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COMPANY OVERVIEWJanuary 2019
2
Forward Looking Statements and Other Important Cautions
This presentation includes statements that qualify as forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements aboutthe following topics: future financial results, the Company’s market position and industry trends.
Forward-looking statements are subject to certain risks and uncertainties that could cause the actual results to differ materially. These forward-looking statements include statements about the followingtopics: future financial results, demand for the Company’s high-speed products, and the Company’s market position. Forward-looking statements are subject to certain risks and uncertainties that couldcause the actual results to differ materially. Those risks and uncertainties include, but are not limited to, such factors as: the Company’s reliance on a small number of customers for a substantial portionof its revenues; market growth in China and other key countries; possible reduction in or volatility of customer orders or delays in shipments of products to customers; timing of customer drawdowns ofvendor-managed inventory; potential governmental trade actions; possible disruptions in the supply chain or in demand for the Company’s products due to industry developments; the ability of theCompany's vendors and subcontractors to supply or manufacture the Company's products in a timely manner; ability of the Company to meet customer demand; volatility in utilization of manufacturingoperations and manufacturing costs; reductions in the Company’s rate of new design wins, and/or the rate at which design wins go into production, and the rate of customer acceptance of new productintroductions; potential pricing pressure that may arise from changing supply or demand conditions in the industry; the impact of any previous or future acquisitions or divestitures of assets and relatedproduct lines; challenges involving integration of acquired businesses and utilization of acquired technology; the discontinuance or end of life of certain other products; market adoption, revenue growthand margins of acquired products; changes in demand for the Company's products; the impact of competitive products and pricing and alternative technological advances; the accuracy of estimatesused to prepare the Company's financial statements and forecasts; the timely and successful development and market acceptance of new products and upgrades to existing products; the difficulty ofpredicting future cash needs; the nature of other investment opportunities available to the Company from time to time; the Company’s operating cash flow; changes in economic and industry projections;a decline in general conditions in the telecommunications equipment industry or the world economy generally; and the effects of seasonality.
For further discussion of these risks and uncertainties, please refer to the documents the Company files with the SEC from time to time, including the Company's Annual Report on Form 10-K for theyear ended December 31, 2017 and its Form 10-Q for the three months ended September 30, 2018. All forward-looking statements are made as of the date of this presentation, and the Companydisclaims any duty to update such statements.
You may obtain these documents for free by visiting EDGAR on the SEC website at www.sec.gov.
Non-GAAP and Adjusted EBITDA Measures vs. GAAP Financial Measures
The Company’s non-GAAP and adjusted EBITDA measures exclude certain GAAP financial measures. A reconciliation of the Non-GAAP and Adjusted EBITDA financial measures to the most directlycomparable GAAP financial measures is provided in the financial schedules portion of its press release issued on November 2, 2018 and available in the Investor Relations section of the NeoPhotonicswebsite at: http://ir.neophotonics.com/phoenix.zhtml?c=236218&p=irol-calendar. These non-GAAP financial measures differ from GAAP measures with the same captions and may differ from non-GAAP financial measures with the same or similar captions that are used by other companies. As such, these non-GAAP measures should be considered as a supplement to, and not as a substitutefor, or superior to, financial measures calculated in accordance with GAAP.
The Company uses these non-GAAP financial measures to analyze its operating performance and future prospects, develop internal budgets and financial goals, and to facilitate period-to-periodcomparisons. NeoPhotonics believes that these non-GAAP financial measures reflect an additional way of viewing aspects of its operations that, when viewed with its GAAP results, provide a morecomplete understanding of factors and trends affecting its business.
3
Key Themes
Best Positioned To Deliver Faster Data Rates – 400G and 600G Lower Cost per Bit
Achieving Double Digit Top-Line and Bottom Line Growth, Expanding Operating Margins
• 400G will be the growth driver for optical networking in both Datacenter Interconnect and Telecom
• NPTN, the market leader in highest performance Coherent Components, the key to 400G/600G.
• The strongest system companies continue to gain market share; all of which depend on NPTN for their most advanced high speed systems.
• NPTN is on plan to return to profitability and to capitalize on its leadership in the most advanced Data Center and Telecom products.
• The China market has stabilized and returned to growth following inventory overhand; 5G rollout begins in 2019.
4
Market Growth Dynamics
Fast Growing Data Center and Emerging Markets Driving Increased Growth For High Speed
DCI (20% CAGR)2018: $2.5 Bil2023: $6.2 Bil
Telecom (5% CAGR)2018: $15 Bil2023: $19 Bil
Cloud Data Centers (20% CAGR) 2018: $2.2 Bil2023: $6.0 Bil
Optics For 5G (70% CAGR)2018: $0.2Bil2023: $3.0 Bil
Coherent For CATV (20% CAGR)2018: $0.4 Bil2023: $1.0 Bil
LIDAR For Navigation (20% CAGR)2018: $0.5 Bil2023: $1.2 Bil
Source: Various third party industry reports and company estimates
TO
DA
YE
ME
RG
ING
5
NeoPhotonics: Delivering the Highest Speeds and Lowest Costs per Bit
Financial and Operational Scale
• TTM Revenues as of 3Q18 of ~$310 million*
• ~1,800 people (major sites in USA, China, Japan)
• ~600 Issued Patents
Deep Technology for High Speed Module Solutions
• Unique laser, modulator, receiver, switching products
• Modulation methods enable highest data rates and flex
coherent switching
• Optical IC and integration technology platform for the
highest data rates
For Network Equipment Transport | Metro | Data Center
SystemsLine Card | Daughter Card | Transponder
Telco Carriers/Mega Data Centers
Central Office / WebscaleData Center
Components & Modules
Market Ecosystem
Components and Transceivers
Optical ICs
Lasers, Drivers, Amplifiers,, Modulators
SemiFabs
NPTN Products NPTN Customers
* FY2017 Revenues of $292 million
6
Trends Align to NPTN Core Strengths
• A purely High Speed optoelectronics company NPTN focused on 400G and above networks
• Data rates continue moving up – from 400G moving to 1.2 Tb/s per wavelength – Mega data centers and cloud driving for higher baud rates and advanced modulation
• Worldwide Metro and Data Center interconnect markets growing rapidly high speed coherent TAM is expanding from Transport / Metro to Cloud / Converged Edge, DCI / intra data center; driving cost per bit
• NPTN PICs support both multi-Terabit Pizza Box and single wavelength 400ZR pluggable DCI solutions
• Inside Data Centers Single-mode lasers are key for high order modulation including PAM4 and DMT
• As data rates increase, transceiver costs in switch/router interconnects drive disaggregation
• Highly dense interconnect meshes between Data Centers drives contentionless routing
• Autonomous vehicles using LIDAR for control; focus on key laser and coherent methods
* Cisco Global Cloud Index Feb. 2018
** Source: Company
Expanding TAM for Coherent
22% CAGR Cloud Data Center
Traffic (2016 -21)*
126% CAGR 400G Line Side Port
Deployments (2017 - 1922)**
135% CAGR 400G 2km+ Data
Center Deployments (2018 - 1923)***
5G Backhaul Spending To Reach
$3B In 2021****
*** Lightcounting
****Piper Jaffery, IDC 2017
7
NPTN TAM >$4B In 2022
NPTN Positioned to Win In 400G/600G for Data Centers
NTPN Leading Market With Lasers and Optical ICs For 600G/Wavelength and Pluggable 400ZR
NeoPhotonics TAM for Coherent
Products Exceeds $2B In 2022
Inside The Data Center Single Mode
Transceiver Market > $2B in 2022
NPTN Serves Markets With Chips,
Components and Modules
• Coherent Components for 600G Line Cards and “Pizza Boxes”
• Highly Integrated Coherent Components for Small Pluggable 400ZR Modules
• 100G/200G Coherent Components/Modules
• Switches to Address Fiber Density in Data Centers
• Lasers and ICs for 100G/400G Inside Data Centers
Source: Company
0
500
1,000
1,500
2,000
2,500
3,000
2017 2018 2019 2020 2021 2022
400G/600G Coherent Transponders
Revenue (
$M
)
8
NPTN End Users are Globally Balanced East and West
• China End-Use Locations are a Smaller Portion of Total Revenues than our Ship-To Locations
• New Tariff Regime to have Minimal Effect because Direct Shipments into US are very small
NPTN Products Ship to China OEMs and to Contract Manufacturers for Western OEMs
ChinaWest
ROW
Ship To Destination
China
West
ROW
Est. End Use Location
Shipments for western customers are generally to CMs in Thailand, Mexico, etc.
End Users of Customer Equipment are Global; more balanced than shipments
9
NeoPhotonics Products
Solutions for the Highest Speed Coherent Networks Capitalize on NPTN Advanced Hybrid Photonic Integration
400G/600G/800G/1.2T 400G/600G/800G Contentionless Networks
• Component end sales with best-in-class performance for speed, distance
• Silicon photonics lasers solutions optimized for data center DR1 / DR4 / FR4 applications
• 28G and 53G EML laser; GaAs Drivers
• Industry leading tunable laser and receiver solutions for 400G, 600G
• Integrated Receiver / Modulator with co-packaged Optical ICs in COSA
• Silicon Photonics based ultra-narrow linewidth tunable laser
• Leading Mulit-Cast Switch solution for contentionless networks
• Expanding applications for both telcos and data centers to manage densification
Client & DatacenterCoherent Optical Switching
10
NPTN Track Record of First to Volume With Highest Speed Coherent
100G
200G
400G
400ZR
First Volume Integrated Coherent
Receiver (ICR) for 100G
Highest Volume Narrow
Linewidth Tunable Laser
Highest Volume ULTRA Narrow
Linewidth MICRO Tunable Laser
First Volume ULTRA Narrow Linewidth
Dual MICRO Tunable Laser for
200G
First 64 Gbaud Micro ICR for 400G
First 64 GbaudCOSA for 400G ZR Pluggable
Module
First Nano ULTRA NLW
Laser for 400G ZR Pluggable
Module
First 64 Gbaud Micro
Modulator for 400G
Highest Volume Type 2 ICR for
200G
400G ZR Pluggable Module
Source: Company, Infonetics (IHS), Cignal AI
From the first ICR through 64 Gbaud, NPTN has been a leader in technology and volume production
11
NeoPhotonics High Speed 400G, 600G and 1.2T Coherent Solutions
Nano-TL+ASIC
(enables CFP4, OSFP)
64 GBaud COSA(Enables OSFP, DDQSFP)
Ultra-Narrow Linewidth Tunable Laser
64 GBaud Driver Modulator (CDM)
64 GBaud Micro ICR with TIA
Shipping Sampling Nextgen Modules
400ZR & 800G OSFP(Pluggable Coherent)
• Discrete 64 GBaud Components
Currently Shipping for 400G,
600G & 1.2T
• Integrated 64 Gbaud COSA
Combines Modulator+Receiver
• Nano-Tunable Laser Enables
400G Pluggable Modules
*All NeoPhotonics High Speed Solutions are
enabled by high performance Optical ICs
400ZR DD-QSFP(Pluggable Coherent)
200G & 400ZR CFP2-DCO(Pluggable Coherent)
DSP
12
Advanced Hybrid Photonic Integration: SiPho IntegrationComponent Solutions Today for Highest Speed Modules
• Integration yields and costs favor SiPho longer term; InP has speed advantage
• Few companies possess InP laser, modulator and receiver capabilities
• NPTN has full SiPho Type-2 IC-TROSA capability with laser
Modulator + ReceiverAnalog InterfaceNPTN has InP and SiPho
Modulator + ReceiverDigital InterfaceOIF IA CompliantNPTN has SiPho
Laser + Modulator + ReceiverDigital InterfaceOIF IA CompliantNPTN has InP and SiPho
COSA Type-1 IC-TROSA Type-2 IC-TROSA
13
3x(4x4) blade 4x16+EDFA blade PLC chip 8x16 module 16x13 module 8x16+EDFA module
Metro-edge
Low DegreeLong Haul
Mid Degree
Metro
High Degree
DCI
High Degree
MCS-based CDC
ROADM scale to any
required number of
degrees
MCS Enabled “Contentionless” ROADMs Improve DCI Network Utilization
• “Colorless-Directionless-Contentionless” (CDC) ROADMs have been proven in telecom networks
– Reduces cost and improves efficiency by eliminating stranded wavelengths and redundant hardware
– Adopted by Verizon, Orange, China Mobile
• Fiber Densification In Data Center Interconnects Require High Dimensionality CDC ROADM
– In DCI, the massive data flows, multiple fibers and “all to all” interconnections create “dense” fiber net
– High “degree” – Fibers come into the switch from more different “directions” in DCI than in telecom
– Google at OFC: CDC is fundamental to add/remove links without touching the cabling infrastructure
• NPTN Multicast Switches (MCS) provide a “pay as you grow” path to “contentionless” switching in DCI
8 degrees / direction x 16 ports
14
Serving Customers from a Global Footprint
Fremont, California• InP Fab
San Jose, California• All Functions
Dongguan, China• Manufacturing
Tokyo, Japan• All Functions• Owned facility 145K sqft
Shenzhen, China• All Functions• Owned facility 260K sqft
Headcount by Function
N.America ~275
China ~1350
Japan ~150
ROW ~25
Total (~725 IDL) ~1,750
Wuhan, China• R&D
Ottawa, Canada• R&D
Comprehensive Vertical Integration for Multi-Material Hybrid Integration
Q3’18 Financial Performance
16
• Q318 Revenue increased 15% y/y to $82 million
• Strength in Americas and China
• Lead customer is 47% of revenue; next four largest customers at 42% of total
• Gross Margin up ~400 basis points, on good capacity utilization and cost reductions
• Inventories remain slightly lower than target – under 90 days of supply
• Continuing actions to improve cash flow and profitability
Q3’18 Financial Summary
We met our financial metrics again in Q3: Revenue is up, gross margin is improving,
operating leverage is increasing, inventories met target and we were free cash flow positive.
Q318 SUMMARY
17
Q3’18 Results
-10%
-5%
0%
5%
10%
$20
$21
$22
$23
$24
$25
Q4'17 Q1'18 Q2'18 Q3'18
Operating Expenses & EBITDA %
Operating Expenses EBITDA %
10%
15%
20%
25%
30%
35%
$-
$25
$50
$75
$100
Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 EstimateMid Point
Revenue & Gross Margin %
Revenue Gross Margin %
Revenue and Gross Margin continue to improve
Operating Leverage is increasing, on strong product design wins and R&D efficiency
Q3’18 Non-GAAP Gross Margin excludes $0.6M of Stock-based compensation expense and $0.1M of Intangibles amortization
18
Revised Outlook for Q4’18
The Non-GAAP revised outlook for the fourth quarter of 2018 excludes the impact of the litigation settlement of $2.2 million, the expected restructuring charges of $3.5 million for asset and inventory write-downs, the anticipated impact of stock-based compensation of approximately $3.6 million, of which $0.8 million is estimated for cost of goods sold, amortization of acquisition related intangibles and other disposition related costs of $0.3 million.
Preliminary Q4 results are at the high end of the previous ranges.
Restructuring improves focus on more profitable product lines. Impact product line EOL and litigation settlement of
$5.7M is included in GAAP results
Excluding those items, Non GAAP Net Income is expected to be positive.
Updated Outlook Previous Outlook
GAAP Non GAAP GAAP Non GAAP
Revenue $90 to $92 million $87 to $92 million
Gross Margin 24% to 25% 27% to 29% 22% to 26% 24% to 28%
Operating Expenses $28 to $29 million $22 to $23 million $26 million +/- $0.5 $23 million +/- $0.5
EPS ($0.18) to ($0.15) $0.00 to $0.04 ($0.17) to ($0.07) ($0.08) to +$0.02
19
Q3’18 P&L Performance (Non-GAAP)
(% of Revenue) 3Q’17 4Q’17 1Q’18 2Q’18 3Q’18
TARGET
MODEL
Revenue $ $71.1M $76.9M $68.6M $81.1M $81.7M 100%
Product Mgn% 32% 27% 26% 30% 32% 35%
Excess Capacity (7)% (4)% (8)% (7)% (2)% --
Period Costs (6)% (2)% (3)% (3)% (6)% --
Gross Margin 19% 21% 15% 20% 24% 35%
R&D 20% 17% 19% 15% 15% 13%
S&M 5% 6% 4% 4% 4% 4%
G&A 10% 9% 10% 8% 8% 8%
TOTAL OPEX 35% 31% 33% 27% 27% 25%
Operating Margin (16)% (10)% (19)% (7)% (3)% 10%
EBITDA (6)% (1)% (8)% 4% 8% 15%
20
Q3’18 P&L Performance (GAAP)
($ Millions) 3Q’17 4Q’17 1Q’18 2Q’18 3Q’18
Revenue $71.1M $76.9M $68.6M $81.1M $81.7M
Product Mgn$ 22.9 21.0 17.5 24.0 26.5
Mfg. Inefficiencies (5.0) (3.2) (5.2) (5.8) (1.7)
Period Costs (4.7) (1.4) (2.2) (2.0) (5.1)
Other Charges (2.7) (0.7) (0.9) (0.8) (0.7)
Gross Margin 10.5 15.7 9.2 15.5 18.9
R&D 14.7 13.9 13.9 13.2 13.2
S&M 4.1 4.8 4.1 3.9 4.4
G&A 7.6 7.7 7.6 7.3 8.6
Other charges 3.0 0.2 0.2 0.8 1.5
TOTAL OPEX 29.4 26.6 25.8 25.2 27.6
Operating Margin $(18.9) $(10.9) $(16.6) $(9.8) $(8.7)
EBITDA $(4.5) $(0.4) $(5.5) $3.0 $6.2
21
Q3’18 Balance Sheet
($ Millions) 3Q’17 4Q’17 1Q’18 2Q’18 3Q’18
Cash & Equivalents $74 $94 $87 $68 $65
Working Capital 118 111 112 106 112
Revenue to Working Capital 0.60 0.69 0.61 0.77 0.73
Total Assets 398 403 390 360 333
Total Debt 66 82 86 68 57
Total Liabilities 196 209 206 190 172
Shareholders’ Equity 202 194 184 170 161
Total Capitalization 268 276 270 238 218
www.neophotonics.com
Thank you