved leadership in several product categories with our leading tunable laser capability, our components strengthened our underlying silicon photonics and advanced hybrid photonic integration technologies. We're excited to have recently introduced a series of new innovative high speed.
Alex addressing cloud and data center markets. Our recently introduced 400 gig Oh, SSP and C.S.P. too and soon to be introduced Qs a P. D. D. DCIO modules offer complete optical connections overdone, ZR distances up to 120 kilometers and form factors that.
Plug directly into switches and routers greatly reducing the cost per bit of cloud and data center interconnection.
Our Oh, SSP and CSP to DCIO modules also offer Z, our plus performance extending reach to metro distances are new coherent module products, which are built on our 64 Gigabaud technologies are sampling and we expect they will ramp in 2021.
To further enhance our leadership position in high performance optics, we recently announced variance of these products in C plus plus configurations. These increased the data carrying capacity of optical fiber networks in cloud and datacenter applications and in telecom applications RC.
Plus plus laser modulator and receiver have expanded spectral bandwidth ranges to support the full supersede band, which provides 50% more spectrum then todays standard network configuration. This is important as.
As users can significantly leverage their existing network investments by increasing fiber capacity and therefore traffic up to 50%.
Our new components also provide more capacity per module through higher speeds in modulation formats, which in turn lowers cost per bit an electrical power consumption taken together. These features enable 34 terabytes or more per fiber of total capacity.
We are demonstrating three key technical solutions that further drive economies and cost per bit performance.
Our 400, ZR O.S.P. DCIO modules, our operating and carrying traffic in customer switches currently our new 400 gig CFP two DCIO modules can operate over even longer metro distances, and our new C plus plus multiplexers and de multiplexers operate with our 400 gig.
C S P to DCIO modules over the entire C plus plus the spectral band. These multiplexer products are optimized for high capacity, Hi, baud rate coherent transmission systems and support operation from 60, Gigabaud to 128 Gigabaud information on these new silhouettes solutions will be available.
Through our website.
The next generation of networks will operate from 400 gig to 600 gig and even 800 gig and higher capacities on a single wavelengths. These systems require customized channel spacings and filter shapes, which we provide altogether, our coherent modules components and MCCS de muffs products represent a fee.
Full suite of cloud and data center coherent interconnect solutions.
As we've noted previously the fundamental driver of our coherent businesses continued deployment of high speed coherent ports.
Which had been growing at approximately 20% or more each year and now we'll include 400 gig pluggable coherent modules. We believe port growth will continue for the next several years and with some acceleration from 400 ZR on the datacenter side.
We anticipate that 400 608 hundred gig component products will continue to ramp through this year next and our new 400, ZR and longer reach 400 gig modules will begin to ramp at the end of Twentytwenty. Each of these requires best in class component performance and is well aligned with the needs of cloud and Hyperscale.
Ill datacenter operators as well as being aligned with our advanced technologies high speed capabilities and strong presence in high speed component platforms. As a result of years of successful R&D today, we produce more of the core optical sub components of these innovative devices in house than others, meaning laser.
Modulator receiver optical integrated circuits and the modules that are built from these components, we believe large new market areas for us our emerging cloud and Hyperscale data centers and in Fiveg wireless backhaul, each with Coherents connections with that I will turn the call over to our CFO Betsy.
Thank you Tim and good afternoon.
Q4 was a strong finish to the year.
103.4 million in revenue higher than our outlook.
Non-GAAP gross margin for the quarter was 31% higher than the midpoint of our outlook on higher volumes.
Non-GAAP Q4, EPS was 10 cents, one cent higher than the midpoint of our range in spite of a three and a half cent negative impact from foreign exchange.
On a full year basis, our leadership in coherent product.
Gross margin five points higher than 28 team on a non-GAAP basis and resulted in a full year non-GAAP eat yes of one cents compared to a 45 cents off last year.
We generated 25 million in free cash flow up from 5 million in 2018.
Moving to more details on Q4 performance.
Our non-GAAP Q4 gross margin was 30.9% slightly above the midpoint of our range within this product margins were approximately 36.8% up two points from last quarter and five points from last year on volume growth and improved product mix.
Other cost of sales charges of about six point were comprised of approximately four points of under utilization charges.
One point for inventory reserves, and one point for tariffs charges on product shipping from our U S fab into China.
Total non-GAAP operating expense for the fourth quarter was 24.3 million up 2 million from Q3 on higher R&D spending for product launches and higher variable compensation, given a full year profit for 2019.
Non-GAAP operating profit for the fourth quarter was 7.6 million or 7.4% compared to 4.8% in Q3.
In Q4 appreciation of the Chinese Yuan relative to the U.S. dollar drove a foreign exchange loss of approximately 1.8 million.
As a reminder, the functional currency of our China operations is do you want the FX loss is driven by the revaluation of trying to balance sheet items to the end of quarter exchange rate.
The FX loss in Q4 reverse is most of the FX gain in Q3.
As a result, non-GAAP net income for the fourth quarter was 5.3 billion compared to an income of 5.4 million in the third quarter.
This translates to a non-GAAP EPS of 10 cents.
Compared to 11 cents in Q3.
Excluding the impact of foreign exchange in both quarters. If he asked was 14 cents in Q4 compared to any P.S. of seven cents in Q3.
For the fourth quarter adjusted EBITDA was 12.5 million.
I will close that my discussion of the fourth quarter income statement with a review of our GAAP results.
Fourth quarter gross margin 30.2%.
Up approximately two points from Q3, and five points compared to the fourth quarter of last year, driven by an increase in volumes and improved product mix.
Operating expenses was 26.9 million up from 24.9 million in the preceding quarter on an increase in R&D related to our new product introductions and higher variable compensation expenses.
Operating profit for the fourth quarter was 4.3 million, which included 3.2 million of stock based compensation expense and approximately point 2 million of amortization of acquisition related intangibles.
Net profit for the quarter was 2.1 million compared to a profit of 2.3 million in the prior period.
Excluding the impact of foreign exchange on both quarters net profit in Q4 is 3.9 million compared to a net loss in Q3 point 3 million.
Turning to the balance sheet, we finished the quarter with 89 million in cash investments and restricted cash after paying down 5 million in that.
[laughter] up 9 million from the prior period.
Net inventory was 47 million or 59 days.
Down from last quarter on higher revenue as operational efficiency continues to improve.
Free cash flow was approximately $13 million.
Before I discuss our earnings outlook for the first quarter fiscal 2019, or 2020, I'd like to remind everyone of our public filings with the FCC and our Safe Harbor statement included in our press release, the discusses the risks and uncertainties that could affect future performance, causing actual results.
Really from a are forward looking statements.
As Tim mentioned, we're constantly assessing the impact of the Corona virus on our operations.
We have included approximately 10 million of impact to Q1 revenue and our outlook, reflecting reduced production in the quarter and added supply chain risks.
We have assessed our supply chain and based on what we know now this revenue outlook is supported by our inventory and what can be produced by our suppliers.
We anticipate that the supply chain impact may extend beyond Q1.
Our suppliers are steadily increasing production and we expect to be able to ship unfulfilled Q1 demand in subsequent periods.
Gross margin is relatively flat to Q4, which is unusual for Q1 on a temporary mix shift to higher margin products.
Additionally, in Q1, we received a onetime license fee of 1.5 million as the credit to R&D expense that is included in our outlook.
Given that the company's expectations for the March Twentytwenty corridor.
Revenue in the range 83 million to 90 million, which includes 10 million of Corona virus impact.
And reflects the slightly wider range given the uncertainty.
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 five cents loss to a five cents profit.
Non-GAAP diluted earnings per share and the range of zero to 10 cents profit.
These numbers are reflective of approximately 52.6 billion fully diluted shares.
No that why wait remains subject to the department of Commerce denial order.
We continue to ship products to walk away that is within current regulation and de Minimis contents guidelines.
If the existing de minimis threshold for to be lower to 10% without other changes we would not expect a significant direct impact to our revenue outlook.
In summary for the full year of 2019 Neophotonics is made substantial progress.
Full year revenue was up 11% to 357 million.
Gross margins were up 4.4 point on a GAAP statement on a GAAP basis and five points on a non-GAAP basis, we exited unprofitable businesses.
Operating expenses were down as the percentage of revenue.
We were profitable on a non-GAAP basis for the full year and cash investments and restricted cash increased year on year by 12 million, while we reduced debt by 11 million.
We're pleased with the progress that we have made to become a consistently profitable business and we'll continue to focus on our execution and the current environment.
This concludes our formal comments and I would now like the asked to ask the operator to open up the line for questions Todd.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you were using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question.
Well take our first question from Paul Silverstein of Cowen.
[noise] burn slippers, Oh, two questions, but another one.
Outside of it. So I know what are you soon in terms of demand trends broadly speaking exactly on the downside risk of equation. It was supposed to walk away.
No I know this question <unk> order, but it doesn't again.
But we do have incent them double or triple ordering <unk> building up inventory above and beyond.
Her needs, which could come back to bite you at some future period, if there would be a reduction in their coming out of religious about inventory over bill.
Well, let's see on the first part of the question or fall.
So with respect to you man from the West is actually pretty steady.
We're seeing a fairly consistent I think that.
It was expressed with our or.
Well you haven't both our Oh Q4 results and our outlook for Q1 for you know for far away.
You know it things differ.
Product and product and it's difficult to say.
No what.
All of a or is this versus shipments you know.
They may build some inventory and in some products and they cannot built inventory in others. So it's it's a.
You know, it's not something where I can provide you application of that we do think there is some level of up inventory build though and and a they'd probably like to build more than they are actually able to do.
Can I sneak one more and dressing in terms of gross margin urgency that some brewery all positive trend, they're willing button gross margin, but as you look out throughout the year I assume you're harder one route products up higher margin indoors ramp the greater volume I would say.
That would all things equal that would have an uplift on gross margin with the question being towards a great must think about that the one what.
Well normal trend would see us drop about 5.21.
And you'll notice we are dropping so absolutely over the course of the years, we get more cost reductions our gross margin tends that I just don't want everybody to.
Take the normal trajectory for individual years and put it on top of Q1 gross margins.
No I appreciate it thanks as opposed to one.
Thanks, Paul.
Thank you well take our next question from Tim Savageaux of Northland capital markets.
Hi, good afternoon, and yeah, congrats on the Oh the results.
So.
No it looks like.
The.
Kind of.
[noise] reserve, you're making for Corona virus.
Not only are gross margin.
You know stronger than historically anticipate her own seasonal basis, but.
Oh revenue would have been as well I wonder if you could just sort of.
Ascribe the demand trends.
Exiting Q4 into Q1.
Are the same which is to say is you know.
Just trying to the key driver there or walk away is your head into Q1.
And.
Oh are you see more contributions.
From other customers and geographies and I kind of want to tie that to the mix comments in Q1 deserve a relationship wrote a geographical driver there.
Yes.
Okay, well, let's see specifically you know coming coming out of end of year end of fourth quarter.
You know, we did say in our prepared remarks that a you know in the fourth quarter, China was up a bit and as far away was up a bit and so you know that that demand coming out of fourth quarter China's relative relatively strong.
I think that for the back half of the year I think we would we would expect that to be a normalized and and <unk> you know relatively stronger for a for the west compared to China, but.
Oh, you know there there are a lot of variables are going on right now with the the risks expressed in our statements so that may be.
Beyond that it's relatively speculative.
And it Tim it's not so much of geographic split on on the mix as they as a a product line split.
Oh, just that the products that are made outside of China tend to be a little higher margin.
Okay, well I'd welcome any color on where those products might be you had it regardless of where there manufacturer if there's a specific [noise].
Application or demand.
Driving that but more broadly on gross margins, where you mention product margin of 37% which is.
As high as I recall.
And of course, some you know offsetting factor.
But as you continue.
Kind of focus on operational occurs and so you can execute I mean, what is there.
Is there a feeling on their product gross margin kinda like that go because you're really.
I don't know if you gave a year on year comparable product groups working what I'd imagine it was up pretty substantially.
Yeah.
Hi, Joe actually we did itself the product gross margins are let me are up about five point [noise].
[laughter] [noise].
[noise] so the the.
[noise] I think as we continue to focus on products that our leadership in the market.
I don't think we get a Ah that we particularly have a ceiling on on Iraq on our product margin.
Leadership products, just naturally come I command, a command a higher margin take a little more R&D, but they but they command a higher margin.
Okay, and then just to finish up but what about.
Right. Yeah, we said he said and I I just went back and looked at the data. We said product margins are up five point compared to last year.
Yep, No I got that.
And then maybe take us through the year no passes on your on.
The puts and takes to the offsetting factors and gross margins from then you always have to some degree of.
Under utilization, but that's I think varied historically and Uh huh.
And obviously the terrorists issue is sort of a one off but.
Can you maybe.
As you look through the year.
What would be the factors moving would be the offsets to product gross margin and you know maybe minimizing those over time.
So the biggest thing is I'm pleased with the progress that we've made on our on product margin and improving those and as we.
Continue to release leadership product, we believe those will those will increase.
As we've said a number of times our goal on product on our total margin is 35% <unk> and what that's going to take in.
As some of the little more structural changes or things like underutilized indium phosphide fabs in that type of thing.
[laughter].
Tariffs, which are ameliorating as at the moment.
Great. Thanks, and congrats on once again on the stem. Thanks, Tim on the results in the financial execution.
Great.
Thank you well take our next question from Richard Shannon of Craig Hallum.
Hi, guys. Thanks for taking my questions as well [noise].
Hi, I'm, maybe a question following up here on gross margins I'm not sure if I. If I just missed this are you mentioned it but you said the a gross margins in the first quarter guide here is is due largely to a mix shift it's temporary what what would you say that gross <unk> gross margin might have been with the normal Nixon and just to be clear is this a is this mix shift.
Is that something that could happen or you're just saying it's for right now, it's just going to happen in the first quarter.
So with the extra as I as I mentioned, a couple of minutes to go with the.
Products out of our China factories, being a low significantly lower than normal because it was shut down for.
More than we expected.
Our higher margin products or a greater proportion of the revenue.
That's.
Really what's the what's driving the mix shift so as we move back to a more balanced China products non China products <unk> type of a Max.
And we would expect gross margin to a shift back to normal proportion I don't think without.
As I said normal normally we drop about five points in Q1, we had a relative lead benign pricing environment. This year. So we would not have dropped that much but we certainly when it dropped more than a.
If you go to come the 31%, where we were in Q4 of the 30 percentage, which is the midpoint.
We would have dropped a little more than that.
Okay, and then if I can extend this into the second quarter.
Obviously, you're not guiding on a revenue level, but let's just say hypothetically you're gonna have a seasonally normal quarter your environment looks pretty healthy maliciously it seasonally normal I'm not having the affirm handle on the magnitude here was it suggests the gross margin should be flat or down or could that even grow in the second quarter.
Yeah.
[noise] you know you know I don't I don't guide.
As well it it usually something by the federal above so.
Yeah, Yeah, hypotheticals nice the but we do.
If you take Q1 to where it would've been if we'd been a more normal product mix and add since that we had a.
They are.
Our.
Product intros are more new products these days rather than a cost reduce products.
So I don't think we can take.
Cost reductions up as high as we usually do but we will still have some over the course of the Ya.
[noise] Richard wireless for another how's that.
Not giving you a direction and not telling you and one of one of the things that I think yeah. We're thinking about right. Now is just the impact on China, you know I, we actually reopened our China facilities you know at the earliest possible time, we have we have factory and Dongguan in Shenzhen, we opened them on February 10th and.
ER as I said, we're running at about two thirds and they're continuing to increase as we have more production operators returning to work.
From other parts of the country, where they may have been Oh, unable able to travel, but you know what we can't quite do right. Now is we don't know what the level is gonna be you know throughout Q2. So best did say you know some of the impacts may extend beyond Q1, we don't know the magnitude of those at this point, we're working on an everyday.
Okay, but a this is another a hypothetical but very very real situation that we're facing with.
Huh.
From Q1 to Q2 in the transition.
Okay I appreciate that balanced maybe a quick financial question for best in the last one for Tim on the Opex spend it looks like you had a a pick up in the fourth quarter. I think you say, yes. Some project expenses for new product launches or something does this signal any sort of a increasing trend with opex. You. Obviously cut back as you went into last year had a very good year your profitable or could we see.
The Opex, you know consistently move higher or we still being very tight with it.
I, our R&D people would tell you, we're still being way too tight with it that said I do believe it's going to drift a it's going to drift a little higher than it was last year, because where we're launching new products and that takes support.
Okay Fair enough and then to my last question one das quickly about the Oh, the C plus plus products or can you kind of help us understand the the breadth of interest here.
You know geographically as well as you know, how many can or or interested in this kind of spectrum advantage. This provides versus maybe some that are not capable of doing so.
Let's see plus plus products do offer a broader spectrum and so this is a normal situation is for for example, Oh operations for GW M. systems are in the so called C band around.
Oh wait wavelengths around a.
50, 850 nanometers and so in this case you know you have a little more wavelengths at the lower end and more wavelengths at the higher end and see how about you have a broader sea bass.
And so that you know that extra plus on the bottom in that extra plus on the top a matter.
Right now are the primary interest is actually regionally in China. The west maybe later, but right now it's it's a primarily China. It also depends to an extent on how much fiber is available because what it really does is if you have an existing fiber plant you can use that existing.
Fiber plant get more leverage from it and Ah Ah.
<unk> increased the capacity without.
On the existing fiber without having to spend a lot of money on a on on more fiber.
It is a you know a change in the line system. So that there is an investment a involved but you know today focus China.
Okay perfect. Thanks for all that detail that's all the questions from you guys. Thank you.
Thanks Richard.
Thank you well take our next question from Simon Leopold of Raymond James.
Thank you for taking my question she's movies viewing for Simon today.
Just wanted to drill of you guys I just wanted to drill more on the potential impact was de Corona virus and.
And your exposure to from exposure to China.
I think the or.
Just sort of size the impact <unk> first quarter indeed.
She was 12% range I guess at the midpoint.
Could you please talk about your own supply chain exposure and how you manage and given current restrictions as well as Oh, how things are looking on on the demand side. Thank you.
Yeah, Let me comment first you know overall and then ask you know I'll turn it over to best for some comments on both supply chain and overall demand but.
The I think its a.
It is important to notice note that you know we were operating.
Two plants in China and.
You know Weve managed thus far to have all of our employees stay healthy.
We've had a tremendous number of actions that we've put in place in our plants and or these are you know what I'll call.
Quite different than normal but just.
Or what we you know employ social distancing in and making sure that a you know people are taking care and all of the normal above normal operating manners. So oh. This is not business as usual this is business very carefully and a very carefully operating in every way.
Keeping people's health as the primary benefit but you know were also down you know with more than a thousand people and and all of them being healthy I think that's a that's a testament to weigh our China plants are operating.
Now we're also working very very closely with our supply partners and ER, our supply partners matter as well.
So far that's gone that's gone quite well, but there's you know daily communication with them as they ramp up you know for a little more on them and overall demand that maybe I can turn it to you.
Sure we've <unk>.
Literally got a daily meetings going with our.
Our supply chain people, we know what the critical components are we know where they are.
And so we I.
We have been able to talk to them and get assurances of how they're coming up what inventory they can ship us and how much they're going to be able to manufacture of our product. So we're comfortable with the range that we have put out there that will be supply capable or four.
Certainly thank for the Q1 and into Q2.
As a reminder.
Most of our manufacturing these days is outside of China.
So and as our a lot of our supply chain partners. So those are not impacted at all and those are continuing to operate as usual with no significant impacts on their supply chain [laughter] no. We have asked yeah, let's let's.
Let's all keep in mind that you know from a demand point of view you know our business is really driven by.
Deployment of bandwidth and that's not it's neither consumer demand nor perishable demand. So we don't really anticipate a major changes in demand as as a result of this business is continuing to go carriers are continuing to deploy a those.
Those normal drivers are actually all in place and so.
No I think we need to be cautious and careful given the risk, but I think we have to keep in perspective, because throughout our supply chain you know below us an above us through to the carriers businesses continuing to flow.
Thank you think you can think of it.
Thanks take care.
Thank you well take our next question from Alex Henderson with Needham and company.
Great. Thanks, a couple of questions like that the for the first one is a around the a 100 gig 200 gig China bias that.
Or is there as a result of the terrorists. It ended the terrorists are using on some parts of it.
Is there any evidence of them thinking about shifting back to higher speeds are.
Anything along that lines that might change the mix a in China.
Let's see the.
There isn't anything that that that we're seeing a along those lines to change that we think said, there's a pretty firm dedication to the 100 gig in 200 gig. This is both at the network equipment manufacturer and that the carrier level the implications have to do.
Do with both the tariffs and the denial order and so to be little more specific there really sticking to 32 Gigabaud and ER.
You know not really moving to 64, gigabaud and so with the 32 gigabaud their operating or.
The 100 gig in 200 gigabit per second.
[laughter], which is what their supply chain can currently provide.
If I couldn't does shift over to the 800 gig segment of the market.
Clearly a full full scale deployments around EUR 21 event, but are generally or the 100 gig or in the 800 gig politics gonna be.
Reasonably available or at some point in the back half of this year or is that more of a you know a 21 event.
Well you know so the 800 gig segment of the market you know doesn't exist yet 'cause it hasn't launched but you know we would expect it it is to start this year.
And we would expect that it would ramp in the in the second half.
But not until then.
Okay, great on the Corona virus or commentary from one Q.
Very clear delineation on the revenue line, but could you talk a little bit about what impact that might have on.
Gross margins are you expediting any product purchases or.
You know changing supply chain or anything along those lines, but also having in the back on Jim's.
So given the fact that you know we're running for the smaller half of our production, which is the part that's you know in China as I said, it's running at two there's capacity. So you know there's not a lot of expediting, that's actually going on but by the same token.
We see that among competitors as well so.
We don't expect demand is shifting.
At all and and.
So you know I think demand is strong and steady production is a increasing for the the part of our production that is in China and has some impact.
We have supply chain risks, we don't have supply chain problems and and I think we're managing those closely so hence best prepared remarks, commenting on the fact that working with and and talking directly to our suppliers or you know we're feeling pretty.
Well as we've provided in our outlook, we are baking a little bit of extra under utilization into our forecast.
I see okay, I'm, just going back to the product utilization and obviously, that's a mix of dairy various products that caused that.
Can you remind us which pieces or are the most underutilized where the variances what products need to ramp in order to bring the utilization rates up is it you know a technology what what is it that.
It has to kick in obviously.
You had a really strong quarter here in the fourth quarter.
On the topline and I would assume the utilization rates a at that level would be quite a bit better what what was the utilization utilization rate import Q, how much is falling as we're looking to to one Q.
Yeah, as we've talked about before a few times, Alex what really drives are under utilization is our indium phosphide factories. That's the majority of it we do have a little bit of under utilization in Q1 as you would expect in China all of that's built into our forecast.
All right so.
Just to the Indian Pos Fide volumes ramp what what level of revenue would you need to get to in order to.
Utilize Ah you know get the utilization to fully Paul out.
It's not a it's not a product or it's not a total revenue.
It's a mix that the mix question we've been.
We added a lot of indium phosphide capacity back in 2017, and we're still growing into it we and we said we said this story back in the beginning of 2018 couple of times I think that we lost some market share from our emails back to the.
Yeah Myles.
And that hasn't come back.
So were.
We have some okay well one last comment do me a and then I'll cede the floor you guys did a great job. Congratulations ER, we certainly we're worried about it thanks.
Thank you.
Thank you as a reminder to ask a question. Please press star one well take our next question from for Hot No Sharma of Cowen.
Hey, guys. Thank you for taking my question.
I would ask you on any linear Saturday, you're seeing in the last few weeks or as this corner wider starts to blow up are you are you seeing your non Chinese customers kind of ramp demand just to kind of has their own no supply chain risk and if that's the case.
What would be the crude demand a run rate going forward, how do you see that.
Oh so.
Overall for Hot I would say no. We don't we don't really see that as a trend we do see isolated spots, where you know if if we have a competitor but may be for example in Koubei province, we might have seen a you know a few orders, but generally we don't see our customers ramping demand.
Canada us.
Got it.
It's been a thing on the earnings call mentioned that 800 gig components will be in short supply.
This year, which will keep the 800 gig ramp.
Are you.
Well you capable of shipping you'd have to get components.
Yes, we ought to go like.
Yes, we are and we're not supply constrained.
Awesome. Thank you and one last question for bad if I may but just related to Alex's question.
Given that two thirds of your folks in China or back to work was the full opex impact of that is there.
I see that your Opex is coming in at about 26% at the midpoint of your revenue.
What would be the crew.
Normalized opex run rate.
So the difference in our Opex in Q1 that I mentioned was a $1.5 million credit for a license sales that we did there's no.
Impact on Opex and because most of our Opex is salaried, we do have a little bit of change on deal.
Art, that's direct labor cost sales and that's all baked into Iraq, our gross margin forecast.
Thank you so much of the yes. Its appreciate it that's all for me.
Thank God.
Thank you at this time, we have no further questions in queue I'd like to turn it back to Tim Jenks for closing remarks.
Thank you very much for your interest in Neophotonics. We appreciate the the diligent work of our employer employees and also of our suppliers to drive our progress and we look forward to updating you in the future.
Good evening.
This concludes todays call. Thank you for your participation you may now disconnect.
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