Q3 2020 NeoPhotonics Corp Earnings Call
[music].
Please standby.
Good.
Third quarter 2020 conference call.
I will be webcast live on the company's website.
W. Neophotonics [laughter] the events page of the Investor section.
It's called the property mix as.
Recordings reproduction or transmission of this call.
Send some new stornext prohibited.
I'd like to turn the call.
Hi, Investor Relations. Please go ahead.
Good afternoon. Thank you for joining us to discuss Neophotonics operating results for the third quarter of 2020 and outlook for the fourth quarter of 2020.
On the call today are Tim Jenks, Chairman and CEO will then yen Chief product Officer, Thatd Chief Financial Officer.
Tim will begin with a review of the company's business in the third quarter and a discussion of relevant market trends well, then will provide a summary of products technologies and growth drivers for high speed products.
That's will then provide financial results for the third quarter before providing the outlook for the fourth quarter of 2000 and watching.
Oh, well then be open for questions.
The company's press release and management statements. During this call include discussions of certain non-GAAP financial measures information, including all income statement and balance sheet amounts or percentages other than revenue unless otherwise noted.
Non-GAAP financial measures are not prepared in accordance with GAAP and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP.
Its 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 of the Neophotonics website.
Material contained in the webcast is the sole property and copyright of Neophotonics with all rights reserved certain.
Certain statements in this conference call, which are not historical facts may be 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 to differ materially.
Some of these factors have been set forth in our press release dated November two 2020, and I've described at length in our annual and quarterly EPS you see filings.
Now I will turn the call over to CEO conjecture.
Thank you Erica and good afternoon.
Our business in Q3 was very strong, especially at the high stage.
At the same time, we're dealing with the challenges of the global pandemic.
And with the revised restrictions in August from the Department of Commerce, Yes pertaining to walk away.
Our third quarter revenue was $102 million up 11% year over year, our non-GAAP gross margins continue to expand reaching 34%, which represents an increase of five percentage points from the year prior.
This is an exciting time for Neophotonics is we are seeing increases in design wins that well higher volumes and resulting share gains in our highest speed over just solutions with a broad range of customers well stocked with customers and new customers.
We have new 400 gigabit coherent module products it will ramp and 2021 further we expect our longer distance 400, New York plus module products to accelerate our growth with new used cases coming online in 2022.
Each of these points indicate upcoming acceleration of revenue growth.
Yes, we thought it would be helpful to take a step back.
And review all high speed developments looked at the performance of our business excluding walk away.
And outline our strategy going forward.
In the first nine months of 2020, our year on a year on year growth was 20% well.
Well, let's look at our 400 gigabit outbound business without qual way.
In the first nine months of 2020 or year on year growth for this business was 91%.
And in the current quarter 400 gigabit kinda both products were 44% of our revenue again, excluding far away from.
Further 400 gigabit involved revenue has been accelerating throughout the year and we expect this to continue through Q4.
Keeping in mind that the number of 400 gigabit ports being shipped each years approximately doubling.
We are simultaneously gaining market share for higher speeds.
Note that as this market heats up we will see increasing revenues from an expanded customer group beyond our two they historically largest customers.
With the industry, leading equipment companies leveraging neophotonics products for their 400 gigabit in foster systems. Our growth is strong with these customers in our second quarter, we reported 210% customers as expected in Q3, we added a third 10% customer.
We believe the trends in our highest speed over just as problems are favorable in terms of accelerating growth.
And in our building an expanded customer base.
Again, well far away, we are providing a revenue outlook for fourth quarter of $67 million at the midpoint, which is 16% sequential growth and considerably higher for the 400 gigabit and above products for the longer term. We have said that we believe we will see 40% to 50.
<unk> revenue growth over the next year on the same basis.
Our outlook for sequential Q3 to Q4 growth.
Good progress toward that goal.
Neophotonics has been a leader in high speed products since our entry into coherent optics face a decade ago.
We are the primary supplier of Ultrapure like tunable lasers for the high speed over distance applications, and we provide the highest bandwidth receivers and highest baud rate modulators use in speed over a dozen centers.
For the last three years, we have been steadily introducing new lasers modulators and receivers for the high speed applications at 600 geared at 800 gigabit plus several new high speed coherent module products, including 400 G. R.
As a result, the ban for Neophotonics high speed products is very strong with accelerating market adoption and deployment and related market share gains of 400, gigabits per second and beyond especially for lunch requiring the higher speed over distance. These deployments are among the fastest areas of growth in the industry driven likely.
While the data center demand and they've been driving our growth and profitability.
Our strategy.
Is to rapidly grow the business by supporting the higher speed over just the solutions at 400 gigabit sound about right.
Telecom equipment providers and expand our business by ramping our new 400 G. R and 400, ZR plus coherent modules to cloud and Hyperscale data center customers starting in Twentytwenty one.
Our preparations for this had been a long time in the making.
Neophotonics specializes in products that operate at the highest speed over distance with products that are designed and engineered by our talented employees around the world who simultaneously make our components work together.
To deliver the highest speeds and highest performance used in networks today.
For all of the leading network equipment producers around the world usually at the tonics products in their flagship high speed systems.
Over the last three years, we have developed advanced manufacturing methods for these highest speed 400 gigabit and above products scaled their production all while steadily increasing our manufacturing utilization, reducing our depreciation cost and seeing our margins expand.
Hi, I'm very proud of our team for what they have achieved.
The acceleration of our components for 400 gigabit above chassis based systems is only the beginning.
As the market continues to move to higher and higher speeds, including 600 gig at 800 gig we are increasingly well positioned to capture this next wave of growth.
Layered on top of this is the opportunity for our 400 gigabit coherent module products.
400, ZR and 400 G. R plus applications, we are a leader in the launch of 400, CR and 400 G. R plus modules, which will effectively double our addressable markets given the importance of hyper scale data center interconnect and metro applications.
Cloud providers, including Hyperscale datacenter customers will be the early adopters in this market.
These will be new volume customers for us beyond our network equipment manufacturer customer base, given our design wins customer.
Customer forecasts and the rate of industry growth at the highest speeds. We are looking forward to seeing our business without far away grow at 40% to 50% over the next year.
Mid 2021, we expect to see an additional revenue stream from our 400, ZR coherent modules being sold into Hyperscale customers.
400, gigabit and above port growth, including 400 ZR.
Is forecasted to grow at an 80% five year compound annual growth rate through 2024 further supporting our long term growth process be on top line growth, we typically achieve higher than average gross margins from our high speed products.
As these products become an increasing fraction of our revenue mix. We believe we will see a favorable trend in our margins.
It's an exciting time at Neophotonics due to the growth opportunities, we face I will now turn the call over to Dr. Wu Tang yen, our chief product officer to provide you with more detail of our road map for 400 gigabit and above products. Some of the trends that are driving their adoption.
Thank you Tim and good afternoon.
The two online learning all strategy.
Colleagues in a strong position to deliver accelerated growth.
We expect to ramp production for the V. all modules you give me Nick 2021.
On top of the global lasers, and 64 Gigabaud components that are driving all parents growth.
All the new multi gig coherent module products, a real game changers.
It's hard to say to the arts data rates.
She couldn't interfaces in very small low powerful doctors.
They believe them to be plugged directly into routers and switches.
Costume traditional DWP in equipment.
Okay identity enables operators to realize significant savings in <unk>.
Equipment.
Thereby flooding adoption rates and you started to use cases.
Without leading vertically integrated laser as the a couple of topics to the allergies yeah.
Colleagues has been the first formed as the OEM module vendor to successfully performed well under the our link offs at a major cloud providers.
Bose This is Pete and she has a PBD molecules and to demonstrate the probability that promises to enable the rapid increase the adoption of some of the ophthalmology.
Oh point of view, all solutions leverage our leading laser capability and our in house I think when we see a couple topics integration.
We expect to complete all forms of the all of the patients as a lead to help customers.
The first quarter of 2021.
With respect to the initial volume applications. So 400, the art to be with major cloud providers the Metro data Center Interconnects.
However, it's going to be up close to the ability the longer distances.
There's also an opportunity for new use cases to emerge beyond Metro data Center Interconnects.
Its use.
Hi, cheap backhaul.
The longer just as reaching those interconnects.
It is important to note that the neophotonics.
The folded the art, that's going to be up plus multi market segments expands our overall accessible market.
I think it adds a higher EPS two module solutions, it's high internal content to all goods to market leader position in high speed over Justin its components.
We expect that all four of the applause molecules will provide yet a third well the other industries that we would begin to ramp in Turkey, Turkey too.
Additionally, each of these new high speed systems, including for the yard afforded the a plus applications upward over dwt M life systems, including open line systems.
These requires specific type of them.
Well.
And the multiplexing products that have unique channels pacings due to shapes, including China lodging too busy so.
The which were also a leading supplier to cloud equipment providers.
During the second quarter, we conducted a brother bar on trends and technology, which we discussed the sea change enabled platform to be architecture.
And in September we held an additional one of them are you telling the key differentiation of our leading high speed over business solutions.
Nation Somebody's trade acknowledge it wasn't ours remains available from investors presentations at the Investor Relations section of the use of Onyx website.
Rapidly growing global tire, which meant continues to be the fundamental driver with all business.
Whether it be for cloud services.
Capacity increases two people working.
Hi speed deployment to the edge of.
Between intelligence and machine learning or Fiveg wireless what else.
That I will turn the call over well see a boat that TV.
Thank you Ken and good afternoon.
Q3 was a strong quarter with revenue of 102.4 million non-GAAP gross margin of 33.6%.
Non-GAAP operating profit of 9.9 million all at the high end of our revised outlook.
These results were partially offset by an adverse FX impact of 3.4 million or six cents per share.
Resulting in a non-GAAP Q3, EPS of 11 cents.
In more detail why wait was 44% of revenue in Q3, and our next four customers were 39%.
I had 310% customers in the quarter.
Our non-GAAP Q3 gross margin was 33.6% coming in at the high end of our range.
Well then this product margins were 39, 36.9% up slightly from last quarter on favorable product mix.
Other cost of sales charges of 3.2% for approximately two points of under utilization.
At a point of warranty and other minor charges.
Total non-GAAP operating expenses for the third quarter was 24.5 million slightly lower than expected on early execution of cost reduction programs.
Non-GAAP operating profit for the third quarter was 9.9 million or 9.7% just under our operating model of 10%, but.
Reflecting continued strong execution throughout the company.
Appreciation of the Chinese Yuan relative to the U.S. dollar was the primary driver of the foreign exchange impact of approximately 3.4 million in the quarter or six cents per share.
As a reminder, the functional currency of our China operations is the Yuan.
FX loss is a non cash revaluation of the China balance sheet items to the end of quarter exchange rates as.
As we have said before we regard any FX gains and losses as large and temporary.
As a result, non-GAAP net income for the third quarter was 6.2 million.
I'll close out my discussion of the third quarter income statement with the review of our GAAP results.
On October five we increased our estimates for the quarter in line with the results I have just detailed.
At that time, we noted that the department of Commerce had expanded restrictions on walk away and its affiliates and we announced that we would manage the business for that revenue contributions from our way.
As a result, we have taken actions to align our capacity and production infrastructure with expected demand levels.
Charges of 9.4 million were incorporated in our GAAP results for Q3 and.
That includes severance charges <unk> point Ninemillion as expected.
Inventory write downs of 4.4 million 1.3 million less than estimated on lower material cancellation charges.
And equipment breakdowns of 4.1 million.
The total charges related to the action are now expected to be 10.9 million to come to 21.
This is less than the 12.1 million estimate stated in our press release.
Third quarter gross margin, including 9.3 million of the charges I just mentioned was 23.8%.
Operating expenses was 27 million lower than expected on early execution of spending reductions.
Operating losses for the third quarter were 2.5 million, which includes the impact of the restructuring and other related charges of 9.4 million.
2.8 million of stock based compensation expenses, and approximately 2.2 million of amortization of acquisition related intangibles and other costs.
Net loss for the quarter was 4.9 million.
Turning to the balance sheet, our cash position continued to improve to 123 million of cash short term investments and restricted cash.
Cash from operations was 15 million, we spent 4 million on Capex and we paid down 1 million of debt.
This cash level puts us in a good position to continue to invest for the growth that we see in lasers.
64, 96, Gigabaud components, and 400, VR and 400 feet plus modules.
Before I discuss our earnings and revenue outlook for the fourth quarter Twentytwenty 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 at.
The restructuring that we implemented when fully realized allows for breakeven at revenue of 80 million based on the current mix split them. That's we will continue to invest in the growth drivers of our business, including lasers, 64, gigabaud components and for him to GE modules.
For Q4, there will be no revenue from walk away.
In Q3, excluding walk away our revenue was 58 million.
We expect a continued rapid growth products for 400 G and beyond to drive revenue growth from this point forward.
Gross margin reflects lower volumes, and therefore higher under utilization charges.
We do expect to see an increase in operating expenses in Q4 EPS.
Continued spending reductions are offset by planned and our repayment for investment in 400 VR developments.
Lastly, subsequent to the end of the quarter, we signed an agreement to settle our lawsuits with eight Pat Opto electronics.
The settlement will result in a gain of 2.9 million in Q4, EPS, which will be included in our GAAP results.
Given that the company's expectations for the December Twentytwenty corridor, our us revenue in the range of 64 million to 70 million.
GAAP gross margins in the range of 20% to 24%.
Non-GAAP gross margin in the range of 22% to 26%.
GAAP diluted earnings per share in the range of 26 up loss to a 16 stop loss and non-GAAP diluted earnings per share in the range of 23 cents loss to a 13 cents loss.
These numbers are reflective of approximately 50.3 million basic shares since.
In summary, Q3 reflects the strength of our base business.
The continuing the trend of delivering year over year growth in revenue and profitability.
Without increasing momentum in 400 G at above design wins across major network equipment manufacturers.
As well as the 400, VR and 400, the outsourcing opportunities in 2021 and beyond we've.
I remain optimistic that industry trends continue to move in Neophotonics save us.
For the longer term, we have said that we expect to see 40% to 50% revenue growth over the next year excluding wawa.
The 16% revenue growth in Q3 to the midpoint of our outlook for Q4 is good progress toward that objective.
In addition, we expect to get back to non-GAAP operating profit in Q3 and gap in Q4 of 20 to 21.
Over the last two years, we have shown that we can work through financial transitions.
We believe we can continue to drive both revenue growth and.
And an expanded customer base and 2021 and beyond.
This concludes our formal comments.
And I will now ask the operator to open up the line for questions James.
James.
Thank you.
I'd like to ask a question. Please signal by pressing star one on your telephone keypad.
We're using a speaker phone. Please make sure your mute function is turned off to a lot of smartreach our equipment.
The interest of time, we ask that you limit yourself to one question and one follow up I mean every time for additional questions. If time permits let's go press star one to ask a question or a pause for a moment, so not everyone an opportunity to signal for questions.
And we'll take our first question today from Richard Shannon with Craig Hallum.
Hi, Richard.
Great Hi, Beth Hi, guys. How are you. Thanks for taking my questions. I guess my first one is on a gross margins for the guidance you had in the fourth quarter. If I look at the kind of the fall through rate, it's a little bit higher rate than we normally see on kind of both averaging up and down if it goes well above.
50%, if my calculations are right here.
I would suggest that the wawa, it's been a fairly healthy mix of gross margins, which I guess you just set a goal to.
You know the thought process on why we're getting good pricing. So wonder if you could help us understand the gross margin dynamics here.
Kind of settling out at 24, and then how should we think about it going forward.
So what you're what you're seeing is what we expected to see in a little bit of an increase from on product margin from not having why ways that they were the biggest customer they get the biggest volume discounts, but it wasn't hugely different than.
Our other customers on a product the product level, they don't get that much more of a discount.
And then where we are seeing a fair chunk of under utilization charges as you would expect from losing a 44% customer and in one quarter.
That is seen in both our Japan, and our China factories.
Okay. That's helpful. My follow on question here is kind of looking at your revenue progressions, you're past the fourth quarter. I think you said that the Oh pro forma rate here, excluding law, which was 16% quote unquote in the fourth quarter.
Obviously would actually see that in the first quarter whats your normal pricing dynamics, but how much of this track is we get to that 46 40, 50% growth over the next year and getting to pro forma profitability third quarter, how much of that is dependent on a customer is out so but it's outside outside of wawa, gaining some share and also.
So you see our product rollouts to get to that point.
Hey, Richard It's Tim first of all the you know we we do expect normal seasonality you know what we've said that we expect to see 60% sequential growth Q3 to Q4, and then normally Q1 is the Uh huh.
Shorter with a Chinese new year, as well as reflecting pricing so Q1.
We'll have that normal seasonality. This year. We would then expect to continue to grow and then in the second half of the year as we're ramping 400 G.R.. We would we would expect to see an acceleration you know that that that is the normal case and then it's not a particularly.
Dependent on share shifts between a and among our lead customers.
Okay, great. Thank you.
When circuit.
Next we'll hear from Tim Savageaux with Northland capital markets.
Hi, Jim.
Hi, good afternoon.
A couple of questions I guess.
I'll start on the operating side, obviously, you're looking there looks like you're keeping <unk> flat. Despite the revenue decline and you referenced in the release and in some of the follow up commentary.
Has increased focus on the our work to try and.
You know quantify that and are you all her in it is out of network or Florida or visit our repayment that you described.
The to me.
<unk>.
You've got some greater visibility on the Cardium and magnitude about your opportunity.
Well, let me comment on the the opportunity on the Opex and and you know that's well Tim.
We have been pushing the opex from the first half of this year to the second half of this year.
All along.
We are comfortable enough with the V. our opportunity is that we are continuing to do the investments needed in order to support that and that's what you're saying in Q4 is there is a I a couple of big and our E payments that were scheduled for Q4, we have maintained those.
But and those are pretty much almost all offset by a <unk>.
By the reductions that we've got we're implementing what we said and not in the press release earlier this quarter is.
From the Q3 0.2, where we will land is going to be about $2 million of production [noise].
Q2 of next year.
[noise] looping you want to talk about the the opportunity and what gives us confidence.
Yeah on the the opportunity are we still expect the.
The first run through his daughter, all you can do 21 and it was one of the more granularity than that on a timely well nor do we see any a reason for the schedule or the like so this deal or something else, we can take 21.
30 ramping will fall into VR.
Great and then with regard to crew wallet illumina couldn't the phone seem to suggest that there.
Revenues for forward, Mike you know moved to reduce levels, but but not to zero when I kind of refocus on how you guys are approaching this stated that you're kind of mid.
Then if we were to businesses, who lunar new revenue, but.
Uh huh.
No you're kind of bump up against the reality of the situation.
Maybe you can update us on.
You know what the dynamics like do you know, allowing barrier player or other suppliers not two or whether you're you're kind of just could you live service [noise] approach.
Approached conservatively going up to <unk>.
We won't be able to show.
Yeah. Thanks, Thanks to the.
You know, we did say that.
We would expect to see.
A situation, where we have to.
She's reliance on revenue with wild way and as we said in our prepared remarks.
You know it will be zero in the fourth quarter.
You know, we're not guiding or we're not guiding more than a quarter, but for now it's zero.
Okay. Thanks, very much and then last one for me you mentioned.
You'd added a 10% customer.
In the quarter I Wonder if you could talk about.
You know what sort of you know provide any further color on.
There are no application geographic focus or any other indication or.
No.
Who you know X y where that becomes or.
Actually larger customer, but any more color about how ignore your customer base.
Broadening out generally in a fair and.
You know particular geographic or product drivers of that.
Yeah, no the the the situation is.
You know as as a as I said in the prepared remarks, you know when the.
In the first three quarters, you know year to date, our business was up 20%.
But the highest speed 400, gigabits and above its a real driver and.
And that's actually up 91%.
And it's with a range of customers and so it actually is the rapid growth of customers at the highest speed, which which are.
Results directly in our having.
Additional 10% customers.
And Oh, we don't you know <unk>.
We don't really see that slowing down quite frankly, the the you know there are a number of customers who are growing with these trends that are Ah Ah.
Strong partners and in 400 gig 600 gig 800 gig or.
Systems and and ultimately you know this this.
This was expected we would expect this to be a pretty important part of.
Our our dynamic through 2021 as well you know the well the first three quarters or were up 91% you know, it's actually at an accelerating rate in other words.
First quarter to second quarter to third quarter each quarter. The you know the amount of additional revenue from the highest speed has gone up so I think that'll.
You know that will change the face I take a bit of the tempered.
10% customers.
You know with with or without walk away and obviously you know we have zero wild way going forward. So.
All of the.
Dynamics that we're seeing in growth for 400 gigabit and above products and systems will be the drivers for four who's in that category going forward.
Hope that helps.
Well hear from Dave Kang with B. Riley.
Hi, Ed.
Hi. Thank you. Good afternoon. My first question is regarding your third 10% customer could it become number one in the fourth quarter being intellectually jump over and above your number two customer.
Well I don't think we're going to you know anything possible, but I don't think we will provide guidance on individual customers day.
Okay fair enough.
Just a law and that the customer I mean can you just at least tell us a you know or which products and four of which markets. You said long haul metro data <unk> anymore Oh.
<unk>.
Well, yeah 'cause it if it's all it's all for 400 gigabit and above and.
You know does the drivers of that are our laser modulator receiver.
And Ah and because you know that's the case because as we've indicated before hundreds we are growth we expect to start a mid 2021 as group at highlighted so it you know the but it is driven by 400 gig and above.
Applications, and we expect that to continue.
Got it and then my follow up is a you know sticking with 400 gig or actually 400 gigabit above between those three components for LNG 608 hundred on the can you just split you know of roughly <unk>.
Holiday break out.
Well, let's see the.
You know.
The number of Ah systems companies that are actually selling systems that it's.
800 gig today is is is is limited because its really just emerging.
So the preponderance of the volume and the revenue is in the 400 gig and 600 gig.
Both of those are going strong, but you know the 400 gig adds in a whole another dimension, because 400 gig and 600 gig bolthouse chassis based systems that leverage our our our component sweet, but then the advent of 400 gigabit.
Coherent module you know is is really.
Causing a pretty significant changes that you know we try and said it was a game changer and not really reflects the introduction of 400 VR products in the old Mississippi and the Qs of P.D.D. form factor and those are additive to products that we introduced 400 gig.
CFC to DCIO.
Which we started.
Shipping a couple of quarters ago. So you know I I.
At the moment it without a doubt 400 gig and 600 gig are considerably larger than 800 gig.
But you know the overall trend is is it's been a continued to increase.
The speed and increase the.
The revenues for each of these products now we do think that.
In.
2021.
The the ramping of 400 G. R is an important dynamic because.
You know that that just creates a whole series of use cases for increasing volume.
Revenue and you know contribution to our business I hope that helps.
Yes, and my last question. If I may is actually 100 gig. So how should we think about 100 gig with all these high speed optics wrapping a is it going to go down or go sideways a anymore color on that.
Yes. So you know that the dynamic is is for 100 gig is you know you have some increasing volume and price pressure you know.
You know we pay you may want to talk about the use cases are not a good case.
Yeah. So we spent hundreds you to stay more or less flat and it's still probably the wolf horse for awful long haul for a while.
And ER, so, we'll see that being flat, but we do see that in another few years or so called the three or four years. Later, you will see a penetration of how did you come to the edge of the network.
So she was the edge cloud so we're seeing hundred G. R. A small form factor, we will start to show up plugging another three to four years and that's what drives the growth on the cheap somebody pointed out.
Got it thank you.
The next question will come from Simon Leopold with Raymond James.
Hey, guys. Thank you for taking my question. This is multi chewing full time.
<unk>, that's going to continue to indicate expectations to grow customers outside of wall, where you buy 40, 50% next year I was just wondering if you could sort of help us quantify what the team is what do you need some of.
<unk> been 60 teaching Oh.
It seems that.
Thank you.
He moulds outside of what we might see kids to your money.
Funny, so barring appealing to you I just feel do you got into the type of skill and dispute on potentially some of these could become interesting customer for you I'm. Just wondering if you have any sort of coming more into teaching on how large do you maybe could be for you in terms of 21.
Oh, Thanks, my follow up.
Do you see any leads both actually teaches you don't usually announce nothing so you should not need a bible. Thank you.
So lets see there was a lot in that question Mauricio Oh, let's see let's start with the Oh you know the fact, the matter is as in our business in the third quarter.
We have 44% of our revenue this is excluding wall.
Oh away, 40% of our revenue.
As for 400 gigabit and above applications products.
And as I said, you know for the year to date that group of products. Now now you know 44% of our business it grew 91% year over year.
And and so there's a lot of tailwinds for that.
Going into two of the end of the year fourth quarter and then into 2021.
And.
You know, we're seeing in the fourth quarter, 16% sequential growth, which of course, you know is contributed to the to to what we are expecting now.
Because of the fact that 400 D.R., we expect to start mid year, you know the second half of the year would see.
It would see some ramzi our [noise].
You know for Q3 Q4 next year, though the precise and now you know I think remains to be seen you know, we're not guiding that we're not guiding out there at this point.
But you know what we what we what we know is and I think what Weve talked about is in the past.
As is the size of the market you know we've got a important growth terms, we have an 80% five year compound annual growth rate.
In revenue terms, it's about a 70% compound annual growth rate over the same five year period, you know as the market expands from what you know right now for 400 gig and above from about a $200 million Mark go into a $1.8 billion market out.
Five years from now so the precise mix on components the components for chassis based systems or 400, ZR modules that really remains to be seen but we have we have strong conviction that you know the products that we have launched [noise].
Go to you know.
Both the chassis based solutions into the module based solution. So we expect to participate in.
In all of that now.
You know you you you did also asked about you know recent recent deals you know I think what's important is that.
It.
You know I think.
What we've seen recently that deals do take time to get the closure. So certainly for the next year or so we would expect.
You know you mentioned five we would expect them to continue to operate independently and and and that's just fine. So I don't think there is a lot of Ah Ah.
A change in the market or the supply patterns.
You know in the immediate term, although as you know in the longer term and if it does add.
Add one more to consolidation, which is reducing the number of direct competitors in that space.
Hope that helps.
That's pretty helpful and they know about a quick housekeeping item. Some 12, 310% customers. This quarter, Oh boy, obviously, a 44% of sales I think mansion and could you quantify.
25 dealer to even if you know leads them to.
[music].
No I think we're just we're just naming 10% customers as we're required to do we're just naming it just saying that how many we have.
Thanks.
[laughter] Samik Chatterjee with JP Morgan.
Hi, this is trying to make the on premise.
Hi, This is actually Joe on for Sonic.
And yet so I guess my first question is actually following up on a previous question on the hallway and apologies for beating a dead horse here, but maybe if I ask it a different way and have you guys completed your due diligence relative to the restrictions and shipping to all always has the conclusion to that then that you can't ship at all.
[noise] you know I think the answer to that is there is an ongoing evaluation on on on a couple of different dimensions.
The way the other restrictions are hard to find.
No one has to have Oh.
Either their strict restrictions pertain to the use of U.S. technology and software and and you know we use a considerable amount of U.S. technology and software, but not exclusively we have a substantial amount of foreign made products.
Mm Hmm.
Most of which actually do use some the U.S. technology or software. So you know how are we or others, though about.
[noise].
The business is ongoing I don't think I would describe anything is done.
But certainly you know, it's it's very clear for the fourth quarter that there won't be any.
Well the way revenue.
You know and I don't and we're not guiding beyond that but for now zero.
No got it understood and then my second question is just relative to obviously Lumentum reported this morning, and they had highlighted a slow down in telecom customers just related to coal that impact.
On things like customers Trialing products, or just not able to physically deployed product and obviously you guys are highlighting some you have relatively strong growth here, excluding already particularly in high speed products, but just curious to hear your thoughts relative to Neophotonics business have you guys seen any moderation in growth as we progressed through the quarter.
Sure and into the first month of for Q relative now.
30 days ago is 90 days ago.
Yeah, you know the.
Essentially.
There are more deployments.
Existing systems, you know that that's that's an important element as opposed to.
Hi are ramping of new systems, you know you do see that and.
The corollary is that there is some slow down with respect to deployment rates versus expectation prior expectation.
On on new systems now you.
You know for telecom, it's it's therefore, it's a bit of a mixed bag for the data center interconnect. It's been quite strong and are you know what we see is a it's a mixture of those two I hope that helps.
No. It doesn't thank you for your anti trust.
As a reminder press star one if you have a question with a follow up from Richard Shannon with Craig Hallum.
Hi, guys I guess, two quick ones Hi, two quick ones from me I'm not sure I had to step off for a couple of minutes submitted and that makes a question on this but if we look into the fourth quarter with wild way are dropping out here or could we see one or two more 10% customers for the quarter.
Yeah, I think the you know as as I indicated that the third remarks, you know we've got we've got strong strong traction and when volumes of ramps. So.
No I think what I'll say is Ah you.
I will lose while away, but what we won't give precise you know outlook on how many.
Customers, but we have several other strong customers. So we'll we'll see how it plays out by the end of the quarter.
Okay fair enough somebody a follow on can those I cant.
Timber Bush in your remarks, you attended splits regarding C. R did I hear you say that you are expecting to qualify a first of a cloud it's a vendor in the first quarter did I hear that correctly.
No. What we said was well you know we do expect to do our first qualifications in the first quarter and we do expect that the you know the cloud Hyperscale guys are going to be the early adopters.
Okay. So the qualifications are starting in the first quarter as I would assume the ramp of the middle year. They know they've got to finish qualification that started at the first quarter of 2020.
But we would expect the way we would expect to be done by the first quarter of next year and and up but Ah I think in our prepared remarks, we will time did say that we expect to complete.
With with Big cloud customers in the in Q1 2021.
But do you have a guess or that she'd like you care to share and how many oh Gee our customers you expect to be shipping in volume I'd say by the end of next year.
Well I'll, just say somewhat staffing and shake that Ah I hope I, wouldnt underestimate that but no I'm not going to I'm not going to speculate.
Okay got together shot that's how come you didn't break it.
Thank you Richard.
Yes.
A question for Tom to Sallie with D.A. Davidson.
Oh, yes. Good afternoon, you look at the prospect of getting back to profitability in the future quarters does that require just the revenue growth you're getting from your non wallet customers or do you need to do more of the cost structure.
We will always look at cost structure.
As we as we have done over the last couple of years, but nowhere I, we expect to be able to get back to profitability without went all the way up.
In a as we said non-GAAP operating profit in Q Chris.
Okay, Great and then you made a comment about the increased R&D spending for 400 as we are in the fourth quarter.
It's a new higher level of spending or is there a one time issue Oh, that's a that's the one that's a one time enter repayment.
The four for 400 the office, Okay, great that was it thank you.
That will conclude today's question and answer session.
[noise] very good.
James Thank you and for everyone dialing in thank you for joining our call today and for your interest in Neophotonics.
We do look forward to updating you in the future and meeting with shareholders again in person once we're able to have a good evening.
That will conclude today's conference. Thank you for your participation you may now disconnect.
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HM.
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Yeah.
HM.
And.
Hmm.
And.
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Hmm.
HM.