Management at NeoPhotonics Corp. (NYSE: NPTN) said during its fiscal second quarter 2020 results call August 4 that top customer Huawei has completed an inventory buildup that saw the Chinese communications technology supplier account for 52% of NeoPhotonics’ $103.2 million in revenues during the quarter, which ended June 30, 2020. Fortunately for the company’s ongoing prospects, increased uptick in sales of components and modules for applications at 400 Gbps and greater from other customers should increase sufficiently to pick up any slack from Huawei going forward, the executives said.
However, such a positive trend may not manifest itself right away. The midpoint of company’s revenue guidance for the third quarter is less than the revenue NeoPhotonics saw in the recently concluded quarter.
NeoPhotonics Chairman and CEO Tim Jenks told participants in the call that Huawei has built up inventory in light of supply chain uncertainties created by its position on the U.S. Department of Commerce’s Entity List (see “Huawei faces U.S. technology access ban”) as well as U.S. efforts to cut off its supply of communications semiconductors from outside sources (see “U.S. tightens screws on Huawei”). Jenks expressed confidence that Huawei would use the inventory buildup as a safety net and thus continue to buy NeoPhotonics products for new and ongoing customer programs going forward. However, he also said that, should that prediction prove inaccurate, ramp of sales of components and modules for 400G, 600G, and 800G applications to other customers will make up for any slippage in sales to Huawei.
“At this point, almost all of the world’s leading network equipment customers leverage NeoPhotonics products for their 400 gigabit and faster systems. Moreover, these customers are now ramping their deployments,” Jenks said on the call, according to a transcript provided by Seeking Alpha. “In the second quarter, excluding our top two customers, our next eight customers combined grew a total of 35% sequentially. We expect this trend to continue. We anticipate that we will have additional industry leaders become 10% customers during the second half of 2020, based on our existing customer orders and delivery commitments for 400 gigabit and above products.”
The $103.2 million for the quarter represented a gain of 26% year-on-year and 6% sequentially. Gross margin was 32.5%, up from 30.5% in the prior quarter and significantly better than the 19.2% in 2Q19. Non-GAAP gross margin was 33.2%, also an improvement sequentially (from 31.2%) and versus the year-ago quarter when it was 25.6%. Diluted net income per share was $0.11, not quite as good as the $0.12 earned in the first quarter of this year but a marked improvement over the net loss of $0.16 per share in 2Q19. Non-GAAP earnings per share for the just concluded quarter was $0.16, again slightly off the first quarter’s $0.17 in the prior quarter and better than the $0.03 net loss in the year-ago quarter. Both earnings and revenues beat Wall Street expectations.
The forecast for the current quarter, which ends in September, isn’t as robust. NeoPhotonics management predicts revenues will fall between $97 million and $105 million. On a GAAP basis, gross margin should run 29% to 33% and earnings should fall within a 0.03 loss to $0.07 profit. Non-GAAP, the company expects gross margin of 30% to 34% and earnings per share between a positive $0.03 and $0.13.
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