Q1 2021 NeoPhotonics Corp Earnings Call
[music].
Good day and welcome to your to the Neo Photonics first quarter 2021 conference call. This call is being webcast live on the company's website at Www Dot Neo photonics dot com on the events page of the investors section.
This call is the property of Neo photonics, and any recording reproduction or transmission of this call without the express written consent of Neo Photonics is prohibited.
I'll now turn the call over to Eric Erica Mannion at Sapphire Investor Relations.
Good afternoon. Thank you for joining us to discuss Neo photonics operating results from the first quarter of 2021 and outlook for the second quarter of 2021.
On the call today are Tim Jenks, Chairman and CEO will Canyon, Chief product Officer, and Beth Eby, Chief Financial Officer Kimberly.
Tim will begin with a review of the company's business results from the first quarter and a discussion of relevant market share issues and trends.
Wilson will provide a summary of products technologies and growth drivers for our high speed products.
Beth will then provide financial results for the first quarter and provide the outlook for the second quarter of 2021.
The operator will then open the call for questions.
The company's press release and management statements. During this call will 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 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 in 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 Neo Photonics website.
Material contained in the webcast is the sole property and copyright of Neo photonics with all rights reserved.
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 April 29, 2021, and I've 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.
Neo Photonics again delivered strong results in the first quarter with revenue of $61 million, which was in the upper half of our guidance range.
Gross margin and operating margins were in the high end of the range as well. These results were driven by the more than doubling of 400 gigabit and above product revenue, which grew 134% on a year over year basis and comprised 52% of total revenue in the quarter.
Demand for Neo Photonics high speed products, including Ultra pure light tunable lasers, and 64, gigabyte modulators and receivers remains strong with accelerating market adoption and deployment and related market share gains at 400, Gigabits per second and beyond especially for Lynx, requiring the highest speed over distance.
These highest speed deployments are among the fastest areas of growth in the industry and driven by cloud and data center demand. They continue to drive our growth in addition to expanding our customer base.
With our high speed product growth, we had 410% customers in the first quarter. These customers range from 12 to 26 per cent of revenue and together comprised 74 per cent of revenue.
We believe the growth in demand for our 400 gig and above components for chassis based communication systems is in early innings.
As the market continues to move to higher and higher speeds, including 600 gig and 800 gig we are increasingly well positioned to capture this next wave of growth.
Our 400, ZR DD QSS P and OSP coherent modules for data center interconnect applications.
And our C F P to D. C O modules for telecom networks at 400 gig and 200 gig long haul applications continue to make progress as well opinion will detail in a few minutes.
Demand strengthened for multi rate CFP two D C O coherent modules within China in the first quarter. These modules use our leading 64 gigabyte components suite as well as our C plus plus laser and other extended tuning range products to increase total fiber capacity up to 50 per cent.
And the customer network trade off between speed and distance network equipment manufacturers within China are utilizing our 64 gigabyte high performance components for long haul applications to achieve 200 gigabit over a single wavelength.
Our multi rate 400 gig.
F P to D. C. O module is tailored to regional and metro distances combined with our C plus plus laser product. We believe our module solutions deliver the same if not better performance as chassis based systems, while consuming less power in a smaller form factor and lowering cost per bit.
<unk>.
We see expanding activity in the western 400 ZR market.
Which initially targeted Hyperscale data center Interconnects.
And then 400, ZR plus smart modules targeted at regional and Metro applications.
Beyond Hyperscale data center operators, we now see more interest in 400 gig module solutions from network equipment manufacturers. This is important as it supports and validates our view that 400 G R and its architectures.
Is a large market opportunity delivering significant savings to network operators.
We are conducting qualifications with multiple potential customers based on current schedules, we expect to increase production to hundreds of units this quarter and two initial deployments in the second half.
Near term demand in western carrier markets is muted.
Our customers tell us that they're seeing modest deployment rates at this point in the pandemic as well as pauses in spending by large carriers. Following the U S. Five G wireless spectrum auctions.
The muted demand is exacerbated by semiconductor shortages the shortages did not impact us in Q1, but we are seeing some impact in Q2.
We expect that this will limit upside in our near term due to the inability to pull in IC chip deliveries.
Currently the China Telecom market too is muted in regional and Metro deployments with just modest tenders by channel China Telecom underway.
That is China mobile business levels currently have been very light in Q1, we began shipping a subset of our legacy products that comply with D. A R to Huawei and we now expect that they could become a moderate sized customer in the near term, we do sell to each of the China network equipment manufacturers. So we would expect to benefit.
As new carrier tenders materialize later this year.
Some.
Taking the U S and China markets together demand in the current period as soft overall, we anticipate this will change in the second half as major global carriers increase their deployment rates as the pandemic subsides and is hyperscale or begin to roll out initial 400 ZR installations.
Looking beyond 2021, we are excited about the applications for our high performance optical components and as we continue to have multiple engagements in adjacent markets as well opinion, our chief product officer will discuss next upenn.
Thank you Tim and good afternoon.
During previous calls we have talked about the three legs of our coherent product suite.
Highest speed over distance applications.
These are first all coherent components, including our industry, leading ultra pure light tunable lasers.
Which we provide to net will equally manufacturers, where their line card and chassis based systems operating at 400 gig 800 gig.
We also integrate these high performance and high volume components into phones as they are plausible modules such as our Q. It's a P. D D who used in data center interconnect applications.
Reaches of around 100 kilometers.
And finally, we extend the performance of these applicable modules to achieve longer reaches.
Does the op plus versions covering metro and even long haul distances.
Oh did you all modules are designed to comply with the optical into networking forums.
And from pension agreements and have been successfully tested at multiple Hyperscale data center customers, demonstrating tolerability with all day vendors for them to be.
Modules.
We believe that all pointed to our modules are industry leading.
And immaturity.
We recently demonstrated the successful operation of 36 of our Q. It's P. D D modules.
Woody populated Ethernet switch.
These flow into the art acuity P. D D modules utilized our vertically integrated silicon photonics coherent optical sub assembly or closer.
And our low power consumption ultra narrow line width, Menno I T L. A tunable laser.
Each of these components can be operated over temperatures ranging up to 80 degrees Celsius.
Well extended temperature datacenter environments that reduce coding requirements.
Our Q3 D D flow into the all modules have passed 2000 hours of heightened mature operating life, It's T O L.
And all that critical testing.
And art and qualification at multiple Hyperscale theirs and other customers.
We'd expect deployment in the second half 'twenty one.
Our ultra pure light lasers.
High performance coherent components, when coupled with the latest generation of COVID-19, yes piece increase the reach of our QC PDD modules faulty young PCI distances coupon could be all plus metro and long haul niches significantly expanding our served market.
We successfully demonstrated all forms of the a plus Q2 P D day.
Couple of Transceivers tries to meeting 100 gigabit per second over a distance of 800 kilometers I think I said.
Five gigahertz space.
System maximizing total fiber capacity.
Oh with either with yet.
We believe such a plus of acuity PPD modules, we will serve the cloud based metro infrastructure capable of supporting five G network services with a common platform.
Well more stringent applications, we have integrated our Indian phosphide coherent modulator and receiver without nano tunable laser into a 52 D C O module.
<unk> applications.
Matching performance or chassis based systems operating at 400 gig.
But at a fraction of the size and power consumption.
We have demonstrated our multi rate DSP to D. C O cooking and plausible tresiba chest meeting at a 400 gigabit per second data rate.
Over a distance of 1000 kilometers.
75, gigahertz day eat up the game channel play.
With the performance margin that we expect will allow transmission up to 2000 kilometers.
Of course.
Ultra long haul a couple of react locations will continue to require the highest performance that can be achieved from chassis based systems with higher cost and higher power consumption.
I would tend to book laser receiver and modulate the products at high market share in these uses due to their performance quality of life.
Ability and availability.
We have continued to expand the capabilities of these products.
I'll simply 96 gigabytes versions 800 gigabit per second systems, and we are developing content 30 gigabyte versions from one terabits per second and beyond.
With the increasing data rates and extending distances.
Use cases performed as they are all growing.
As a result, we're engaged with and expanding target customer group.
<unk>, the leading hyperscale theirs and traditional unions.
<unk> content providers, Datacenters, and although private high performance network operators.
Communications is just one application area for our coherent technology.
Oh query ability used in coherent optics opening further opportunities for us English Jason market.
Okay, phonology improved sensitivity and performance with such applications.
And so satellite communication links including for low Earth orbit.
<unk> satellites.
Same thing for industrial applications, and Lidar autonomous vehicle navigation.
We're investigating such applications.
We will provide additional information as they mature.
With that I will turn the call over to <unk> CFO Beth Eby.
Thank you Ruben and good afternoon.
Neil Photonics continued to execute well in Q1 increased demand for our high speed products resulted in slightly better than expected revenue and gross margin above our range.
As Tim mentioned revenue was $60 9 million on strong demand for our 400 G and above products, which comprised 52% of Q1 revenue.
As expected, we did chip and immaterial volume of U S E R compliant products to Huawei.
Non-GAAP gross margin of $22 four per cent was just above our range as a result of favorable product mix and good execution of cost reductions.
Product margin of 45% was offset by the expected high levels of excess capacity charges.
Non-GAAP operating expense for the first quarter was $21 5 million down $2 2 million from Q4 and lower than expected as some expenses pushed to Q2.
Non-GAAP operating loss for the quarter was $7 8 million intra.
Interest and other charges were offset by $1 1 million of FX gains.
Tax expense was <unk> 6 million and full year losses as opposed to the effective tax rate benefit we had expected.
This resulted in a non-GAAP net loss of $7 5 million and a loss per share of <unk> 15 cents.
This is at the midpoint of our estimate is the consistent good news in the operations and operating profit.
Were offset by the change in tax estimate methodology.
I will close out my discussion of the first quarter income statement with a review of our GAAP results.
First quarter gross margin was 21, 9% down slightly from Q4, but higher than expected given the higher product margins and the use of previously reserved materials for production.
Operating expense was $24 4 million up $1 1 million from Q4 as the prior quarter included one time gains.
Those gains were mostly the settlement of litigation.
Operating loss for the first quarter was $11 1 million and net loss was $10 7 million, which included expenses of $3 3 million of stock based compensation.
<unk> 5 million of accelerated depreciation amortization and other costs.
Set by the materials reserve release of <unk> 6 million.
Turning to the balance sheet, we finished the quarter with $111 million in cash investments and restricted cash down $12 million as we held inventory levels flat and made payments on previously settled litigation.
Net inventory was 46 million flat versus last quarter, the inventory reductions related to the lower revenue had been offset by an inventory build for critical components, given the IC shortages and new product ramps.
Days of inventory increased to 88 days.
We remain in a good position to continue to drive the growth of Neo photonics, even while we increased inventories on key chips to buffer supply shortages.
As Tim mentioned, the annual demand forecast from Neo photonics highest speed products remains strong.
We are seeing softness in Q2 and have spot shortages that are constraining our ability to satisfy all of the opportunities we see in the quarter.
The shortages could impact future quarters, though we have a history of working through supply chain challenges.
As a result, while there is increased risk we remain committed to our growth target of 25 per cent to 35 per cent for the year excluding Huawei.
Our revenue ramp in the second half to meet that target is substantial.
We expect the ramp will be in the following areas.
First unsatisfied demand from Q2 and customers second half ramp of 400 G and above components based on their forecasts.
Second coherent module ramps, both telecom and Datacom.
And third stronger China revenue in the second half compared to the first half.
Q2 revenue is impacted by low to mid single digits of supply chain constraints.
Those supply constraints disproportionately impact the high end products.
Of this our gross margin is down quarter over quarter on less favorable product mix plus the expected underutilization charges.
Operating expense is higher due to the expenses that pushed from Q1 and the start up expenses for 400 ZR modules.
As a result, the company's expectations for the June 2021 quarter or.
Revenue in the range of 59 million to $65 million.
GAAP gross margin in the range of 15% to 19%.
Non-GAAP gross margin in the range of 17% to 21 per cent.
GAAP diluted earnings per share in the range of 35 cent loss to a 25 cent loss.
And non-GAAP diluted earnings per share in the range of a 30 cent loss to a 20 cent loss.
These numbers are reflective of approximately $51 6 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.
Still expected in Q3 on a non-GAAP basis.
Our strong cash position allows us to invest for that growth, while positioning us for even higher levels of growth and profit in 2022.
This concludes our formal comments and now I would like to ask the operator to open up the line for questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you were using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question.
East participant will be allowed one initial question and one follow up question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
We'll take our first question from Tim Savvy, Joe with Northland capital markets.
Yeah.
Hi, good afternoon.
Yeah.
I got a question you made a comment about.
Net of initial volumes for hundreds of your I guess in the current quarter second calendar quarter.
Being in the hundreds as we get closer to your cash.
The expectation for.
Volume production.
I guess I want to.
We were trying to get a little color on your definition of volume production.
Thousands of units or what sort of.
Visibility do you have at this point.
Those type of unit volumes and would you say that would be the predominant factor.
Of the three that you enumerated in and kind of making up for this and some weakness in Q2.
Yeah, Tim Thanks for the question.
Ah I think the.
The most important thing would be you know moving into.
Just say four digits you know four digits.
In terms of production and by four digits, you know what I'm, what I'm really referring to is are you now.
Whether it's.
You know 1000, plus units a month or in that order I think you know that would be a volume production.
And then the second part of your question no those three areas that we enumerated are.
Roughly in the same order of magnitude.
Sorry.
Quick follow up was muted there.
And also in your AR and your guidance for Q2.
What are you factoring in for for Huawei, There I imagine.
I'm not sure of the timing.
You said you had an immaterial revenues in Q1.
Would you get up to some level of materiality in Q2.
Yeah, I would expect to have a level of materiality, but I still think there'll be a you know a modest sized customer just because of.
Very few of the legacy products that are involved and.
You know it would still be a modest a modest number we're not going to give specific numerical guidance on individual customers, but.
You know our point really is just a point to point out that there there, but there's still modest size.
Okay. Thanks.
Thank you we'll take our next question from Dave Kang with B Riley Securities.
Yes. Good afternoon. Thank you.
My first question is that you're still targeting third quarter to be profitable or at least breakeven.
I'm just wondering if you can I'm not asking for guidance, but at least maybe just how should we think about you know like a metrics.
Top line margins and all of that.
Well.
You know our breakeven model, Dave It's a it runs I 80 85 in revenue are the Opex, but we are going to hit average for the year of 22 five per cent.
Baxter into 'twenty, eight 'twenty, 9% gross margin.
So breakeven.
Alright.
Positive in Q3 is going to be somewhere in that range.
Got it and then regarding a chip shortages I mean.
Can you tell us which chips are are really impacting this current quarter.
I think that.
You know one of the things with chip shortages as Uh huh.
Sometimes it surprises there there there are two to really.
Issues as you know try and as we're seeing lead times extend and I think several companies have talked about that that started you know a number of months ago.
And.
Essentially.
The.
For us it's our best said in the prepared remarks, one of the issues is that.
To the extent that there there are a chip shortages some sometimes they affect the.
The newest products and that often have a flow through effect of margin but.
I don't think I'll say more about which specific chips.
Yeah.
Got it so is it fair to sort of summarize that it sounds like sort of a double whammy for us I mean.
400 gig and above demand is strong, but then have shortages is impacting that negatively whereas 100 gig and below it seems like demand is soft due to various factors that you mentioned about you know U S and China slowing down is that a fair summary.
Yeah.
It's a it's a good observation I you know I think the supply chain, we do expect the supply chain will work through.
And.
The the comments about overall demand.
We did see a 134% growth year over year on 400 gig and above products and then for products that we're shipping to customers other than Huawei on a year on year basis, we were up 28, 28% and so you know the underlying business.
<unk> is certainly.
Doing well, but.
We think it would be doing better if we didn't have a semiconductor chip issue.
Okay. Thank you.
Thanks, Dave.
Thank you we'll take our next question from Alex Henderson with Needham and company.
Thank you.
All right that's good to hear your voices.
And I'm, hoping to see you guys at some point this year I know that things are starting to improve.
And the broader economy.
So I was hoping you could talk a little bit about a day.
The mechanics around the assumptions here.
Yeah.
Is it the high end of the band you have you still have some visibility to the components that you need for the current quarter end.
And.
At the lower end of the band.
It's a mix shift between product that causes maybe a little less visibility on how do we think about.
The supply constraints are relative to the top and lower.
Bottom of the band.
Well, what we see in the AR and the highest speed products as we see good rates of growth in a number of cases, we see some acceleration, but the ability for a less mature components to be accelerated.
Through foundries that already are full and have long lead times, that's pretty tough.
We think we have we have a reasonably good visibility visibility to the things that we need but essentially if if.
We give the example of customer winning a new order a significant deployment that is above and beyond their prior forecast. It can be hard in some cases to respond on the upside you know unless we've.
Buffered that inventory so.
For example.
We've seen some impact in our international deployments of 400 gig and above systems were under the pandemic.
<unk> deployments may slow in a region well by the same token if theres an opportunity to accelerate if it's not already in the forecast.
You have limited ability to.
Pull in and accelerate and so.
What we have done is we worked to buffer our inventory we've.
Tried to protect that where we can and we're working with suppliers, where we have.
Some concern or or limited visibility.
These are the things that were.
We see as if you will risks near term.
I hope that helps.
Yeah.
The question really is do you have do you have in hand in plain sight to all of the inventory necessary to hit the high end of the band.
Under what circumstances would you be at the low end of the band I assume it's not a demand problem the band as a stripping.
The the supply capabilities is that not accurate.
I would say that's absolutely accurate and.
And our coherent market.
From where it's a it's definitely a supply chain constraint and theres opportunities in there.
We continue to work the supply chain things work.
Yeah.
How comfortable are they at the low end of the range as you say.
At the high end of the range at Uh Huh.
We have good visibility on getting to the materials, but some of the some of the upside things that we could have been able to go after but.
We don't have line of sight that'd be able to get and as you know Alex actually I asked you a year ago, we kept highlighting yet we're going to have about $10 million of restaurant supply chain and it didn't materialize. So we didn't we continue to work it and more.
Pretty effective at working it.
The second question is do you have line of sight to the product and components that you need in order to ramp the products that are driving the acceleration in the second half.
Or is the risk.
In the second half as prevalent or even greater role because it's further out.
And is there any risk of decommissioning or decommitments.
I would say we could have we do have a we do have good line of sight, we know what we need.
We're working out with our suppliers.
We buffered parts, where we think there are risks we think we have good line of sight that said you don't know what you don't know you know.
But I think to the but I think at the at the moment, we feel pretty good about line of sight.
I'll get back in queue. Thanks.
Thanks.
Thank you we'll take our next question from Richard Shannon with Craig Hallum Capital Group.
Hello, Good afternoon, guys. Thanks for taking my questions, maybe I guess my first one zone on the third quarter here, suggesting that getting to a breakeven level or above here a pretty significant ramp from the second quarter guidance you just gave us if.
If we think about the the bridge here in sales in terms of ZR and <unk> and other products how do we think about this.
Tim given what you suggested about unit volumes in the in force figures here with you know prices I can probably guess that it's seems to suggest that ZR might be a majority of that bridge from sort of from the second to third quarter. So it's a way to right way to think about that or how would you have us think.
Take care.
Yeah on an order of magnitude basis, I'll start and Tim can pile on is those three areas that I mentioned the.
Unsatisfied demand from Q2.
Debt.
We hope to satisfy in Q3.
The ramp of the 400 G and above components is.
<unk> to be excellent.
And there's work that's part of the supply chain issues. We're having so that was one and then you get coherent modules and it's both the telecom module the CFP two D C O.
And the Datacom module of 400 ZR.
And then China because.
Because some of the as Tim mentioned some of the China customers have been pre.
Pretty well.
Not doing a great deal of five G stuff in in Q. The first half of the year. So between those three I would say there roughly.
Roughly equal plus or minus <unk> 5 million or so.
So 400 ZR itself is not a it's not a majority of it at all.
Sam you want to pile on well the only thing I'd add is it's not the majority, but there is more upside to it.
Yeah.
Now it is.
The we talked about we talked about the fact that the overall business ex Huawei grew 28% year on year and the fact that the 400 gig and above products as they are grew.
134% and that's without any.
Real material 400 G. R. So the the ongoing 400 gig and above component business is more predictable.
And the four.
<unk> Z R has start dates for the second quarter because for the second half, but it's a little more unknown. So.
This is the view as we see it today.
Okay, that's fair enough I'm going to extend the question here ZR specific a little farther into the year I Kimber from this is on your fourth quarter call or in the Tech trends color. You did in March could you talked about Gee I think getting it.
I think it was a couch it as a favorable environment getting too much as 10 per cent of your sales. This year do you see that bogie is achievable or is that a stretch either due to deployment timeframes or component shortages or both.
It's still in the cards, Richard but you know.
You know this is in the category of predicting.
Trying to be predicting in two significant digits.
Where.
The.
The ability to do so actually is is.
Limited, so I think it's still a possibility but but.
It's it's difficult to say specifically you know what percent of the forecast will be you know, it's also worth saying that in 400 ZR. We have two different levels of participation. You know we we we of course have modules that we're supporting in the in both.
The Q S. A P D D and the OSP, but we also sell our ultra pure light tunable lasers into other vendors are 400, ZR modules and so.
If.
If we think about those two pieces the the sale of lasers actually is in the more.
Predictable part because it's a component sales.
But we will be supporting both of them on an ongoing basis.
Okay.
Share remind you there last quick question from me on the ZR here is on the gross margin impact are any any more precise thoughts I know this has been asked in the past quarters, but any more precise thoughts on what you expect that relative to your current portfolio.
Okay.
Relative to our current margin higher but our current margins are slightly depressed right now.
But no we don't we don't have a good picture of.
What margins are going to be until we until we get a little farther along and as we've discussed in the past.
There are frequently.
<unk> startup yield issues that you have to work through so it's a little it's a little early to be predicting margin on that.
Got it okay. Thanks for those thoughts that's all from me. Thanks.
Thanks Richard.
Thank you we'll take our next question from Paul Silverstein with Cowen and company.
Thanks, guys first of all.
Can you tell us what the high speed in 400 gig growth was good the last several quarters.
Maybe I misheard.
But the 400 gig and above growth in.
In total is that what you're asking.
Yes.
Let's see in the in the current quarter.
We said that it was.
52% of revenue, but but actually.
Compared to 46% last quarter yeah.
What was the year over year growth rate.
Yes.
100 year over year growth rate was 134% so first quarter 'twenty, one over first quarter 'twenty 134 per outlet.
And for <unk> for high speed, two what was the year over year growth.
100 gig and a book I think is how you define your husband.
Yeah.
Now, 94% a year ago it was 92.
So it's.
It's actually going to be down because because it had huawei in it.
Uh huh.
I thought you had been disclosed ex Huawei on a year over year in my role I thought you'd been somewhat measured prudent wawa.
We've been doing that for the 400 gig stuff.
Uh huh.
About 100, right not for the 100 gig.
Okay, My apologies I'll move on.
That's right.
I was confused I'm sure sure coming from maybe not you, but I was confused by your response.
On the question about demand versus supply, let me ask the question directly.
I thought I heard you talking about softness in the market, but then in response to question you said.
Man for coherent strong the issue of supply if I understood correctly.
<unk> argument in person.
Got it.
There's two things going on the bigger the bigger factor absolutely is supply, but there is also some softness in the market that that we're seeing in the first half both in the U S.
After their after if there are large spend on.
On spectrum and in China, where it's looking like the five G rollouts.
Have gotten a little I have slowed down a little bit so it's but.
Big the bigger factor is supply and its supply.
Our highest speed.
Products because of because it's chip shortages there was that price there's upside there's upside to the Q2 number that we would have been able to get.
Alright, I'm not trying to trip you up what I am trying to understand when you responded to a coherent demand was strong as good reconciliation that statement to your statement about some softness in the market in particular folks to use spectrum auctions and the China plus project Rollouts as reconciliation that coherent demand strong all through them in the U S.
And other than in China, or or was it just from the statement.
No we werent, we werent trying Paul to talk about geography, we won the point was about timing so.
We're seeing overall demand customers are forecasting up customers are saying that they will be.
Higher in the second half and that reflects in in the backlog in the ordering pattern, but in the near term you know how much of the deliveries into Q and a.
<unk> current softness for the reasons that we stated net Beth articulated.
In North America.
And in China for.
Backbone provincial long haul networks get soft right now.
Two months.
Got it wrong or later in the Air Yeah. My My statement was a little more annual 18 months type of thing rather than.
Q2.
Got it and just to be clear I appreciate the clarification, but just to be clear too.
<unk> with respect to the U S.
Based on the rolling forecast, you're receiving that.
That underlies your view that it's largely if not entirely.
Q issue and not a second half issuers moving somebody different.
We think it's Q2 issue.
Alright, So you have a big and it's not just based on your hope you have a basis for blue belt as the near term to Jewish you're not a full blown. So you wanted 21 issue.
This is based on what our customers are telling us yes.
Alright, just one or two quick more.
Say that you are expecting a thousand or multiple thousands of units on G. R O.
Am I wrong in that from a revenue perspective that would translate to a relatively low.
Couple of million, maybe not much more than that from a revenue impact just to gauge the impact from a model in mind lowball pricing sensitive but.
I forgot the total revenue from talking about load value.
Right.
Well, so let me first start with the premise I didn't say what we're expecting.
Western I was asked was what would constitute volume production and I said volume and four digits per month would be what we would call volume production okay.
And us and then we subsequently responded to another question that saying, it's not the majority.
40 of our second half second half.
Ramp or revenue target.
But there.
There is potentially more upside with the yard just because of the units as a potential for units and volume it remains to be seen.
So.
I hope that clears up.
The assumption versus the forecast.
Yeah, that's five for yourself through the Russell fine. Thanks, I appreciate the responses. Thank you.
Thank you.
Thank you wont take our next question.
We'll take our next question from Fahad Mahjong with MK M partners.
Hi, Todd.
Hey, Tom Thank you for taking my question.
A couple from me as well first.
If you didn't have any component shortages would it be safe to say that you would have met your Q2 guidance or maybe some or above.
Above that.
Guidance range.
Yes, I, we said low to mid single digit millions.
So I don't know where your guide was for hot.
Just trying to get a sense.
I.
See the street consensus numbers.
Alright.
Just trying to get a sense that if you didn't have component shortages would you have exceeded.
Consensus was at.
$66 5 million for the quarter.
Low to mid low to mid single digits of our impact sizing that would've been in the range.
Maybe a little light.
Okay.
Tim.
The softness in China, if my checks are correct.
Increasingly hearing from a number of your peers and others in the supply chain.
There is an increasing China in sourcing risk that the Chinese customers are now kind of sourcing from within China.
What extent is the softness.
Related to in sourcing and <unk>.
So although you're concerned.
Concerned about in sourcing in China.
Impacting your long term outlook this year and maybe next year.
From China.
Well in.
In sourcing in China is not new and certainly with the U S. China trade tensions.
Heightened.
Uh huh.
So the fact of the matter is.
Sure.
With our highest speed products, we have.
Very significant growth rates, certainly on a year on year basis.
But.
Some of the legacy products or or.
As we call it network products and systems.
Have not really been growing so some of that is is.
Because.
Of.
Customers in China, increasing.
Their business with local partners.
<unk> with <unk>.
Direct.
Competitor products or with suitable alternative products.
But you know essentially.
What we're working on most aggressively is things that are 400 gig and above.
There in fact.
We don't believe that they really have the alternative.
Using domestic suppliers in China for those for those for a lot of those products.
So I think in sourcing is continuing to be a a relevant element.
The forward look however, it's it's not new it's been with US for years, and we are continuing to fight the battle of competition.
Through innovation.
And I think that's what we're building our forward model on is is those newer products.
Okay.
A clarification question for Beth can you just.
US what 100 gig and beyond was in the quarter.
In the past given that number but I don't think you gave it this quarter.
Yeah, It was 94%.
94% Okay.
Thank you.
That would be all from me.
Thank you Bob.
Thank you we'll take our next question from Sami <unk> with J P. Morgan.
Hi.
Hi, Thanks for the question.
I guess I just wanted to start off with the simple one.
I know you mentioned the expanding market for 402 yard with Nick will go beyond.
Beyond just the Hyperscale customers.
And you mentioned I think you were in <unk>.
<unk> vacations as well just wanted to understand like when you get to that stage IV.
Have they already been it will go for it.
Just kind of.
Andre beside it did end shortlist, you don't want any more deals at that point.
Still evaluating adjusted B system will be there'll be a more difficult.
Good morning.
So yes.
And then Blake.
What does that indicate.
Generally competing views at that stage and then I have a follow up as well.
So.
The mechanics of our.
Our process are that when.
When you are selling components are when you are selling modules youre working through a qualification and seeking design wins.
On systems or on applications that require that products. So for example, if it's a chassis based system at 600 gigabit per second or if it's a chassis based system that will run up at 800 gig per second you are competing for a socket win on that and then as you win it.
Ideally you would have an ongoing business for some period of time, such as the case with the Z R 400, ZR module qualifications.
It's in the process of doing the module qualification doing the design win and doing the potential of first article sale.
The.
The purchasing decision of the customer whether it's a data center operator or.
Or a carrier.
<unk>.
First purchasing decision of what their system level or architecture level tradeoffs.
It is less.
Less clear and and so.
We do know that ZR is new.
We do know therefore that essentially all the incumbent installations are not see are.
They're all chassis based systems.
And so really the question it goes down to the.
Customer looking at new architecture, a new way of doing business with their network or are they going to.
I'll stick with the way they have been doing it on a legacy basis. If it gives them a appropriate economics I think that probably varies.
By customer but.
Just a I think it would be a little bit.
You know more on the side of hope to say that you know Gee if they qualify the module then they'll make all systems decisions in favor of that system I don't think that's the way. It works. So there there's not a direct one to one correlation. So we expect that there will continue to be for some time, there's going to be a mix and as well.
Penn said in his prepared remarks.
Certainly the highest performance the longest distance the submarine net networks, where you really have to have the high performance at the highest performance at the highest speed.
You know those are going to continue to be a chassis based and and so I hope that I hope that addresses your question. What do you Wanna do you want to chime in on this at all or are you. Okay, alright, yes. It make so go ahead.
No.
Got you. Thank you for that so the second one I was just going back to the.
Ramp that you have in front of you in the second half and understand as a supplier component.
And as a demand component.
When it comes to North America and China.
But just wanted to like I would've thought of.
Very high confidence from those metrics.
In relation.
In addition to demand and your customers seeing that demand from nickel golf retailers in the second half.
Knowing the component charges kind of try to put in some of the orders ahead.
In relation to coherent components. So I'm just wondering like what are you seeing in your order patterns because if there is high confidence in that second half revenue ramp and no income from shortages wondered we logical for some of them to start moving autozone and putting them in.
It would be logical and they are.
Okay.
Thank you thanks for the cash.
No.
Thank you we'll take our next question from Michael Genovese with West Park capital.
Thanks, a lot.
First question just quickly I want to go.
Go back to the earlier question about the macro and just understand if the first quarter in the second quarter.
The same if theres any changes in the first quarter to the second quarter, because I mean, you're very slightly beat the first quarter and maybe adding back to components are very slightly missing the consensus for the second quarter.
But as the macro the same two quarters. It was actually worse are there more push outs from the second quarter.
I think there are more push outs in the second quarter.
If you if you put it in that term, but there are other things that have that have happened.
No.
We talked a bit about China.
China Telecom, China mobile and slowness in deployment.
Which really derived from the <unk> overall, so those are slower.
In China now and then additionally, in the North American market.
We saw the completion of the.
The wireless spectrum auctions, so that the major carriers in North America completed that and so then they are early in the quarter or late in the last quarter. They kind of outlined some of their plans, they're multiyear plans for deployments those take those take a bit of time to.
Get rolling and so.
I would describe it as a little bit of an air pocket.
While we're transitioning from what was the plan to what will be the plan and that's more of an impact in the second quarter and the first quarter.
Yeah.
Okay that makes sense my follow up on a different topic is a number of Z E. R potential Z. Our customers I mean are we just talking about the hyperscale errors in the switch and router vendors or so is it is it you know 10 potential customers and and and and and related to that how many trials are you in or.
Or is it many more potential customers than that.
Well, let you know there's there's two ways to think about that and that is that.
400, ZR interconnects in the in the top level the attractive point as it allows direct connection between switches and routers.
So well, while the hyperscale or.
Are the leaders in terms of time schedule and deployment.
Anybody who uses switches and routers at 400 gig as a potential customer for foreign G. R.
So if you will there there are.
Those two broad categories of.
Of customers and so are you know when we first made our early 400 G. R. A module deliveries are early last year and we were we were.
Among the earliest deliverers and certainly the earliest of all the different form factors here.
We've been working on it therefore for some period of time, but those without a doubt we're focused on the biggest guys with the earliest schedules.
We're now we're now more than a year down the road and so there are numerous.
Numerous other companies in different parts of the world and in different bits of business.
That is as <unk> said in his prepared remarks that our operators high performance networks that are that are now due.
Doing their own testing trials proofing, a 400 ZR so.
There still will be a relatively small number of very large customers, but I think there will ultimately be a large number of customers.
In the traditional sense of a long tail.
Great. Thanks for that simple.
Thank you we'll take our final question from Simon Leopold with Raymond James and Associates.
Great. Thank you for taking the question how are you guys doing.
Hope everybody's well couple of things I wanted to ask about one one was on the ZR opportunity.
I believe you're among the three meters with products actually being evaluated trial, but.
We've definitely heard about many participants expressing interest in coming into this market.
Wanted to get your view on how many companies do you expect to be competing in and how you think about what the margins could be like overall, if it's a crowded space or if you expect.
It won't be crowded what's your thought on industry structure of the ZR market, how many players will there be.
Yeah.
Microsoft Ball is not perfectly clear on this kind of question.
I agree with you about the fact that there are there are three companies who've been in the free for all over the last year with the.
Operating modules and multiple tests.
Different vendors, how many companies ultimately.
The way the way things have gone in the industry for years is that.
Things start with complete module vendors and then over time.
Some people who were able to build this component or that component, but couldn't get the module business then they start to be merchant vendors of the components.
And that allows assemblers then too.
Get into the business now in this case, we're talking about pretty sophisticated.
Capabilities to be.
To be doing this business and are the leading players with leading schedules.
Uh huh.
Our.
Really demanding vertically integrated.
Manufacturers too.
Have the ability to stay with the program over the long term and then extend it.
From ZR to ZR, plus and then from 400 to 800 and and so you know.
I think there will be additional.
Additional entrance, but I I think it will still be.
Let's call it a large handful I I don't think it'll proliferate.
Great appreciate that and then in terms of the outlook for the second quarter gross margin.
Youre looking at revenue, that's not that different than what you just reported but a lower gross margin I am imagining that some of the headwind has to do with higher input costs and I'd like to see if you could help us unpack.
What what aspect of the relative gross margin in Q2 versus the quarter, you just reported as related to input costs might be related to things like air freight and shipping.
<unk> is related to just your own pricing.
Could you could you help us understand the bridge between the two quarters.
So our costs are a major component is just like our customers are pretty much negotiated annually. So we won't see any inflationary aspects until until the annual contracts come up what's the real story is on the Q1 two.
Q2 gross margin is product mix is as you know well we have done a great job on increasing our product margins over the last year, we're up five points year over year.
So if we start to sell some of the older products the less favorable mix that I talked about in the in the script.
<unk> Hi, it's going to show up and that that's exactly what's happened is the.
The 400 G components get constrained where there is demand that can't wait till Q3 there.
They're taking older products and the older products have lower margins.
Great No I appreciate that insight that's helpful. Thank you for taking the questions.
Thank you and at this time. This concludes our question and answer session I'll turn it back to Tim Jenks for closing remarks.
Thank you Todd.
Thank you for joining our call today and for your interest in near Photonics.
But the core trends of the industry playing to our strengths in 2021 and subsequent years.
I'm very proud of our team for what they've achieved and we do look forward to updating you in the future have a good evening.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
Okay.
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Total revenue.
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