NeoPhotonics Corporation

Welcome to the Neophotonics fourth quarter 2020 conference call. This call is being webcast live on the company's website at www.neophotonics.com on the events page of the investor section. 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. I will now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.

Good afternoon. Thank you for joining us to discuss Neophytonics operating results for the fourth quarter of 2020 and outlook for the first quarter of 2021. On the call today are Tim Jenks, Chairman and CEO, Wu Pen-Yen, Chief Product Officer, and Beth Evie, Chief Financial Officer. Tim will begin with a review of the company's business in the fourth quarter and a discussion of relevant market trends. Lupin will provide a summary of products, technologies, and growth drivers for our highest speed products. Beth will then provide financial results for the fourth quarter and provide the outlook for the first quarter of 2021. The operator will then open the call for questions. The company's press release and management statements during this call will include discussions of certain non-GAAP financial measures and information. including all income statement and balance sheet amounts and percentages other than revenue unless otherwise noted. These non-GAAP financial measures are not prepared in accordance with GAAP and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. These financial measures and a reconciliation of GAAP to non-GAAP results are provided in the company's press release and related form 8K being filed today with the SEC and can be found in the investor relations section of the NeoPhotonics website. Material contained in the webcast is a 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, customer demand, inventory levels, economic and industry projections, and subsequent events. Various factors could cause actual results to differ materially. Some of these factors have been set forth in our press release, dated February 25, 2021, excuse me, and are described at length in our annual and quarterly SEC filings. Now, I will turn the call over to CEO, Tim Jenck.

Thank you, Erica, and good afternoon. Neophotonics completed a strong 2020 with revenue of $371 million. We continue to be a leader in high-speed optoelectronic solutions. Neophotonics is the primary supplier of ultra-pure light tunable lasers for the highest speed over distance applications. And we provide the highest bandwidth receivers and highest baud rate modulators. For the last three years, we've been steadily introducing new lasers, modulators, and receivers for the highest speed applications at 600 gigabits per second and 800 gigabits per second in chassis-based systems, as well as several new high-speed coherent module products for 400 ZR and 400 ZR Plus applications. As a result, demand for Neophytonics' highest-speed products is very strong, with accelerating market adoption and deployments and related market share gains at 400 gigabits per second and beyond, especially for links requiring the highest speed over distance. These high-speed deployments are among the fastest areas of growth in the industry, driven by cloud and data center demand, and they've been driving our growth and profitability. Our fourth quarter and full year results are evidence of this strength. Each of the following metrics exclude Huawei, given the tightened Department of Commerce BIS restrictions. Our revenue grew 18% sequentially to $68 million. This was again largely attributable to our products for 400 gig and above applications. These products grew 35% sequentially and comprised 46% of revenue in the quarter. On a full year basis, these products grew 92% year over year. We have realized continual growth in our 400 gig and above product applications. In Q1 of 2020, these products grew 46% year over year, and their growth accelerated to deliver 153% year over year growth by Q4. Our strategy is to grow the business by focusing on the highest speed over distance solutions at 400 gig and above for telecom equipment providers. Within this, The newest and highest data rate communication systems are operating at 600 gig and 800 gig per wavelength, and they are now being offered by several of our customers who directly or indirectly use our high-speed component. As a result, and in the first quarter, we expect the growth of our 400 gig and faster revenues to continue to more than double versus the previous year's first quarter. As we have stated previously, with the number of 400 gig and above ports being shipped approximately doubling each year, and our market share increasing at these highest speeds, we are seeing our customer diversification continuing to increase. In the fourth quarter, we had four 10% or more customers, ranging from 10% to 22% of revenue, comprising 67% of our total. For the full year, which includes Huawei, Our 10% customers were Huawei at 40%, Stiana at 17%, and Acacia Communications at 10%. For comparison purposes excluding Huawei, we had three customers totaling 10% or more of our revenue with Stiana at 29%, Acacia Communications at 17%, and Nokia at 11%. Products for chassis-based systems operating at 600 gig and 800 gig are rampant. and we continue to make progress in gaining design wins and qualifications for 400 ZR and 400 ZR Plus coherent modules with hyperscale data center operators. We have shipped dozens of units for qualification and we have installed our first production lines for these modules that are now being ready to ramp volumes. While we have had continued strength in the market for our highest speed products, in recent months we have seen some softness with customers serving the North American cloud market following substantial bandwidth deployments that were pulled into 2020 in response to the pandemic. Longer-term demand for products for 400 gig and above applications remains robust globally. We anticipate some ups and downs in deployment rates that are typical in DCI build-ups, which may be exacerbated by share shifts among and between network equipment manufacturers, essentially all of whom are our customers. With components for chassis-based high-speed systems and 400ZR and 400ZR Plus modules as the growth drivers for our business, we believe rapid growth in our highest-speed products will continue in 2021 and 2022. We will have our normal seasonality in Q1 with sequential growth in following quarters. From a long-term network investment standpoint, we believe 2020 marked an upward inflection in high-speed network growth. While the pandemic drove needs to increase bandwidth deployments, this is a lasting trend. As the pandemic subsides, we expect that companies will move increasingly to hybrid workforce models in the future with continuing dependence on working from home. This will increase the need for bandwidth at the edge of the network and the need for high-speed interconnects throughout the network, thereby continuing to benefit our business. Virtually all of the leading network equipment producers around the world use Neophotonics products in their flagship high-speed systems. Over the last three years, we have developed advanced manufacturing methods for these highest-speed 400 gig and above products, scaled their production, all while steadily increasing our manufacturing utilization, reducing our depreciation costs, and expanding our margins. In spite of the impact of U.S.-China trade tensions, we see our actions benefiting our business for the longer term. I would now like to turn the call over to Dr. Wu-Pen Yen, our Chief Product Officer, to provide you with more details of our roadmap for 400G and above products and the trends that are driving their adoption. Wu-Pen?