NeoPhotonics Corp of San Jose, CA, a vertically integrated designer and manufacturer of silica-on-silicon photonic integrated circuit (PIC)-based modules and subsystems for bandwidth-intensive, high-speed communications networks, has reported its ninth consecutive year of annual revenue growth, up 13% from 2010’s $177.7m to a record $201m in 2011.
Expectations were also exceeded for gross margin. On a non-GAAP basis, gross margin was 25.7% (though down on 31.9% in 2010). Loss from continuing operations in 2011 was $9.6m, compared to income of $9m in 2010. However, for fourth-quarter 2011, NeoPhotonics reported record revenue of $57.2m, up 33% on $42.8m in Q3 and up 14% on $50.2m a year ago (and 14% above the top end of the projected range of $45-50m).
The ten largest customers accounted for about 90% of total revenue. Revenue from largest customer Huawei Technologies of China grew 46% sequentially after a return to a more traditional order pattern, suggesting that (along with higher demand) Huawei was restocking its inventory after an unusually low third quarter. Huawei thus grew to 47% of total revenue, up from 44% in Q3. Ciena comprised 11% of revenue.
“We experienced strong demand in our ‘Speed & Agility’ and ‘Access’ product categories and [as a vertically integrated supplier] avoided adverse impacts from the floods in Thailand,” says chairman, president & CEO Tim Jenks. “Instead of seeing an anticipated slowing with our customers due to their other suppliers being impacted by flooding in Thailand, we experienced an increase in demand from some customers seeking additional supply. This incrementally positive effect was more notable for 10G products and tunable laser products, both of which are in our Speed and Agility product group,” he adds. “In addition, we saw an increase in new customer engagements in the fourth quarter, particularly for our coherent PIC-based products,” continues Jenks.
Q4 revenue also included $5.8m attributable to Santur Corp of Fremont, CA (acquired on 12 October 2011), a designer and manufacturer of indium phosphide (InP)-based PIC products. “Revenue from Santur products was at the top end of our guidance projections [of $5-6m], and we have seen an increase in new customer engagements for Santur products since the acquisition,” says Jenks. Founded in 2000, Santur commercialized PIC-based laser array and packaging technologies for communications networks. Products are designed to provide reduced size, power consumption and cost for DWDM, coherent and client-side networking applications in 10G, 40G and 100G networks. Santur contributes almost exclusively to NeoPhotonics’ ‘Speed & Agility’ product group.
In Q4, ‘Speed & Agility’ products comprised 52% of total revenue (up from 37% in Q3), ‘Access’ products comprised 31% (down from 34%), and ‘Other Telecom’ products (legacy products such as DWDM, Sonet and SDH) comprised 17% (down from 30%, due mainly to decreasing demand for transceivers used in legacy systems below 10Gbps).
Generally, ‘Speed & Agility’ products have higher-than-corporate-average gross margins and ‘Access’ products have lower gross margins. However, Santur’s products overall had lower gross margins than the NeoPhotonics product portfolio, so the margin differences for the three product groups have narrowed for the immediate term. On a non-GAAP basis, gross margin has fallen from 28.5% a year ago and 27.8% in Q3 to 23.5%. Nevertheless, despite the Santur acquisition and the effects of annual price negotiations completed during Q4, this was above the projected range of 19-21%.
Total operating expenses have risen from $12.7m a year ago and $16.1m in Q3 to $35.1m (or $22m, excluding a $13.1m non-cash charge for impairment of goodwill). The increase was due mainly to the addition of Santur’s operations (not yet offset by restructuring efforts, begun during the quarter).
Inclusive of the firm’s ‘delta’ R&D investment begun in Q3 (spending $1m per quarter for 4-6 quarters, in order to further leverage its PIC technology platform into next-generation network opportunities in switching and high-speed devices), the loss from continuing operations was $6.4m, doubling from $3.2m in Q3 and compared with income of $1.8m a year ago.
During Q4, NeoPhotonics consumed $2.2m of cash from operations and spent $3.2m for capital expenditures. Total cash, cash equivalents and short-term investments fell from $103m to $86.4m, due mainly to paying the purchase price for Santur.
During Q4, NeoPhotonics initiated a plan to increase production capacity of narrow-linewidth tunable lasers (NLW-TLs), completing the first phase to double output. The firm believes that demand for these products has outstripped current industry supply capacity due to the rapid uptake of coherent optical technology, coupled with industry supply constraints attributable to the flooding in Thailand in October 2011. With orders received from seven new NLW-TL customers and additional engagements underway, the firm is currently expanding production capacity further. “Due to the significant step up in customer qualifications, the existing strong relationships we have with these customers and our rapidly added capacity, we believe that our increasing share in this important marketplace can be a permanent shift, not a short-term supply opportunity,” says Jenks.
For first-quarter 2012, NeoPhotonics expects results to reflect the typically seasonally lower first quarter against a more normalized demand pattern versus Q4/2011 revenue (which was atypically strong). Accordingly, it expects revenue of $46-51m and gross margin of 20-22%.
NeoPhotonics says that, by combining Santur’s InP PICs with its existing hybrid PICs, it can provide new products for 100G coherent systems that feature higher levels of integration, higher performance and greater functionality. Santur also brings new growth opportunities, with tunable lasers for reconfigurable networks and 40G and 100G transceiver modules for client and cloud applications.
Various functions and systems of NeoPhotonics and Santur have been integrated, including ERP (enterprise resource planning). Integration actions included reductions in staffing and the elimination of functional redundancies, systems and resources. The firm continues to pursue consolidation of its Silicon Valley facilities. Consolidation of operating functions, from sales and R&D to operations and finance, has resulted in lower combined total operating expenses and a smaller overall footprint. On a run rate basis, total operating costs should be cut by $1-1.5m per quarter. “These changes will make us leaner, while also being more flexible and more scalable in response to technology changes and customer needs,” believes Jenks. “We could return to profitability in four to six quarters,” he adds. “We will remain cautious, however, as we continue our process of integrating Santur and given persistent uncertainty in the macro-economic environment in Europe, as well as a view of potentially moderating spending at carriers, particularly in North America, which could impact our network equipment manufacturer customers.”