Mar 1, 2016
Executives
Erica Mannion - Investor Relations, President of Sapphire Investor Relations Tim Jenks - Chairman of the Board, President, Chief Executive Officer Ray Wallin - Chief Financial Officer, Senior Vice President
Analysts
Alex Henderson - Needham Simon Leopold - Raymond James Troy Jensen - Piper Jaffray Richard Shannon - Craig-Hallum Capital Group Tim Savageaux - Northland Securities
Operator
Welcome to the NeoPhotonics 2015 Fourth Quarter and Full Year Conference Call. This call is being webcast live on the NeoPhotonics event calendar webpage at www.NeoPhotonics.com.
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. You may listen to a webcast replay of this call by visiting the event calendar page of the NeoPhotonics website.
I would now like to turn the call over to Erica Mannion at Sapphire Investor Relations, Investor Relations for NeoPhotonics.
Erica Mannion
Good afternoon. Thank you for joining us to discuss NeoPhotonics operating results for the fourth quarter and full year of 2015 as well as the company’s outlook for the first quarter of 2016.
With me today are Tim Jenks, Chairman and CEO, and Ray Wallin, Chief Financial Officer. Tim will begin with a review of the fourth quarter results.
Ray will provide a financial update including results for the fourth quarter of 2015 and the outlook for the first quarter of 2016 and then Tim will summarize before opening the call up for questions. 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, levels of sales and profitability, subsequent events, product and technology development, customer demand, inventory levels and economic and industry projections. Various factors could cause actual results to differ materially.
Some of these risk factors have been set forth in our press release dated March 1, 2016 and will be described in our SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, which we filed on November 6, 2015, and our Annual Report for the year ended December 31, 2015, which we expect to file on or before March 15, 2016. Listeners may obtain a copy of the company’s press release by visiting the Company’s web site.
Now, I will turn the call over to CEO, Tim Jenks.
Tim Jenks
Thank you for joining us today. In our fourth quarter NeoPhotonics grew revenue by 7% sequentially to a record $89.1 million, which was $5 million above the mid-point of our outlook range, and was driven by a 10% sequential increase in High Speed 100G and beyond product sales.
As we indicated last fall, the delay in 100G deployments by China Mobile at that time was brief such that robust demand is now reflected in our strong results and outlook. High Speed products were $51.7 million or 58% of revenue, which we believe is the highest 100G percent in the industry.
With this overall growth, we expanded non-GAAP gross margins to 32.4%, a 2.6 percentage point sequential expansion. Overall Non-GAAP profitability increased to $6.9 million or 16 cents per diluted share and we generated $11.8 million of Adjusted EBITDA and $5.0 million of cash from operations in the quarter.
For the full year of 2015, NeoPhotonics delivered record revenue of $339 million, representing 11% year-over-year growth, we generated non-GAAP gross margin of 31.5%, Adjusted EBITDA of $43 million and non-GAAP earnings of $0.53 cents per share, and we had $26 million of cash flow from operations. 2015 was the best performance year in the company’s history.
Moving on to the business, we believe that the industry has entered an expansion cycle where CAPEX for 100G and beyond deployments is expanding globally for both Telecom and Datacenter applications and that these two segments are in sync. For telecom and inter-datacenter interconnections Coherent transmission is the technology of choice, providing an efficient path from 100G to 400G.
For intra-datacenter interconnections, the release of 25G switches, itself part of a full upgrade cycle in the datacenter, is rapidly driving data lanes to 25G data rates and interconnections to use single mode fiber and single mode lasers. These trends, as well as the momentum building for the deployment of next generation “contentionless” ROADMs, are all favorable to NeoPhotonics – to our coherent product suite, our multi-cast switch products, our new client and datacenter 100G transceivers and our 28Gbaud and 56Gbaud EML lasers and high speed IC components.
Today NeoPhotonics is a market share leader for key products used in coherent 100G and beyond transmission, including Integrated Coherent Receivers and Narrow Line-Width Tunable Lasers. Our suite of 100G products are used in long haul and metro transport systems and in datacenter and enterprise applications.
For the full year, 58% of our revenue came from High Speed 100G and above products, and we believe our product and technology leadership in advanced hybrid photonic integration, including for high speed applications, is second to none and continues to drive our leading market share position in coherent transmission. We are seeing an acceleration of deployments throughout the ecosystems we serve.
Even considering the 21,000 100G ports released last quarter by China Mobile, this acceleration is stronger than we might have expected as customers’ forecasts expand. We are similarly seeing strong growth in the Datacenter Interconnect market, again leveraging NeoPhotonics’ 100G product suite.
These points lead to our expectations for strong performance in the first quarter of 2016 with these deployments and additional 100G network deployments around the world. In fact, thus far this year we are seeing our strongest Book-to-Bill start in the year since the Thailand flooding that affected the market in early 2012.
Further, we are encouraged by on-going ramping of 100G deployments in North America and Europe, notably by Verizon and others. Demand for our 100G coherent line side products is robust as our growth in backlog and customer forecasts in the last few months illustrates.
As we make our way through 2016, we expect demand for these products to continue apace, with demand for our 100G client modules and components also accelerating. Note that deployment of line side ports also leads to associated deployment of Client side ports.
Our Client side 100G products, which include modules such as CFP2 and QSFP28, as well as components, such as EML lasers and high-speed driver ICs, similarly were up more than 20% sequentially with accelerating demand thus far in 2016. Demand for our Multi-Cast Switch product is much stronger than previously anticipated, driven by the roll out of Colorless, Directionless, Contentionless switching.
While it is notable that Verizon has chosen this architecture, it is also the case that a portion of current demand derives from webscale content providers. The need to eliminate contention is being driven by the move to “software defined networks,” or SDN, which is important to both telecom network requirements and content provider networks.
A “contentionless” architecture uses both traditional “Wavelength Selective Switches,” and a new “Multicast Switch” which is supplied by NeoPhotonics. One or more multicast switches are deployed initially with each ROADM node, and then additional multicast switches are deployed over time as traffic growth demands, such that networks are enabled to expand as needed.
We expect this product line to contribute $10 million or more of revenue this year depending on our production rate as we add capacity, but with an overall trend that will continue producing steady growth over the medium and longer terms. Due to the strengthening demand and strong volume growth for both our long haul and metro 100G coherent products, together with strong Book-to-Bill, virtually all existing production capacities for these products are now booked out, and we are now in the process of adding capacity at module level, component level and chip level to keep up with demand acceleration.
Over the past year and a half we have almost tripled capacities for coherent receivers and ultra-narrow line-width lasers and we are continuing to expand capacities for these products now. For 2016, as a result, we are investing in capacity expansion at a higher level, which Ray will discuss.
So I will now turn the call over to Ray Wallin, our Chief Financial Officer.
Ray Wallin
Thank you, Tim, and good afternoon. Revenue for the fourth quarter totaled $89.1 million, coming in above the high end of our outlook range, an increase of 13% from the year ago period and up 7% from the third quarter of 2015.
This growth was driven by strong demand for our High Speed Products which were up sequentially 10% at $51.7 million, as previously noted. Our Network Products and Solutions business was up 2% sequentially at $37.4 million.
This product group includes lower speed transceivers, and as Tim has indicated previously, we view these products as mature and therefore may decline over the medium term. Note that this decline is anticipated to have an uplift effect on gross margins.
Our Non-GAAP gross margin was 32.4%, which was up 2.1 percentage points compared to the prior year and up 2.6 percentage points versus the September quarter, and above the mid-point of our outlook range. Again, our margin expansion was driven by the greater mix of higher margin High Speed Products as well as solid manufacturing cost reductions.
Moving on to operating expenses, total Non-GAAP operating expense for the quarter was $22.6 million, an 18% increase versus the prior year period and a 9% increase versus the prior quarter. These increases reflect higher opex as we added the EMCORE product line for the full year.
Further, we acquired the precision optical power monitor business of EigenLight Corporation in the fourth quarter, which will contribute approximately 1% of revenue, and we modestly increased our rate of investment in our high speed product development efforts. Note that these results reflect our commitment to manage our operating expenses in line with our target operating model at 25% of revenue.
Non-GAAP operating income for the fourth quarter was $6.2 million, or 7% of revenue, up 30% from the prior year period, and up 49% from the prior quarter, reflecting very strong manufacturing efficiencies and demonstrating good operating leverage. We also recorded a foreign exchange gain of $1.3 million, or approximately 2 cents per fully diluted share, as compared to a $2.4 million gain in the year ago period, or 5 cents per share, and $1.9 million in the prior quarter, or 2 cents per share.
Our Non-GAAP results exclude $2.8 million of end-of-life inventory write-down charges, $1.3 million of amortization of acquisition-related intangibles, inventory and fixed asset step-up costs, $2.3 million of stock based compensation expenses and $0.5 million of acquisition-related costs. The end-of-life inventory write-down charges related to our drive to optimize our tunable laser product line in alignment with our 100G and beyond product strategy.
We are terminating support of certain versions of tunable lasers that are not aligned with this strategy. Our Non-GAAP tax rate for the fourth quarter was approximately 10%.
Going forward, we anticipate our non-GAAP tax rate to be in the 15 to 20% range. Overall, we recorded Non-GAAP net income in the fourth quarter of $6.9 million or 8% of revenue, as compared to 8% of revenue in the prior year period and to 6% of revenue in the prior quarter.
Based on a fully diluted share count of 44.3 million shares, this translates to earnings of 16 cents per share. For the fourth quarter, Adjusted EBITDA was $11.8 million, or 13% of revenue, very close to our target model at 15% of revenue.
This compares to the $11.6 million recorded in the year ago period and $10.2 million in the prior quarter. And, for the fiscal year 2015, we generated $43.2 million of Adjusted EBITDA, or 13% of revenue.
On a GAAP basis, fourth quarter gross margin was flat at 28% both sequentially and with the prior year period. Gross margin was impacted by the recognition of $2.8 million of End of Life inventory write-downs.
Independent of these charges, our GAAP Gross margin would have been 31%. GAAP operating expenses were $25.8 million, or 29% of revenue.
On a GAAP basis in the fourth quarter, we continued to generate positive earnings, recording net income of $0.4 million, including the benefit of the foreign exchange gain noted earlier. Geographically, our revenue mix for the fourth quarter was 17% in the Americas, compared to 30% in the third quarter, reflecting quarterly skewing as we do not see any meaningful change over the longer term.
China was 67% in the fourth quarter compared to 49% in the prior quarter, reflecting the burgeoning demand conditions we have noted. Japan was 3% compared to 4% in the prior quarter, and the rest of the world was 13% compared to 17% in the prior quarter.
Note that these figures are based on shipment destination, not the end use destination. We had two 10% or greater customers in the fourth quarter of 2015, and together they comprised 69% of revenue, up from 67% of revenue in the prior quarter: Ciena comprised approximately 14% of our total revenue; and Huawei Technologies comprised 55% of our total revenue, which is inclusive of affiliate HiSilicon Technologies.
This certainly reflects the strength of 100G deployments in China that we forecasted last fall. A full reconciliation of our GAAP to non-GAAP results for the quarter is included in our press release.
Turning to the balance sheet, we finished the year with $102.0 million in cash, cash equivalents, and restricted cash and investments. Our total debt as of the end of the year was $44.2 million.
And Net Cash was unchanged from the prior quarter at $57.8 million. Accounts receivable increased by $5.3 million in the fourth quarter, ending at $83.2 million, with day’s sales outstanding flat at 84 days as in the prior quarter.
Net inventory decreased $5.1 million during the fourth quarter to $65.6 million. Our days of inventory on hand decreased to 92 days from 106 days in the prior period.
Capital expenditures totaled $5.8 million in the fourth quarter, up from $5.4 million in the prior quarter. Full year capital expenditures were $16.8 million.
Fourth quarter depreciation and amortization was $5.4 million, nearly flat from $5.5 million in the prior quarter. For the full-year of 2015, our $339.4 million of revenue was 11% over the prior year, despite headwinds faced from product pruning activities during the first half of the year.
Our non-GAAP gross margin for the year increased a full 6.5 percentage points year-over-year to 31.5%, driven by our strong 100G product growth. We held non-GAAP operating expenses flat year-over-year with good operating discipline.
We delivered record Non-GAAP net income of $21.1 million, $0.53 of Non-GAAP EPS, and $43.2 million of Adjusted EBITDA. This is our sixth consecutive non-GAAP profitable quarter.
Today we can see NeoPhotonics on a strong growth path, with a solid balance sheet and sustaining profitability. Now, to support our accelerating demand conditions across each of our high speed products, we are increasing our capital expenditures for the coming full year to a range of 7 to 9% of revenue.
Our outlook for the first quarter of 2016 is up from the fourth quarter. Our first fiscal quarter is historically seasonally low after completing annual price negotiations and due to the timing of Chinese New Year and with lower Access shipments in winter.
That said, we anticipate strong momentum from 100G demand, and in contrast to our normal seasonal pattern, for the first quarter of 2016, the company’s expectations are: Revenue in the range of $92 million to $98 million, up 3 to 10%; Non-GAAP Gross margin in the range of 30% to 33%; GAAP Diluted earnings per share in the range of 1 cent to 10 cents, and Non-GAAP Diluted income per share in the range of 10 cents to 18 cents (this is reflective of approximately 9 cents of after-tax non-GAAP adjustments and an assumed share count of 44.9 million shares). I want to remind everyone to refer to our public filings with the SEC and our Safe Harbor statement included in our press release that discuss the risks and uncertainties that could affect future performance causing actual results to differ materially from our forward-looking statements.
We do not plan to update, nor do we take on any obligation to update this outlook in the future. Now I will turn the call back over to Tim.
Tim Jenks
Thank you Ray, As I noted earlier, the overall environment for 100G and beyond products globally, for both telecom and datacenter applications, is very robust. Our bookings are strong and our forecasts are showing continuing strength due to increasing 100G spending globally.
The accelerating deployment schedule within China and the continued strength in demand for our high-speed coherent products is driving healthy increases in the near term as compared to traditional seasonal softness. Looking beyond the first quarter, with strength in 100G and 200G coherent and growing strength in contentionless switching, accelerating 100G client and datacenter modules, increasing 100G component demand, and stable Access demand, we believe 2016 will be a very good year for us.
We are expecting full year revenue growth to be in the range of 15% overall. To support this growth, and as previously noted, we are adding capacity at chip, component and module levels, expanding assembly and test capacities, and we are working with our supply chain partners on their expansion plans.
We believe NeoPhotonics has the highest share of micro tunable lasers and integrated coherent receivers for the expanding range of coherent transmission applications, from 100G to 400G data rates. We believe this market will drive continuing growth in revenue.
As I noted previously, our Client side business is seeing strong sequential growth as well. Extending this product range, our new 100G QSFP28 modules are expected to ramp to volume shipments over the following two quarters for high-density, telecom-client and datacenter applications.
Further, we are developing 400G client side modules in CFP8 configurations that will be based on our leading 28 Gbaud lasers at 50 Gbps using a PAM4 architecture. Taking this development one step further, we are also introducing an ultra-high-speed 56 Gbaud EML laser and driver IC set which enables single wavelength PAM4 100G applications as well as eventually four wavelength 400G intra-datacenter transmission.
Also, for mega-datacenter applications we have introduced a series of new high power laser diode array products designed to power short reach Silicon Photonics’ based 100G intra-datacenter interconnections which use parallel single-mode architectures, or PSM4. Now, at this point I am pleased to announce that NeoPhotonics will be entering the coherent module market.
Our first such product is a new CFP2-ACO module, which will be initially sold in a Class 3 configuration. We will be showing this product to lead customers at the upcoming Optical Fiber Communications conference in Anaheim, California, March 22nd to 24th.
Our coherent module products will feature NeoPhotonics high-performance components inside, enabling these modules to meet the highest specifications in the industry. We expect to be shipping these modules in 2016.
In addition to our new CFP2-ACO, we are supplying multiple other CFP2-ACO module manufacturers with our high performance components, which is a testament to the performance and technology leadership of our coherent component platform. We believe we are very well positioned to benefit as a leader in both pluggable modules and components as coherent applications grow.
In addition, at the OFC conference in March we will feature a new 43 Gbaud Integrated Coherent Receiver which will extend the reach of 200G coherent transmission to more than a thousand kilometers and is suitable for use either in pluggable modules or on high density line cards. These introductions represent a significant increase in product breadth and capability for NeoPhotonics as we move into this heightened demand cycle.
As a result, we believe we are well positioned for the expansion in 100G and beyond networks. This concludes our formal comments and now I would like to ask the operator to open up the line for questions.
Operator
[Operator Instructions]. Your first question comes fro the line of Alex Henderson from Needham.
Your line is open.
Alex Henderson
Thank you very much. I apologize if there is background noise [indiscernible].
Anyway, congratulations guys. You really hung in there full summer waiting for this to rebound [indiscernible].
You were spot-on in your analysis. A couple of quick questions.
One, as we look at strength out of China, [indiscernible] fourth quarter, how would you characterize that? Is that a catch-up of the 2015 demand?
Or is that also the sum total of what you would expect out of them and [indiscernible] ordering out of China as the year progresses towards the back half of the year?
Tim Jenks
So Alex, thanks for the comments. Let me just repeat the question.
You are asking about China strength and is it a catch-up of 2015 demand or is it continuing through 2016? Did I understand that right?
Alex Henderson
Yes.
Tim Jenks
So I would view this as principally 2016 demand. There are certain announcements for the broadband China initiative through 2016 and 2017.
While the announcement from China Mobile included about 21,000 lines of 100 gig during the last quarter, that demand is actually now upon us and it will extend in the next couple of quarters, but in the China broadband, what we understand is there some $112 billion that will be spend on broadband infrastructure over the period of 2016 and 2017. So we would view this as well beyond leftover demand from last year.
Alex Henderson
If I could follow-up with a second question, could you breakout for us [indiscernible]?
Tim Jenks
So Alex, I need to ask you to repeat the question, because I couldn't hear it with the background.
Alex Henderson
Yes. I am sorry.
[indiscernible]. Could you just give us a sense of what the datacom versus telecom numbers look like [indiscernible]?
Tim Jenks
Yes. So principally, in our business we refer to the data center applications and telecom client.
Essentially both are strong, particularly the coherent line side business which is telecom space with the growth rate for the client side and datacom is actually quite higher, telecom and client and data center. We don't specifically breakout those percentages.
So I can't give you precise numbers.
Alex Henderson
Great. Thanks.
Tim Jenks
Thanks, Alex.
Operator
Your next question comes from the line of Simon Leopold from Raymond James. Your line is open.
Simon Leopold
Thank you. Hopefully you can hear me okay.
A couple questions for you. Actually, a handful.
I will try to wean my list down. But not to take anything away from the strength of the 100 gig and above, but much of the upside relative to our expectation actually was your network products, the other stuff and that was up sequentially in a quarter where you typically get some price reductions from your Chinese customers.
So there is often a sequential decline. Could you talk a bit more about what was going on in the, let's say, less sexy segment of your business?
Tim Jenks
Sure. And I appreciate that insight on this.
The network products and solutions business actually incorporates both lower speed transceivers and our passives business. And so the overall access and transceivers business is largely flat, 2015 over 2014.
It was down just slightly in the fourth quarter versus the third quarter, but the overall network products and solutions was up 2%, because of the fact that the passives business was also up. So you have two effects.
So it wasn't down. Now mindfully, we are reporting on the fourth quarter and so the comments about pricing have a small impact on the fourth quarter.
They are more impacting in the first quarter, where they have an impact on the entire quarter and of course, that's reflected in our guidance, but not in our results. I hope that helps.
Simon Leopold
It does. So then when we think about the mix for the March quarter where the overall forecast is calling for a sequential increase, I am presuming you expect a seasonally normal sequential decline for network products and then the growth is really all driven by the 100 gig and above.
Is that a correct assumption?
Tim Jenks
Well, so in the network products and solutions, we have to say that the access relatively will be down slightly, I think you are correct about that. Also in this group are those things that have to do with mobile backhaul and that was pretty strong.
So I would expect that the first quarter, without a doubt, the mix is favoring the 100 gigabit products but the network products and solutions does have access down a little bit, passives are doing pretty well and then the mobile backhaul being the strongest. So those three pieces are moving in that.
Simon Leopold
Okay. And one more question, if I might.
You mentioned, I believe in the prepared remarks, introducing intra data center solutions. It sort of was buried within a laundry list of new features or elements you are introducing, but that one took me by surprise.
Could you talk a little bit about what you are doing in that that particular market? What kind of solutions?
And how that might affect your margin in particular?
Tim Jenks
Yes. So there were two particular comments there.
First one is that we do have a 100 gigabit QSFP28 module which is an LR type module. It's used in both telecom client and intra-data center.
So that would be one at the module level. And then we also have introduced this group of laser and laser array products, which go into applications that are essentially silicon photonics based and they are PSM4, parallel single mode.
So those are components. So the QSFP28 is a module solution and the SiPho lasers are essentially component solutions for PSM4.
Both are used in intra data center. And for their respective product groups, I think both of them have small uplift effects on margin.
Simon Leopold
And what's the transmission distance spec for those products?
Tim Jenks
Let's see. The module for QSFP is essentially used in two to 20 kilometers or 10 to 20 kilometers.
You have got two kilometers and greater. So in the datacenters, the actual application is usually two to 10, okay.
It can be used in longer distance than that. But typically it's used in two to 10 kilometers.
The PSM4 spec, I can't quote off the top of my head.
Simon Leopold
Okay. Sorry, you didn't know there was a test.
That's okay. I will cede the floor.
Thank you.
Tim Jenks
Thanks Simon.
Operator
Your next question comes from the line of Troy Jensen from Piper Jaffray. Your line is open.
Troy Jensen
Hi guys. Congrats on a really nice quarter and guidance.
Tim Jenks
Thanks Troy. I appreciate it.
Troy Jensen
So maybe a couple of questions. On the ACO product you talked about here, can you just help me out, what is a Class 3 configuration?
Tim Jenks
So there are three classes. And a Class 3 configuration, well actually what I will say first is, on our website, we have a blog blog.neophotonics.com and there is pretty careful explanations of each of these available on the blog.
But that said, Class 3 is a module that actually has a line card control of optics. Class 2 and Class 1 are module control of optics.
Class 1 is really 100 gigabit only and Class 2 is dual rate 100 gig and 200 gig.
Troy Jensen
All right. And then you said, timing you expect to ship in 2016?
Are you talking shipping samples or shipping volumes?
Tim Jenks
We would be expecting to be in volumes.
Troy Jensen
All right. Prefect.
When do expect to have samples in the market?
Tim Jenks
Sampling process has actually been launched.
Troy Jensen
Okay. All right.
Perfect. How about maybe some foray here, you talked about your OpEx being 25% of revenues.
Curious to know if you think we have got leverage beyond that? And maybe you have ever given longer term business model targets?
Or thought about what operating margins could get to?
Ray Wallin
Yes. So we have given longer term business target.
Our target is fairly consistent, remaining the same, carrying into 2016 as well. We loosely refer it to as our target model.
And the target model is 35% non-GAAP gross margins and 10% operating margins and 15% EBITDA margin. So we are operating the company within that framework.
Troy Jensen
Okay. But even though you have got 25%, if you look at that model, it implies 25% OpEx.
Do you think there is any OpEx leverage going forward here?
Ray Wallin
Yes. There very well could be some leverage as we continue to expand revenues.
We have a rule in the country adding expenses with a lag. So with lag, means behind the ramp in revenue by one or two quarters.
But we will be investing some additional dollars that we generate in R&D activities, particularly in our 100G portfolio of products that we are focusing on.
Troy Jensen
Yes. Understood.
All right. Keep up the good work, gentlemen.
Ray Wallin
All right. Thank you Troy.
Operator
Your next question comes from the line of Richard Shannon from Craig-Hallum Capital Group. Your line is open.
Tim Jenks
Hi Richard.
Richard Shannon
Hi Tim and Rick. Hi guys.
Thank you for taking my question and congratulations on a great end to the year. A great end to a very good year.
So congratulations to you and your team.
Tim Jenks
Thank you.
Richard Shannon
I guess maybe I will ask a direct question. I think, Tim, you are implying in some of your comments thinking about the sustainability of the 100 gig cycle here you have got deploying in some many different aspects of it.
I am very specifically interested about that in China. Obviously it seems like there is some great opportunity here in the near-term.
You were mentioning a large number of CapEx. I think you said $115 billion over the next couple of years in broadband in general.
I am more interested in the sustainability of that in your 100 gig and higher category. How far out do you see visibility and frankly even bookings at this point?
Where is your crystal ball for [indiscernible]?
Tim Jenks
Well, there are couple of parts to that. The crystal ball is perhaps less clear than some announcements in country.
We heard under the broadband China initiative that was announced midyear, there was discussions of $182 billion as a boost toward enhanced Internet speed by the end of 2017. So at the time, that was about $113 billion for 2016 and 2017, or about CNY 700 billion.
Overall, the goal there is increasing fiber optic broadband and 4G mobile networks. And all of that requires continued investment in the in the 100 gig and this is all really from China State Council's objectives.
And there are some published forecast that look out into 2016 and 2017 that supports this view. The thing that it tends to be a little bit lumpy is timing of tenders between China Mobile vis-à-vis China Telecom and China Unicom.
So we can't always see exactly when those are going to happen, but the overall trend looks quite favorable.
Richard Shannon
Okay. Thank you for helping us for that.
Your insights are always pretty useful here. Look, I guess a few more questions.
Maybe I will go to the multicast switches. I think you are talking about $10 million this year.
A couple of questions about multicast switches. First of all, talking about $10 million this year.
I think earlier this year at an investor conference, you talked about more like $5 million to $10 million. What's driving that?
And is this more of sooner deployments this year from single or small number of large vendors? Or do you see other carriers also starting drive same type of technology?
Tim Jenks
The principal issue related to our revenue is our rate of ramp, our investment and ramp. This is a very small number of customers and they are serving both telecom and content provider customers.
So the thing that determines what our revenue is, is how rapidly we ramp it. And so we are ramping faster than we had originally planned, but it's not a step-up, it is a ramp.
Richard Shannon
Okay. Fair enough.
That's helpful. I understand that dynamic.
Maybe just two more questions from me. I want to follow-up on your CFP2-ACO mentioned there.
How are you viewing competition here? How are you going to differentiate between others who obviously have got to market a little ahead of you, cost, performance, functionality, et cetera?
How will you position yourself here?
Tim Jenks
Well, the ACO product is designed as a modular pluggable version to take certain applications into a pluggable architecture as opposed to a line card. Line cards remain both cost competitive and high performance.
And generally speaking, our components are the highest performance of their product types available. We also have the highest volume of principal components.
And so we are working on products that are competitive in terms of specification, product performance and application across the range. So in terms of differentiation, it really is based on product performance and not other attributes.
And I think that's also a testament as to why others have chosen to use certain of our components in their ACOs as well.
Richard Shannon
Okay. There is probably a few follow-up questions I could ask and I will maybe just go on to my last question and get it offline.
I am sure there is other questions. And this one is PAM-4 delivering some lasers to the markets here.
How many customers are you expecting to work with this year on PAM-4?
Tim Jenks
Well, at the moment we have a very small group of target lead customers that are dealing with the CFP8 400 gig. And so this is a pretty sophisticated high-end technical development.
And so we are not working to aggregate a large number of customers. It's a few target customers for the initial product launch that uses the 56 gigabaud laser.
So it's not really a program that's built around how many customers. So few, low single digit in fact.
Richard Shannon
All right. I guess I was looking for a number that's either one or greater than one.
But I think I get the general idea. I think that's all the question I had to ask.
Thank you very much for brining me in here and congratulations again.
Tim Jenks
Thanks Richard.
Operator
[Operator Instructions]. Your next question comes from line of Tim Savageaux from Northland Securities.
Your line is open.
Tim Jenks
Hi Tim. Well, Tim, are you there?
Can you here me?
Ray Wallin
Hi Tim.
Tim Savageaux
Was I on mute there?
Tim Jenks
You were on mute there, but now you are not. You are back.
Tim Savageaux
Okay. I am sorry.
Telecom analyst. Anyway, nice quarter.
Well done. I have a couple of questions.
First on customer concentration and then on gross margins. And so first, you obviously had some pretty sharp moves in customer concentration here in the quarter, though arguably less so in the year, nice increases with both your at last top two customers and you did make some commentary in your prepared marks around whether or not we should be reading anything into what's your North American market developments by your revenues in the region or with Ciena.
I wondered if you can maybe in the context of providing your annual growth guidance of 15%, which I appreciate, can you talk about what sort of changes you expect amongst your big customers and concentration in general, looking at on that annual basis, understanding that near-term likely China is going to play out a larger role in your revenue mix? And then I will follow-up after that.
Tim Jenks
Yes. Well, one thing I would just start off in terms of customers.
If we look a little more broadly than the top two, I think out of our top five or six customers, essentially all but one were up and that one was flat. So they are growing at different rates however.
And without a doubt, in the current situation we do see this burgeoning demand in China. So a couple of our largest customers for the quarter were Chinese and that has historically been the case for us, certainly with Huawei as the largest customer, but others in China have also grown with this broad demand.
So I would think that for 2016, we would have above our normalized, if you will, level of revenue from customers in China, Huawei included, but not just Huawei. Some of our other customers who have slightly lower volume in the fourth quarter than the first quarter, that math augments the China percent of revenue, but certainly in the top two, we are 67% to 69% of revenue, not a whole lot of change in the top one in aggregate.
But I think your point for the full year, it is right. We would expect a bit more than normal demand from the overall China market as a percent of the global market.
Tim Savageaux
Right. Okay.
And let me sort of continue on that front for a minute. Having said that and understanding we are going to see some strength in China here, you did also post some pretty and again understanding that your shift to geography is always representative of end market dynamics, but within the context of that, you did show some pretty good growth in the Americas.
I guess in general, would you expect that your anecdotal commentary was pretty suggestive of overall 100 gig strength in North America and Europe. I guess, do you continue to expect to grow from those regions for 2016 in addition to what you are seeing in China?
Tim Jenks
On a year-over-year basis, absolutely yes. I think you are referring to a year-over-year basis, because on a percentage basis, our Americas was a bit down in the fourth quarter versus the third quarter, but for a year-over-year basis, it is up and we expect it to continue to be up.
Tim Savageaux
Yes. And I was actually looking at absolute numbers full-year, actually, which is sort of the big contracts I was looking to understand things and that's fair enough.
Over on the gross margin side, trying to understand the dynamics driving the guidance of that 33% range, I imagine mix could be a positive. We seem to have forgotten in this sector for the time being about the pricing declines, given that all the revenue strength near-term, but I imagine that's playing a role as well.
So I wondered if you could discuss the factors influencing what remains a relatively wide range of gross margin guidance including those two and whatever else might be relevant?
Ray Wallin
So a couple of observations. This is Ray Wallin, by the way, Tim.
So a couple of observations on the gross margin. If you recall from previous years, our gross margins tend to drop somewhat significantly in the first quarter versus the fourth quarter, simply because it reflects the impact of the annual price negotiations in the first quarter and then as we go through subsequent quarters, we achieve cost reductions that makeup for it.
This particular year, our gross margins were relatively stable. At the midpoint of guidance, it would be about 31.5% and we clearly reflected our ASP changes in the first quarter and the price negotiations.
And you will probably recall from our prepared comments also that we are bumping up against all of our capacities from our over factories. So we are achieving some significant favorable manufacturing results and cost efficiencies in our plants as well as full utilization which helps to improve gross margins.
And so the combination of all that has actually given us an excellent result for the first quarter.
Tim Savageaux
Okay. Thanks.
I will pass it on.
Tim Jenks
Thank Tim.
Operator
There are no further questions at this time.
Tim Jenks
In closing I would like to thank everyone for taking time today to join our call and thank our employees for their dedication in helping us achieve our goals in 2015. We look forward to updating you on our progress on our next call.
Thank you and have a good evening.
Operator
This concludes today's conference. You may now disconnect.