Perhaps no other US company has been hurt as badly by US sanctions against Huawei as NeoPhotonics. A specialist in advanced optical components, it previously counted the Chinese equipment giant as its biggest customer by far.
This time last year, before export restrictions had been tightened, NeoPhotonics owed more than half its first-quarter revenues to Huawei. A year later, the figure has crashed to just 1%.
This would be nothing short of disastrous for many companies, a threat to their very survival. And the situation at NeoPhotonics is not exactly pretty.
After reporting a $6.3 million net profit a year ago, it has racked up a $10.7 million loss for the first quarter of 2021. Back in October, just weeks after new sanctions took effect, the 1,200-employee company warned that a restructuring prompted by US moves against Huawei would cost $12.1 million.
The wonder is that NeoPhotonics is not doing worse. Despite the near complete disappearance of Huawei as a customer, the sales drop for the first quarter was just 37%, to $60.9 million.
Spending by other customers has filled part of the Huawei void. And management expects it to continue. This year, it is guiding for revenue growth excluding Huawei of between 25% and 35%.
If NeoPhotonics can achieve the midpoint of that range, it will limit the full-year revenue decline to 22%, judging by numbers published in its 2020 annual report.
Investors have been relatively sanguine. The company's share price fell 6% yesterday, to $11.20, after the publication of first-quarter results, but it is still 188% higher than it was in May 2019, when stakeholders were in a panic about Donald Trump's campaign against Huawei and unsure of the full impact it would have.
Demand for the company's state-of-the-art technology is strong. Sales of products that can support data rates of at least 400G rose 134% year-on-year, to $31.4 million, accounting for 52% of the total.
Most of the world's big equipment makers are customers, including Ciena, Cisco, Fujitsu, Infinera, NEC, Nokia and ZTE. And despite its recent financial difficulties, NeoPhotonics has pumped extra money into research and development to maintain competitiveness. Spending was up a tenth in the first quarter, to about $13.1 million.
There are challenges besides the loss of Huawei business, though. NeoPhotonics has not been immune to the effects of the semiconductor supply crunch that has received so much recent attention.
"Component shortages are handicapping its ability to ship 400G+ higher-speed products," said Fahad Najam, an equity analyst with MKM Partners, in a research note. Those shortages, he said, "are driving low-single-digit millions of headwinds" to guidance for the second quarter.
NeoPhotonics also complained about weak demand in both China and the US for some of its other products.
"The bigger factor absolutely is supply, but there is also some softness in the market that we are seeing in the first half in the US, after the large spend on spectrum, and in China, where it's looking like the 5G rollout has slowed down a little bit," said Elizabeth Eby, the chief financial officer, on a call about results with analysts.
The supply issue is unlikely to be a long-term problem, however. "The company expects substantial revenue growth in 3Q21 and says it has good visibility," wrote Michael Genovese, an equity analyst with Westpark Capital, in a research note issued today. "It believes it will make up the 400+G product revenues that are slipping out of 2Q21 due to the components constraints."
Of greater concern is that worsening relations between China and the US eventually cut NeoPhotonics off from other Chinese customers, besides Huawei.
ZTE remains off the US Entity List for now. But Fiberhome, a lesser-known Chinese vendor, was added to it in May last year. Its listing could be a further pain point, acknowledged NeoPhotonics in this week's filing with the US Securities and Exchange Commission.
Ultimately, NeoPhotonics could be a victim of China's push for technology independence from the US.
"Insourcing in China is not new and certainly with the US-China trade tension, it's heightened," said CEO Timothy Jenks. Sales of older products have suffered partly because some Chinese customers have turned to local partners instead, he told analysts.
Right now, the company can justifiably claim to be ahead of its Chinese rivals on the development of cutting-edge technology.
"What we are working on is things that are 400G and above where, in fact, we don't believe that they really have the alternative of using domestic suppliers in China for a lot of those products," said Jenks. Sooner or later, that seems likely to change.
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— Iain Morris, International Editor, Light Reading