Q2 2019 Earnings Call
Please standby we're about to begin.
Welcome to the new.
Photonics 2018 second quarter Conference call. This call is being webcast webcast live on the Neophotonics event calendar webpage at Www Dot Neophotonics Dot com.
This call is the property of Neophotonics and any recording reproduction or transmission of this call without the express written consent of Neophotonics is prohibited.
The webcast is available on the event calendar page of the Neophotonics website.
I would now like to turn the call over to Mr. Canadian at Sapphire Investor Relations. Please go ahead ma'am.
Good afternoon. Thank you for joining us to discuss Neophotonics operating results for the second quarter of 2019 and outlook for the third quarter of 2019.
With me today are Tim Jenks, Chairman and CEO , and that's got to be Chief Financial Officer.
Tim will begin with a review of our business progress in the second quarter and discussion of business drivers and products that will then provide financial results for the second quarter before providing the outlook for the third quarter of 2019.
That will then turn it back to Tim for closing remarks before opening the call for questions.
The company's press release and management statements. During this call include discussions of certain non-GAAP financial measures and information, including all income statement and balance sheet amounts and percentages other than revenue unless otherwise noted.
These non-GAAP financial measures are 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 FCC and can be found at the Investor Relations section on Neophotonics website.
Material contained in the webcast is the sole property and copyright of Neophotonics 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 capital needs in availability customer demand inventory levels, economic and industry projections or subsequent events.
Various factors could cause actual results to differ materially some of these risk factors have been set forth in our press release dated August 15, 2019 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.
Neophotonics recorded second quarter revenue of $81.7 million.
Above the high end of our revised outlook up 3% from the prior quarter.
And essentially flat compared to the same quarter last year high speed products were 89% of revenue. This was in spite of the headwinds of U.S. government actions related to walk away technologies.
The department of Commerce, Footwall way historically, our largest customer on its entities list with effect as of May 21st, thereby banning them from purchasing items subject to U.S. export administration regulations or U.S.D.A.R.
As a result, we revised our financial outlook from an initial revenue midpoint of $90.5 million to a revised midpoint of $77.5 million.
Reflecting the immediate cessation of our shipments to walk away.
Neophotonics is committed to rigorously complying with the United States export regulations.
Since the addition of why wait to the entities list, we implemented processes to evaluate each of our products against the standards set forth in those regulations.
Each product must be reviewed individually in a detailed specific and rigorous process and these reviews are ongoing.
Having consulted with our legal counsel and technical experts, we determined that certain of our products are not subject to EEI, our and may continue to be sold to walk away and its affiliates. Consequently late in the quarter, we restarted shipping certain non E R products to walk away.
In late June administration guidance was that U.S. firms would be allowed to sell to walk away with a license under certain conditions, we have applied for a license to ship certain EEI our products.
As a result of our cessation of shipments to walk away for much of the quarter, our business with them declined from 46% of revenue in 2018.
The 36% of revenue in the second quarter of 2019.
In the quarter. Our next four customers were 48% up from 37% of revenue in the last quarter.
The telecom business in China continues and we note that late in the second quarter, China Mobile announced the award of a tender for certain parts of its five G. network.
Of which while way want to significant share further we see ongoing demand for deployments of existing 100 gig in 200 gig systems.
In the second quarter demand from our customers in China other than one way increased slightly but remained within.
The normally expected range, we do not expect significant share shifts there going forward.
Our business has been strong with western customers, especially in DC Metro market in fact.
Our top five western customers were each up by double digit percent in sequential revenue growth with growth coming from product shipments for 400 gig and 600 gig systems as a result, our business from western and rest of world customers was 52% of revenue.
Comprised of 24% from the Americas up from 18%.
And 28% from rest of world up from 25%.
China was down commensurate with the drop at Wawa to 48% of revenue.
Moving to product technology recent industry announcements of focused attention on system approaches to increasing data rates in a single fiber.
And then in a single channel.
The increase the information bandwidth carried by a single wavelength optical system designers have two levers to work with they can increase the basic frequency.
At which the system operates called the baud rate or the symbol rate or they can use higher order modulation to transmit more symbols more bits per symbol.
There are tradeoffs to these two approaches with higher order modulation, having shorter reaches and higher baud rates requiring wider wavelength channels. Indeed.
Most systems use some combination of the two approaches.
Each of these high data rates high performance optics is critical to achieving the required system performance Neophotonics provides high baud rate modulators and coherent receivers. In addition to our ultra narrow line width tunable lasers, we continue to see good progress with design wins and volume growth for our class 40, 64, Gigabaud product suite, which is aimed at 400 gig and 600 gig applications and we have announced our class 50 receiver and modulator aimed at 800 gig applications.
As we have discussed previously with higher order modulation, such as 64 Qualcomm.
The very pure light and low phase noise of our lasers becomes increasingly important.
Because of this our tunable lasers have the right performance to be the laser of choice for the higher performance systems.
Connecting those two specific specific system data rates, we anticipate that 400 gig will continue to deploy while our 600 gig products ramp through this year and next.
Beyond 2020, we expect 600 gig will coexist with coming 800 gig and we will be engaged in deployments of bull.
Each of these approaches requires best in class component performance, which neophotonics delivers both with our vertically integrated indium phosphide pick platform and our active silicon photonics platform.
On the Pluggable side of the business, we continued to make good progress with design wins and shipments of our clear light CFP CFP DCO modules.
At the LLC trade show in March we demonstrated our CFP two DCIO module also at OFC, we demonstrated our 64 Gigabaud Silicon Photonics based co CIO or coherent optical sub assembly, which together with our already shipping nano tunable laser provides all of the optics required for a 400 ZR pluggable modules.
Overall, the drivers for the markets, we serve are well aligned with our advanced technologies high speed capabilities and strong presence in high speed components. These trends transcend the current while way ban.
And coupled with the beginning of Fiveg wireless infrastructure deployments and continued demand with Hyperscale Datacenters, we are optimistic about neophotonics new product prospects.
With that let me turn the call over to our CFO Beth.
Thank you Tim and good afternoon.
Our second quarter brought us both challenges and some opportunities.
In may after the wideband went in place we executed on changes in our operations to adjust to lower revenue levels, we reset our supply chain adjusted R&D projects and reduced expenses substantively.
This combined with good news and FX resulted in a non-GAAP Q2, EPS loss of three cents.
Compared to our revised midpoint of a 10 cents loss.
As Tim mentioned revenue was 81.7 million slightly higher than we expected on strength in the western DC market and the restart of noni, our product shipments to our way at the end of the quarter.
Our non-GAAP Q2 gross margin was 25.6% at the high end of our range.
Within this.
Product margins were approximately 32% as expected.
And up five point from last quarter on good execution of cost reduction.
Other cost of sales charges of about six and a half point were comprised of approximately five points of under utilization charges given the volume cut.
And appointment half of other charges all less than half a point the largest of which was tariff impact.
Moving to operating expenses total non-GAAP operating expense for the second quarter was 22.1 million.
This was at the low end of expectations down approximately 2 million sequentially on a combination of spending Rajah reductions and project push outs.
non-GAAP operating loss for the second quarter was $1.2 million or 1% fall.
Compared to a loss of 8% in Q1.
Driven by higher gross margin and lower spending.
In Q2.
Appreciation in the US dollar relative to the Chinese Yuan drove an FX gain of approximately $1 million.
As a result, non-GAAP net loss in the second quarter was $1.2 million compared to a loss of $9 million in the first quarter.
This translates to a non-GAAP EPS loss of three cents compared to a loss of 19 cents in Q1.
For the second quarter, adjusted EBITDA was 6.8 million.
I will close out my discussion of the second quarter income statement with a review of our GAAP results.
Second quarter gross margin was 19% down from 20% in Q1.
And flat compared to the second quarter of last year.
The second quarter margin includes charges of 3.6 million related to the write down of walkaway specific inventory.
And the costs related to end of life of our client module of point Ninemillion.
Operating expense was 23.9 million down from $27.7 million in the preceding quarter.
Lower spending and a point 8 million dollar gain on the sale of our Russia.
Operating loss for the second quarter was $8.2 million, which in addition to the charges I already mentioned.
Included $3 million of stock based compensation expense.
And approximately $2.3 million of amortization of acquisition related intangibles and restructuring charges.
Net loss for the quarter was $7.3 million compared to a $14 million loss in the prior period.
Turning to the balance sheet.
We finished the quarter with 74 million in cash investments and restricted cash down 5 million from the prior period on the repayment of debt.
Net inventory was $49 million or 67 days down $5 million from the first quarter, mostly on the write down of why we specific inventory.
Free cash flow was approximately point threemillion better than expected as we made the needed changes in our spending.
Before I discuss our revenue and earnings outlook for the third quarter of fiscal 2019, I would like to remind everyone of our public filings with the SEC and our Safe Harbor statement included in our press release.
Discuss the risks and uncertainties that could affect future performance, causing actual results to differ materially from our forward looking statements.
We continue to monitor changes.
In the department of Commerce, and B is rules related to walk away from their affiliates.
We have not included any benefit for shipments under pending licenses and our forecast.
However products that we have determined are not subject to U.S.E.R.
Our included.
These products represented a majority of our shipments to our way in 2018.
Demand signals from our global customers are positive for the year.
As a result revenue for Q3 is expected to be solid.
The supply chain constraints that we have seen for the last six to nine months have ameliorated.
Given that the company's expectation for the September 2019 quarter are.
Revenue in the range of 87 million to $93 million.
GAAP gross margin in the range of 24% to 28%.
non-GAAP gross margin in the range of 25% to 29%.
GAAP diluted earnings per share in the range of a nine cents loss to a one cents profit.
And non-GAAP diluted earnings per share in the range of a three cents loss to a seven cents profit.
These numbers are reflective of approximately 48.6 million fully diluted shares.
Looking forward to the fourth quarter based on what we know at the moment, we would expect revenue in a range largely similar to Q3.
In summary, while we continue to monitor the evolving status of the wall way ban and US China trade, we have executed well to reset our business and remain focused on managing the business for cash and profitability.
I'll now turn the call back to Tim for closing remarks.
Thank you Beth.
We're looking at western customers and DC for continued growth.
And we expect to benefit from growing deployments at 400 gig and 600 gig data rates.
As best noted, we exited our Russia operations.
And dmitry on off representing Russ Nano subsequently resigned from our board of directors. We appreciate his contributions as a director of the company.
Moreover, we are pleased that Dr yen being Lee a seasoned engineering executive from the cloud services industry joined our board of directors as we announced on July nine 2019.
As we have communicated over the last year, our focus has been on profitability as we ramp our newer high speed products. We have also remain focused on execution to extend our leadership position in the high speed digital Opto electronics market was 64, gigabaud and moving to 100, gigabaud and above product introductions as well as seeing some adjacent market opportunities developing for our high speed technologies.
This concludes our formal comments and now I would like to ask the operator to open up the line for questions Cody.
Thank you if you'd like to ask a question. Please think about pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. We would like to ask that you. Please limit yourself to two questions and one follow up once again that is star one if youd like to ask a question. We'll take our first question from Alex Henderson with Needham and company. Please go ahead.
I am very impressed.
As a great job of managing through a very difficult situation my hats off to you guys.
Thanks.
Hoping hoping you can give us a little bit more granularity.
A couple of the key pieces of the puzzle here.
Specifically.
What portion of your revenues to while away are not covered by the year.
Requirements and to what extent.
Or what portion has been requested of the government.
For exemptions in particular those are the two key pieces that we don't really have a full granularity on.
So.
Let's see taking that in part as as Weve said.
We do have.
A lot of our products that are not yet they are in fact, the majority of the products sold in the course of 2018.
Just recall, we've been acquisitive over our lifetime, we've acquired businesses in Japan, China, and we have development centers in those countries as well and so we have a number of products and technologies that are that are not subject to EEI are so it is the majority of our wawa shipments.
The license pertains to specific products that are subject to EEI are and not surprisingly, it's a minority and.
It's fairly modest overall so our.
Our outlook for the for Q3 reflects the.
Majority of of product shipments to while away continuing and.
As they are they are non EA are and and as best said, we haven't included any.
Yeah, our shipments in our in our forecasts and she gave comments for both Q3 and potentially for Q4.
So just to be clear the.
Demand from Wild way hasn't a slack and for the products that would then go into systems that might be.
And able to produce because they were missing other products. So there's been no.
Drawdown in demand from our way at all in that context.
Well.
You know as as I said in my prepared remarks, we're seeing a fair amount of demand for 100 gig and 200 gig systems. So these are a bit more legacy.
And.
This is essentially where the the preponderance of demand is rather than in.
Let's say 400 gig or or more state of the art technology.
I see thanks, and just one question for best if I could.
Can you give us some sense of what the trajectory on Opex will look like for the next couple of quarters since obviously, you're taking a pretty good.
Shot of bringing those down as much as you can it would be very helpful. Thank you.
We took we absolutely took a haircut and if everything goes as expected I would expect us to remain in Q4 at $22 million to $23 million or.
As our ranges for Q3.
Thank you, we'll now move on to our next question from Simon Leopold with Raymond James.
Thank you for taking the question.
Certainly relieved by these results so certainly a difficult time for you guys. So were mentioned its been stressful.
So just a little bit of help in terms of understanding that this licensing process.
What's your sense of how long it takes to get through and would you anticipate that if you were to get a response back would it be the kind of thing you would provide an interim update.
Or is it not material enough to your your your guidance.
Well, let me start let me start Alex by saying, we did not put anything Simon sorry.
But we did not put anything in the guidance. So it I wouldn't expect it to be.
A huge upper.
Yes so.
As we previously said.
After the band hit is that we talked about noni, our products and the fact that.
We.
Two things have to happen. One is you have to have products that you can ship and second as you have to have demand.
And.
So that's the process that is done here is.
There are pretty clear guidelines from B. I guess as to the process for applying for a license as as we said in our prepared marks we have done that.
And.
We have we have received.
Clarifying questions back from B.
Yes.
We're not aware of.
Other companies, having been granted at this point licenses. So therefore, we actually don't know how long it will take.
Because of the fact that.
The revenue from these products is.
A minority and they're not in our guidance.
The longer it takes the less expiate expectation, we have for uppers because of the fact that we have to generate demand for products. If we're given a license.
And so.
At the moment, we don't know how long it will take.
We don't know if theres going to be ongoing demand. Therefore, we don't really know what level it could be an upper so we havent included anything in the forecast.
Okay, and you did mention why way I believe was 36% of sales in the quarter can you offer us any other color where there are additional 10% customers, how big where they can if so.
We have we had.
We had one other 10% customer.
How material.
Well, yes, certainly, but as you know above above 10%.
Hi.
Thing more specific I assume you mean, you you don't want to tell us today.
Well so in our 10-Q, we will file on a 10% customers and as we said, we we did put the.
The next four in our 48% of revenue.
Thank you we'll take our next question from Paul Silverstein with Cowen.
Slightly different perspective should address.
Okay is it.
This is Paul.
Is there a risk that wall way I assume by definition, there is risk that wall way as double if not triple ordered and orders stock up and kissed the administration expand the definition of what's prohibited.
And is there also corresponding risk of the other cues supplier acute customers, having also gone to some degree if not double and triple some degree of over ordering.
In connection with what had been tight supplies in order to secure with the needed and therefore true demand is not quite as robust as what the numbers would indicate I don't know if it's.
The quality of your insight, but anything you can or will those be appreciated.
Well I think.
I'll start and.
Tim can pile on is I think it's absolutely normal behavior for them to get some inventory in.
If they can but as I as I said the supply chain constraints have ameliorated they have not gone away.
So it's not clear that.
That they have or are building inventory on the products that we have.
Now that said as you know we always we always look back at the quarter after the quarters over and say what did they ship out versus what did we ship to them and do a check but it's backward looking.
You know Paula I would say, though the risks that you expressed do exist and I'll disagree with you.
Those are all risks.
It's hard to.
It's hard to say.
To what extent for what volume but.
Certainly.
The risk exists.
Good in true historically I think your best.
Made observations in terms of your ability to track.
How much is actually being consumed how much inventory is actually being built saw is the quality of your your insight different today for better or worse.
Hi, its a little worse actually because we don't know.
Who's able to ship what.
At the moment.
So you know also under under the ban we have fewer interactions with with.
While way so we actually have less information than we might have had in.
Prior quarters and years.
So im not trying to buys the argument, but at the risk of stating the obvious I assume the worst case scenario would be that they are limited to one extent or another and what they can ship out to customers by virtue of missing one or another component what components. They can obtain from folks like yourself. They are buying all they can see that when they have all the components required.
They all have a big inventory buffer I mean, I assume that would be the extreme more skus.
You know it again, it's within the realm of possibilities, but again.
We have seen certain tenders, we we've.
We have seen the onset of the Fiveg.
We do see that.
Their focus is actually more on the legacy systems at the lower data rates, where they are they do in fact have.
More second and third sources for components. So I think that's in the range of realm of possibilities, but.
Time, and time will tell I think they have.
They've they've said that their their business maybe down.
25% on the year, but that still means they'll do $100 billion of business.
Thank you we'll now take our next question from Richard Shannon with Craig Hallum. Please go ahead.
Hi to invest thanks for taking my questions per day remote today. So if there is any ambient noise I apologize in advance here.
Let's see a couple of questions. Jim you noted some very strong growth from outside of China. As you. As you described that your western customers can you give us a sense of what you've baked into your guidance for the growth of that customer set in your third quarter guidance.
Well, what we've said is that.
The five largest western customers were all up in double digits.
And.
Collectively.
They all have.
Strong backlogs with us.
And so.
In our in our forward looking guidance, we have expected a smaller percentage of total revenue from while way not surprisingly and Weve expected continued strength from the largest of our western customers.
I can't quite quantify it up in terms of what percent of revenue and I don't think our AR.
Our forward looking.
View.
Our forecast accuracy is good enough to do that but.
Yes. It is.
Forecasting continued growth from the west and rest of World Vis-a-vis China.
Okay. That's a that's helpful to get some perspective.
Tim also in your remarks, and the answer some questions you talked about trends between the slower speed 100, 200, and then higher seed 406 hundred or I know, yet gigabaud relationships are too but.
What's your sense of whether 400 600 is anywhere near.
Yes, the hassle of half of that high speed category right now.
No actually it's not what we did what we did say is it's more than 10%, but it's it's not half of that.
Okay.
Okay. That's helpful and last question for me and I'll jump out of line here.
Yes, I did I read that gets just remember also that.
We did say that for example in the case of China and walk away.
The preponderance of demand is on 100 gig.
So it's not on 400 gig so there's there's a certainly a decrease in demand from far away in China for the 400 gig so.
That that affects that's factored into my saying it you know it is still more than 10%, but we we kind of took a breather on the 400 good growth because of the Chinese situation with wild way.
Okay. That's helpful. Thanks for that Tim My last question I'll jump out of line here.
Yes, some of your products.
That are not subject to FDA or this not subsidy that specifically because they are sourced from outside the United States and kind of the corollary to that question. If that's if that's so is there a possibility you see any risk of those becoming EA are even if they are made actually made internationally and.
Potential downside risk free.
Yeah.
You know.
As we said in our prepared remarks, you know were.
We're following the regulations.
We were studying the regulations and.
The regulations are certainly subject to change.
Products that that.
Our.
Developed outside the U.S. manufactured outside the U.S certainly our non EA are there are certain products that are U.S. products that our EA are.
In between it's the the detail of examination within the boundaries of the regulations.
I think to the extent that that the regulations are consistent there they are quite clear as to what the rules are and we will rigorously followed the rules.
Thank you we'll take our next question from June Jain with Rosenblatt Securities.
Hi, Judy and Beth Thanks for taking my question. So I have two questions. One you mentioned there is a.
Strengths coming from non China markets.
It's more from Dci market or from more from the Fiveg related.
Product that's one.
Second.
As you guys put up another 10% a terrific partner 300 billion a product or does that include.
The optical module and how do you see the impact on the on the Q3. Thanks.
So the preponderance of our strength is actually a DC metro and I think I said that in my prepared remarks, rather than fiveg per se we.
We do see a demand in fiveg, but today, it's relatively modest for neophotonics.
Tariffs.
As as I mentioned that we were subject to tariffs, but the tariffs were subject to our the tariffs in China coming from us product.
Those are the ones that impact us more we ship very little directly from China to the U.S., we shipped very little to the U.S. at all when we cite the Americas most of that's going to contract manufacturers in the Americas outside the United States.
The additional 300 million does not impact us at all.
Okay got it.
And one more follow up on that.
And the Metro or do you see like we we talked about in the I think.
First how about a little bit slowing down of your one of your major clients.
In the U.S. is that anything changing right now and.
Do you see the distillate demand is sustainable.
In next few quarters. Thanks.
So as as I noted.
Our five largest western customers were all up sequentially in.
In.
Double digit so to the extent that western customer is going down it would not be among the top five.
Okay got it.
Thanks.
Thank you we'll take our next question from Tim Savageaux with Northland capital markets.
Hi, good afternoon.
Hi, Jim follow up on.
Hey.
I want to follow up on the.
Beat a dead horse on the non.
I guess, we'll look at it non walkaway strength.
It looks like that was up almost 30% sequentially in the quarter and in line with your double digit commentary which is.
Pretty extraordinary.
And I wonder.
You've talked about DCR, but do you see that it is pretty broad based or is that strength.
Driven by.
One or two of your bigger western customers or how would you characterize that growth and that did that come in.
Stronger than you might have expected in the quarter.
So you know at.
As noted it it kind of goes across.
[noise] actually probably the top 10 customers for the most part.
We do have you know a couple of larger customers.
In the west that.
You know frankly, just you know we have.
Fairly concentrated customer group. So big changes are usually done by the big customers and I don't think thats different. This time. So it is strongest with the strongest yes.
But Tim on your on your 30% number.
I remember we had.
We were only frankly, a little bit above the high end of our range and that's as we started to ship again to walk away at the end of the quarter. So we.
30% feels a little.
Frankly.
Just just doing the math.
And maybe this leads into my next question, which is and Tim You mentioned, you expect wild way down as a percent.
You also expect well weigh down on an absolute basis in the quarter.
It sounds like you're kind of looking at it flattish or something like that.
[noise].
I think ER.
You know on a percentage basis, I would expect that far away will actually decrease.
On a dollar basis.
I'm not sure I know, whether they'll increase or decrease but because of the fact that we're expecting.
In a reasonable growth in the third quarter and were not necessarily expecting much growth from all way they'll decrease on a percentage basis.
Right. So at the very least you expect a continuation of that kind of.
Pretty solid double digit growth.
Across the rest of the business.
Yeah, and so you know and a lot of that does reflect in demand for 400 600 gig products and.
We're fortunate in the timing of that that growth in that demand and volume.
Given the wawa situation.
But.
You know it's also in my prepared remarks, I said, we are looking to those those western customers in DC.
As.
As the sources of growth going forward, and our resources and focus have to be that way.
Thank you and then move on to our next question from Dave Kang with B. Riley FBR.
Thank you good afternoon my question.
Hi, Tim My question is on on 56 Gigabaud email.
Can you tell us the number of customers and presented as a percentage of revenue right now.
Generally speaking, we we've said that on a components basis. It runs in the range of a 10% of revenue and we don't detailed a number of customers.
He said.
[laughter] gigabyte.
Oh, Okay might you might not actually falling.
Yeah, six gigabaud email is heavy in the design phase we're not we're not our our shipments are actually quite small and 56 gig today.
No actually I'm just to be clear debts for 400 gig.
For intra data center applications correct.
Well the applications are both or intra datacenter in fiveg or Fiveg, you know a backhaul made hall you know single gig single a single Lambda 100 gig Pamfour.
And.
Uh huh.
Our expectations are that the you know the the Fiveg fronthaul mid haul applications will probably.
You know that that's kind of 2020 growth rather than not right now.
And who is your competitor there.
Well, everybody else, who makes emails.
Thank you, we'll now move on to our next question from Michael University with MKM partners.
Great. Thanks, a lot. The last time you guys gave guidance I think you suggested that Threeq you run rate would be about $65 million. So today with the.
$90 million guidance I. My question is is 100% explained by the difference I'll give you previously and now explained by the why wait on EA our products or.
Versus that time are you also lose your outlook for these top five or 10 western vendors as well.
Well when we when we said 65. We also said that is if there is no further demand for Nani a our products. We subsequently did say.
That we do have nani, a our products and it is the case that there has been ongoing demand, but at the time that we cited the $65 million number. We said if there is no further demand from walk away for these these are non <unk> products.
So my first answer.
That's the majority of it is is why way coming back, but there is some strength from other customers as well.
Great and then Tim based on that same conversation I think you talked about that it could take time for Redesigns too.
Hi, customer did you redesign that would benefit these non E. Eight our products do you think that you've seen the impact of Redesigns or do you see do you think that that's in front of us and that could still happen and drive demand for these products are these sort of seems like older products to even a higher level than what we're seeing now.
Yeah I.
You know you're.
You know its an insightful question, but it's one where our visibility is limited.
You know essentially.
The fact that.
You know why way appears to be having more demand for the legacy systems does suggest that with certain customers, perhaps the domestic customers.
You know there is a continuing need for capacity in the network. There is a continuing need for them to invest in their infrastructure and therefore there.
Fulfilling that perhaps with more of the legacy systems and Oh, you know for some of our products you know our some of our products are unique and differentiated in there.
And their capabilities and so.
You know others, you know others. They do have you know Chinese competitors are Japanese competitors or both.
I think what's what will happen in the in the redesign.
You know that that will happen over time.
Just as.
They they may modify their their supply chain overtime, certainly you know, we'll modify our customer mix over time.
And ER.
[laughter] frankly, my Crystal ball isn't quite clear enough to see how all that will play out.
Okay Fair enough. Let me just ask on 600 G. you've made some positive comments about 600, G., but you know versus where you were three months ago on 600 G. How do you feel better or worse or are things moving faster or slower.
What's your what's your view.
Yeah, I I'd say better you know for 600 G was pretty it was early days, you know a quarter or two ago, we're shipping products into that space and the volumes are increasing so we're feeling pretty good about it.
Thank you, we'll now take our next question from Alex Henderson with Needham and company.
Great.
Thanks for those last couple of answers I was hoping you could talk a little bit about how you feel about the DIY market as we start to anticipate.
The the move.
Two a Z R zero plus or down the line.
And whether that helps to virtu, how does how does it play out relative to your positioning.
[noise].
Well, let's see.
That is the that is the the 4 billion dollar question Alex.
You know the ER there are two parts of that for the first one is that.
The the 400 ZR approach.
Is.
You know capable and enabling a a slightly different architecture. It will take time for it to roll out but.
Essentially.
We are selling a component suite into 400 gig and 600 gig.
Going into line cards or pizza box architectures, now and we've developed the full 400 ZR capability.
Components suite for Pluggables.
As well so for us the 400 ZR will.
Is primarily on our silicon photonics platform, where we have.
Nano tunable lasers and coaches that go into 400 ZR.
We see that as as early 2020 ramping in 2021, and so that market isn't isn't upper for US. It also expands the size of the market by the same token the the market that is using pizza boxes and line cards. Today 400 gig 600 gig that will expand to include 800 gig and then as I said they will they will coexist.
And then we also have recent deals that that.
Affect who's in control of the market share and what systems offer and I think that is also a big.
Determinant into how the.
The 400 ZR market develops.
This is this is an important set of topics for our industry for our company and for our competitors as well, we're feeling our positions in terms of technology products and roadmap are actually quite well suited for the direction. It's moving.
Great. Thank you.
One for you Beth.
Currency gain in the quarter.
<unk> million dollars I think you said.
I'm, assuming you have some currency benefit in the September quarter guidance are you assuming that drops out totally.
And to the extent that there is a.
Big shift in the exchange rate versus the Chinese currency here does that have an impact on your thinking.
So what we are functional currency in our Chinese operation is the RMB.
So all the million dollars of currency gain that we put in there is it is a revaluation due to a weaker UAN during the prior quarter.
To the extent that we finished this next quarter with a weaker yet.
RMB then there will also be again, but we don't we do not include those in our forecast.
Yes.
We don't forecast currency.
So I should assume then that you're not using the currency as of the last Oh look before you came into the room, but rather the currency at the end of the June quarter as York shape.
Correct.
Thank you well move on and we'll take our next question from Simon Leopold with Raymond James.
Thanks for giving me a follow up I just wanted to get broader thoughts about vertical integration specifically, both why wait and see I have made comments in the past about efforts to vertically integrate cnas made an acquisition.
A couple of years ago, just trying to understand what they may be doing where it would would overlap with your products and and where you see.
Opportunities continuing even with vertical integration by your customers. Thank you.
With this denial order while way is continuing to operate in part because of.
Work that they have done.
Two risk mitigate a little different than.
The acquisition that Sienna did.
Sienna was.
Certainly working too.
Have certain technologies that can't be copied by others or or.
Essentially too.
Make.
Additional propriety part of their fabric if you will.
And.
To an extent I see some of that in the recently announced Cisco deal as well as the possibility of Cisco being in.
More control of their future as a result so.
Different customers I think have.
Different rationale.
The the volumes.
Through the course of these events have continued to grow and.
Data rates have continued to.
Increase.
Both trends of which have.
Provided.
Growth opportunities for Neophotonics as we stay on the leading edge of technology.
You know for us the imperative is to stay on the leading edge and to offer some differentiated solutions from from what they would otherwise have an anda.
That that is.
Part of what we have to do on a daily basis.
Great. Thank you for taking that.
Hi, Thank you, we'll move on to Tim Savageaux with Northland capital markets.
Yeah I appreciate the color.
Grand we got.
Cisco accretion because that was going to be.
My question.
I imagine both of those.
Companies could be among your top funds so remote your top 10 customers. So.
At a high level do you see any kind of business impact positive or negative from that potential transaction, but really the bigger question is.
You know with Cisco I guess, having taken a look at the coherent DSP space, where there's a limited amount of suppliers and decided that the DSP was.
Pretty strategic, especially as they move toward Pluggable.
I Wonder if you could discuss the role of laser technology relative to coherent DSP you mentioned it.
Another one of the levers designers have tried.
In terms of kind of the strategic nature of laser technology to this whole equation relative to where we've seen good DSP side I'd be interested in your.
In your views there in addition to any.
Potential impact positive or negative that transaction on your run rate business. Thanks.
Yeah.
You know for these high speed data rates the.
The aspects that I talked about in the prepared remarks being able to leverage.
Baud rate.
Or signal rate as opposed to leveraging.
Higher order modulation these are kind of the core.
Elements.
A lot of time and attention is given to the discussion of DSP, but the dsps operate.
Over time, they are operating with input signals in the input signals.
They're clarity and their data rate is.
Is kind of a precursor to system performance to that extent.
The lasers.
In order to operate at the very.
At the higher data data rates the lasers have to have very narrow linewidth. They have to have very low phase noise in order to increase the baud rate you have to have very very low phase noise, and our our laser technology, which leverages, what we call the CL external cavity lasers.
Which are offered in our microwave delay in our our nano CLA.
These offer the lowest phase noise by a considerable margin in the industry and and that is critical to these higher these higher data rates and it's also critical to be able to operate with the higher order modulation the Qualcomm.
Modulation that is used so.
It absolutely is the case that.
Laser technology matters.
The characteristic of line within phase noise matters.
Hi, Hi data rates.
Thanks very much.
Thank you we'll take our next question from Paul Silverstein with Cowen.
So if this was answered my apologies, but I don't recall, you will ever breaking out your narrow line with tunable laser revenue specifically for the laser.
Done that or can you do that more importantly.
What we have said is we have three different types of lasers.
And.
We've said that lasers actually represent.
Approximately half of the revenue of the company and that the largest part of our lasers are the.
Narrow line width tunable lasers so.
I think thats the level of granularity that will will provide Paul.
I'll take a shot of this book I guess it leaves a little room for interpretation, but would it be over 25% of total revenue.
Yes, it would.
That's all I needed appreciate it thanks guys.
Thank you that does conclude todays question and answer session I'd like to turn the conference back over to management for any additional or closing remarks.
Okay, well, thank you very much for your time and interest.
And neophotonics today.
We do look forward to updating you on our progress in the future.
Have a good day.
Thank you that does conclude today's call. Thank you all for your participation you may now disconnect.