Tim Jenks - Chairman, President and CEOThank you Cal. Notwithstanding the recent determination regarding the purchase price accounting for NeoPhotonics Semiconductor, we are pleased with our continued progress.
NeoPhotonics is a leading designer and manufacturer of photonic integrated circuit, or PIC, based optoelectronic modules and subsystems for bandwidth-intensive, high-speed communications networks. Our products enable cost-effective, high-speed data transmission and efficient allocation of bandwidth over communications networks. As network speeds have moved from 10G to 40G to 100G, we have been enjoying rapid growth with our leadership in 100G applications, as we provide a suite of solutions to customers for Coherent and other high speed networks.
Our business continues to be driven by our 100G products including those used in telecom Coherent networks, plus contributions from NeoPhotonics Semiconductor, notably also for 100G products. Revenue from our high-speed products was $28.4 million or 37% of total revenue in the third quarter. This is an increase of 31% from the third quarter of 2012. Our100G product group was the largest contributor to our highest revenue quarter in the Company’s history. Today we have a strong suite of solutions for 100G transmission. That our customers are utilizing for next generation designs due to superior performance as well as cost competitiveness.
We continue to work on increasing our content per port in 100G systems, and we believe that our percent of revenue in the 100G business is one of the highest of companies in the market for optical modules and subsystems, and we continue to see expectations for ramping in this early part of a multi-year investment cycle for 100G systems.
In the industry going forward, we expect to see modest increases in carrier CapEx, such as was recently announced by Verizon, and new program awards for 100G transport and metro deployments, which we would expect to result in increasing demand conditions over time.
The China market in the first three quarter of the year was slower than previously expected, and we anticipate this to continue into the fourth quarter as large tenders announced by two of China’s largest carriers have taken longer to be awarded than originally estimated by our analysts and our customers. Recently we have seen some large tenders being awarded for LTE deployments, and we anticipate that wireline deployments will start to pick up as well within 2014.
We have been delivering strong growth for many quarters, and would expect an increase in the economic growth in China could be accompanied by stronger demand from China carriers and their network equipment suppliers. In turn this would be beneficial to our top-line and create more leverage in our operating model. We believe that tender awards in China for 100G network deployments will strengthen our product mix and our market position as we participate in those network upgrades.
We have been investing in these products for several years and we believe we have a competitive advantage to continue to support the expected growth in the market for 100G deployments over the longer term. In our last two quarterly calls, I noted that we added considerable manufacturing capacity which is just now beginning to be utilized as intended. With this action, we have necessary capacity for increasing volumes and at competitive cost.
Specific to 100G, we now have customer design spanning all of our defined Tier-1 customers including 6 different product families, all of which are in production. For our speed and agility product group, now100G products constitute 54% of the total group and, as I mentioned, includes all of our top tier customers.
In addition, we believe we are currently the number one supplier of coherent receivers to transport systems in the industry, and the number one volume supplier of narrow line width lasers for coherent applications over the last two years. For single mode 100G Ethernet client side transceivers, we believe we are the number one supplier of lasers and laser driver ICs for these modules and the number two volume supplier of optical transceiver modules themselves, resulting in our participating in the rapidly growing 100G client side market in two significant ways.
We believe that Coherent is a sea change to network architectures, allowing for higher and higher data rates over longer distances, as customers continue to demand more bandwidth. Demand for speed is driven in part by massive data traffic demands as well as new LTE wireless installations, which generally leads to the need for upgrades in telco backbone networks. We expect the world’s largest network equipment manufacturers will capture the largest share of the demand for new installations and we are fortunate to count these Tier-1 customers as long standing customers and as customers for our 100G Coherent product suite.
Analysts predict that while the overall telecom market will be relatively flat over the near-term, volume deployments of 100G coherent optical interfaces in the core telecom network will continue to grow in 2014 and beyond as service providers continue to upgrade their core networks to100G coherent and begin targeted rollouts of coherent interfaces in metro and regional networks. Then as our system equipment customers continue to release their cost and performance optimized 2nd and 3rd generation 100G platforms, this will also boost demand.
I will now talk about our Product Groups.
In the third quarter of 2013, revenue from Speed and Agility products was approximately 69% of our total revenue which is consistent with the prior quarter. Of this, revenue from our 40G and 100G products was approximately 37% of total revenue, up $7 million or 31% from the third quarter of 2012. Revenue from this product group was slightly lower by $0.9 million in the third quarter than in the second quarter, when it had increased 33% compared with the first quarter.
This resulted in the slight amount of excess inventory at key customers, which we believe has now been consumed. This product group has been on an accelerated growth path over the last two years, and with Metro deployments beginning in 2014, we expect this trend to continue. We believe that essentially all of our 100G product families are early in their life cycles and we expect to leverage these product families for years to come. We are building on our proprietary PIC technology platform to introduce new and enhanced products and gain new customer design wins.
In the third quarter, revenue attributable to our Access product group was approximately 23% of our total revenue, which is up $2.7 million sequentially in dollar terms. Within this group are point-to-point networks, certain wireless backhauling applications, and passive optical networks, or PON.
Our PON products have been declining slowly over the last two years. Due to plateaued growth in PON and continued pricing pressure in the market, we do not expect to see a growth trend in PON over the foreseeable future. As a result we have trimmed our spending in this area in order to enhance our 100G focus. PON products are relatively low margin, such that a slow decline in these products as they mature will not be adverse to overall margin or profitability. We anticipate that this segment will decline as a percent of our total revenue overtime.
And I’d like to talk a bit about industry trends.
It is important to recognize that virtually all of 100G Coherent shipments to-date are for long haul transport systems; that is, for system platforms designed for long haul. Based on inputs from our customers, we expect we will begin to see systems designed specifically for Metro deployments in the second half of 2014.
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