Q2 2020 NeoPhotonics Corp Earnings Call
[music].
Good day welcome to the Neophotonics second quarter 2020 conference call. This call is being webcast live on the company's website at Www Dot Neophotonics dot com on the events page of the Investor section.
This call is the property of Neal photonics in any recording reproduction or transmission of this call without the express written consent veal photonics is prohibited.
I would now like to turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.
Good afternoon. Thank you for joining us to discuss Neophotonics operating results for the second quarter of 2020, and how it looks into third quarter of 2020.
On the call today, or Tim Jenks, Chairman, and CEO and Thatd Chief Financial Officer.
And we'll begin with reviews, the company's business in the second quarter and it just a question of market drivers and products.
That will then provide financial results for the second quarter for providing the outlook for the third quarter of 2020, that's well then open the call for questions.
The company's press release and management's statements. During this call include discussions of certain non-GAAP financial measures and information, including all income statement and balance sheet amounts and percentages other than revenue unless otherwise noted.
These non-GAAP financial measures are prepared or not prepared in accordance with gap and are not a substitute for or superior to measures of financial performance prepared in accordance with gap.
Financial measures and a reconciliation of GAAP to non-GAAP results are provided in the company's press release and related form 8-K being filed today with the FCC and can be found in the Investor Relations section on Neophotonics website.
Material contained in the webcast is a sole property and copyright of Neophotonics with all rights reserved <unk>.
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 product and technology development.
Customer demand inventory levels, economic and industry projections or subsequent events.
Various factors could cause actual results could differ materially.
Some of these factors have been set forth in our press release dated August 4th 2020, and I've described it lands and our annual and quarterly FCC filings now I'll turn the call over to CEO, Tim Jenks.
Thank you Erika and good afternoon.
Our business continues to perform well despite the challenges of operating through a full quarter in the Covisint pandemic.
We continue to put the highest priority on the health and safety of our employees.
Our supply partners and their families.
Revenue in the second quarter was $103 million growing 26% year over year compared to 23% growth in the first quarter.
Our growth for the last four quarters was 19% over the prior year.
Non-GAAP gross margins continued to expand to 33.2%.
Eight percentage points from the year prior and two percentage points sequentially.
Similarly, our operating margins and EBITDA or at the highest levels in our history.
Our non-GAAP EPS was 16 cents per share.
Sequential growth was driven by cloud and data center demand as our 64 gigabaud another products for 400 gigabit and above applications accelerate.
We view ongoing demand for bandwidth and associated infrastructure upgrades for datacenters to be an important growth area in the years ahead, notably at 400 Gigabits and above.
Neophotonics continues to be an industry leader for the highest speed over distance optical network solutions supplying customers with components and modules, which deliver the highest interconnect bandwidth per wavelengths and per fiber.
For distances at 40 kilometers and longer.
Our products enable these highest data rates and backbone networks regional and Metro area networks and the biggest pipes.
For a data center interconnect.
Our high speed products, now consistently represent 90% or more of our business.
Then this our newest in high speed products, including Ultra pure light tunable lasers high speed modulators and receivers are at the core of 400 gigabit per second 600 gigabit an 800 gigabit solutions. These components are also used in lower speed applications, such as 200 gigabits to extend reach.
To longer transmission distances taken together these higher speed over distance deployments are forecasted to be among the fastest areas of growth in the industry for the next several years and have been driving our recent growth in both revenue and profitability.
We believe that our products for 400 gigabit and above applications will approach, 20% of our total revenue this year.
Beyond topline growth, our 400 gigabit and above solutions are also increasing our customer revenue diversification.
At this point almost all of the world's leading network equipment customers leverage neophotonics products for their 400 gigabit and faster systems.
Moreover, these customers are now ramping their deployments.
In the second quarter, excluding our top two customers. Our next eight customers combined grew a total of 35% sequentially. We expect this trend to continue.
We anticipate that we will have additional industry leaders become 10% customers. During the second half of 2020 based on our existing customer orders and delivery commitments for 400 gigabit and above products.
Great tensions.
Our causing market share shifts between our customers.
Due to the breadth of our design wins and customer base Neophotonics is likely to be a beneficiary of these shifts.
For example, a market share shift of one 400 gigabit and above poor.
Away from our largest customer and to another industry leader would likely be favorable to neophotonics and revenue terms. Similarly.
Our market share shift of one 100 gigabit port away from our largest customer into another leader would likely be roughly equivalent to neophotonics and revenue terms.
Over the last year, we have reported that our largest customer qual way.
Has had a plan to build strategic inventory.
Due to trade tensions.
We believe at this point that they have achieved their goal.
As our next group of customers ramp their respective systems for 400, gigabits and above applications.
We believe the strength of deployments from these customers.
We'll offset potential revenue impact from wally's inventory adjustments.
We previously noted that carriers in China are using supersede band spectrum window to increase fiber network capacity, leveraging the Neophotonics C plus plus laser product.
And 64, Gigabaud component and module solutions.
Using higher baud rate is sufficient for distance and this expanded spectral range allows additional wave length channels.
Increasing fiber capacity in backbone and provincial networks.
Looking beyond 2020 strong progress continues with our 400, ZR and 400, ZR plus pluggable coherent modules, which we launched in the fourth quarter last year.
Our 400, ZR and 400, ZR plus modules for cloud and Ethernet applications are in customer qualifications, having moved from initial sampling in the first quarter.
We have taken further steps toward establishing the 400, ZR and 400, ZR plus echo system together with Inphi, we completed the industry's first interoperability demonstration of away at 400, ZR compliant coherent transceivers.
Operating over a 120 kilometer optical fiber Lincoln utilizing multiple wavelengths across this event.
Full 400, ZR coherent optical transceivers carried error free traffic demonstrating the aid availability of interoperable coherent transceivers for multiple vendors.
This is a key step to enable next generation DC I links using IP over Dwt EM.
And the 400 ZR architecture.
We expect initial volume applications for 400, ZR to be what type of hyperscale customers for datacenter interconnect.
However, with 400, ZR plus capability for longer distances. There's also an opportunity for new use cases to emerge beyond datacenter interconnects, including Metro area, Interconnects, Fiveg backhaul interconnects and longer distance regional in long haul interconnects.
It is important to note that for Neophotonics, the 400, ZR and 400, ZR plus module market expands our overall Tam as it adds higher ASP module solutions to our existing market leading position in highest speed over distance components.
Additionally, each of these new high speed systems, including 400, ZR and 400 ZR plus applications.
Operate over Dwt online systems, including open line systems that requires specific high performance multiplexing products, having unique channel spacings in filter shapes and channel monitors, which we also provide.
Rapidly growing global bandwidth.
Needs continue to be the fundamental driver of our business, whether it be for cloud services capacity increases due to remote working high speed deployments to the edge or Fiveg wireless rollouts.
With increasing momentum and 400 gigabit and above design wins across the major network equipment manufacturers as well as the 400, ZR and 400 ZR plus opportunity in 2021.
And with caution due to risks risks related to the ongoing pandemic, we remain optimistic that industry trends continue to move in neophotonics favor.
With that I'll turn the call over to CFO that baby.
Thank you Tim and good afternoon.
Neophotonics performance remained strong with Q2, non-GAAP EPS of 16 cents higher than our guidance range as a result of outstanding execution by our team and our suppliers in a challenging quarter.
As Tim mentioned revenue was 103.2 million above the high end of our outlook, while away was 52% and our next four customers contributed 30% of revenue.
Similar to last quarter.
Our revenue was not materially impacted by the most recent U.S. department of Commerce restrictions upon the sale of customer design products designed or manufactured using use software or manufacturing equipment as we design all of our own products.
Similarly, as we stated in our press release dated May 25th based on our review of the products we ship.
Revenue was not materially impacted by the addition of fiber home and their affiliate to the entities left.
We remain committed to complying with all U.S. EA our rules.
Our non-GAAP Q2 gross margin was 33.2% coming in towards the high end up our range within this product margins were 36.3% up slightly from last quarter on increased volume.
Other cost of sales charges of 3.1 percentage points improved sequentially as expected. These charges were approximately a point of warranty charges.
A point of residual tariff adjustment.
For half a point of under utilization.
And other minor charges.
Total non-GAAP operating expense for the second quarter was 23.6 million slightly lower than expected on continued push outs related to cope with 19 impact.
The spending delays are not impacting our project timing.
As we said last quarter, we expect to make up the first half under spend in the back half of the year to ensure continued success of our 64, Gigabaud and 400, the our programs.
Non-GAAP operating profit for the second quarter was a record for Neophotonics at 10.7 million or 10.4%.
<unk> from both the increasing leadership of our products and our continued strong execution.
Non-GAAP net income for the second quarter was 8.7 million or 8.4%.
I will close out my discussion of the second quarter income statement with a review of our GAAP results.
Second quarter gross margin was 32.5% up two points from Q1, driven by an increase involved.
Operating expense was 26.9 million up 4.5 million quarter over quarter as expected with the lack of the onetime license credits in Q1 and higher variable compensation expense.
Operating profit for the second quarter was 6.6 million, which included $3.8 million stock based compensation expense and approximately point 3 million of amortization of acquisition related intangibles and other costs.
Profit for the quarter was 5.7 million compared to a profit of 6.3 million in the prior period.
Turning to the balance sheet, our cash position continue to improve to 113 million of cash short term investments and restricted cash cash from operations was 10 million and we paid down 4 million end of debt, while increasing our inventory is planned to buffer continued supply chain volatility.
We continue to be well positioned to invest in our next phase of growth.
Before I discuss our earnings in revenue outlook for the third quarter of 20 to 20, I would 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 to differ materially from our forward looking.
Statements.
As we have noted in the last few quarters, we believe that why wait and their affiliate hi, Silicon have been building strategic inventory. We believe this action is now complete and future orders will better reflect and customer demand.
As Tim mentioned, given the strength in demand of our high speed products, we expect to put our other customers will continue to ramp largely offsetting the why way decrease.
The net result is a Q3 revenue outlook, which is nominally in line with Q2.
Gross margin reflects some increase in under utilization charges. This is the result of slower than planned deployment due to covert 19 of customers Silicon photonics space Transceivers that use our fixed wavelengths lasers.
As I mentioned earlier operating expense is increasing in the back half of the year to maintain the planned investment and 64 Gigabaud and 400 the are for the year.
We believe that investment will continue to drive both revenue growth and customer diversification and Twentytwenty, one and beyond.
In Q3, we're taking the unusual move of including a 1 million dollar FX impact in our forecast or a two cents per share adverse impact.
As we have seen an increase in the value of the Chinese Yuan relative to the U.S. dollar.
As a reminder, this impact as the noncash revaluation of our U.S. dollar assets on our China balance sheet and will change if the U.S. dollar valuation recovers.
Given that the company's expectations for the September Twentytwenty quarter, our revenue in the range of 97 million to 105 million GAAP gross margin in the range of 29% to 33%.
Non-GAAP gross margin in the range of 30% to 34%.
GAAP diluted earnings per share in the range of the three fat loss to a seventh and profit.
Non-GAAP diluted earnings per share in the range of a three cents to 13 cents profit.
These numbers are reflective of approximately 54.7 million fully diluted shares.
In summary, we have now had eight quarters of delivering year over year revenue growth.
Expanding gross margin and positive free cash flow.
We have also delivered four quarters in a row of profitability.
Q2 revenue grew 26% year over year, and our non-GAAP gross margins expanded by eight point over the same period last year, demonstrating our focus to drive profitability.
Net cash increased from 26 million to 77 million from the same period last year, putting us in a good position defined long term growth with an expanded customer base. We are excited about our growth prospects.
This concludes our formal comments.
Now I will ask the operator to open up the line for questions Brad.
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 has turned off to a lot of your signaled to reach our equipment.
We ask you limit yourself to one question with one follow up question and again press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
We will take our first question from sneak chatterji with JP Morgan.
Hi, guys. This is actually Joe Cardoso on for Sonic Chatterji for my first question I just wanted to know relative to your QQ revenue performance, whether you guys actually ended up seeing any co that headwind there and then relative to your Threeq Guide are you guys baking any coface headwind.
So what we said when we put the Q2 guide in place or was that we were expecting about $10 million of a supply chain headwinds, we were able to mitigate almost all of those are in which is how we got the revenue over over our guidance.
Range.
We are still seeing supply chain impacts in Q3, but we believe based on our experience in Q1 and in Q2, we believe that we will be able to mitigate those through the quarter.
Understood and then just relative to your comments on hallway and then finally, achieving the inventory level I I suppose that they were targeting [noise].
As you see maybe whole Wally revenues kind of moderate and the subsequent quarters and potentially offset by ranting business with other customers. How do you guys expect that to impact. Your margin is would you expect a margin benefit from that shifting customer mix. Thank you.
I think we'll see ups and downs need to see the exact numbers on what those are a walk away is our largest customer they get the most volume discounts, but that is could be offset by some level of under utilization charges. So we need to see how.
All that how that plays through and we see their actual orders.
Thank you we'll take our next question from the Hot no job with Cowen and company.
Oh, Thanks for taking my question, Tim and but.
Good morning, actually a big picture question on.
You know, we're getting a putting a while we have five youre.
You asked based largest customer has certainly done a significant amount of you don't want people integration.
How should we be thinking about your non wallboard business power to those customers.
Vertically integrating and how do you see a business being impacted by that and then now you're beginning to see some of that shipped already from some of your non while they customers internally developed some other components that youre previously supplying to them.
Well, we do see Oh, we have commented in past quarters about some level of or vertical integration integration.
But as I said in the prepared remarks, you know if we if we look beyond.
Our top two and to our top 10, you know essentially you know the other eight.
Did grow.
35%.
Q2 over Q1 and are they are you know collectively on a growth path.
Those the vast majority are not a vertically integrated.
Now.
Oh, we do expect that the rate of growth will continue and industry forecasts suggest that for 400 gigabits of though the growth rates are expected to be a quite.
Quite good and then right now that is for 400 gig 600 gig and and to some extent for 800 gig.
All of that for US is add a component level with the exception of.
Telecom focused coherent modules.
But the b or by the time, we get the 2021, then we're looking at 400 ZR being an additional revenue capability and then 400 ZR plus so there there are without a doubt headwinds to vertical integration by the same.
Im token of there are.
Continuing to be very good opportunities with an expanding market and expanding Tam that we're addressing.
And these these opportunities are.
Really what's causing us to be pretty excited about prospects.
Got it and then on the near term.
Can you speak too I mean, there's always this concern and I. Appreciate the comments that you had but maybe if you can give us some idea in terms of.
Inventory build up in China, I mean, certainly fiveg is a big piece of the deployment.
In China, you know how much of your revenue can be attributed to Fiveg deployment horses, DCR type deployments, just kind of help us understand.
The end applications, that's driving much of your demand for your components.
Let's see.
You know for Fiveg.
We have to think about.
The.
Front haul mid hall and backhaul.
Aspects of a fiveg deployment.
Early in the deployment it is mostly front haul and some mid hall.
Our largest physician it would be in the backhaul, which would move toward a network build out and it is.
Based both on the rate of deployment of the front haul and the subscriber usage.
So essentially as they deploy front haul and mid halls. They build it up was with a a subscribers then that requires more capacity for backhaul and that will use that would impact us. So.
For the part that is that is front haul and mid hall, we do sell some fixed wavelengths lasers and components, but it's actually a a very small percent of our revenue in total so.
There really is a.
You know kind of very modest impact on revenue at the moment.
Thank you should be says I'll pass it on.
Thank you and we'll take our next question from Alex Henderson with Needham and company.
Thank you everybody else.
Hello.
So I thought I'd start with a little bit of mundane stuff could you give us direction on what you think the tax rate, it's gonna do or tax expenses.
Quarter to something nice Monday.
I see our tax rates remain remain the the same is we have an all wells, but offset the U.S. taxes or Japan, 35% China's 25%.
We have had a shift in approach of how those taxes are accrued and honestly, Alex there still stable, there's still sorting out.
Because Q1, and Q2 were both significantly higher profits than expected, we got hit with a significantly higher tax burden in Q1 in Q2 than expected.
So I assume it's something considerably less than 1500 does it was posted in the June quarter.
No. That's the right one for June June was a no no no I mean going forward.
Oh, yes, yes, <unk> well it should average out over over the year.
Two.
Something that in.
Slightly lower than our current level.
Right.
Just wanted just to make sure I understood your comments around a well wait.
Clearly the revenues were benefiting from a building inventory now you're saying.
Other customers are willing to be able to offset some relative weakness in far away. But then you also said that Wally orders would be to meet demand do you expect why way to sustain the current level of inventory and therefore.
Underlying demand grows out of China would be.
Consistent with the order rate growth rate or do you expect them to start to draw inventory down a little bit.
I'm not sure I completely got the subtlety around that so yes, though the.
You know the trade tensions are.
Putting a well away in a in a somewhat unique position and are they have built up a strategic inventory and we do expect that they will.
Continue to be purchasing products that are based on their market demand and run rate.
As opposed to.
Working down their strategic inventory.
You know that would change if there was a highly favorable change in the trade tensions but.
As it is we do expect to have a.
A smaller revenue base from far away as a result, because over the last year, we have had a larger than normal.
Well I'll wait percentage of revenue as they were accumulating a strategic inventory.
Now he has historically or.
No over multiple years looking back about five years, you know why way has been in the range of.
You know high Thirtys to 40% of revenue, but in the last year, it's been more like 50. So.
That's how we expected to play out now as we look out toward.
Uh huh.
You know beyond the quarter and next year, you know walk away is in a situation where.
They may see they may be subject to market share shifts and as I commented, a you know their competitors our customers as well and.
The relative balance of market share remains to be play playing out. However, if they are losing share then there.
Their inventory actually on a relative basis is.
Probably more of an ample.
But we do expect them to purchase on an ongoing basis.
Thank you.
Well now take our next question from Richard Shannon with Craig Hallum Capital Group.
Hi, Richard Thanks, Tim invests Oh, hi, Thanks for taking my questions as well.
Maybe a question on the third quarter, asking a slightly different way than one than prior ones. Here is it fair to think about the sales guidance here, which is just kind of.
Down I think down slightly in <unk> or at the midpoint here since you fly, but pretty close is it safe to thinking about why why being down and the rest of your aggregate revenues kind of flat to up or should we think about that differently.
No I think that's Ah hey.
That's the right right way to think about it is why way has been building inventory, but we believe there's been a whole that inventory already and still continue to order as Tim just said, but we're seeing good growth from the high speed purchases of others.
Okay.
Tim I think you said, you expect a one or more or 10% customers in the second half. The year can you characterize so are these guys in any way or I would assume at their Oems or is it a possibility of you'd seen direct cloud customers and if they were at Oems can you characterize a them in any way to Jay graph.
Thirdly or otherwise.
Yeah sure there so that specifically you know I said that Oh. These are network equipment manufacturers that I'm, referring to so so that yes, there they're Oems, but you know there there are number of companies that have launched a 400 gigabit 600 gigabit and you know the new systems.
And Oh, and demo and even higher speed and so you know we're selling to each of those and as they ramp that seeing a much higher than the market average rate of growth.
The result of those ramps is we are seeing a increasing quarter over quarter revenue, but we're also seeing.
Strong backlog for subsequent quarters so.
You know we're in the early in the situation, where certainly in the case of Oh Wow ways.
Unique position they have been the largest but they are.
[music].
Challenged by the overall trade situation, we've got a very strong group of customers relying on our components solutions for their 400 gig 600 gig and above products and and as those ramps that's a very strong.
Growth stream for us.
Going forward and you know the customers are kind of you know.
All in the top 10 network equipment companies in the industry.
Okay. That's helpful. Tim One last quick question I'll jump out of line not for best on the Opex here, but your guidance and your discussion mentioned Oh, a higher level here. It for this quarter I think you're implying your beyond that how should we think about the trajectory or model for Opex as we go out a few quarters here is expected to flatten out or.
Could it be percentage of sales or how should we think about that.
Yeah. The <unk>. This year is gonna be unusual because we were so low in Q1 Q2, and so a balance that out Q3 in Q4, because the projects we're working on our Ah important.
But ongoing <unk> the models that where we've said for Oh Wow now is that gross margin of 35% and Opex is 25% of revenue that's how I'd model it out.
Thank you.
Our next question comes from Tim Savageaux with Northland capital markets.
Hi, Tim.
Hey, good afternoon.
Well couple of questions, let's continue on.
I would just sort of discussion here I'm changing customer mix and you mentioned that kind of 35% sequentially I guess.
Customer three to 10.
In Q2.
Do you expect that sort of trajectory there to continue into Q3, I guess would be the question in which case Rio.
See your why wait concentration come down almost to kind of historical levels is that.
Yeah, the magnitude of shifts that you're implying in the guide.
Or might you see that sequential growth rate it slow a bit with the new customers.
And that's exactly right exactly right.
We are referring to you know customers three to 10, we do expect that rate of growth to continue based on our view of our committed shipments in our backlog.
You know for for these higher speed systems, you know, we have a range of products that we sell we have.
Narrow linewidth lasers, which are critical in the highest rate systems, we have our our I'm hearing driver modulators CDM, we have our high bandwidth receivers.
We combine these together in our CSP too.
400 gig module and different customers you know qualify you know one to all of these products and so each customers a little different in terms of their content, but you know for some customers as they ramp or you know our content is very very strong.
And this is why said in my prepared repaired remarks that we can be a beneficiary of this.
As you know customers argue over market share.
Okay, just a follow up on that.
I have one afterwards, but.
But that was interesting so it sounds like an addition to the.
Different customer mix here you might have.
The mix issues going on a couple of different from sort of like to ask about one and I think you alluded to was maybe component versus module.
There were some of these newer customers you're seeing come in.
Might be more focused on the module of water looked at as or maybe your revenue plus possible. Your margin <unk> minus I'm not sure. Then can you speak to whether there is a changing kind of end market mix is that customer mix shifts in that do you see.
At 400 gig it up you know more cloud type applications versus.
Carrier Metro long haul transport applications.
Yeah, Yeah, so for the right now the.
400, gigabit 600 gigabit and above applications are primarily.
Components in line card that are are essentially fabricated by network equipment manufacturers some of which are used in DC eyes.
The preponderance art our telco.
Designs that we have a and products for coherent modules do include the CFP to 400 gigabit product that is capable of Ah distances.
You know essentially much longer than ZR alone and so these these are for a regional network applications and.
Kind of leading market for that kind of deployment actually is the market in China.
For you know in 2021, we would expect to be than ramping 400, ZR cloud and Ethernet versions. This for US would mean, the Oh, it's a p. form factor in Qs P.D. form factor and those are decidedly you know cloud focused or customers in Africa.
Patients.
Okay that was gonna be the area of my my final follow up which is on.
As he ours integrated or if you heard the insight call. This morning.
At a then interoperability test was also mentioned.
It was.
At least some opinion over there about prospects extending.
Beyond the PCR <unk> do you see I marker then that you are to the have as you mentioned.
In your remarks, and a significant applications come on the telecom side I think you mentioned.
Metro in a range.
So yeah would you say your visibility towards those applications is there's increased for you over the last quarter. So as you blue.
From sampling into qualification.
Maybe you could characterize your opportunities.
Cloud versus telecom and where the telecom has.
Has increased over that time period.
Well I think Oh, you know for the for the 400 gig modules for 400 ZR.
You know this is this is really focused on cloud.
And ER.
And I I think you know you referred to in Fies call. This morning, I think we would agree with their timing of it being mostly a 2021 and and with a volume in the second half in 2021.
[music].
You know.
Our our product offerings or you know do include capabilities for taking this to ZR.
400, ZR, but also for 400 ZR plus.
And this is where as I said my prepared remarks, we would expect there to be additional use cases.
And the use cases do extend for you know these these longer interconnect so not not just datacenter interconnect, but but metro fiveg backhaul and regional in long haul interconnects and and so these would essentially be the telco. So that's the 400 G.
In the ZR application is cloud first.
Then the additional use cases.
I would have it gained share in telco applications.
Thank you that help.
Okay.
And we'll take our next question from Simon Leopold with Raymond James and Associates.
Oh, Thank you for taking my only question do you see selmo leasing consignment today.
Oh Gee you could have continued to expand on the up on 400 gig GE, our opportunity maybe sort of help us understand the up you saw <unk>, so well well these dealer for you well, but also you could talk about the competitive landscape here, Oh, you will likely be directly competing weve.
All of your seven customers one of those new supply.
VSP, a coherent DSP capabilities to.
Okay.
Well, let's see first first is the a discussion of the opportunity in the our you know I think are over the last two conference calls in response to questions.
You know we talked about this as potentially $500 million over three years I think the the view is increasing closer to a billion.
[noise] billion dollar opportunity over three years for the market and and ER and so you know we're competing for a share of that Oh that opportunity that would be the size of the ZR Tam if you will.
Now with our product offerings being each of three form factors and both CRM ZR plus we would be competing for all of the town are served market is is there for quite broad.
But you know again the the first real application is 400 ZR serving the cloud.
With respect to you know Dsps you know we do.
You know we did the interim with a was inphi and we did say in that a press release that we use a DSP for that product from them and they they have been a strong partner.
We have also deployed in the past or other coherent module products using dsps, including from any all in Japan. So we are we are depends on the product to.
Deploying dsps from a a different vendors.
Thank you.
Thank you and we will take our next question from Dave Kang with B. Riley FBR.
Thank you good afternoon, Oh first Hello did you give out what the book to Bill over maybe perhaps orders work.
And how do they compared with a <unk> first quarter.
Uh huh.
No we didn't give that out we generally don't don't report on our book to Bill, but I I will say that.
First quarter was was are quite strong the second quarter as well if we look back over the year, we consistently had a positive book to bill.
But we don't generally report quarter to quarter the specific numbers due to the amount as via my that we have because it means a meaningful amount of our shipments are from vendor managed inventory.
The book to Bill doesn't reflect that.
Got it and regarding I'm acquire away, obviously Derrick in a lot of questions, but my question is.
<unk> Brett do you think about the trough that I know how long do you think it'll take.
Hey that against that I didn't I misunderstood you.
Oh sale for <unk>, you know, where do you think I mean, you guys did what about 53 million or so with our weight in the second quarter just trying to.
Gauge what the bottom is as far as always concerned.
Well, let's see you know as as I said previously you know, we we've seen historically over a longer term you know we've seen we've seen a far away revenue be approximately equal to their market share.
No that historically has been you know mid thirtys to 40% something like that but you get away isn't an interesting and unique position right now with the trade tensions and the you know the geopolitical tensions.
You know we.
We have to be you know pragmatic and expecting that there will be market share shifts and we're seeing some of that and so how that plays out over the longer term is really not possible for us to accurately forecast at the moment, but what we do expect is that.
You know the revenues specifically from walk away will no longer reflect buildup of strategic inventory and that's that's really the key point here.
[laughter].
Thank you.
We'll take our next question from Michael Genovese with MKM partners.
Hi, Thanks.
Hey, I've got first question can you just tell me more detail again, what's going on with the the gross margin. If he said to me about under utilization any delay in the third quarter, that's causing Chris murchie to be down sequentially could you explain that then.
Yeah. So as you heard me say for a number of corridors are we become under utilized on a.
Regular basis in our indium phosphide, perhaps with a two indium phosphide fabs. So we have customers that are doing some very interesting seafo based transceivers that use our fixed wavelengths lasers and a couple of those projects have pushed out.
Not because of our product because if I have their own or their own internal.
Project somebody that is that the reason, but the gross margin I mean, you came in liquidity to five Daddy city choosing that is I'd say explanation color.
That's the biggest smoking.
Okay.
No you only guide one quarter at a time, but do you any comments during the getting home. It's in the fourth quarter Ito versus normal seasonality with this customer mix shifts going on we want to be coffee Cup rental fourth quarter cautiously.
I'm always cautious [laughter], but what we did say in Tim said in the prepared remarks is that we do expect to have a multiple.
10% customers and that we see good momentum on our.
64, gigabyte in high speed product.
<unk> revenue.
Okay, and they're not lastly from me and then there's been a lot of discussion about why way I understand the the.
Inventory discussion I understand me market share discussion, but what we haven't talked about is.
Do you have anymore color or visibility or clarity on the potential for for knock on effects, but even if they have trouble getting supplies and some other part of the business. Yeah. Yeah. I mean, there just seems to be a lot of confidence here that walk away is going to remain a sizable customer wasn't in the future and you talked about the risk.
Not happening or is that something we have to worry about.
Well, there's the weight, Mike I think it's an insightful question because the.
You know we have to think about it multiple ways. So a in the first instance, you know in China Walkaway has a broad portfolio systems that they're going to continue to deploy and to the extent that their knock on effects as you say and they're unable to get some parts than than you know they will be fulfilling customer orders in China with things that they can fulfill.
I'm in the international market, it's it's a little difference situation because in the international marketplace. There there are more competitors with strong market positions, but as I said previously you know all of those customers are essentially our customers as well so to the extensive there our market share shifts.
You know things.
May.
Have a little bit of a delay period for example, but ultimately if if a why ways share decreases in in the international markets.
We would expect to be a beneficiary of there.
Whoever is gaining the market share.
From walk away, we would expect to be.
Be supplying to them as well now you know in China.
Yes.
We have to look at at two effects. The first one is just what's happening with walk away supply chain, but you know in China as in the rest of the world we sell to all of the network equipment companies. So to the extent that there you know our share shifts to other Chinese network equipment providers.
We would be in those supply change too so.
You know because why way has been a significant customer and they have been the largest market share holder in the industry and they have been building strategic inventory.
They get kind of.
Outsize identification and therefore, they get outsize risk profile.
But the fact matter is.
To the extent that their share shifts in China are outside China. Other companies will win and we supplied to the other companies as well.
So you know that's how we look at the Oh the whole equation.
Thank you.
Once again, ladies and gentlemen, if you would like to ask a question. Please press star one.
We will take our next question from Alex Henderson with Needham and company.
Thanks, So I was hoping you could go back to the basics are a little bit and talk about what's going on in China in terms of the actual demand from that geography.
I think you've got as good a pulse on that as anybody in.
Pretty hard for us to read it externally.
Can you give us some sense of the you know how many what the port growth might look like a.
And has that changed.
Between National Backbones provincial just some color around that would be very helpful. Thanks.
Okay. The.
The overall demand in China has continued to be.
I will say, it's actually surprisingly strong.
Given the ER.
You know given the the well what we might otherwise conclude you know just from a media in the U.S. essentially China mobile is ER.
You know continuing to.
Do deployments they are using a as I said in the prepared remarks, they're deploying using the the C plus plus a spectrum. This is where they use a wider a structural with add more channels and then they can get you know even more capacity with the additional channels.
On each wave length and on each fiber so that is actually going strong.
And it also is important to note that.
That that uses among other things RC plus plus laser product as well as our 64 gigabaud components and so it is oh, well I said that the ER.
Customers. If you will three through eight where we're growing 35% sequentially. You know is also true that we have essentially 64 gigabaud revenue streams from the major players in China as well, so our visibility to national backbone versus provincial backbone is really not.
No different than before it's it's hard to see the differences because of the fact that of the provincial networks are accompanied by you know brought announcements, but the overall consumption. You know in terms of sports is Ah you know I think it's in the range of up 10% or so from last year. So its content.
Moving to be.
Consistent business.
I guess I'm little confused by that comment a 10% port growth in China is below historical averages I think of 15% plus and if I just for pricing that would imply down revenues.
Okay can can you clarify that because it doesn't sound some correct.
Did you mean revenue pool revenue port or do you mean shipping unit ports.
I'm I'm, referring to I, our assessment of total ports between.
While ways Ichi in fiber home and ER and you know I'm I'm not intending to comment on whether other analysts numbers are right or wrong.
We see we see a modest increase in the total number of ports and win within you know the error range.
You know is it 10 or is it 15% I'm not sure where is that accurate.
Isn't pricing still down.
Double digits.
No.
Okay. So it's a function as a pricing has stabilized more than normal declines and then if you're still seeing port gross hence revenue growth out of China.
Excluding inventory adults.
Well, Yeah, you know intimates inventory is the elephant in the room isn't it. So so yes aside from the biggest factor yes.
Okay perfect.
And do you have any sense of whether theres acceleration than that because of delays in the first half due to covert and therefore in the back half it'll it'll accelerate in terms of improved deployment rates or do you think its decelerating any any trajectory first order derivative there.
You know.
Frankly, it's it's not that clear what what I would say.
Is that.
You know, we don't have that level of visibility yet for what.
How the third quarter and fourth quarter are going to play out we have to keep in mind. You know away was placed on the entities listen the second quarter of 2019 Fiberhome was placed on the entities list in the second quarter of 2020.
And with those companies being on the entities list.
That more than cobot or any other factor does.
Have a stabilizing effect on on on pricing the.
You know they are continuing to ship ports.
As long as they are able to be supported by their respective supply chain. There is supply chain risk there's covert supply chain risk. There's also entities list and there were there are additional b. I asked requirements related to you know while way design chip production and all of these facts.
There is our you know there identified but they're not fully quantified and and so.
You know what we're saying is is continued demand continued strength in terms of volume however, our forward visibility.
Is limited to what we what we actually know and or the.
You know our ability to speculate on what might happen.
It is we don't we don't have that ability. However, you know it is also.
Notable.
Given why ways a unique situation in the international marketplace and with the the entities list and the limitations on their their chip availability.
There is expectation for.
You know some loss of market share that has two effects that you know one is that their strategic inventory is relative or in a relatively larger.
And.
Back to see increasing backlog and demand forecasts from other customers.
That will play out over the next two quarters.
Thank you.
And ladies and gentlemen that concludes today's question and answer session I would now like to trying to call back to Mr., Tim Jenks for closing remarks.
Thank you for to everyone for dialing in a we thank you very much.
For your interest in Neophotonics.
We do appreciate the diligent work of our employers and our suppliers to drive progress, especially in light of the current environment and the conditions of the ongoing global pandemic.
Stay safe, we look forward to updating you in the future and meeting with shareholders again in person.
As we are all able to in the quarters to come how did that evening.
Ladies and gentlemen, this concludes today's call. We thank you for your participation you may now disconnect.
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