NPTN - Earnings call transcript Q4 2017

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Operator

Welcome to the NeoPhotonics 2017 Fourth Quarter Conference Call. This call is being webcast live on the NeoPhotonics event calendar webpage at www.neophotonics.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 will be available on the event calendar page of the NeoPhotonics website. I would now like to turn the call over to Erica Mannion at Sapphire Investor Relations.

Erica Mannion

afternoon. Good quarter joining of NeoPhotonics year, XXXX outlook the for the results and to for quarter fourth and first us you operating discuss for our Thank XXXX. of full fiscal Chief are today and Beth Jenks, With Financial me Tim Officer. CEO, Chairman and Eby, Tim a with begin of the will quarter. fourth review of for then before for outlook providing results quarter fiscal for the quarter XXXX. will Beth financial the and the the fourth provide full year first fiscal the Tim will business market then on turn provide Beth call and to before questions. to the back opening drivers color it for call company's discussions and and The statement and otherwise release management's press all than including certain statements and measures during financial other this sheet amounts unless percentages include Non-GAAP balance income of revenue, information, noted. not should GAAP are GAAP. substitute accordance Non-GAAP financial measures a as with financial not considered or prepared prepared and superior for to performance of measures with in accordance be in These GAAP and Relations a These X-K, and the are release press the Investor found with of financial can website. NeoPhotonics provided of and company's SEC, be to at measures related filed Non-GAAP today the the results section reconciliation being Form in rights the contained with the NeoPhotonics, and all Material copyright in of property sole is webcast reserved. availability, not this events, product and involve and technology historical in which demand, sales projections. capital statements subsequent levels profitability, customer future and of inventory and and statements industry may conference statements business forward-looking call, regarding risks be considered Certain include and facts, uncertainties are that and results, economic needs levels development, factors materially. cause to results differ Various could actual

quarterly XXXX been in at and release risk our March these our SEC X, press length have factors in described forth filings. of Some annual and set are dated

over turn Tim to will Jenks. the CEO, Now, call I

Timothy Jenks

prior our customers quarter solid was range. today. of in and demand this of from for we of quarter our end a combination In and with other the outlook coming Chinese representing X% the Thank demand revenue us growth above joining the top regions in NeoPhotonics increasing over delivered the fourth $XX.X million, Driving results, stable you growth serve.

of rates were and for fourth of of products. customer quarter revenues Our to our High XXXX revenue. and normalized our in proforma comprised levels XXXX XX% inventory XXXG we believe beyond have XX% China, data our Products Speed the full year Specific for of

reduce many recall, early made aware the a reduced the experienced and As we semiconductor our a industry was in of inventory XXXX customer working inventory the from of much through levels X-X inventory months customers of week result customers target will set supply – as Chinese optical OEM range you in we overhang saw the this XXXX to Telecom several result was down components in fourth of mid-XXXX. substantial throughout a and chain of the our demand quarter inventory. In by of

and larger thus both a increasing trials. drivers additional our XG I mid- The as tenders modest expectation of our in pull Outside That quarter, with typical is, volume strong see first a we we in fourth this we in later initial XXXX. increases More seen from growth have to them far despite volumes QX of long-term China demand growth quarter provincial shipment our believe we seasonality the to and or mentioned volumes products, is input not customers support importantly, customers QX began of step-up trend levels. continue. the increase previously, degree in saw in over in materialize from we China increasing carriers, and yet a specific demand firm in these drivers. will is to With either both some this indication is specific domestic see QX modestly of dynamics, near-term that from and these end-market customer of end-market traction

will volumes have wins, to our modules quarter and in demand base. products, we we fourth from Switch strengthening grow our Multicast low through a we respect our seeing XXXG components initial for XXXX linewidth side began all shipping DCO With to design are accordingly. coherent three increased customers shipment receiver. XXXG across to and and rate platform our Turning line We ultra-narrow notably expect leading coherent product the offerings, including starting and XXXG our XXXG of driver-modulator see coherent tunable in strength and laser, micro we

schemes wavelength, a very minimal because speeds are achieving there narrowest phase bits lasers are higher and noise more order linewidth these data ultra-narrow lasers pure signal in methods for of risk required. When coding – is linewidth are have unless degradation on a that the modulation Our given critical – they or the are element encoded used.

San PIN-PDs external are factor COSA, Optical Switch suitable and on port for coherent XXXG and gen and for applications and focused optimally cards; wavelength center, transceivers single rates or reach control optical all GBaud tunable are and Optical optical our in necessary low XX XXXG TIAs be highlight in technology DCI well high and to GBaud elements products in the ASIC PLC versions compact XXXZR inside PAMX our “contentionless” daughter second, XX and a very provides the pluggable these Coherent path Metro plan that PAMX cost initially performance Multi-Cast weeks, Lasers will XXXG finally together networks version networks, driver in of America EMLs, introduction including product for Europe a our At center for package integrates our driver-modulator XXGBaud Silicon of discrete as again data is nano our loss we XXXG customers’ with count enable adoption line regions a wavelength as suitable data receiver as Subassembly, now First, in as the accelerating full highlighted. PSMX small modulated offerings with such XXXG Fiber four circuitry, data supplying for laser, content China, in Chinese DD-QSFP; provider see and form next, performance to modulator transmitters receivers. this we And solutions, we rates Diego content linewidth factor short small in side center new and pluggable data ultra-narrow based them whom of XXXG Photonics two to product third, family for or drivers this to Power in or highest ROADMs applications I for We This now contentionless Similarly, CWDMX. growing to on in laser demand effective which for and our for the believe the of well of gen XXXG North serve. with also growth and cavity of stable solution with data demand modules; XXXG for suite, held XXXG subsequently networks; products. our PAMX customers applications. are coherent provide and for X.XT modules including: our plus next receiver electro-absorptively integrated coherent a XXXG client levels that components Conference, as a of normalized, highest we the form we all to Communications the and use work High new transceivers, X.XT matter. and side continue Our growth and for positioned next The based inventory including and lasers, or

later out deployments backbone, national wins, wireless, the strong seeing in provincial as design this in networks year, build continues data continuing prepare key for we China to are in market. Metro XG and expect and and We advance center growth

our within or our there drivers now in success Beth and when turn However, XXXX XXXX, deployments half to to for tenders in the mid- the top product will further on by next financial drivers, the us market in believe around profitability. the uncertainty and compelling, performance. first China I call over will line and are business introductions, is provide new detail half second occur. drive our these help We complemented growth of may long-term to

Elizabeth Eby

Thank and you, China note our million profitability free $XX in cash we our quarter afternoon. the flow. positive fourth positive renewed, drive been Bank free by lines flow. and inventory good QX, Japan continued and Tim, achieved Of we toward reduced and to have cash In

announced Sold. from Cost operating million million in complete, have restructuring to action million this Our $X.X QX $X.X in of results. Goods related and our $X.X in in non-GAAP been excluded QX costs is of with in The QX of savings expenses

to quarter X% Moving up China. our quarter, over million, results $XX.X for quarter, X% fourth revenue totaled with in growth the

XXXX, year our and tenders, full the the in XX% strong of For fiscal over-hang year, totaled million, over $XXX down delays sale year, by product a after an assets. speed low inventory revenue driven China

products, the from declined sale revenue China year. Americas of our the prior our our XX%. XX% of In low the Excluding QX, total revenue and speed represented were XX%

Huawei revenue. Technologies, our again their and approximately year, fiscal our XX% accounted revenue the HiSilicon and Americas XX%. QX, full Technologies, the largest of China For of were XX% affiliate was customer the Company’s in for was including

after of four customers Our Huawei XX% in QX. next total represented revenue

For the of revenue fiscal the represented of revenue. Huawei full XX% XX% and year, total was four next total

expected. Our than three midpoint inventory new qualification third Non-GAAP our were third and of lower the First our fab, quarter quarter. at of the XX.X%, the and taken X.X approximately good negotiations; initial from gross equipment the of Japan of than from longer news In XXXX impact offset margin This fab. the were quarter expected of full in points The was There by change: than output both price has largest, integration was partially write-offs lower up fourth annual the our and primary Japan forecast. and drivers

over of for the write-off million, a $X expense million officer carry will severance and debt and Non-GAAP costs main includes this bad into adverse $X.X fourth quarter an approximately causes million. of impact QX. Total was addressed $XX.X While operating remediated, and the have been

QX, $X.X negative down of in for the Excluding quarter revenue, the compared or given the expenses our related compared improvement fourth XX% operating the impact margin restructuring actions and $X.X million, prior loss expenses we primarily cents tax as gross in to per I million by lower QX, of operating one-time in quarter, charges, was In discussed. to operating these million, tax expected restructuring. share, negative Non-GAAP as of China. impact were a X or to $X.X recorded driven XX%

finalized million and we of the tax China by XX share not loss Based per inventory. driving China year-end new to was profit U.S. Non-GAAP to in provisions, count a diluted inventory we provision. XX result This a subsidiary. a loss share shares, our on subcontract us. purchased quarter tax The related cents the year of Non-GAAP legal the manufacturer, new tax U.S. the the U.S. not of activities the tax one-time as that for As compared impact of The law. in million million of could to the entity, our third of loss was the end provision hold in determined $XX.X was for written-down by the fourth quarter, minimal driven net tax law loss this cents XX.X fully to $XX.X a compared a was QX. translates the subsidiary

quarter, of Adjusted in EBITDA quarter $X.XM loss to For compared of the million $X.X loss of a fourth the XXXX. was third

statement $X.X the due primarily for amortization costs in of year was intangibles, which of a to We million was restructuring EPS XX.X%. million XX% of close income to million. full a recorded quarter $XX.X $XX.X and related lower in was the in $XX.X for of disposition margin quarter. will charges. year quarter, prior loss the margin opposed of and to my EBITDA loss was and net million XX%, loss the acquisition-related up of the of results. million million million loss out other gross Operating per Fourth GAAP $XX.X preceding of net prior I $X.X quarter, $XX.X discussion the and expense in compared million Non-GAAP from was was the share Non-GAAP of review Adjusted period. for Our Net of loss of $XX.X fourth compensation our QX gross cents as a Operating related costs included and $X.X impact quarter, a fourth restructuring and loss $XX.X expense a full million quarter year. with stock-based the approximately in the was Non-GAAP QX. the $X.XX million

share. year, the GAAP a our and per for is recorded full the net of EPS of year. for full loss was a in loss million included gross of reconciliation cents Non-GAAP the our dollar we numbers was one GAAP For quarter press release. and margin XX%, to A $XX.X twenty-three

were fourth operations Net $XX finished the quarter. balance $XX and the days in we the provided Turning inventory to $XX million over XX by cash. of million sheet, quarter quarter. the million expenditures in investments was quarter, $X the in in million million, prior cash, on restricted Capital $X approximately $X with with down inventory million, Cash was hand. down fourth from

free fourth in cash $X.X was As the flow quarter. million result, a

As Bank annual $XX $XX million of Credit in with exchange we end million at the our Bank on million of we XXX China renewal previously Subsequent agreement current have credit $XX the the new for CITIC credit million line to the line. on or quarter, our disclosed, approximately completed RMB, CITIC expired borrowed rates. and repaid

We loan Part with XXX Mitsubishi Japan long repay Yen, into agreement have XXX in of $X term new or the entered for or seven million. approximately the of previous also million used proceeds this was loan million to loan. $X year a million Yen approximately Bank

discusses statement could fiscal that in results first our risks our Before that for everyone to public materially forward-looking future outlook discuss our the causing XXXX, and with Safe included want SEC Harbor I differ of performance quarter filings affect statements. the press the uncertainties of our I remind revenue from release to and and earnings our actual

the Tim our quarter price New and impact first lowest quarter to mentioned, seasonally As typically of Year. is annual negotiations the due Chinese

over-supply, industry the of range the were price Given reductions of historical high end XX%-XX%. toward

take the quarter QX, to typically levels impact in volumes fourth In mitigate the reductions effect cost by first gross reductions began on increase margin. occurring to quarter followed modestly throughout these full the the in inventory year normal. impact as expected are As the return to occurs, price to with

QX lower our also fab impact mentioned, from output of previously an I As has million. of $X Japan

$XX XXXX margin Gross range the XX% in in expectations and; XX diluted approximately numbers to for fully loss per of margin the Given reflective to in diluted XX%; to the of diluted cents, shares. of range $XX March of million XX% per quarter these These the factors, Non-GAAP in million; the gross Non-GAAP GAAP Revenue loss range are: Company’s net to share cents. range of in cents cents the XX share range net of XX the to XX.X are XX XX%;

focused on flow previously and return have a I are to noted, As profitability. we cash, cash

that Our are progress reducing reductions have inventory good customer’s have operating inventories our believe levels. expense we made complete, we reached normal and

we As actions now committed will mid-eighties revenues the I’ll reduce amortization remain we to to breakeven breakeven back further under of absorption the and turn Tim. with to in complete continue reaching our charges, call point.

Timothy Jenks

Thank you, Beth.

await for further on business. as As improvements Company, execution focused remain a we in operational near-term demand including containment cost our we

of in in around overhang a awards currently market, in uncertainty with tender feel China. timing meaningful first for in the of of the however overall to information our we frame While confident elimination growth the to competitive year outlook in additional at position hand. mindful The it is we remain the the XXXX, difficult is an inventory our step customers

beyond. deployments PAMX globe; the and data high speed high wireless; and higher continued embracing Metro GBaud the with XX suite of port XXXG center Third, focused about Phosphide speeds remain and growth modulation telecom, of and first leading drivers in within technologies capacity advance we NeoPhotonics needs cloud both long-term build-outs applications for we Growth believe component including prospects Indium data China over is their receivers a drivers the speed near-term, architectures XXXG, deployments, solutions, the and beyond rapidly enthusiastic the the centers contributing Looking and of First, big We networking to our modulators been industry rapidly. are and that include: coherent and has data mid- performance markets increase our are lasers, space. optical of to these medium- delivering and modules. expanding of as Second, components deliver across on continuing are XG and long-term including for

carrier significant Multi-Cast with new higher We XXXX growth momentum industry toward to added years. multiple adoptions continued and expect the customers networks and new contentionless fully dimensionality world. Switches around the build Finally, in over shipment

second This said I drivers ask like and are the I to long-term our that questions. well compelling, expect would in previously, line drive as we market comments half formal operator As growth the top as to now we believe for up open profitability. the mid- and our business XXXX to for concludes such line

Sophia?

Operator

question Simon with James. our take [Operator Instructions] from Leopold we’ll Raymond And first

Mauricio Munoz

Thank taking This Mauricio you my Simon for in for question. is today.

Timothy Jenks

Mauricio. Hey

Mauricio Munoz

you? Tim. housekeeping for Beth. How are a Just quick item Hey,

customer sales. You XX% your talked to customer XX% customers disclosed contributed also you large approximately quarter on any this about that Huawei standalone, four quarter? being the Were a and other the December XX% next of there

Elizabeth Eby

Yes, Ciena was at XX%.

Mauricio Munoz

this in Okay, us thank wanted just quarter? China demand experienced China. from you. Can And I jump then, this on do to uptick into give color some you that

Timothy Jenks

want please you say to that Do that say. again you

Mauricio Munoz

quarter? in this Yes, on can give color that China us I from demand know, some uptick if experienced you this you

Timothy Jenks

to is, prepared to levels year Mauricio inventory we at significant our and my So, that procurement end, had so, customers. the our inventory at inventory And four that, impact certain depletion, then we that believe, mid-year, production and I with in weeks they from moved parts had they their as biggest three indicated of the in remarks overhang increased range VMI. come of actually by

impact So, we actually the believe. largest that’s

Mauricio Munoz

But the you hear to I expect case call and also right? that think don’t that’s I in trying the what to… in that’s quarter, the be I what March am

Timothy Jenks

I if of – step-up will has the now you happened. the think is impact

result up March of fact volumes the have actually is that, you the demand. down. to so, and the are consider are But ASPs also actual And quarter the

or volumes that normally China count we go overall higher see, So, more, XX% range see prices XX% up down to but the year, the we as year. in up XX% Beth of port saw range this XXX-Gig said, being are we and for in of end

what quarter, is and that be flat impact are the up. overall volumes to we higher lower slightly it first of the kind just of So, would say would the in prices. year, we But, for seeing

reflected course of guidance. is our in this So,

Mauricio Munoz

towards North in to metro opportunity – And on this America, Yes, so North America. then, thank just to you. switch wanted

suggested Some in second in that visibility regarding and of initiative I your and NeoPhotonics? in the accelerating there competitors if impact Verizon the am qualitative guess, could what’s I wondering or metro half help color have of that quantitative the projects your ramping year. us, can the the provide start more you

Timothy Jenks

Well, let’s see.

visibility total the generally largest are next after is both the For whom we of our as in – there trajectory as are specific customer, to fact, are we my Verizon What in of fourth first said remarks XXXX relatively manufacturers, principle generally customers have that see and them from for real quarter. supply NeoPhotonics. stable really in two the the it in customers I the in course for do don’t prepared chain, reflected as reflected the network those equipment a referred Beth four, see demand we for Verizon. to the are changes our outlook But, quarter as and was

Mauricio Munoz

guess to am what guess, – growth say you trying declines within is the you the range that, I that XXXX close – do if you I contributions your fiscal think metro grow you question Verizon include XX% XXX-gig you my revenue going do year XX% a in from and price do at that from is, XXX-gig projects? in would I business this Tim, to to the China. port above expect get in

Timothy Jenks

We expect be XXXX. in big things. growth drive to that able we is two will There

new pricing, I China new based products might layer in and highlighted in offset increases up. to we of XXX-gig. As have to the expect it in that products are my the in would as I well revenue slightly prepared into by And remarks, said, The some flat on now. that be that’s you then flat, ports

we question? on of new that driving are growth a that your it would the product the same be, products. some it with we then relatively and So, flat be would mix, answer would Does basis think

Mauricio Munoz

Yes, thank taking you questions. my for and

Timothy Jenks

You bet, thank you, Mauricio.

Operator

go Company. to Alex & with Needham we’ll next Henderson And

Alex Henderson

said impact it I measure what you could towards that us bring Great, XX-days work give sense inventory would you of thanks. assume to hoping I XQ? was be some XX are to days. if Tim, I the from, down of around it believe the in you trying down

fixed couple points a overhead is to So, variance? of there

Elizabeth Eby

was So, we’ve easy the Frankly, that to XX part. gotten it days. down

We are days. to XX now in get to

are products have have to in – an are We pulling inventory able products what we we already are they to what versus produce. versus we get the, okay, do

We of four to in $X the expect expect we to we million impact relatively hit. that QX going, are – help, low but points. also that where That’s right, have Japan you which underabsorption of the be does

Alex Henderson

So $X it’s million…

Elizabeth Eby

That meets nicely. of

Alex Henderson

points? million – what So it’s plus XXX, $X amount basis another XXX

Elizabeth Eby

at $X looking underabsorption Most of plus, are is PAM. of because what? the we that the million is,

Alex Henderson

this variable. All is then redundant, right, -

Elizabeth Eby

Yes, exactly.

Alex Henderson

of And that I Japan, being the the thought, function Japan qualification. that the I thought equipment of you was in utilized said was installation a

Elizabeth Eby

was, It variance in same variance. line accounted P&L margin the the the gross it on or item but

Alex Henderson

in the million is $XX think to I will down completed days, of and end of So, those been inventory I by issues first assume XX moving roughly has your prop the the most that quarter out? further

Elizabeth Eby

a are know, cash in you we for XX flow, asking lot the we i-tunable the little as off. a and stuff. the bleed estimating, QX. full and and is to up absolutely, to inventory of of longer going so down are little producing Customers MPSs we we we hang So, managing ultimate days to it new more a get new not are new the while the are going lasers stuff

Alex Henderson

to less range? be be as into If will up cover to ask question your at we a gross as just second section, on, I you back quarter another getting on or than plus get XX% do where of would front two margins think in third

Elizabeth Eby

Absolutely.

higher. three We are Two exceeding quarters, absolutely. for to

Alex Henderson

Okay, thank you.

Operator

we’ll from go Shannon to Next Craig-Hallum. Richard

Richard Shannon

Beth questions. and for my Tim taking Thanks,

Timothy Jenks

Richard. Hey,

Richard Shannon

Let me start with the – hi.

remarks, said you on seeing hearing are Let Tim, happen? I your OEM with or little the anything process not tenders. I’d improvements China. guess at what maybe than question they a but your least, in here, a might you when lot great thought that might me better customers I direct view coming? a any when from clues not about some carriers start bit be the or visibility, the a half, clear in to Any I think around normal, first ask guess, are if you like on a

Timothy Jenks

north The forecast of our like, for range from really ports. that. the there XXX,XXX, normal. customer than It Well, of more is the anything largest little a XXX-gigabit that’s XXX,XXX in better looks maybe first all, bit range of ports in of isn’t

first If the in China the second you near-term, of all the known are half half aren’t OEMs, tenders second there causes toward for year. us half, which versus take new significant all or really expected timing of to the any look the that

be it respect big or quarter tenders. the that out earlier news and the China course of third largest have for coming near-term. see is of in would possibly little could So actually than we to carriers, With don’t changes we the more Mobile China Mobile in

this second the little inclusive So, us mobile makes China more cautious for more half. the half of optimistic the and first for

Richard Shannon

about you is process like some to revenue Thanks are ultimately could to XX% provide about That ask margin It cost well. I helpful. Alex. that response than growth and product if Okay. if to the Maybe Tim. try the help reductions wonder higher and going clarity gross mid sounds question we for think question on think kind for we us and you model thought last as you more follow-up on any this about try and to maybe XX%, there? aiming think think that your to from how in of should want am as to I mix and

Elizabeth Eby

They We think Japan have events by of like gross But will driven price discussion. lower the because product So, a little or past lower in and decent some the discussed volume. I than they a is margins. negotiations. the be a as got little of a – by of in unusual lot because of you lot driven the – our margin are were annual it get I is QX we’ve

We will just – and there. I’ll start

over they down million and and cost price with annual then year volume. come go they Japan, the will negotiations in we with margins get as exception with start QX the then reductions the up QX in in underabsorption product the So, – the of $X

So, will be the decreasing then increasing – our goes as up revenue we underabsorption.

the on we margin. well will – will to gross possibly impact you anything always before, be increasing as can be our we as managing cash that? as minimize add flow. inventory And want also we said to I’ve So to Tim,

Timothy Jenks

the of be asking we Well, – in would up think modeling, XQ. I Richard respect think, a likely from more volumes about

I So, comments. in Beth’s think that reflects

Richard Shannon

one any it enough. or you remarks about wins optimistic Tim, in those this your and me. That’s that or are of you helpful, like mentioned process, if you talk some sounds solely and Wondering two happen, whether That’s for might Okay. when announced can DCO maybe later you modules China, us fair questions could about and it? regarding more other year. seeing you are design demand are help happening geographical you understand design there areas wins any for

Timothy Jenks

western have mean, both we and I Yes, customers. eastern

of have number in a have that We that companies others qualified, are still process.

that And so, to does China, comments said and in the for shipments. we reflect I Certainly of have because – with qualified, have overarching several started the case China respect half first half. second

grow I into would more faster. half, and So, would expect well the delayed, If then deployments, to grow it to more business expect that’s are tenders that I more if there then slowly. second

in since of it. comments, the and of part big So, for China. a half it, is our Beth’s a rest of volume like lot us matters is China business

Richard Shannon

sense what be on how to the do that able Within or to them one kind might of DCO? Okay. you Tim, you’ve suppliers context, in big two any topic, module think over your capture who you of build of out there, of There then share themselves. some want And follow-up obviously share the medium-term? to that Chinese got is some about

Timothy Jenks

the case our used optic modules largest I customer, significant coherent in certainly building DCO There modules. by digital it the of merchant Well, we of of way. large customers. in seller ship And that who are players about a this known are are think the components

DCOs, people’s merchant DCO for DCO be sale components participation sales. expect modest continue leverage other into overall DCO So, I while. OEM but of our But higher, our will market we component in capability, and products participate our own the our then, to share meaningfully of both or in component the our would whether a it’s because is

Richard Shannon

Okay.

So out bit jump Tim back jump of Thank in and a Thanks. I’ll line, maybe that you, is later. Beth. helpful.

Timothy Jenks

Thanks.

Operator

Jensen Troy with to next Piper we’ll Jaffray. go And

Troy Jensen

Hey, congrats on the top-line. strong

Timothy Jenks

Troy. Thanks,

Troy Jensen

of I and the the hit $XX you right? to do welcome. second half? you are on Tim, second of profitability million have – said, in said First all maybe you half profitability have hit you in I revenue planned to statements visibility think Beth, that those and correct year, think very you Are

Timothy Jenks

and in the we correct notably that first don’t half. and carriers customers and the have a than message – we’ve first do second think aren’t that that, reason potential But be tends both additional are visibility to we second What yet. and with know much gotten statements announced So, stronger of customers carriers from consistent for all, citing no, two for the in the the tenders. there is be the that China, tenders we discussions will for half

But our So, be on profitability have and to are revenue, tied the to in consistent second mid-XXs half comments those expectations. comments about profitability we the cautious.

Troy Jensen

Okay, to a To understood. there they to And just and on expert lot love it Tim, plan. I focused seems in its thoughts the me, get seriously moving view pretty domestic as five year on new suppliers. China China a trade restriction like VTE

targets mean what and And of can’t can some XXXX they hit what is realize targets and it I that does that but XXXX you? to So, you? type risk of to these happen near-term,

Timothy Jenks

plan. more a – new there that’s with year domestic the Yes, going than five something capability of trend China But have is been Telecom a on decade. announcement is Ministry to the are so, suppliers for, improving

certain It has – we been their This the plan, our kind of example, both where XX do internally. trend communications HiSilicon, investment last see, production sovereign roadmaps we technologies really They So, level time. will, localizing you is add they’ve in for accounted the which over going each a for have for module on When our product quarter if we plans. that we do been is in highlight. the some with and years. affiliate of Huawei

it And so, is a process. process. an new not ongoing It’s

the challenging ICs more challenging. vertical optical the takes is it longer that chips, components, to photodiode then in the the affecting and of I with i.e. is think integration and the localization the for ahead stay recognize achieved in is first. process, what’s readily assembly is important test modules of and more to With that respect laser innovation or most terms and development us

in vertical chips, components PDs, the with it to really ahead with so LDs our the the to all optical elements and And on innovation path. have we well deep intent integration consistent as on tried the the innovation NeoPhotonics, ICs, is of the our stay as path

Troy Jensen

would Okay, you last timing me launch or timeline question for do a for right, you a when can be, have and do you CFPX DCO? understood, a think

Timothy Jenks

we about and haven’t think modules. I there DCO is actually, are a CFPX to next-gen that product that set There in are yet. of So, topics talk the three broader announced

there each because for next-gen then but form CFPX it as it the and that is focus components the form form smaller planned. of along is for smaller versions, on CFPX so, an DSPs i.e. the the that’s may the solely form well as CFPX these remarks, the there example, the described current-gen, than us, market, the Some merchant available with factor in DDQSFP argue have really I factors my as factor is not factors prepared of a already market. each planned we availability of factor way in small OSFD in to certainly, are marching is said form And – with for go two and

Troy Jensen

Okay, so… go ahead.

Timothy Jenks

customers roadmaps call important also of weeks trade Yes, rather show year than an we having this two of before of the and year look to are thing the after. course the at it’s biggest conference each

in can that So, few weeks a talk about we again.

Troy Jensen

to forward seeing at OSC. Look perfect. It’s you

Timothy Jenks

Thanks, Troy.

Operator

Savageaux next Tim comes Northland Your question Capital from with Markets.

Timothy Jenks

Hello, Tim.

Tim Savageaux

some can having All are issues here you we hang right, right, on. me? All hear

Timothy Jenks

clear. Loud and Yes, indeed.

Tim Savageaux

from happen well. got kind I’ve out is of vendors that trying questions heard Well, CMS, a a say near-term several this their to some out in sort kind levels Chinese other what Verizon your this with and for regard to we’ve that to carriers a of of Well, that XG one of is and those network relate what’s we coming well. relate at the China, stuff. you couple week a to of if is your an kind as And there coming kind as of to plans And the other of integrated commentary chatter support a heard would is is XG, to Excellent. happening the which lines. acceleration on question, related along pause lot lot might of here one might supports seem commentary Barcelona front, business Multi-Cast trying And, that somewhat Switch about in right. All at bit hearing look say, high-level first there. with of the all what to backhaul which

might And interested Verizon happening and of XG-related carriers so, of But and relate to have what any your happen? think yet. would activity is, other be deployment that Chinese I’d stated infrastructure explicitly XG on pursuing our might seen guess, how to and my question happen actually to put I the haven’t you that I of between you what’s correlation same at in you carriers or would type with sort who fiber make be perspective of what in you agree you to required regard sort goals at sort forward and earlier that expect –

Timothy Jenks

that the questions. of on a XG… – lot Well, was I’ll just

Tim Savageaux

question context one Really, really, with was. really it is what

Timothy Jenks

the So, the having the pretty is trials just able understanding to XXXX third being fourth continue there quarter, with that, essentially, to but wireless respect and equipment the late in important begin ready – with initial said overall network services to some XXXX. XXXX, respect turn thing trials the is – not then, their network the then have XG the in to the our deployments be would are scale. to other then, and on And Tim, But the aspect, is to in allow just half, larger second quarter that the architecture developments shipments and clearly situation, of in in second customers – half. in Chinese initial

their convert then infrastructure. network things So, further the the the XXX-gig rollout existing out have rather to XG. And infrastructure be some customers capacities doing are to innovative support to in have to moving XXX-gig able order of in

some are innovation. the that currently through industry are with moving some dynamics important important there So,

out. to have So, actually this forward rolls we are looking

Tim Savageaux

but was, China guess, point spotty I XXX-gig the my Well, a metro the infrastructure. pre-suppose confidence exist Verizon, a point. little in I does exist that that that more is existence bit does is hear this at on of would that you that, we are confident fairly

my upgrade of networks? even whether fair happen activity. the absence of being in I the any metro of deployments question of XG or meaningful of pretention a it point bid either of how Well, trials sort kind initial any this was, or could of So, fiber quasi access-oriented this guess, volume to

Timothy Jenks

our deployment Well, that, actually the targeted is in China, there are understanding cities. a of initial number for

debating So, am not about metro. point I your

in the then, that dozen the we metro that have certain rollout, architectures rapidly. two those on would planned, in and have one accelerate today. and the assumption that initial do goes between cities as deployment of seen China – rate announced place However, we that are that And in expect as

So, be deployments country, going build, and The dozen one added new the have capacity all the will been metro but provincial both be and XG the two it provincial on. over deployments in have initial cities. won’t

Tim Savageaux

Understood.

Okay, topic. next

try in Year, the number mentioned you it that and coming if that context. XXX,XXX to that as you and I actually, Chinese So number, wonder could quite call New before I’ve new does, recently number was on that’s a heard post number put

understand other XXX,XXX need numbers. we’ve there and maybe You we of previous OEMs what the so maybe seem recast – to seen that I before. some to be sort what lumping in

Timothy Jenks

now, Well clear. be let’s real

largest you Chinese and add for but then, Huawei, range if in or customer, get said take bit in carriers the the ZTE, for example, of you our FiberHome, a we in XXX to above it’s total, I then above. So, slightly a to to XXX,XXX have

difference NEMs. the the between is between Huawei XXX So, XXX and China difference and the

Tim Savageaux

still that, me. understand to new a number I

this and inventory to In guess, IC XXX,XXX optical Now of of only your change, about is I the line god you may June strong over with not knows have that’s quarter, suppliers from you businesses, talking that do changed number for situations sequential number very a where comes from time. various perspective, various but your increases. and visibility regards their course

it bit changed plus side. to the like Although, may plus sounds XXX have the a little

Timothy Jenks

We’ve seen down and little bit. the XXX up a go

is if that more respect that the have there IC to individual managed certainly real-time fuzziness a out difference in up. is number. a is of the vendor is past go suppliers you component versus is and still inventory little quarter that a existing or talked current suppliers, would between that where there talked, we the optical in living have may two or inventory around then mean lower and So it burned being world off, quarter bit I about with And

that your explanatory I there differences maybe for the each are regarding the optical So, between of in think question that companies chain supply IC.

Tim Savageaux

what Japan? What fab? just happened? buzz Final in not in question. a could agree mean, Was I more. happened I that the

Elizabeth Eby

as into expected. some So bringing as online capital are everybody equipment we’ve was we’ve of equipment the pretty – them of all of and end laser in and our the pieces much couple lines, added not some we we brought QX characterization starting in knows, of going as quickly QX, a

lower. So, output was

Tim Savageaux

Got it.

but so, was, that margins in higher XXX bps Is right? And buzz what QX. gross be ex you would say did this that

Elizabeth Eby

a Yes. QX. in million is $X There impact

that’s yes, number, four about on a midpoint. So, million $XX points

Tim Savageaux

Okay, you. thank

Timothy Jenks

Tim. Thanks,

Operator

next question from our And Zhang we’ll Instructions] take [Operator Jun Securities. with Rosenblatt

Jun Zhang

Well, thanks for taking my questions.

questions top-line. have a I about two So

XXG is EML. about first The

percent you question. for line? do XXG product improving – for yield EML you you rates plus laser of margins, quarters, next consider XX gross first about So, do the when think, you Tim, do guide couple your That’s the

Elizabeth Eby

Japan I the in That’s fab QX. that higher margins the there. more when and pushed we to in back volume like absolutely That’s mentioned gross discussion comes

not am misleading I so, anyone. Just

Jun Zhang

second CFP-DCO Okay, question you the great. yesterday. product And about announced

addressable Thanks. of So, potential more about market. more for this that revenue about Tim, from market product the of you a datacenter What’s But little talk could bit for right it. size the a line? more a telecom now, is what’s market it’s

Timothy Jenks

yesterday, DCI. are approximately release was that fact announced and it’s think actually general you market we’ve capacity product availability. in metro what has a ramping. said telecom-related mostly today that our is And we of estimates DCI actually, product billion and ago yesterday in to how in it’s The So, a market that of to today. general it’s market. in are is referring applications large started a and essentially $X.X we put announced our availability, of than respect With rather essentially this a that I applications year press we it it a Most

Jun Zhang

some you going and you see that last how initial my of XXXG, the demand XXXG do then clients from do benefit And Thanks. that is any Okay, NeoPhotonics see how that question – the of XXX great. trends forward those – would you the G the on see how and deployment?

Timothy Jenks

principal then, used. the Well, questions, started applications because, telecom for in there telecom use market two XXXG in then XXX what that either has today deployments gig. side gig and out are and the The deployment, and trend In the the line the or activity being where first components let’s wavelength wavelength for trend what’s see, client let where the into are divide line side side be market. our me XXXG datacenter times XXX two or essentially two that can one you And often XXX. are might

configurations So, the any bit – PAMX side it’s datacenter are in product and XXX that yet. those But are advanced Gig. in meaningful the client more for there than modules side a really are volume not client

side right and exists that, say probably line to deployments true next So, most year XXX of that the so. really are the will I that have or Gig for telecom now be

Jun Zhang

that’s Okay, questions. great. my all Thanks,

Operator

to Dave B. will And Riley King go with next we FBR.

Dave King

afternoon. Good you. Thank

budget What’s the year? this CapEx. on all, for of First

Elizabeth Eby

said some commitments in complete and on we’ve CapEx then, from to got previously, as the So, prior the go we payments will about QX X% we’ve revenue. to of

Dave King

the quarter first So, is approximately? what,

Elizabeth Eby

at looking was I I our Seven, recall as FP&A.

Dave King

how assuming okay, just second mean, you OpEx talk Can you up? good. actually can much you of mid-XXs hold Okay, then, OpEx will half. get or up in leverage? I the about And the the go to

Elizabeth Eby

only profit-dependent increases. have OpEx So, will some

Dave King

So pretty marginal.

Elizabeth Eby

Yes.

Dave King

about part Okay, million gross talked impact. pro and XX% that of clarify wanted Is margin to XX%? gross forma margin to down? you a that just has first that quarter about the been of $X Or non-GAAP

Elizabeth Eby

the that’s No, non-GAAP.

Dave King

CFP-DCO all And think TAM, versus it. as you Got captive is that Tim, merchant mix it between on then, do just lastly what the okay. is $X.X factored merchant? Non-GAAP, or billion,

Timothy Jenks

is suppliers merchant think of relatively because straightforward actually are Well, there the it at part this in I point time, of DCO. few

the would a near bit as well we merchant. participate between I the as quite a there said, module DCO we is And supply pretty So, so. as in actually balance providing chain solution and or expect captive the

Dave King

around the do versus that what switch versus me actually do you customers, think – for what make? merchant Let you Chinese then, will think their mix be largest the

Timothy Jenks

in customer, majority rate much think the than smaller I for Well, is can announce dependent And is merchant that what carriers is, growth of directed largest generally their the the the and really captive captive. faster. XXXX think I for at grow products captive for version on captives – that half, example, is the vast mix the actually second OEMs

able leading to being talking So, the put interesting in a with market. is be coherent DCO and OEMs smaller and to to really technology make for their about to Huawei affiliate are of captive, we an able us customers and innovative DCOs. large HiSilicon a solution amount But good time them to for

to merchant, And important so, each are place. we’ll well. proposition think, pace it real some a announcing with was value proliferation you but between asked we and I associated see captive of there them continue very grow of as But, as a have level a is the that’s China balance the earlier. market, In case of

of seeing proliferation for We are in that factors They are number real form the form these a just applications factors OSFP, growing. a is the are really because for proliferation and CFPX them DCO-CFPs, of DDQSFP.

Dave King

right. it. Got All Thank you.

Operator

we all or today. that for call questions additional I’ll the any have remarks. CEO, Tim is it And Jenks the for now to closing back over turn

Timothy Jenks

interest do forward your in next Good Thank participants Sophia. on the you, for talking to look our Thank the in bye. you to for you We to call. all – call NeoPhotonics.

Operator

Thank you concludes for call. all your participation. today’s conference This

may now You disconnect.

Neophotonics (NPTN) 1 Mar 182017 Q4 Earnings call transcript