NeoPhotonics Corporation
Q1 2020 Earnings Call Transcript

Published: 1 May 2020

[Operator:]

Good day and welcome to the NeoPhotonics' First 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 investors 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 would now like to turn the call over to Ms. Erica Mannion at Sapphire Investor Relations. Please go ahead ma’am.

[Erica Mannion:]

Good afternoon. Thank you for joining us to discuss NeoPhotonics operating results for the first quarter of 2020 and outlook for the second quarter of 2020. With me today are Tim Jenks, Chairman and CEO, and Beth Eby, Chief Financial Officer.Tim will begin with a review of the company’s business progress in the first quarter and a discussion of business drivers and products. Beth will then provide financial results for the first quarter before providing the outlook for the second quarter of 2020. Beth will then turn the call back to Tim for final comments before opening the call for questions.The company's press release and management's statements during this call 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 8-K, being filed today with the SEC and can be found in the Investor Relations section on the NeoPhotonics website.Material contained in the webcast is the 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 30, 2020 and are described at length in our annual and quarterly SEC filings.Now, I will turn the call over to CEO, Tim Jenks.

[Tim Jenks:]

Thank you, Erica, and good afternoon. At work and at home, the global COVID-19 pandemic is at the forefront of our collective thoughts and as a company our first priority remains the health and well-being of our employees, and those of our supply partners.Currently, our North American facilities are operating under shelter-in-place orders with some impact, while our China and Japan factories are running with full labor capacity, producing steady output.Our China suppliers have largely recovered, but there remains potential for new supply chain risks to emerge. As manufacturers around the world comply with local public health guidelines, we have teams in place to address these issues and we are confident in our ability to support our Q2 outlook.Moving to our first quarter results, NeoPhotonics delivered very strong revenue of $97 million, above the top end of our outlook range, with non-GAAP gross margin expanding to 31%, despite normal seasonality, the extended Chinese New Year shutdown and supply chain issues due to the COVID-19 pandemic.This was revenue growth of 23% from the same quarter last year and was driven by a combination of strong end customer demand in China, which represented 60% of revenue, as well as strong Metro and DCI markets in the west, where our continued leadership in 400-gig and faster solutions address the emerging needs for more network bandwidth capacity by both cloud players and carriers.High speed products were 92% of revenue. The continued strength in our performance reflects our focus on high speed products, including our unique ultra-pure light tunable lasers, serving industry leaders in coherent telecom and datacenter networks, and the transition of cloud and hyper-scale data center networks to coherent technologies.Huawei, our largest customer, contributed 52% of total revenue, up from 41%, as demand in China has returned following the pandemic onset. Revenue from our next four customers was 33% of revenue, which was up 10% in dollars terms from the same quarter last year. This was down sequentially as is generally anticipated in the first quarter and lower in percentage terms due to China strength during the quarter.Within China, China Mobile released their phase-13 national backbone tender results, in which Huawei won the east ring network and ZTE won the west ring network. Note that these deployments are for the national backbone, covering long haul distances. We expect national backbone installations in China will be followed by additional provincial deployments in support of 5G rollouts.We are expecting that a portion of these new China deployments will use 200G QPSK modulation and the Super C-Band spectral window, which effectively doubles typical data-carrying capacity in an optical fiber.For NeoPhotonics, the use of Super C-Band leverages our C++ LASERTM product and related 64 Gbaud component and module solutions. This is important, as combining the C++ spectrum and high baud rate together are key technology advances for speed over distance; this combination is first being deployed in China.For high speed over longer distances, using higher baud rate is more efficient. To increase fiber capacity, you can also expand the spectral range, which is achieved using our C++ LASER together with our 64Gbaud components; these are designed specifically to work over the full Super C-Band wavelength range. We expect that these innovations are here to stay, and that ultimately these attributes will be broadly adopted.Addressing cloud and data center markets, recently we introduced several new DCO coherent modules. In addition to CFP2 and OSFP coherent modules for 400-gig and 400ZR applications, we now have sampled our new QSFP-DD DCO module, such that NeoPhotonics has now sampled 400G coherent modules in all three form factors to leading customers.The OSFP and QSFP-DD DCO modules offer complete optical connections over ZR distances, up to 120 kilometers, in form factors that plug directly into switches and routers, enabling the IP over DWDM network architecture, which greatly reduces the cost per bit of Cloud and data center interconnection. Each of our DCO modules also offer ZR+ performance, extending reach to metro distances.And our CFP2 modules have the ability to operate over the wider C++ spectrum or over the C and L-Bands, increasing usable fiber capacity. These are further examples of how our tunable laser products are differentiated and how they work in tandem with our other high speed components and modules. We believe these products will gain strong traction when they ramp in 2021.Momentum continues to build for 5G deployments, most notably in China. As evidenced by the recent China Mobile tenders, the major carriers in China have indicated that their 5G deployments will not be delayed by the COVID-19 pandemic.In the west, with many people working from home, carriers have reported network utilization increases of 20% to 40% or more and some carriers have proposed increased CapEx to accelerate 5G deployments, though timing will vary by region.Deployment of next generation networks is now underway, and NeoPhotonics products are supporting currently ramping rollouts at 200G, 400G and 600G, which provide ever-higher capacities on a single wavelength; plus 800G systems that are being introduced. Each of these new high speed systems further require customized multiplexer products having unique channel spacings and filter shapes, which we also provide.In the current environment, drivers of our business continue to be favorable given the increasing bandwidth needs due to remote working under the pandemic. We remain optimistic about the medium and long term trends in the industry, but we are also cautious about the next few quarters under the ongoing pandemic and the global uncertainties it creates.With that, I will turn the call over to our CFO, Beth Eby.

[Beth Eby:]

Thank you, Tim and good afternoon. Q1 was a strong quarter, resulting in non-GAAP EPS of $0.17, higher than our range, on outstanding execution by our team and our suppliers in a difficult quarter.Moving to more details in Q1 performance. As Tim mentioned, revenue was $97.4 million well above our outlook. Non-GAAP Q1 gross margin was 31.2% above the midpoint of our range. Within this product margins were 35.8% than one point from last quarter from annual pricing reductions offset by a favorable product mix. This was up nearly nine points from the same quarter last year, driven by the increasing leadership of our lasers.Other cost of sales charges of about 4.5 points improved sequentially and were comprised of two points of underutilization charges, mostly related to the extended Chinese New Year shut down. Just under two points of inventory reserves and just over half a point of sales charges on product shipping from our U.S. fabs into China. This is lower than last quarter, as tariffs on most of our products were eliminated in March.Total non-GAAP operating expense for the first quarter was $20.3 million, down $4 million from Q4, $1.5 million of the reduction was a one-time license fee as a credit to R&D as expected. The remaining reductions are related to COVID-19 impacts in terms of lower travel, fewer marketing events, and a temporary push of R&D projects and as some of our teams were not in the lab. The R&D spending reductions from Q1 will be added to future quarters.Non GAAP operating profit for the first quarter was $10.1 million, or 10.4% compared to 7.4% in Q4. In Q1 depreciation of the Chinese yuan relative to the U.S. dollar, global foreign exchange gain of approximately $1.3 million. As a reminder, the functional currency of our China operations is beyond the FX gain is driven by the revaluation of China balance sheet items to the end of quarter exchange rates. As we have said before, we regard any FX gains and losses as largely temporary.As a result, non-GAAP net income for the first quarter was $9.1 million, compared to an income of $5.3 million in the fourth quarter, and a loss of $9 million in the first quarter of 2019. This improvement reflects in our results is a reflection of the increased value add products and continued strong execution.I will close out my discussion of the first quarter income statement with a review of our GAAP results. First Quarter gross margin was 30.5%, up slightly from Q4 and up 11 points compared to the first quarter of last year, driven by an increase in volume and improved product mix.Operating expense was $22.3 million, down $4.5 million on a one-time license credit and lower spending related to the impacts of COVID-19. Operating profit for the first quarter was $7.4 million, which included $2.5 million of stock based compensation expense, and approximately $0.2 million of amortization of acquisition related intangibles. Net profit for the quarter was $6.3 million compared to a profit of $2.1 million in the prior period.Turning to the balance sheet, as you know, over the last couple of years, we have put a heavy emphasis on cash, cash flow and paying down debt. This focus has positioned us well with $109 million in cash investments and restricted cash. Long term debt paid down to $41 million, lien inventories at 61 days and good free cash flow at $22 million.That said, we are taking steps to ensure that we can withstand a variety of potential scenarios that may emerge through the rest of the year, both positive and negative. As part of this, we are working to build inventory to buffer supply chain volatility.Before I discuss our earnings and revenue outlook for the second quarter of 2020, I would like to remind everyone of our public filings with the SEC and our Safe Harbor Statement included in our press release, which discusses the risks and uncertainties that could affect future performance, causing actual results to differ materially from our forward-looking statementsWe believe there is immediate demand increase network bandwidth capacity to handle the increased traffic. We continue to see supply chain risks. We have included approximately 10 million of impact to Q2 revenue in our outlook due to concerns about suppliers shut down, as they comply with their local public health orders.We expect the supply chain risk to continue into the second half of the year. Given that the company's expectations for the June 2020 quarter are, revenue in the range of $94 million to $102 million, GAAP gross margin in the range of 29% to 33%, non-GAAP gross margin in the range of 30% to 34%, GAAP diluted earnings per share in the range of a $0.02 loss to $0.08 profit, and non-GAAP diluted earnings per share in the range of a $0.05 to $0.15 profit. These numbers are reflective of approximately 54.2 million fully diluted shares.We remain confident in the long term demand trends for our industry. We are pleased with the progress that we have made to become a consistently profitable business with exciting products, and continued strong execution in a volatile environment.With that, I will now turn the call back to Tim.

[Tim Jenks:]

Thank you, Beth. We are pleased to deliver another profitable quarter, notably through our seasonally low first quarter in spite of headwinds from trade, bands and the pandemic. Needless to say, we're optimistic about our future.Through the pandemic, China was shut down for only a short period and came back strong. Now, they're accelerating deployments. This is a favorable supply environment for us. As our high performance and high speed products bring even greater value in the systems they enable.Our new product launches, including our new and differentiated Nano and C++ tunable lasers, and our strong lineup of new 400 gig and 400ZR DCO high speed coherent modules, plus high speed modulators and receivers position as well with competitive product offerings as the world's cloud data center and telecom market strive for more bandwidth capacity in their networks. Moreover, these trends align well with new, large customer demands that we see and in our Expanding TAM serving data center and 5G markets.As we look forward, the industry continues to move in our direction with higher and higher performance requirements. As this transition occurs, high speed and high performance optical components will increasingly be the differentiator and we believe that NeoPhotonics is positioned to capture more of this value going forward.This concludes our formal comments. And now I would like to ask the operator to open up the line for questions. John?

[Operator:]

Absolutely. Thank you. [Operator Instructions]At this time, I would like to take our first question. And our first question is from Mr. Richard Shannon from Craig Hallum. Please go ahead, Richard.

[Richard Shannon:]

Thanks, Tim, Beth, for taking my questions. Congrats on a very nice start to the year. If I may ask that question, first on the results from the first quarter when you gave guidance you would imputed a $10 million impact from COVID. You beat the midpoint by roughly $10 million. Does that mean you didn't see any risks there or were there some issues still COVID and you were able to beat the numbers by other missions?

[Beth Eby:]

We absolutely did see some of the risks, but largely mitigated an increase in demand as well. Some just -- some new business.

[Richard Shannon:]

Okay. And let's take that into the second quarter with your sales guide here, mid points, it's a modest growth here is just because you had such a strong first quarter. Are you building in again some of these risks here from the supply chain others? Other inventory built in the first quarter that you're worried about, if you can help us unpack, kind of that trend in the second quarter looks a little bit lower than normal, especially in what looks like a favorable environment for you.

[Beth Eby:]

Yeah. The -- again having a $10 million risk in the second quarter is related to COVID. It's a little bit higher risk than I would say that we saw in the first quarter, because what we saw in the first quarter was just we're waiting for companies to start up in China.Now we're dealing with a much broader set of supply -- suppliers that are potentially impacted by COVID-19. And some of them have periods of shutdown. And I’m trying to come back up.

[Richard Shannon:]

Yes.

[Tim Jenks:]

I'll just add to that, Richard is that in the first quarter, it was risks and that played out over time in the second quarter, we've actually seen some of them actually impact. So it's not just risk and all of it hasn't been mitigated though we're working hard on all of it.

[Richard Shannon:]

So Tim, would you say the supply chain risks, they are very specific and you're watching closely or just mortgage generic cover all statement for…

[Tim Jenks:]

No, no, no. They're actually very specific. And the comments that we made about local public health orders in certain countries of the world that they'll impose a shutdown and they shutdown plans. And then even when those plants sometimes come up, if they come up at 20 or 30% capacity, you have a problem. We've seen that play out a number of times over the last two months. And we expect that it will continue to play out. So it's very real and very specific.

[Richard Shannon:]

Okay. That's very helpful. I will jump on the line. Thank you.

[Operator:]

Our next question comes from Tim Savageaux of Northland Capital Markets.

[Beth Eby:]

Hi, Tim.

[Tim Savageaux:]

Hey, good afternoon.

[Tim Jenks:]

Hey, there.

[Tim Savageaux:]

Congrats on the results. We should lock you guys down more often. It was spectacular. I wonder if -- well, I guess, first question, with regard -- well, first very quickly, I mean, isn't kind of the question. I missed your China percentage number. I got the Huawei at 52, but what was China overall again?

[Tim Jenks:]

China overall was 60%.

[Beth Eby:]

Just to finish that China was 60%, Americas was 19%, the rest of world was 21%. But as you know, it's that's just where we ship to as opposed to our end customer demand.

[Tim Savageaux:]

Yep. Thanks for that. Okay. Well, looking at China in particular, it's pretty clear, we've done a lot on strength there. And I wonder if you could talk to the various drivers of the strength you mentioned the backbone of work on Q2. Can you tell whether you've seen that in your backlog yet?Obviously, a lot of this is connected to 5G in terms of front hall or mid hall, and we've heard some positive comments about DCI in China from Nokia this morning. So as you look at this range of drivers and you're absolutely feel free to extend this across your total business, but at least starting with China, in terms of the strength that you're seeing, I wonder if you could talk about it in those various categories?

[Tim Jenks:]

In China, the first part of your question said, is it forward-looking or are we seeing it? And the answer is, yes, we are seeing it. And it is reflected in our guidance for the second quarter. We've -- in the prepared remarks I talked about the phase 13, and the expectations we have on provincial follow on.In addition, these are supporting the overall 5G rollout. So depending on the carrier, they have created certain timeframes within this calendar year to deploy the tenders that have been awarded. So we would -- while the phase 13, for example, wasn't expressly a large tender, it is one that we expect to play out during 2020 and then to be followed by provincial. This is all carrier telecom and not DCI.

[Tim Savageaux:]

Right. And in following on that kind of provincial commentary. Historically, you’ve seen provincial deployments are perhaps significantly larger in the sort of regional backbones that were just awarded, and I guess I asked this with an eye toward, your feeling on the continuation of this sort of strength throughout the year, and would you expect provincial awards to impact later in 2020 or into 2021? And what sort of magnitude would you expect for those relative to what you've seen here in the first half?

[Tim Jenks:]

Well, the pattern has been that provincial awards follow national backbone. So that is the primary reason for our having such expectations. Until we actually see it, though, we really can't know either the timing or the magnitude. And I'd rather not speculate.

[Tim Savageaux:]

Fair enough. Well, and probably won't answer this one, then but we'll give it a try. It's been a while since we've seen kind of normal seasonality sort of overwhelmed to some degree and probably would have been up without your COVID impact in Q1. I think that was 2016, which is a pretty big year for this industry. And I wonder if you can compare kind of what you're seeing now to what you saw then and from both a demand standpoint, and maybe a pricing standpoint as well, given the consolidation we've seen, did that play a role in your better than expected Q1 results?

[Tim Jenks:]

Yeah. Couple things there going back a few years, we certainly saw in 2016 a strong year, but recall that was also followed by a very soft 2017. And we did express in our last two quarterly calls that we actually had some customers in China and in the West, who were increasing their procurement and perhaps risk mitigating their go-forward plans. So, I think for these reasons of potential customer inventory as well as the supply chain risks, I think we need to be a little cautious about how it might prove out.Now with the pressures of the U.S.-China trade situation as well as BIS rules on EAR, we have seen a pricing environment that was not quite as aggressive as it has been in prior years. So I think that has been bit more stable in the recent -- most recent quarter, and certainly in the first quarter and the fourth quarter. So in those situations, yes, it is a bit favorable.

[Operator:]

We'll take our next question from Paul Silverstein of Cowen.

[Paul Silverstein:]

Thanks. Can I just before -- the question, just to make sure I understood you was previous question. Special pricing, historically, you and a lot of other vendors have been citing 10% to 15%. And I think the common [indiscernible] that it was on the more benign side of that, if I recall correctly. With respect to the price resets that you just referenced, one, can you give us the quantification? You mentioned that it's more stable, more benign than it was previously. Did I understand that correctly?

[Tim Jenks:]

No. Your memory is precise, Paul, and it was at the -- was that range, it was at the lower end of that range.

[Paul Silverstein:]

And so it's consistent. And it’s still on the more benign side of that, was previously productivity.

[Beth Eby:]

Yes. And -- but the other thing that I mentioned, Paul, is that we are moving to higher mix and higher performance parts as well. So that does -- that helps offset some of that just more benign and historical average.

[Paul Silverstein:]

All right. So [indiscernible]. Here are the two questions, one is we expect [indiscernible] I assume you are saying that as [indiscernible] up to 220 and 800-gig and beyond, the number of competitors that can make ultra-line with tunable lasers and other critical components that are critical -- either extremely are critical to achieving those line rates as opposed to line rates, where customers may not want to pay off and they don't need that components. I assume that for fewer competitors by definition, and therefore, pricing is relatively better. The other question is beyond China, outside of China and rest of the world can you all offer us more insight in terms of what you're seeing in terms of demand trends from a product market, DCI, long haul, et cetera as well as from a regional Asia-Pac, non-China, EMEA market, et cetera? Any color you could add? Appreciate it.

[Tim Jenks:]

And the first part on the product mix Paul, the -- in the prepared remarks I mentioned a couple things. So if we think about in order, lasers, coherent components and coherent modules, certainly, our lasers are differentiated and we have several new versions. So the ability for example, to provide a laser product to the Super C-band with our C++ Laser product is different. And then, I think it's true that the number of players, at 64 gigabyte at the higher symbol rates is a relatively smaller number. So that does certainly matter in this domain.With respect to the products such as modules, the launching of 400ZR modules has happened, but, they're not into production volumes yet, so they're not really impacting at this point, the discussions about pricing. Because of the fact that we sell a lot of components into line cards, it's a little more difficult to differentiate between say DCI and long haul for Western customers. Although, we have noted that in some customers are doing proportionally more of their business from data center and that no doubt reflects in product mix as well. I hope that helps.

[Paul Silverstein:]

Can you answer from a regional perspective, if things are really shipping to book when we look at demand -- China, Europe, North America, what are you seeing any incremental color you can add?

[Tim Jenks:]

Well, let's see, in China, what we certainly saw was that at the end of 2019, we were concerned about China inventory build. Now we're seeing tenders released and so that we'll work through the system reasonably, but China has been strong in our last two quarters and so we're going to be cautious about how it looks later in the year in China. The U.S. has generally been strong in consistently so particularly at the higher speeds. EMEA is relatively stable, Japan too, some positive notes in Japan. But I would say, China's the strongest followed by North America, followed by rest of the world which really means EMEA in Japan.

[Paul Silverstein:]

All right. Appreciate that. So one quick clarification with respect to your business by revenue mix, I know you don't get out this way. But is there any insight you can share with us in terms of what percentage of revenue is lasers in particular, and I trust in module businesses till now still very, very small, so dominated by components, overall revenue, but any sense of view, that's what lasers specifically are in terms of the overall equation?

[Tim Jenks:]

Yeah, recall that we have several different types of lasers. And so, the sum of all of our lasers, approaches about half of our total revenue and that means, lasers for data centers that are fixed wavelength is DSPs. That means, lasers that are generally used for example, in 5G mid Hall and front hall length those are generally EML lasers. And then tunable lasers which are which are used in coherent systems and are used in conjunction with our current components. So lasers are important part of our company. But it does have three different broad types of lasers.

[Operator:]

And our next question comes from Alex Henderson of Needham.

[Tim Jenks:]

Hey, Alex.

[Alex Henderson:]

Hello. I was hoping we could just talk a little bit more about the supply chain side of things. To what extent that might be causing people to be building -- trying to build more inventory the same as you're trying to go more inventory downstream from you. Do you have any sense of whether the rate that you're shipping into the Chinese for instance is consistent with the rate that they're shipping out to their service providers, or do you think that there's some inventory built? I realized that there was a concern at the end of the year. But you think that's continuing build as we go forward? Or do you think that alternatively, that they're in fact shipping the product through as fast as you're shipping it to them? Given they're also rebounding in terms of demand? Which dynamic do you think is more prevalent?

[Tim Jenks:]

Well, let's see in the in the first quarter, I think we're probably seeing more shipments to them than their shipments out. However, as we talked about in response to an earlier question, during Q1, we saw these new tenders. And so those I specifically referred to China Mobile, but now there are additional things being done by China Unicom and China Telecom. And so, in second quarter we expect more balanced or even potential more use than accumulation. So, I think Q1, the sum of all China customer inventory was probably increasing. And in the second quarter, I think it'd probably be flat to down.

[Beth Eby:]

I do think, Alex, if we were able to get to our full, unconstrained revenue there would have been some inventory building there, but we're constrained on supply chain.

[Alex Henderson:]

Right. So I would assume that that reflects back to you by your customers calling you and pushing you to ship more product in being very concerned about product availability timing, is that an accurate assessment? That you are hearing frequently from your customers about when will you get the constraints bind you?

[Tim Jenks:]

Well, they're not asking when. They're just -- it's much more that they ping us daily and sometimes hourly. But they understand the situation in the pandemic, they're wrestling with the same kind of supply chain issues we are. We're all in the same storm, though we're in different boats. And so there's -- everybody's wrestling with it.

[Alex Henderson:]

If you were to flip that from China to focusing on Western accounts, is there any difference in the -- your sensibilities towards those accounts?

[Tim Jenks:]

No, not really. I don't think I can really tell you much. We actually haven't heard enough from the whole ecosystem with this quarter and kind of the aftermath of living through a couple of months of the pandemic. I don't know enough yet.

[Alex Henderson:]

Quite reasonable. I'll cede the floor. Thanks.

[Tim Jenks:]

Thanks, Alex.

[Operator:]

And our next question comes from Sameer [Indiscernible] of JP Morgan.

[Tim Jenks:]

Hi Sameer.

[Unidentified Analyst:]

Hi, guys. This is actually Joe [Indiscernible] on for Sameer.

[Tim Jenks:]

Hi, Joe.

[Unidentified Analyst:]

Hi, how's it going? So my first question, I kind of wanted to dive in into the gross margin guidance, obviously very strong relative to your historical performance. And obviously, this quarter, you guys performed well on the gross margin line as well. I just want to kind of dive into the high-end of that guidance and kind of get an understanding of what's driving that high-end and how you guys would get to the high-end of the quarter progress.

[Beth Eby:]

So one of the things that impact our gross margin, product volume, particularly swings is on the underutilization. It also impacts our cost, product mix different products in different markets have different levels of margin. And the ASP reductions are pretty well baked in also cost reduction. One thing that is unusual this quarter and I alluded to it in my remarks is that as of March, the tariffs in China that's been running in any given quarter for the last few quarters between a half a point and a point of gross margin the tariffs on our U.S. products going into China have been eliminated.So the bulk of the difference, frankly, between this quarter and next quarters is that elimination of those tariffs. And we'll see what product mix ends up doing. And that'll swings to the high end or the low end of the range.

[Unidentified Analyst:]

And then on the OpEx side, last quarter, you guys mentioned, expecting maybe a slight increase in OpEx on the new product launches that you guys are having this year, and obviously OpEx your current pepper market, you said that was a little bit down, but you're expected to learn some of the expenses as we go through the year, so kind of two clarifications on that. One is, do you still expect OpEx to be higher this year and then the second one being, how do you expect the cadence of layering on these R&D investments as we go through the year?

[Beth Eby:]

We don't guide more than one quarter. Welcome to Neo. That said, the -- we said straight out in Q1 that we guided midpoint of 22.5 and we had a $1.5 million unusual credit, give you a pretty good idea of the stable run rate. There'll be some variability around that.

[Tim Jenks:]

As Beth said in the prepared remarks Joe, we did have overspending in the first quarter with the pandemic and we expect that to be added to the subsequent quarters.

[Unidentified Analyst:]

Got it and then if I could just…

[Tim Jenks:]

Get the same work done.

[Unidentified Analyst:]

Yes, got it. Understood. And then if I could just one more on my end, relative to your C plus-plus products, obviously you guys have been seeing strong interest in China or some Chinese customers there. I'm just curious, what would drive or what are you guys expecting will drive interest outside of China from the rest of the world? And I guess to that point, what -- why are Chinese customers finding that or finding the interest to that product? Thank you.

[Tim Jenks:]

Well, let's see the -- it's an interesting situation to be in the middle of this pandemic with people working from home and availing themselves of cloud services. People are talking about higher bandwidth utilization or bandwidth demand. And that all means that you want to increase the data carrying capacity of the fibers that are already installed. That is what C plus-plus does. And in China, work has been going on over the last year around these kinds of technologies with the Super C-band and the use of Super C-band width QPSK as a modulation, which I talked about in my prepared remarks. So they've been added for a year and now that they have these new tenders awarded, we expect it to deploy.But other parts of the world, it'll take them a similar amount of engineering time to assess the value proposition and, and decide if it works. It's interesting to see that that initial deployment is going to be starting just as we've all gotten adjusted to this need for more bandwidth capacity through the pandemic. It also depends to some extent on available fiber capacity, because you know, if there are available channels on existing fibers, then you know that has to fill first before the next structure or the next technology is applied to increase that capacity further, but ultimately it is a solution set that that solves a particular problem and that problem has gotten more current in recent months.

[Operator:]

Okay. Our next question will come from Simon Leopold of Raymond James.

[Simon Leopold:]

Thanks for taking a question. Wanted to get a quick maybe clarification or add a color here. You did you highlight the Huawei business being very strong. Did you have any other customers that exceeded 10% of revenue in the quarter?

[Beth Eby:]

We had one other customer that exceeded 10%.

[Simon Leopold:]

Do we know how much they exceeded 10% by?

[Beth Eby:]

As we discussed a number of times, they have asked us to not cite their percentage.

[Simon Leopold:]

Okay. And then I just wanted to follow up with the 400-gig opportunity, understanding it's still early, but having products available gets us started. What do you view as the timing for when that business becomes material for you, and how you think about the total market opportunity in 2021? Thank you.

[Tim Jenks:]

Well, let's see the 400 gig opportunity, I have to I have to describe two parts of it. It's more than 10% of our business right now, but there are two parts of it. The first 400 gig part that is driving more than 10% is the fact that we have a wide range of 400 gig capable components that go into line cards and that are being sold in volume today.For the DCO modules which is for us we have three different form factors. We have a CFP2 DCO module, which is the favorite form factor for the telecom carrier space. And then for data center, we have both an OSFP and a QSFPDD DCO modules. Each of these are 400 gig DCO modules. These we expect to ramp in 2021 and frankly we expect that through the course of the last few months, things have moved a couple of months to the right. So, what might have been early 2021 now might move to the second quarter or even mid-year in 2021. I hope that answered your question.

[Operator:]

And our next question comes from David King of B. Riley FBR.

[David King:]

Thank you. Good afternoon. Can you give us an update on Japan and Thailand production status?

[Tim Jenks:]

Sure. They're both running full throttle.

[David King:]

So no impact from local quarantines at this point. And you're not making -- they're not part of any 10 million impact for this current quarter -- second quarter?

[Tim Jenks:]

Yeah, our production is running fine. It's running full throttle. This is this is true not only in Thailand and Japan, but also in China. In our last quarterly conference call, it was a just after China returned from an extended China New Year period. And we were light on our labor. But over the next few weeks, the labor force returned from other provinces in China as they were able, so that we were running full speed. Now…

[Beth Eby:]

The 10 million Dave is pure supply chain in multiple locations in the world.

[Tim Jenks:]

Yeah, the other thing I just wanted to say was that in each of our locations, we have impacts from COVID-19 and you know we're running with practicing protocols of social distancing and low density working, et cetera, et cetera. So there are impacts everywhere. But we're well into it. We've gotten used to it. We're getting all the work done and things are moving right along. But in terms of production only, it's all running just fine.

[David King:]

We got into supply chain supply each year, is there any kind of a key component that could cause some kind of a component imbalance or bottleneck that could hold things up?

[Tim Jenks:]

Well, the answer is yes. There are about 10,000 of them. Essentially every component is -- every sub component in a component is key and every component is key in a module.

[Beth Eby:]

So, if you can nail or some glue or a widget, you're going to have problems.

[Tim Jenks:]

So we have -- broadly speaking there are two issues, we have -- we tried to have multiple suppliers for most things that we buy, but oftentimes, there's a large one and a small one. And if the large one is unable to produce at the same rate, you know, that causes a problem.If someone is a sole supplier, that also causes us a problem. And when -- if a larger one has a problem, and we go pull on the smaller one, the smaller one may be being pulled on by multiple companies at the same time. So, daily -- this has been part of our daily conversation really since we learned how to spell COVID and it's just that it's the reality with a global supply chain and different local public health requirements that in some cases we've had vendors that they'll have a public health ordinance, they'll shut down and they'll be back up three days later. Others, it takes few weeks. So, it varies widely. And it requires our full attention every day.

[Operator:]

And our next question comes from Tom Diffely of D.A. Davidson.

[Tom Diffely:]

Yes, good afternoon. First kind of follow-on the last line, I was wondering if COVID has had an impact on your R&D labs, you had to limit in those -- projects?

[Tim Jenks:]

Well, it has had an impact. And I'll comment about a couple way, we have R&D locations in several places in the world. We have R&D in the U.S., Canada, Japan, China and in China, we have R&D in both Shenzhen and we have R&D in Wuhan. So, certainly the most impact and the earliest impact was with our colleagues in Wuhan. All that said, they're all back at the office, they're running strong, and they've done a great job.By the same token, R&D is generally done around the world in a collaborative way. So when one organization is a little bit late, the others can pick it up to some extent. So, we've continued to be able to get the job done. But we've had to pretty innovative and flexible in making sure that that we can do that. So far, it's worked out well.

[Tom Diffely:]

Okay. And then as far as the data center goes, the only scan that you're seeing that you think that COVID has actually accelerated plans to be coherent -- to the data center.

[Tim Jenks:]

No, I don't think that that's a an accurate statement, but do think that there is there is a need to deal with bandwidth capacity. And there are very, very good ways of leveraging coherent technology in increasing bandwidth capacity, which I talked about. And these are things for example, having a wider spectrum, more channels of late. This is this is the C++ running with higher baud rate.I said that that is efficient, that's a way of dealing with it actually having higher order modulation. That's a way of dealing with it. All of these require very pure lasers, which we supplies. So, the ways of actually using coherent technology to increase capacity, certainly our strong suits of NeoPhotonics, but I think the general trend of adopting in the data center more coherent technology, that's a big picture topic that takes considerable time.

[Tom Diffely:]

Okay, appreciate the color. Thank you.

[Operator:]

Our next question comes from Ryan Koontz of Rosenblatt Securities.

[Tim Jenks:]

Hi Ryan.

[Ryan Koontz:]

Thanks. Congrats on the strong quarter and thanks for transparency in the business.

[Tim Jenks:]

Thank you.

[Ryan Koontz:]

Given kind of the upcoming disruption that's impacted the DCI market from CR, do you expect the fulfillment model to work given there's a lot of different players and a handful of buyers there. You have the DSP suppliers, the optics guys, the systems guys, all kind of coming together.

[Tim Jenks:]

Well, that's what you might call the, $200 million question. The industry is a global industry and oftentimes competitors are also each other suppliers and there's a good level of collaboration at every level of the food chain.I think there are a couple things to consider. First one is, is the fact that in the cloud and data center world, there are a dozen players around the world that that are the preponderance of ultimate demand.By the same token, the same is true right now, with the network equipment companies that we supply. There are a dozen that that make up the vast majority of the industry. So, it's incumbent on people trying to launch new technology products and volume to compete with your technical and production capability for those design opportunities --- design win opportunities.I think for the 400ZR market that will be playing out over the next several quarters. My crystal ball isn't quite clear enough to say precisely how it will end up, however.

[Operator:]

And at this time we are out of time for any additional questions. We'll now turn the call back over to Tim for closing remarks.

[Tim Jenks:]

Thank you, John. Thank you everyone for dialing in today and thank you very much for your interest in NeoPhotonics. We appreciate the diligent work of our employees and of our suppliers to drive progress, especially in light of the current environment. Everyone will stay safe. We'll look forward to updating you in the future and meeting with shareholders again on the other side of the pandemic. Have a good evening.

[Operator:]

Ladies and gentlemen, that does conclude our call. On behalf of NeoPhotonics, we do appreciate your participation. Please have a great weekend. And at this time, you may disconnect.