NeoPhotonics Corporation

This call is being webcast live on the company's website at www.neophotonic.com on the events page of the investor section. This call is the property of Neophotonic and any recording, reproduction, or transmission of this call without the express written consent of Neophotonic is prohibited. I will now turn the call over to Erica Mannion at Sapphire Investor Relations.

Good afternoon. Thank you for joining us to discuss Neophotonics operating results for the first quarter of 2021 and outlook for the second quarter of 2021. On the call today are Tim Jenks, Chairman and CEO, Wu-Pen Yen, Chief Product Officer, and Beth Eby, Chief Financial Officer. Tim will begin with a review of the company's business results in the first quarter and a discussion of relevant market issues and trends. Wu-Pen will provide a summary of products, technologies, and growth drivers, for our highest speed product. Beth will then provide financial results for the first quarter and provide the outlook for the second 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 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, or subsequent events. Various factors could cause actual results to differ materially. Some of these factors have been set forth in our press release dated April 29, 2021, 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. Neophytonics again delivered strong results in the first quarter with revenue of $61 million, which was in the upper half of our guidance range. Gross margin and operating margins were in the high end of the range as well. These results were driven by the more than doubling of 400 gigabit and above product revenue, which grew 134% on a year-over-year basis and comprised 52% of total revenue in the quarter. Demand for Neophytonics' highest speed products, including ultra-pure light tunable lasers and 64 gigabaud modulators and receivers, remains 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 highest speed deployments are among the fastest areas of growth in the industry. And driven by cloud and data center demand, they continue to drive our growth in addition to expanding our customer base. With our high-speed product growth, we had four 10% customers in the first quarter. These customers ranged from 12% to 26% of revenue, and together comprised 74% of revenue. We believe the growth in demand for our 400 gig and above components for chassis-based communication systems is in early innings. As the market continues to move to higher and higher speeds, including 600 gig and 800 gig, we are increasingly well positioned to capture this next wave of growth. Our 400 ZR DDQSFP and OSFP coherent modules for data center interconnect applications and our CFP2 DCO modules for telecom networks at 400 gig and 200 gig long haul applications continue to make progress as Wu-Pen Yen will detail in a few minutes. Demand strengthened for our multi-rate CFP2-DCO coherent modules within China in the first quarter. These modules use our leading 64-gigawatt component suite, as well as our C++ laser and other extended tuning range products to increase total fiber capacity up to 50%. In the customer network trade-off between speed and distance, network equipment manufacturers within China are utilizing our 64 gigawatt high-performance components for long-haul applications to achieve 200 gigabits over a single wavelength. Our multi-rate 400 gig CFP2 DCO module is tailored to regional and metro distances combined with our C++ laser product we believe our module solutions deliver the same, if not better, performance as chassis-based systems while consuming less power in a smaller form factor and lowering cost per bit. We see expanding activity in the Western 400 ZR market, which initially targeted hyperscale data center interconnects, and then 400 ZR plus modules targeted at regional and metro applications. Beyond hyperscale data center operators, we now see more interest in 400 gig module solutions from network equipment manufacturers. This is important as it supports and validates our view that 400 ZR and its architectures is a large market opportunity delivering significant savings to network operators. We are conducting qualifications with multiple potential customers. Based on current schedules, we expect to increase production to hundreds of units this quarter and to initial deployments in the second half. Near-term demand in Western carrier markets is muted. Our customers tell us that they are seeing modest deployment rates at this point in the pandemic, as well as pauses in spending by large carriers following the US 5G wireless spectrum auctions. The muted demand is exacerbated by semiconductor shortages. These shortages did not impact us in Q1, but we are seeing some impact in Q2. We expect that this will limit upside in our near term due to the inability to pull in IC chip deliveries. Currently, the China telecom market, too, is muted in regional and metro deployments with just modest tenders by China telecom underway. That is, China mobile business levels currently have been very light. In Q1, we began shipping a subset of our legacy products that comply with the AR to Huawei, and we now expect that they could become a moderate-sized customer in the near term. We do sell to each of the China network equipment manufacturers, so we would expect to benefit as new carrier tenders materialize later this year. in the current period is soft overall. We anticipate this will change in the second half as major global carriers increase their deployment rates as the pandemic subsides and as hyperscalers begin to roll out initial 400 ZR installations. Looking beyond 2021, we are excited about the applications for our high performance optical components and as we continue to have multiple engagements in adjacent markets, as Wu-Pen Yen, our Chief Product Officer, will discuss next. Wu-Pen?