Q4 2020 NeoPhotonics Corp Earnings Call
Good day and welcome to the Neo Photonics fourth quarter 2020 conference call. This call is being webcast live on the company's website at Www Dot on E. O P. H O T O N I C. S dot com on the events page of the investors section. This call is the property on me.
Photonics and any recording reproduction or transmission of this call without the written without.
Sorry, without the express written consent of Neo Photonics is prohibited I will now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.
Good afternoon. Thank you for joining us to discuss Neo photonics operating results for the fourth quarter of 2020 and outlook for the first quarter of 2021.
On the call today are Tim Jenks, Chairman and CEO with Penn Yan Chief product Officer, and that's E D Chief Financial Officer.
Tim will begin with a review of the Companys business in the fourth quarter and a discussion of relevant market trends will come will provide a summary of products technologies and growth drivers for our highest speed products. That's will then provide financial results for the fourth quarter and provide the outlook for the first quarter of 2021.
The operator will then open the call for questions.
The company's press release day management statements. During this call will include discussions of certain non-GAAP financial measures and information, including all income statement on balance sheet amounts and percentages other than revenue unless otherwise noted.
These non-GAAP financial measures are not prepared in accordance with GAAP and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP.
These financial measures and a reconciliation of GAAP to non-GAAP results are provided on the company's press release and related form 8-K being filed today with the SEC and can be found in the Investor Relations section of the Neal Photonics website.
Material contained in the webcast is the sole property and copyright of Neil Photonics with all rights reserved for.
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 for example, product and technology development customer demand inventory levels economic and industry projections and subsequent events.
Various factors could cause actual results to differ materially. Some of these factors have been set forth in our press release dated February 25, 2000, 2021, excuse me and are described at length in our annual and quarterly SEC filings.
Now I will turn the call over to CEO, Tim Jenks.
Thank you Erica and good afternoon Neil for.
Don ex completed a strong 2020 with revenue of $371 million, we continue to be a leader in high speed optical electronic solutions.
<unk> is the primary supplier of ultra pure light tunable lasers for the highest speed over distance applications and we provide the highest bandwidth receivers and highest baud rate modulators for the last three years, we've been steadily introducing new lasers modulators and receivers for the highest speed applications.
600 gigabit per second on 800 gigabytes per second in chassis based systems as well as several high several new high speed coherent module products for 400, ZR and 400, ZR plus applications as a result.
For Neo Photonics higher speed products is very strong with accelerating market adoption and deployment and related market share gains at 400, gigabits per second and beyond especially for lengths requiring the highest speed over distance.
These high speed deployments are among the fastest areas of gross growth on the industry driven by cloud and data center demand and they've been driving our growth and profitability.
Our fourth quarter and full year results are evidence of the strength.
Each of the following metrics exclude Huawei, given the tightened department of Commerce restrictions.
Our revenue grew 18% sequentially to $68 million.
This was again largely attributable to our products for 400 gig and above applications. These products grew 35% sequentially and.
And comprised 46% of revenue in the quarter.
On a full year basis. These products grew 92% year over year.
We have realized continual growth in our 400 gig and above product applications in Q1 of 2020.
These products grew 46% year over year and their growth accelerated to deliver 153% year over year growth by Q4.
Our strategy is to grow the business by focusing on the higher speed over distance solutions at 400 gig and above for telecom equipment providers within this the newest and highest data rate communication systems are operating at 600 gig and 800 gig per wavelength.
And they are now being offered by several of our customers who are directly or indirectly use our high speed components as a result, and in the first quarter. We expect the growth of our 400 gig and faster revenues to continue to more than double versus the previous year's first quarter.
As we have stated previously with the number of 400 gig on about ports being shipped approximately doubling each year.
And our market share increasing at these higher speeds, we're seeing our customer diversification continuing to increase.
In the fourth quarter, we had for 10% or more customers ranging from 10% to 22% of revenue.
Comprising 67% of our total.
For the full year, which includes Huawei.
Our 10% customers were Huawei at 40% Siena at 17%.
Asia Communications at 10%.
For comparison purposes, excluding Huawei.
We had three customers totaling 10% or more of our revenue with ciena at 29% Acacia communications at 17% and Nokia at 11%.
Products for chassis based systems operating at 600 gig and 800 gig or ramping.
And we continue to make progress in gaining design wins and qualifications for 400, ZR on 400, ZR plus coherent modules with Hyperscale data center operators.
Have shipped dozens of units for qualification and we have installed our first production lines for these modules that are now being ready to ramp volumes.
While we have had continued strength in the market for our high speed products in recent months, we have seen some softness with customers serving the north American cloud market. Following the substantial bandwidth deployments that were pulled into 2020 in response to the pandemic.
Longer term demand for our products for 400 gig on above applications remains robust globally, we anticipate some ups and downs in deployment rates that are typical on Dci buildup build outs.
May be exacerbated by share shifts among and between network equipment manufacturers, essentially all of whom are our customers.
With components for chassis based high speed systems, and 400, ZR and 400, ZR plus modules as the growth drivers for our business.
We believe rapid growth in our highest speed products will continue in 2021 and 2022.
We'll have our normal seasonality on Q1.
With sequential growth in following quarters.
From a long term network investment standpoint, we believe 2020 marked an upward inflection in high speed network growth.
While the pandemic growth needs to increase bandwidth deployment.
This is a lasting trend.
As the pandemic subsides, we expect that companies will move increasingly the hybrid workforce models on the future with continuing dependence on working from home. This will increase the need for bandwidth at the edge of the network and the need for high speed interconnects throughout the network, thereby continuing to benefit our business.
Virtually all of the leading network equipment producers around the world use Neil for <unk> products in their flagship high speed systems over the last three years, we have developed advanced manufacturing methods for these higher speed 400 gig and above products scale their production on.
All while steadily increasing our manufacturing utilization, reducing our depreciation cost and expanding our margins.
In spite of the impact of U S. China trade tensions, we see our actions benefiting our business for the longer term.
I would now like to turn the call over to Dr. Kerr will opinion, our chief product officer to provide you with more details of our roadmap for 400 gig and above products and the trends that are driving their adoption.
Yes.
Thank you Tim and good afternoon.
The acceleration of our components for 400 and above chassis based systems, which drove much of the growth in 2020 is a strong beginning.
But the market continues to move to higher and higher speeds, including 600 gig 800 gig we are increasingly well positioned to ride. This next wave of growth.
We have announced and are now sampling our newest 96 gigabytes component suite for superb 800, GCI for <unk> long haul transmission enabled ultra.
Also low noise tunable lasers, and also wide bandwidth modulators and receivers.
We expect these products were reached general availability in Q4 of 2021, adding to the revenue stream of our leading 64 gigabyte components suite.
Okay.
Net units on top of these chassis space opportunities is the 400 ZR informed at the a plus coherent module market.
We believe we have been a leader in launching 400, ZR and ZR plus modules.
These products effectively double our addressable market, while serving a particularly fast growing segment.
Given the importance of Hyperscale Metro data center interconnect applications.
We believe cloud providers, especially Hyperscale data center customers will be the early adopters of the technology.
These will be new volume customers for us.
Our customer base of network equipment manufacturers.
Our new for them to Dr. Yopp, plus coherent module products are game changers.
You've had your state of the art data rates.
Some level interfaces in very small low powerful factors, enabling them to be plugged directly into routers and switches bypassing traditional DWP and equipment.
This capability enables operators to realize major savings in network equipment.
As well as lower total power consumption and better environmental sustainability.
Thereby driving adoption rates and expanding use cases, including in new areas, such as interconnect for distributed edge networks and for <unk> sales sites.
We have samples are formed a Z R <unk> D and OSP modules to multiple hyperscale customers and on.
All in the test and qualification process.
Well one of the very few who are capable of meeting the challenging for it as your optical specification.
We continue to expect completion of qualifications in the first half of 2021.
With deployment starting in the second half of the year.
An important addition is that we have now demonstrated for them does the a plus performance <unk> form factor by leveraging the industry, leading optical performance of our tunable laser and silicon photonics components.
We believe that Florida is the plus in <unk> form factor will be widely adopted and cloud based metro networks for <unk>.
This is important.
The 400, ZR plus market segment substantially expands that of standard for under Dr.
We expect that all for does the on plus modules at Metro and longer distances will provide a third major gross revenue stream that will begin to ramp in 2022.
Yields on our high performance 64 gigabyte components.
Obviously for <unk> 400 G modules are now shipping in a high performance fee plus plus version.
Offering a wider optical spectrum, and therefore higher type of capacity.
This product has demonstrated the best transmission performance for 204 hundred G available in a <unk> form factor.
Combining its unique ability to operate in 75 gigahertz channel spacings with.
With the wider SP, plus plus spectral band on.
On a 52 desio supports fiber capacity that leads the industry at 32 Terabits per second for regional and Metro applications and 16 Terabits per second for long haul.
This widespread top performers equals or exceeds line called day, 64, gigabyte solutions, while reducing power consumption approximately 40%.
Each of these new high speed systems, including 400, ZR and ZR plus.
Plus applications operate over TWD on line systems, including open line systems.
These require specific high performance multiplexing and day multiplexing products that have unique channel spacings and filter shapes, including China monitoring capability.
For these applications are a simple multiplexing products or <unk>, specifically designed for the ZR as long as we are plus applications have completed qualification and will be deployed with open line systems in conjunction with the equivalent of one of your on networks.
We are at the early stages of several long term macro trends.
We see rapidly growing global bandwidth demand as a result of cloud services.
The new requirements of remote working on.
Official intelligence and machine learning three D sensing on life applications, plus <unk> wireless roadhouse.
As a result.
Starting time as we believe our technologies for speed over distance meet these growing needs at the heart of the industry.
With that I will turn the call over to our CFO, Jeff <unk>.
Thank you Ken and good afternoon.
EMEA photonics continued to execute well for a tough 2020.
We're seeing the results of our investment in speed over distance products with revenue with growth in revenue overall for the year and in the 400 G and higher speeds.
We delivered substantial increases in gross margins and profits for the year.
And when the department of Commerce tightened the rules around shipments to Huawei, we took action to improve structural costs and reduce expenses, while continuing to invest for growth.
We're ahead of schedule on those changes.
All of this resulted in record levels of cash.
Summarizing the full year 2020, we delivered revenue of $371 million up 4%, even with the additional department of Commerce restrictions.
Non-GAAP gross margin of 31% a four point increase over 2019, and GAAP gross margin of 28% a three point increase year over year.
Lower year over year operating expenses and increased operating leverage while we maintained the investment that will drive accelerated growth.
Total year non-GAAP profit of $16 7 million up from $8 4 million profit last year, and GAAP profits up from a loss of $17 million in 2019 to a loss of $4 million in 2020, even with the restructuring costs.
And lastly, free cash flow of 41 million up from 25 million with net cash almost doubling from 47 million to $90 million.
By all metrics. This was a strong year for me on photonics.
Moving to Q4 performance good revenue growth from western Western customers and strong execution resulted in higher than expected Q4 revenue of $68 2 million low.
Lower operating losses, and a non-GAAP EPS loss of <unk> 14 per share well above the expected 18 per share loss.
As we indicated last quarter, we did not have any revenue from Huawei in Q4.
The demand for our products and our strong growth on the market.
<unk> had an 18% sequential growth from our other customers, we are well on our way to a more diversified customer business model, even before we ramp for 400 ZR modules in the back half of 2021.
Our non-GAAP Q4 gross margin was 24, 7% down eight nine points, but still in the upper half of our guidance range.
A small increase in product margin was more than offset by higher excess capacity charges as expected given the lower volumes.
Total non-GAAP operating expense for the fourth quarter was $23 7 million $10 8 million from Q3 and better than expected on faster execution of spending reductions.
As a reminder, in our last earnings call, we announced that we expected to reduce spending by about $2 million per quarter from Q3 as part of our restructuring.
Non-GAAP operating loss for the fourth quarter was $6 9 million or 10% compared to a 10% profit in Q3.
As a result of the department of Commerce action.
Below the operating profit level, we had two largely offsetting impacts and foreign exchange and the non-GAAP tax adjustment.
In Q4 appreciation of the Chinese Yuan.
<unk> to the U S dollar drove a foreign exchange loss of approximately $3 5 million.
As a reminder for functional currency of our China operations is the you on the.
On the FX losses, driven by the revaluation of China balance sheet items to the end of quarter exchange rate.
The foreign exchange impact was largely offset by the true up of the non-GAAP tax for the full year of 2020 of $3 5 million.
This true up reverses the non-GAAP tax adjustment charges.
And our foreign entities, where the expenses were reimbursed by the U S and as a result covered by the U S net operating losses.
This will be the method that we use.
For non-GAAP tax adjustments going forward.
Non-GAAP net loss for the fourth quarter was $7 2 million or <unk> 14 per share compared to the midpoint of our expectations of a loss of <unk> 18.
On faster implementation of the operational changes we outlined in Q3.
I will close out my discussion of the fourth quarter income statement with a review of our GAAP results.
Fourth quarter gross margin was 22, 7% down about a point from Q3 on lower volumes.
Operating expense was $23 3 million down $3 6 million from Q3 on.
$3 2 million of one time events.
Mostly for settlement of our litigation with APAC Opto electronics as announced last quarter.
Operating loss for the fourth quarter was $7 9 million and net loss was $11 5 million, which included a net gain of $2 1 million of legal settlements and advisory services.
<unk> of $1 million on the sale of assets and expenses of $3 3 million of stock based compensation expense <unk> 7 million of accelerated depreciation and restructuring and approximately <unk> 2 million of amortization of acquisition related intangibles.
Turning to the balance sheet, we finished the quarter with $123 million in cash investments and restricted cash.
This cash position is the highest in our history.
Net inventory was $47 million flat versus last quarter.
Days of inventory was 80 days as we work through inventory and raw materials orders that were in progress when the additional restrictions by the department of Commerce were announced.
Cash from operations was just over 5 million and Capex was just under $5 million, resulting in free cash flow of approximately $1 million.
We remain in a good position to continue to drive the growth of Neo photonics.
Okay.
Before I discuss our revenue and earnings outlook I would like to remind everyone of our public filings with the SEC and our Safe Harbor statement included in our press release that discusses the risks and uncertainties that could affect future performance, causing.
Actual results to differ materially from our forward looking statements.
As Tim mentioned, we have seen several changes in recent months.
Notably we have begun to see softness at the start of the year from network equipment companies, serving the North American market.
We believe this is due in part to the timing of bandwidth deployment related to the pandemic.
Current customer indications are that some demand has moved to later in 2021 due to travel restrictions eliminating deployment of new systems.
This leads us to estimate full year revenue growth, excluding Huawei of 25% to 35 per cent.
To reiterate we believe overall demand in the mid and long term for 400, G and above components and modules remains unchanged.
In addition, as a result of our efforts to develop products, which comply with the most recent pis restrictions for Huawei.
We expect a modest level of shipments to Huawei in forward quarters.
With these changes we still expect to return to operating profit in Q3.
Yeah.
As usual Q1 is our seasonally lowest quarter for revenue and margin due to the Chinese new year shutdowns and implementation of annual pricing reductions.
We improved from that point as volume increases and on the implementation of cost reductions through the year.
The companys expectations for the March 2021 quarter are revenue in the range of $57 million to $62 million.
GAAP gross margin in the range of 16% to 20%.
Non-GAAP gross margin in the range of 18% to 22%.
GAAP diluted earnings per share in the range of a 28% loss to an 18 fat loss and non-GAAP diluted earnings per share on the range of a 20 cent loss two attempts that loss.
These numbers are reflective of approximately $50 7 million basic shares.
In summary for 2021, we are focused on driving growth in our 400 G and above product lines.
Moving into the Hyperscale market with added customers for our 400, ZR and 400 ZR plus modules.
And a return to profitability.
Our strong cash position and the restructuring allows us to invest for that growth, while positioning us for even higher levels of growth and profit in 2020 true.
This concludes our formal comments and I would now like to ask the operator to open up the line for questions.
Thank you if he would like to ask a question at this time. Please press star followed by the number one on your telephone keypad, if you're calling for a speaker phone. Please make sure. Your mute function is off to ensure you're sitting on can reach our equipment again star one to ask a question and.
And first we'll go to for hard Michelle I'm from MTM partners. Your line is open.
Thank you for taking my question Force a clarification and then a question on cloud.
Classification.
He doesn't incorrectly that you had for debt for certain customers in the fourth quarter or so.
What was that for some person.
So for the.
The fourth quarter, we did have for customers.
The percentage of revenue range from.
10% to 22% and as usual.
For those for added up to 67% for hot.
What we did is we did disclose in the prepared remarks, the the for customers or the 10% and above customers for the year, Okay and.
Uh huh.
So I hope that helps.
Okay.
Yes.
That would be my question.
Two parts to that one on.
Diversification.
Can you tell us.
In terms of where you think.
Where are you on revenue that day.
What type of.
Dogs to keep it low you expect do you think we are with a total greater than 10%.
Total revenue for the year.
And then in more broader or would there be a question for you too.
Involved.
As you look at your 800 gig.
Debt against it.
The data for the.
There's talk about per.
For technology.
Higher margin Las Vegas beam, but maybe you could do for bogs do you see that as a potential expansion opportunity of bad debt.
Further it has for diversification.
Our strategy thank.
Thank you.
Yeah. There's a there was a lot in that Oh, let me let me comment.
First of all about 400, ZR revenue and then I think I'll I'll ask a will opinion to comment on the the.
For the use of technologies for intra data center.
You know the expectation based on customer schedules for 400 ZR is that.
After qualifications, we may have some low level production by the end of the first half, but primarily that would be for ramp purposes. It would be in the second half and it's conceivable that it could reach it could reach 10% of our.
Of annual.
Annual revenue, but.
I think that's a you know it's in that it's in that range you know the.
Different customers have different schedules and so it remains to be seen how many people actually.
Started deployment and have meaningful volume in 2021, when do you want to comment on the on.
On the question about cash.
Cam for technology.
Yes, so just only so yes.
Yes, 800 G.
Technologies I think both the Pam for coherent will likely be used for.
For coherent side each other.
On a sensor would be optimal G that could expand our Tam.
And further diversify our business going forward in the meantime, also just keep in mind, we also have optical devices lasers and other.
Optic devices that should we think going to peg for as well. So we do see both depend for ankle humans will play a role in the data Center 800 G and we.
To view those as the both the opportunity for us to diversify our business for them.
Okay.
Thank you I appreciate the answer.
We'll go on if I can ask for a follow up.
Regarding the universal.
All right.
<unk> technology for inside the 800 gig.
All per children.
If I'm not mistaken there are not many existing intra datacenter optics suppliers that have modulators debt.
Attendance.
That kind of performance.
Or do you think debt at 96 type of deal.
Gabor type of performance you think Pam technology, we didn't have any kind of free with you guys on whether it's.
Well I haven't like approach or even.
Beverages.
Hi, SNP modulator technologies could you extend debt.
For solution.
Okay.
Yes, I think the answer is yes.
800 <unk>.
96, or even higher baud rate and we do think there's such a high bar rates is getting very challenging to England and debt.
Certainly.
Strength also new photonics, so we definitely see that option with G will always analogies to be applied to <unk>.
Nice to speak about or higher.
I appreciate the answer thank you for myself personally.
And next we'll go to Dave Kang from B Riley Your line is open.
Good day, thank you.
Hi.
Yes, so I'll ask you. The first question debt Oh, what do you think are the cash cash usage will be first half I think you gave us.
On that data point for you know the fourth quarter on fourth quarter, what about for first half this year.
Yeah, we don't as you know, we don't generally forecast our cash flow other than to say that capex runs for the 6% of revenue on average for the any given year.
And we still expect to we have also said that we expect to be on the high end of that range for 2021 because of the ramp of 400 ZR. We are at the moment is as you saw on the numbers on our inventory has been about flat. So we're still working to burn off some of them.
The inventory that was on order.
As the department of Commerce tightened the rules around Huawei.
Got it and then.
But maybe Tim maybe you can take this price adjustments are in December or late late last year.
Price price reductions are each year.
You know historically, they've been on the 10% to 15% range, but.
This year is actually a little better than average so low end of that range.
Got it.
Do you guys have been kind of a chip supply chain issues.
I'll tell you what we are we're reading about it we're seeing some impact some suppliers are complaining about it.
Thus far we haven't.
Actually had any impact to our supply chain, but we are on top of it in terms of monitoring and.
Looking further up the supply chain, but.
I hope that addresses the question.
Yes.
And then maybe my last question is regarding your first quarter outlook assumptions for how should we think about you you gave us on some color. That's true at all you know how the 400 gig plus will you know growth.
Year over year how.
How will that change high speed optics versus non high speed optics. It was high speed was about 46% how is that number going on.
How will that change in first quarter.
Yeah, so actually our high speed, which we've classified as 100 gig and above.
Was I think for the year it was 92%.
For the full year.
Thanks for that.
Sorry, Jim Army troops and 400 gigabit slot for our gig draw strength.
No I haven't I understand per cent, yeah, I thought I thought so but I just wanted to clarify okay. Okay.
The.
What we what we say is high speed products as a product group was $92 92%.
Of revenue.
In the 400 gig and above products.
You know they they are.
They've been accelerating throughout the year and by the.
The fourth quarter or the fourth quarter a.
Contribution from 400 gig products for 400 gig and above applications.
Actually was 46% of total revenue and are in my prepared remarks, I also said that that was up 153%.
Over the same quarter of the prior year.
So.
It has been growing rapidly and it's now approaching half of our business.
So can I assume that it could be more than half in the first quarter or so it sounds like you know 100 gig into low has experienced some softness.
Well I said in my prepared remarks that we actually do expect in the first quarter or two for it to again double over the over the prior.
First quarter.
Whether or not whether or not that gets to.
You know I I'd say, we're creeping up on half of our business, but you know on I'm.
I'm not going on I'm.
I'm not going to actually say when that happens I don't I don't know enough.
And actually this will be my last question is just to be clear when you talk about some some softness on some push outs.
I'm, assuming you're talking about.
Optics below a 400 gig.
Is that right.
Okay.
I think we're seeing it in the overall market.
For.
And its a deployment timing thing the same as some of our other co travelers in this market has been had been talking about the 400 gig in up will also be included just because it is a system deployment timing.
A timing issue related to.
Covid and travel.
Got it alright, thank you.
And next we'll go to Paul Silverstein from Cowen and company. Your line is open.
That's what actually did hear and I'm pretty sure. The response you just gave about the new Gpus for weakness.
I just Wanna, Michigan.
From a demand for stuff.
Youre not for your Salt demand weakness you reference and you believe book due to logistical issues related to COVID-19 insurance growth.
The ability of your.
Customers get access as usual the net loops, whereas you will also be on components of the weakness.
So what we're hearing from customers is more of the former.
And.
You know that there is.
Kind of a chorus of of <unk>.
Customer interest debt that suggests that they expect their demand as a result to be.
More back half loaded.
And.
So overall, we are now kind of in the current quarter were hearing more concern about chips as I indicated previously that hasn't impacted us at this point, but to the extent that it impacts our customers ability to.
Do something with our products that may have it may have an impact, but generally the bigger impact thus far has been.
How has COVID-19 affected the rate of bandwidth deployment certainly in 2020, and then how is it affecting you.
New system deployments today.
Yes, as you well know Paul the overall demand profile for increasing bandwidth is is the underlying underlying profile with <unk>.
Drives our business and.
It has not changed.
Yeah.
Alright.
As we get closer.
I don't know who.
Yes.
Logistical issues instrument zone.
Your customers getting access insurance for the networks and small simple.
Moving on.
On the mobile.
Okay.
It's hard for us to to you know.
Go to a root cause basis, but what what their guidance has been and what the conversations with them have been in.
Is that there is an impact on deployment rate very very recently, we've heard some.
References.
Two chip supply.
Uh huh.
Theres also kind of the the latent effects of share between and among network equipment companies as a result for the Huawei restrictions on the hallway.
And so no share shifts between customers.
Can impact short term.
Orders, though the overall demand rate may not have changed.
So that's as we see it today.
It shouldn't be albeit we would look for journeys to assure shape.
The sugars for Huawei, Nokia Huawei to two new items.
Zero, well simple insure them for the winter debt mature, but it's not a single channel that you're really seeing is that true.
Forget.
Yeah in the case in the case of share shifts because.
Worse, we're supplying products.
To each other major network equipment companies and as we've commented in prior quarters is to the extent that there's a share shift moves from Huawei to another one on the western customers.
Net net overall that may end up being favorable to us.
In the.
The situation with <unk>.
Share shifts between.
For a month.
Western customers is a little.
A little harder to quantify but it also is the question right now is to you know.
Who's winning share and where.
Understood Jim I recognize you won't get them to move on.
The question, obviously, you always saw the bids before the announcement of <unk>.
They're big numbers as you said again, we're working on is you won't see every day.
So.
Direct or indirect as you would in all that's going on it's own transitory impact on speed.
Mortgage loans.
Body <unk>.
Spectrum would be crazy not to go ahead and spend more than Nutri force you'd get bids for pizza and operational on the other hand.
Since he was writing some concerned about the day, giving cash flow.
So you have to bear metrically opposite forces and you said you can share with us.
Well, then maybe you have some perspective here.
So what we are hearing so far is still the.
The demand is still kind of second half of the year loaded would you see the result of seabed auction today, it's on the FCC and the carrier spend a lot of money right, but we have not heard any changes on the demand profile being more of a second half will be year low.
Yeah.
Well I appreciate that true two quick questions on labor.
Quickly on.
The debt can you share with us and there's a reason for the question.
How much sits on 800 gig as a percentage of total revenue for percentage of the 400 plus.
Total number was it meaningful.
Now we just have we just have 400 gig and above and that was 46% of revenue in Q4.
Alright.
True.
We are.
We don't we don't break it out because on a lot of cases, we can't you know and.
But we're very clear on which products are used in 400 gig and above but because of the fact that the products are actually baud rate rather than a bit rate.
It's it's it's not really possible to be as granular as what 601 800.
Understood one last quick question for.
Your customers do you expect.
Revenue this year, how many commitments for Ya.
How many commitments for what the for Zia.
Okay.
Are you now.
I think we're going to we're going to forecast that when we can actually talk about design wins so far.
There are only a few who actually have schedules for 2021. So it's a it's a it's a modest single digit number so it's not a lot.
Alright, I intrusions on pet.
Thanks for.
Okay. Thanks, Paul.
And next we'll go to sneak <unk> from J P. Morgan Your line is open.
Hi, Thanks for getting me answer question here.
Oh, great. Thank God.
On Florida on gross margin Q O Q.
Looking back you did about a 33 total focus on gross margin on about 100 million low forever.
As we look for or how should we think about root zone.
In terms of what you need for home revenue just given debt.
Thanks for going to change and maybe you've done Austin for humans.
Absolutely.
I just wanted to go to.
Not a specific items.
It gives you an award revenue.
For those.
Gross margin level and just also on the second bucket I wanted to understand how are you.
Back on gross margins once you launch on mortgage.
Thanks.
So I'm going to start with the second question first.
We do not have any estimate for the 400 ZR margins, yet and those trends are all still in discussion.
We do expect them to be healthy.
Hum.
Once we get through the initial ramp so you've got a I always got in the initial phases of our product is got some yield improvements to go off and do.
On the overall gross margin our target.
It remains 35% we hit 34 in Q3.
And over $100 million in revenue so that that remains our target. We have done as you can see in our historical financials, we have done substantial improvements on gross margin so weird.
68 million in Q4.
For revenue and we're at 25% gross margin.
And we were at our last time, we were down at 68 million in <unk>.
In revenue, we were at 15% gross margin so we've substantially.
The improved gross margin over.
Overtime, but.
Until we hit our target of 35% that remains our target.
Okay. Thank you thanks for taking my question.
And next we'll go to Tom Diffley from D. A Davidson your line is open.
Yeah.
Just following up on all followed up on the last question do you expect any meaningful changes in opex over the next couple of quarters.
Cutting costs, but also you've got a ramp coming up so just curious what opex is expected to do.
What a good question.
Is that as we said we did a.
Restructuring worried about $24 5 million and this is all non-GAAP in Q3.
The midpoint of our guide for Q1 for about 22, and a half so we're hitting that target for that $2 million of restructuring savings a quarter earlier than we had initially forecast on what we will we could see.
Opex might pop up a little bit as we're doing the final ramps for the 400 ZR just because that is a major driver of growth and if we need a couple of extra dollars and we're certainly not going to work going.
Going to hold that back, but I would expect to remain as we said for the restructuring in the 'twenty two to 'twenty three overall range for it.
Until we get Rev.
Revenue and profit back.
Okay that makes sense and then just two quick is on the 400 ZR.
Dean a qualification that happened in the first quarter.
For the second part of the question is do you need more than one customer to hit your 10 per cent of revenue this year.
So.
It is the case that initially last year in 2020, we had anticipated that our initial qualifications, maybe maybe completed by the end of the first quarter. It's now looking like its in the second quarter as we as we indicated.
You know the answer to your second question actually depends on who the first customer as you know and.
And it's it's a it's a customer and share award question that it's entirely possible for us to do it.
But we don't we don't know so I think it would be inappropriate to try and predict that.
Outcome.
Okay that makes sense. Thank you.
Thanks, Tom.
And next we'll go to Simon Leopold from Raymond James Your line is open.
Thank you for taking.
But at least on consignments became a REIT.
Vince.
Just on.
Apologies if I missed that.
But did you guys provide you on your revenue contribution from 400 gig on a boat it's Huawei.
For 2020.
For 400 gig and above.
Ex Huawei now we just provided it in the fourth.
The fourth quarter, which was.
Which was 46%.
Yeah.
Let's say for the for the for the year.
Here ex Huawei I think it's 35 per cent.
Of total sales.
Thank you.
And then on them.
Thank you.
We are I think well.
For that.
I think on her.
No it stage.
Revenue growth from 25, two percentage year over year.
Moving to one.
Well you mentioned was vs.
Softening that we're seeing for them, so oh listen Oems on people go to get too low.
North America demand.
<unk> expense.
On that softness.
What can what is that we're talking about it more.
What scale operators.
Components to go into.
Let's go on their words.
North America tier one operators.
You could talk about that please.
So I think you've seen a lot of this kind of pile on after I'm done you've seen a lot of this from other players in the market as well it looks like we're all kind of seeing the same thing of just a pause and deployments from and for US we see it from the North America.
Equipment.
Our network equipment companies.
So I think it's it's a I think it is also a bigger content.
And those guys all tend to be serving Dci.
But where there is you know where those deployments, it's not limited to one.
Thank you on that.
Hum.
Good day to day, we are.
Now you.
Qualification for the patient.
Thing second quarter versus the first quarter before COVID-19.
You can talk about the competitive landscape.
Thank you please identify acacia.
I'm sure you're closer competitors.
Our market.
That continues to be the gains on that competitive.
But it is true somehow expanded to include always on.
I have a follow up.
Yeah, No I think you're accurate on ACO.
We are I think we're one of the very few who can.
Who can meet these competitive specs currently in and are the two that you decided you know we do see them out there as well so.
I think in addition to near Photonics, Acacia communications and in five.
Have for.
400 ZR.
I think the there there are a lot of considerations here because there are 400, ZR and there are 400 ZR plus.
Opportunities going forward. There are also considerations about power envelope power consumption and so as companies are initially rolling out products, it's meeting the appropriate.
Pacification, but.
Keep in mind also that you know of course Acacia.
In a.
Ah contract to be acquired by by Cisco and similarly in Fi.
Is planning to be acquired by Marvell, and so I think be a photonics is the independent operator.
In this conversation.
Yes that makes sense.
I'll come back very quickly on debt.
Our senior debt.
One of your large hyperscale customer good quantify.
How should we think about your working capital on it.
For the rest of 2021, given that some of the requirements of these hyperscale operators in terms of the amount of inventory on hand.
Quite a few have et cetera.
Oh, absolutely absolutely. These are fairly demanding customers are they ask which you carry a certain amount of of inventory for them on their site.
And commit to certain levels of replenishment rate. So we would expect our our working capital to increase.
Yeah.
And which is why we've got $123 million in cash and people ask me on a regular basis. What are you going to do with all that cash and my My General response is priority number one is absolutely making sure that we can ramp these web scale customers.
And next we'll go to Alex Henderson from Needham Your line is open.
Thank you.
That's really all I was hoping you could talk.
Since you're on the subject here.
On the relative.
Again, it is a disadvantage as a 400 gig ZR versus the 800 gig products.
Out there.
To what extent.
There is a.
Lower.
Power envelope.
The difference in cost per day.
Sure.
On some other elements in terms of flexibility.
How is the competition between 800 gig and 400 gig we are setting up.
Hey, Alex simply speaking.
That's a great question.
<unk>.
This is how we view this 800 GE is going to be a universal platform. As you know it goes you know short distance Dci to long haul.
We do see the <unk> strength really in the us for long haul high performance applications, and we do see 400 ZR.
Being able to bypass teed up the inbox, just plug into our routers or switches.
<unk> provides the other flexibility and potential cost savings to the year to go to the west web scale customers. So you know.
We see on did you being a universal platform powerful.
But then we see for one of the our being a floor.
Flexible platform, that's a cost reducing and.
Enabling new applications.
I think what I'm, saying.
On the Ashford.
That's true then.
Well.
So Tim you know certainly the use cases, you've got the 400 ZR initially, but then there's.
As an opportunity for the new use cases to emerge beyond D C I and so that goes.
With with 400 ZR plus on longer reach then you're able to start accessing metro area Interconnects <unk> backhaul, and then potentially a longer distance regionals, but you know that takes place over time.
Yeah, So what I was asking though.
Look at it on a cost per bid basis, just for people to try and see where it doesn't strike me as.
So our competitive advantage product it suddenly in the fact that it's plausible.
It changes the architectural.
The way the Transceivers are deployed.
That's really where it sparkled and changes to the dynamics of that.
I used to think about this as an architectural issue as opposed to.
Just a simple cost per bit.
Power on blood patient.
Actually the first to think about really is the cost per bit issue because you skip the entire teed up for you on box and all the associated clients value connections right. It was really plug.
You save one layer you go directly plugged the day.
<unk> capable into a router prior to this it was not possible to plug a relative capable plausible deal with GM that can go long distances.
Before but now this is really the first time that happens. So you can think about this really is a cost driven approach and which then results in the architectural change.
But it's in the architectural change that the cost per bit is lower not the cost per bit per well on a per white spaces.
If I don't look at the change in the architecture.
G transceiver in.
Two other existing GWB on box.
It wouldn't have a cost advantage would be actually a disadvantage.
Sure Yeah, that's probably true for debt.
That's right.
Right right, but does not change it is enabled by the fact that you have a very small plausible for factor yes.
And next we'll go to harsh Kumar from Piper Sandler Your line is open.
Yeah, Hey, Thanks for fitting me in quick question first of all what do you think.
Aggregate run rate will be for 400 gig plus products.
As you either enter second half, where you answered the other telling me on let's say.
Harsh this is Tim.
Okay.
The.
The answer to your question.
A couple of parts. The first one is that.
With the rapid rate of growth of.
400 gig that we've experienced this year.
You can predict the high exit percentage however.
It's also.
[noise] noteworthy that.
Our our passive products as <unk> said in the prepared remarks, you know we have.
We have.
Products that do Matson demos functions that are particularly good for the 400 ZR architecture that will also deploy <unk>.
Those products are in or are there not on our high speed group, we report them as part of our.
Network products.
And so we would expect growth there and then in addition, as Beth said in the prepared remarks, if we do.
Have some level of increased shipments for lower speed.
For example, there are there are some current.
Tenders pending for.
And in China that tend to be at a 200 gig. So there are there.
There are possible growth areas that are not 400 gig too.
Uh huh.
Basically.
Offsets the rapid growth of our four.
400 gig so I think we're not going to get too high and forecasting we would like to see it would be more than half of our business, but hard to predict at this point.
Okay for my follow up on the loss can you you talked on loans about softening that youre seeing that share.
And as for your customers.
I was wondering if you would have visibility one level below that in other words, the actual hyper scale always on.
The cloud guys or whoever it is that as debt you think that maybe you can just coming from what do you think is causing that is at some level of inventory build as adjusted they feel like demand peak.
If you have any visibility on that would be really helpful.
In addition to other things we've already said we think.
There's also a overall share shift and so we you know.
I think that'll play out over the next quarter or two as we see.
Deployment rates happen.
With with them between the network equipment companies.
And as we said earlier you know, they're all our customers, but how that share shifts plays out.
Matters.
Okay.
Okay. Thank you.
Thank you.
And at this time I will turn it back to Tim Jenks for closing remarks.
Well, thank you for joining our call today and for your interest in the photonics.
Yeah.
The core trends of the industry play into our strength in 2021 and in subsequent years. So I'm very proud of our team for what they've achieved we do look forward to updating you in the future.
Have a good evening.
And that does conclude our call for today. Thank you for your participation you may now disconnect.
Okay.
[noise].
Yeah.
Okay.
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