Acacia Communications (ACIA) Q1 2019 Earnings Call Transcript

Acacia Communications (ACIA)
Q1 2019 Earnings Call
May. 02, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Acacia Communications first-quarter 2019 financial results conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Miss Monica Gould, IR of Acacia Communications. Thank you, Miss Gould.

You may begin.

Monica Gould -- Investor Relations

Thank you, Tim, and good afternoon, everyone. Acacia Communications released results for the first quarter, ended March 31, 2019, this afternoon after market close. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at ir.acacia-inc.com. This call is being webcast live and a replay will be available on the Investor Relations section of our website.

With me on today's call are Raj Shanmugaraj, president and chief executive officer; and John Gavin, our chief financial officer. Before I turn the call over to Raj, I'd like to note that during today's discussion there are references to our prospects and expectations for the second quarter of 2019 and beyond, projections on the size of our markets and market share, statements about our customers and new products and our competitors' products, statements regarding the size and timing of demand for our products and other forward-looking statements, which are based on the business environment as we currently see it and, as such, include certain risks and uncertainties. Please refer to our earnings press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements described in today's discussion. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.

In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to GAAP. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliations of the GAAP measures to these non-GAAP measures in addition to a description of the non-GAAP measures can be found in today's earnings press release.

And with that, I'd like to turn the call over to Raj.

Raj Shanmugaraj -- President and Chief Executive Officer

Thank you, Monica. Good afternoon, everyone, and thanks for joining us today. I'll start with a business update and then turn the call over to John Gavin, who will provide a more detailed review of our financial performance and outlook. I am pleased to report strong first-quarter results that exceeded the high end of all four of our guidance metrics with total revenue of approximately $105 million and, on a non-GAAP basis, gross margin of 47.4%, net income of approximately $15 million and earnings of $0.37 per diluted share.

In the first quarter, we had four customers who each contributed 10% or greater of our total revenue. Sales to these four customers included a mix of pluggable and embedded modules, as well as semiconductor products, which we believe demonstrates continued progress in our revenue diversification activities across our broad coherent product portfolio. In the first quarter of 2019, sales to our two largest China NEM customers remained strong. These NEM customers, as well as service providers in China, are telling us that they are continuing to see progress on tender activity in preparation for capacity upgrades to service providers' existing backbone networks.

We believe our first-quarter sales to China customers were driven by existing demand for their products and, in some instances, may also have supported trial activity and production ramp in preparation for anticipated tender awards. Historically, our customers have had contractual obligations for rapid field deployments of these backbone upgrades, requiring them to ramp production capacity in advance of these anticipated deployments. While our customers and service providers are telling us that the current planned deployment timeline is commencing in the second half of 2019, it is important to note that these upcoming tenders have not yet been awarded and that when these tenders are awarded we anticipate the deployments could be of a short duration. Moving now to an update on our markets and products, our broad coherent module portfolio is helping our NEM customers to compete in a wide range of optical transport applications.

Starting with our embedded module product group, there was a significant increase in our AC1200 shipments in the first quarter of 2019 over the fourth quarter of 2018. We anticipate a further increase in shipments in the second quarter of 2019 as our NEM customers begin shipping AC1200-based systems to network operators. Since our last earnings call, additional network operators have completed field trials with AC1200-based systems and we believe that our NEM customers are preparing to deploy these systems in a wide range of applications from the edge to submarine. Hyperscale network operators typically adopt new products that offer sustainable advantages compared to competitive solutions in support of multiyear deployment cycles.

We believe our AC1200 module supporting a dual-core 1.2-terabit architecture, 3D shaping and other advanced features offer sustainable improvements in cost, performance, network utilization and low power compared to competitive solutions, including 800 gig products still in development. Given this differentiation, we believe AC1200-based solutions are well positioned for a multiyear deployment cycle in hyperscale networks. Additionally, we believe our product road map is well aligned with the needs of hyperscale network operators. Our 400ZR modules will begin sampling later this year, which we believe will be on a timeline similar to competitive 800 gig solutions.

Standardized and interoperable 400ZR modules are being specified by the Optical Internetworking Forum and designed to address what industry analysts believe to be the fastest growing segment of the DCI market. We expect these modules to offer significant benefits in total cost of ownership because they will allow transport optics to plug directly into switch platforms eliminating external transport equipment. This architecture shift has the potential to help merchant coherent vendors like Acacia further compete for share in the DCI market. Our NEM customers are also pursuing opportunities with their AC1200-based systems in traditional service provider networks serving metro, long haul and submarine applications.

Although these service providers have historically had longer qualification and deployment cycles than hyperscale network operators, our NEM customers are telling us that they expect deployments in these service provider networks to begin in the second half of 2019. Moving to our pluggable module group, we expect shipments of our CFP2-DCO to increase in 2019 over 2018 subject to quarter-over-quarter variability. NEM customers are deploying CFP2-DCO in a variety of systems that address metro transport and IPoDWDM applications while also pursuing emerging opportunities in access network applications. There is momentum behind the adoption of CFP2 form factor -- CFP2-DCO form factor in the industry.

We anticipate that this could lead to increased competition, but we believe we are well positioned to benefit from this momentum based on our strong CFP2-DCO market position and our continued investment in enhancements for this product family. As more NEM customers, customer systems using our CFP2-DCO, enter the market, we anticipate that opportunities for these platforms will start to outnumber opportunities for platforms supporting our CFP-DCO. We believe CFP2-DCO is still in the early stages of a multiyear deployment cycle, which we expect will continue from current-generation products supporting 100 gig and 200 gig to next-generation products that will support 400 gig. I'm also pleased with our progress on development of our next-generation pluggable module products.

Industry analysts anticipate that 400ZR modules in QSFP double density and OSFP form factors will drive broader adoption of IPoDWDM architectures in edge DCI applications and enable the first wide-scale use of interoperable coherent interfaces. We believe our established track record of delivering pluggable DCO modules with the low-power DSP technology and highly integrated silicon photonics positions us well to be an early leader in this market segment. Also, we have already demonstrated DSP technologies and silicon PICs operating at 400 gig and above in our commercially available AC1200 module. Additionally, in March we demonstrated prototypes of our advanced packaging technology to customers at the OFC trade show.

We currently plan to sample our 400ZR module before the end of 2019 and believe the 400ZR market will benefit Acacia given our investment in increased vertical integration of these complex technologies and experience developing low-power, small form factor coherent interfaces. Moving to some takeaways from the OFC trade show in March, there was significant industry focus on pluggable coherent module growth for DCI applications. Additionally, there were also discussions on many trends including the increasing adoption of IPoDWDM architecture, advanced packaging of optoelectronics and the use of coherent technologies inside data centers at higher data rates. Our efforts to help drive these industry trends, which play a central role in our strategic vision, position us well to benefit from the broad adoption of these trends.

Acacia was founded with the vision to siliconize the optical interconnect to address increasing bandwidth demands in optical network while reducing cost, size and power consumption. We believe the trend toward pluggable coherent interconnects that we helped create with our CFP and CFP2-DCO modules will continue with 400ZR and higher performance 400 gig pluggable modules supporting metro and regional applications with reaches in the thousands of kilometers. This increasing adoption of pluggable coherent solutions has the potential to expand the merchant vendor's share of the coherent market. Additionally, we believe standards-based interoperable DCOs in pliant form factors will enable the adoption of coherent technology for shorter reaches, which has the potential to increase the total addressable market for coherent interfaces.

Furthermore, our silicon technology investments are enabling us to offer a highly differentiated portfolio of embedded and pluggable products. We believe our portfolio and road map are well aligned with the needs of hyperscale and traditional network operators. In closing, 2019 marks Acacia's 10th year anniversary and I am proud of the achievements of our team over the past 10 years and value the customer relationships that we have developed. I would like to thank our employees, customers and partners, who have been instrumental in contributing to Acacia's success.

I look forward to the exciting opportunities in front of us. With that, I would like to turn the call over to John.

John Gavin -- Chief Financial Officer

Thanks, Raj, and good afternoon, everyone. I will start by reviewing our financial and operating performance for the first quarter of 2019 then I will provide our outlook for the second quarter of 2019 before opening the call up for questions. Total revenue in the first quarter of 2019 was $105.2 million, an increase of 44% on a year-over-year basis from the $72.9 million reported in the first quarter of 2018. The year-over-year increase in total revenue was driven primarily by revenue from the strength of sales in our pluggable module and semiconductor product groups.

Sequentially, revenue in the first quarter of 2019 decreased by $1.9 million or down 2% from the fourth quarter of 2018 driven by anticipated first-quarter seasonality as well as a decrease in shipments of certain of our legacy module products to direct DCI customers. This sequential decrease was partially offset by an increase in shipments of certain products in our embedded module and semiconductor product groups. Turning to gross margin, our GAAP gross margin was 47.4% in the first quarter of 2019, compared to 33% in the first quarter of 2018. Our non-GAAP gross margin was 47.4% in the first quarter of 2019, compared to 42.9% in the first quarter of 2018.

The increase in both GAAP and non-GAAP gross margins was due to the reduced impact of our semi-fixed operating costs in manufacturing given our higher revenue level in the first quarter of 2019 and an increase in the percent of revenue from products in our semiconductor product group. In addition, the increase in GAAP gross margin was driven by a significant year-over-year decrease in costs associated with inventory write-offs and reserves attributable to the ZTE ban and the quality issue originally recognized in earlier periods. GAAP operating expenses in the first quarter of 2019 totaled $46.7 million or 44.4% of revenue, compared to $38.7 million or 53.1% of revenue in the first quarter of 2018. Non-GAAP operating expenses were $36 million in the first quarter of 2019 or 34.2% of revenue, compared to $29.1 million or 39.9% of revenue in the first quarter of 2018.

The increase in GAAP and non-GAAP operating expenses was primarily driven by a year-over-year increase in development costs related to our new product development programs and by costs associated with additional staffing, primarily related to our product and technology road map initiatives and sales and customer support services. Our GAAP operating expenses also include certain litigation-related costs associated with ongoing matters. GAAP operating income was $3.1 million or 2.9% of revenue in the first quarter of 2019, compared to GAAP operating loss of $14.7 million or negative 20.1% of revenue in the first quarter of 2018. Non-GAAP operating income in the first quarter of 2019 was $13.9 million or 13.2% of revenue, compared to non-GAAP operating income of $2.2 million or 3% of revenue in the first quarter of 2018.

The increase in both GAAP and non-GAAP operating income was driven by improved gross margins on higher revenue levels in the first quarter of 2019 partially offset by the increase in operating expenses that I previously discussed. EBITDA was $6.3 million in the first quarter of 2019, compared to a loss of $11.5 million in the first quarter of 2018. And adjusted EBITDA was $17.1 million in the first quarter of 2019, compared to a positive $5.4 million in the first quarter of 2018. Our GAAP effective tax rate benefit was 26.9% in the first quarter of 2019, compared to an effective tax rate benefit of 32.1% in the first quarter of 2018.

Our non-GAAP effective tax rate was 5.7% in the first quarter of 2019, compared to an effective tax rate benefit of 23.4% in the first quarter of 2018. Our GAAP net income was $7 million or $0.17 per diluted share in the first quarter of 2019, compared to GAAP net loss of $9.1 million or $0.23 per basic share in the first quarter of 2018. Our non-GAAP net income was $15.4 million or $0.37 per diluted share in the first quarter of 2019, compared to non-GAAP net income of $4.3 million or $0.10 per diluted share in the first quarter of 2018. Now turning to the balance sheet, in the first quarter of 2019 we generated $29.3 million of cash from operating activities and ended the first quarter with cash, cash equivalents and marketable securities of $429.2 million and no debt.

Turning next to our outlook for the second quarter of 2019, as noted in today's earnings press release, in the second quarter of 2019 we expect total revenue to be between $104 million and $112 million. We expect non-GAAP net income to be in the range of $11.7 million to $17.5 million or $0.28 to $0.42 per diluted share based on an anticipated 42 million fully diluted weighted-average shares outstanding. And we expect non-GAAP gross margin to be in the range of 45% to 47%. As a reminder, our outlook is forward-looking and actual results may differ materially as a result of factors described in our earnings release and in our filings with the SEC.

In addition, our gross margin can fluctuate based on a number of factors,  including quarterly product mix and changes in manufacturing-related costs. Finally, as discussed on prior calls, most of our products are not subject to the tariffs that are already in effect and, as a result, we do not anticipate that the China tariffs currently in effect will have an impact on our second-quarter 2019 guidance. We continue to monitor ongoing tariff and trade developments to assess any potential impact on our future business and financial results. With that, I will now turn the call back to Tim for questions.

Tim?

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Rod Hall of Goldman Sachs. Please proceed with your question.RK KameshHi. This is RK on behalf of Rod.

I know you are more focused now on the AC1200 and 600 gig, but just wondering what Acacia's own plans for 800 gig looks like. Are you excited about the eventual 800 gig potential for Acacia?

Raj Shanmugaraj -- President and Chief Executive Officer

Yes. Let me try to answer that question. So we continue to work closely with the hyperscale network operators and believe that we are aligned on road map and timing with both our AC1200 and 400ZR products. So we believe that 400 gig next-gen network architectures begin to bifurcate their requirements.

So this is primarily driven by the 400 gig data center infrastructure upgrades. And as I said, we believe our multi-haul AC1200 improves network utilization and addresses the transition from 100 gig to 400 gig already, and additionally, will drive the wider deployment -- the 400 gig network upgrade will drive the wider deployment of pluggable interoperable 400ZR modules in switches due to significant cost benefits. So between the AC1200 and the 400ZR and ZR-plus versions, we will address a significant portion of the edge to the metro, regional and long-haul markets. And again, we have a track record of delivering industry-leading products and working on what the road map is, the requirements of the hyperscale, and we are well covered in the short term with this product road map.RK KameshOK.

Great. Could you also give us some color on the volumes you're expecting for AC1200? For example, when do you think you will be shipping your 5,000th unit?

Yes. We have not given specifically volume numbers and we don't break it down by that level. However, as I said before, we have -- we increased significantly shipments in Q1 of 2019 over Q4 and we continue to increase this in Q2. And we're going through what we would call a step function in ramp.

And so that's -- demand continues to remain strong and so that's pretty much what we would say. We don't give out specific volume numbers. I think the breakdown would be in our embedded versus pluggable versus semiconductor product groups as the product ramps in volume.RK KameshGreat. Thanks.

Operator

Our next question comes from the line of Tejas Venkatesh of UBS. Please proceed with your question.

Tejas Venkatesh -- UBS -- Analyst

Thank you. You've had five 10% customers in prior quarters. Is the customer that's not 10% this time a cloud customer?

John Gavin -- Chief Financial Officer

Yes. Hi, Tejas. This is John. Yes, so we've had some fair stability in the top 10.

They've been hovering right around four 10%-or-greater customers over the last, I'd say, two to three quarters. Previously, we had another customer when we were at a lower revenue level earlier in 2018 that we reported as a greater-than-10% customer. That was a NEM-based customer and that customer still has -- they're early working with us on some of the new products and they're continuing to ramp, but given their volume in that particular quarter and given the lower relative revenue levels in that quarter they had popped up as a 10% customer. But they're certainly well within our top 10 customers continually through the rest of the quarters after that early 2018 quarter performance.

Tejas Venkatesh -- UBS -- Analyst

And if I recall correctly, that NEM customer was a China NEM, and it's particularly interesting in the context of there being concerns out there that China may be undergoing an inventory build ahead of anything potentially happening. So any color there would be helpful.

John Gavin -- Chief Financial Officer

Yes, Tejas, this is John again. I think as Raj said in his prepare remarks, there is -- we saw certainly strength in China carried out from Q4 into Q1. We believe that there's a number of things going on there. One is just normal level of business activity.

Raj had covered in his remarks that there was some trial activities in support of some of these tenders. And then in China there are requirements that these tenders, once they're awarded, they must be deployed fairly quickly. And in order to ease the ramping of that, some of the NEMs do some pre-building in terms of trying to accommodate those rapid deployment schedules. And so that's one thing that we've seen throughout the Q1 time frame.

We anticipate that to carry over into Q2 in terms of some of that preparation. So we don't believe or view it as a buildup of inventory, necessarily, for inventory's sakes. It's really more to get ahead and start to pre-build and pre-launch some of the capacity that's required that once the NEMs understand what their awards are then they'll be under the task to deliver them quite quickly. So it's a lot to try to get those on their way in anticipation of some of that award activity.

Raj Shanmugaraj -- President and Chief Executive Officer

Tejas, just to add to that, I think the -- of course, ZTE is the primary, the largest customer we've had. And the second customer has been in and out of being 10% depending on, as John said, on the revenues. So while we see China NEMs being strong, it's not always the equal amount that ships to both of them. They do have different levels and different products and different generations of products.

John Gavin -- Chief Financial Officer

And, Tejas, just to go back to your point about the cloud customer again. That customer has been a direct customer for Acacia. They were not one of the four 10% customers in Q1, but in past quarters they also have been a 10% customer. And we've always talked about quarter-to-quarter variability with those types of accounts, and in Q1 they were not a 10% customer.

Tejas Venkatesh -- UBS -- Analyst

Thank you for all that context. One final one. Do you have any update on 400ZR? Last time on the earnings call, you told us that the first pack silicon had come back. But given that there's so much investor interest in there, I was wondering if there's any update to where your product is.

Raj Shanmugaraj -- President and Chief Executive Officer

Yes. So I think what we -- and nothing has changed. As I said, we are happy with the progress on the 400ZR. We've been working at it for over a year.

And we've had multiple test chips on this, in the seven nanometer [Inaudible] we've gotten back. And in terms of performance, power validations, those look very good. And as we said already, we already have the 400 gig component both for the digital side, the DSP, as well as the optics working in our commercially available AC1200s. So I think we feel pretty comfortable with it.

It still stays on track for sampling before the end of the year. But I do want to say beyond just DSP and optics, there is also the whole compact packaging challenges that we demonstrated prototypes of that at OFC, as I said. So we expect to, as I said, we expect to be -- anticipate being one of the early leaders in this product segment.

Tejas Venkatesh -- UBS -- Analyst

Thank you.

Operator

Our next question comes from the line of Michael Genovese of MKM Partners. Please proceed with your question.

Michael Genovese -- MKM Partners -- Analyst

Well, thanks for the questions. Raj, I guess I'm interested in hearing your perspective on the 600G cycle. You mentioned it a bit in your prepared remarks, but I guess the debate between whether it's going to be really strong and really quick and be just 2019 or whether it's going to ramp more gradually and last for a longer amount of time, I'd like to get your perspective on that and sort of how you think the overall 400G market will act as the 600G market is growing.

Raj Shanmugaraj -- President and Chief Executive Officer

Yes. So, Mike, let me take a crack. I think I covered some of that in the prepared, but let me give some more color on this. So hyperscale customers typically only adopt new products that offer sustainable advantages over what they have today in support of multiyear deployment.

So that's what they plan on initially. They don't look at deployments being one, two, three quarters. It is a multiyear deployment. And AC1200 was designed to meet these requirements right from the get go and it sets a high bar on performance and network utilization.

And so we already talked about the 1.2-terabit capacity. And when you say 600 gig, it's really in the AC1200 we can transport three 400-gig signals. So that is a very high density that we're able to offer in a small form factor. In addition, with the 3D shaping and variable baud rate and other features, we are able to provide significant benefits in cost, performance, network utilization over even at 800 gig products that are still in development.

So we believe our AC1200-based solution offers sustainable advantages and is well positioned for multiyear deployment cycle in these networks. And when we started the road map, we prioritized the AC1200 first followed by the 400ZR, ZR-plus that was planned. And that was planned and aligns well with our customer, hyperscale customer upgrade plans as well and, combined, offers a significant improvement not just in network utilization, but also cost. So we believe AC1200 remains well positioned for a multiyear deployment and we are happy with the demand and we are continuing to ramp the product.

Michael Genovese -- MKM Partners -- Analyst

Great. If I could just ask as my follow-up. I appreciate all that color, Raj. I just want to ask -- I don't think you raised any concerns in your conference call about the North American market this year.

But I just want to ask specifically, North American optical has been strong I think driven by metro and DCI. What do you think, just generally speaking, North American demand this year, how does it look to you?

Raj Shanmugaraj -- President and Chief Executive Officer

Yes. So let me start with the demand. If you look at just the analyst reports like Signal AI they project port count growth of about 20% in 2019 over '18. If I look at, just start with the DCI growth itself, I know there's been talk about capex reduction on a quarter-over-quarter basis.

As we have said before, we don't see much correlation between capex versus spending in the DCI-specific segment and optical transport. These are large budgets from these hyperscale guys and our belief is they prioritize capacity expansion and improvements in network utilization ahead of some of those other technologies. So from our position, we have most Tier 1 customers selling into the DCI space. And our AC1200 is less dependent on the capex growth per se, the absolute growth.

We believe we are going to get more gains through a share shift, getting increases in share of the equipment. And what we've seen from Q4 to Q1, Q1, Q2 to Q1 projected we feel comfortable that that is -- that will continue to happen throughout the year into a multiyear deployment cycle. And so from the DCI perspective, while there has been some discussions about capex, I think through the share shift we see less of an impact for our AC1200-class product. We did see, as John said, some quarter-to-quarter fluctuation and tapering on the legacy product, the AC400, to our direct hyperscale customer, but that, again, has been around for many years.

And when we look at the metro and the telecom space itself, I think Q1, as John indicated, was -- there was some seasonality in that, but we are, in our Q2 guide we are expecting some improvement in the seasonality. So we feel pretty good about the overall ability to increase our port count share in the -- with the newer products, including CFP2-DCO, AC1200 and our semiconductor group, in these markets, including metro, long haul as well as the DCI.

Michael Genovese -- MKM Partners -- Analyst

Thanks. That's helpful, thanks very much.

Operator

Our next question comes from the line of Brian Yun of Deutsche Bank. Please proceed with your question.

Brian Yun -- Deutsche Bank -- Analyst

Hey. I'm on, on behalf of Vijay. Could you talk about the recent 200 gig CFP2-DCO demonstration at Tencent? I'm just thinking about how we can sort of think about that in the context of either demos out of tenders or just the larger any award opportunity.

Raj Shanmugaraj -- President and Chief Executive Officer

Yes. So we talked about -- I mean I think if you look at historically the back customers generally buy directly from NEM customers except for client-side optic. That's what they've done historically. And it may change with the availability of client form factors like phone with VR.

But as of now, I think we have some of our NEM customers selling into all the back customers, Baidu, Alibaba and Tencent. And our press release specifically was a lab demonstration showing capabilities of the Tencent open line system with an IPoDWDM architecture. It's similar to what the other hyperscale customers have done outside of China. And Tencent is no different.

They traditionally buy historically, have bought transport from NEM customers. So they will still need to go select architectures and vendor based. But the press release was much more of a demonstration, lab demonstration showing the capabilities of what can be done with IPoDWDM using our CFP2-DCO.

Brian Yun -- Deutsche Bank -- Analyst

OK. Great. Thank you.

Operator

Our next question comes from the line of Tim Savageaux of Northland Capital Markets. Please proceed with your question.

Tim Savageaux -- Northland Capital Markets -- Analyst

Hi, good afternoon. I wanted to follow up on your recent commentary on sustainable competitive advantage on the cloud DCI side, at least from the perspective of the cloud customers, which is a bit confusing on the face of it, which is to say you've got competing technologies coming to market at 800 gig per wavelength versus your current capability. I suspect that some of that difference may be on not capacity per wavelength per se, but capacity per fiber. Or at least it does appear that 800 gig solutions, because of trade-offs elsewhere, won't really bring any advantage in terms of capacity per fiber relative to what you're bringing to market currently.

Is that the case from your perspective? And how does -- is that what's behind your confidence of the AC1200 having a multiyear type of runway?

Raj Shanmugaraj -- President and Chief Executive Officer

Yes. I think that's a good question, Tim. I think you are hitting on some of the key points there. So I think when people talk about how much per wavelength, it depends on a few different things.

It depends on what the baud rate is, what the optics -- how much optics is required and what's the utilization of the whole -- network utilization of the whole fiber. And so from that perspective, if you can transport multiple client, the high-speed 400 gig clients, efficiently over the network -- over the fiber, it increases the network utilization directly. And of course, there is cost and size benefits in terms of how much they can use on these switches. So I think from that perspective, it is sustainable over -- just looking at purely the cost advantages, the performance and the reach, of course, and then of course the network utilization piece of it.

And I think when we look at what reduces the -- when you get into cost factors, what takes it even a notch below that is when you get into 400ZR where you have transport optics directly on switches. And so I think we look at this and say that our road map was designed exactly to do that, to give them a high performance and a high-density, high-capacity solution with the 400ZR, ZR-plus following behind so that we can address the broad swath of applications even in DCI all the way from DCI edge to DCI metro and DCI long haul. And so in long haul it doesn't necessarily improve the fiber capacity. That's much more about utilization and how good your performance is.

So it really is coming down into the DCI edge and metro where we have these two products that are well positioned.

Tim Savageaux -- Northland Capital Markets -- Analyst

Yes, and if I could follow up on that actually because I do think there is those kind of comments about fiber capacity and spectral efficiency I think are more in effect on the shorter distances when we're talking about 600 and 800 100 kilometers plus or minus. I wonder if you could assess the similar competitive environment between AC1200 and some competing technologies that are emerging. When we are talking about more carrier versus, and switched versus DCI point-to-point networks and longer distances. I see you've done some pretty impressive tests with regard distance at 400 gig, I guess subsea.

But is there a way of thinking about how that, what appears to be a pretty obvious advantages at the shorter reaches, how does that translate into carrier networks and over kind of long-haul type distances?

Raj Shanmugaraj -- President and Chief Executive Officer

Yes. That's a very good question. You're getting into some fine detail of why there is so much excitement on this product. I think if you look at carrier networks getting into the metro and long haul, it really is going to be around 400 gig performance, and in long haul it's going to be 200 to 300 gig performance.

And so that's all been built in because you can't be doing 800 gig or 600 gig on longer reach, including metro, regional or long-haul networks. And so 400 gig is where the metro and the regional and long haul, and as we pointed out, our performance has been demonstrated to be very good. When you start talking about 800 gig or 600 gig, that is in the shorter reaches in the metro edge and that's where you have a lot of other factors that play into -- that come into play as well, which includes the -- they need to have a multiyear sustainable advantage over existing products. These are complex technologies so they need to be able to have the cost efficiency, which the AC1200 brings having multiple client signals that it can transport.

And of course, the utilization in transporting 1.2 terabit on the small form factor offers them some density advantages as well in terms of the equipment itself. And then you get into the lowest cost per bit and that comes ultimately from the ZR, the pluggables beyond that. So I think in the shorter reaches, it is going to be where 600 gig plays and, of course, it will be shared with the higher speed and the lower cost 400ZR market.

Tim Savageaux -- Northland Capital Markets -- Analyst

Thanks. Appreciate it.

Operator

Our next question comes from the line of Dave Kang of B. Riley FBR. Please proceed with your question.

Dave Kang -- B. Riley FBR and Company -- Analyst

Thank you. Good afternoon. First of all, I was wondering if you can break out revenue by geography. I'm mainly interested in North American and China.

John Gavin -- Chief Financial Officer

Yes, Dave, it's John. I can give you the Q1 data for that. So for Americas, we did 13.7% in Q1. Asia Pac was 67.2%.

And EMEA was 19.1%.

Dave Kang -- B. Riley FBR and Company -- Analyst

OK. And then I assume China was the bulk of that -- most of the 67%. Is that a fair assumption or --?

John Gavin -- Chief Financial Officer

It was a good amount, Dave, but some of our product is measured by the ship-to address and therefore there's a fair amount of revenue that rolls up into Asia Pac that is destined for contract manufacturers on behalf of our NEM customers. But it is a good chunk of that percentage, but there is another aspect of it that's going to CMs in other parts of Asia Pac.

Dave Kang -- B. Riley FBR and Company -- Analyst

Got it. So if that is the case, then is it fair to assume that out of four 10% customers, two are Chinese NEM customers?

John Gavin -- Chief Financial Officer

No, that's not a good assumption.

Dave Kang -- B. Riley FBR and Company -- Analyst

No? I think I heard that.

John Gavin -- Chief Financial Officer

I mean one of them would be our traditional China customer in ZTE. They would be obviously our largest 10% customer there.

Dave Kang -- B. Riley FBR and Company -- Analyst

Got it. And then I think you talked about Chinese tenders not being finalized. My understanding is that once they are awarded, it takes like several months, anywhere from like four, five, six months, to go from award to deployment because I guess they have to go through trials and all of that making vendor selections. If that's the case, even if they were awarded, let's say, tomorrow, I mean you would take like four or five months then you're looking at like September or October for deployment to commence.

So when you say second half, I mean is it more likely fourth quarter of second half?

Raj Shanmugaraj -- President and Chief Executive Officer

Yes, Dave. Let me take a crack at that. I mean I think clearly some of these could always take longer, but what we are hearing about is specifically this China Mobile backbone ring expansions that are anticipated. They were anticipated in the middle of the year.

It looks more like it's the third-quarter time frame. These are all -- they have not been awarded and there could be delays, but the expectation is that they were going to be awarded in the -- over the next couple of months and then you get into its rapid deployment cycle that we talked about. So there have been testing activities ongoing for these already, from what our customers are telling us. So this is not something that -- this has been in the works for a while.

And so could it slip out much beyond into, beyond into fourth quarter? It could. But from what we are currently hearing about plans, it is a second half and it will be of a short duration. And so that's where we are seeing some activity of customers building, ramping their production in anticipation of these because, as you know, they have contractual -- in the past, I know they have had contractual obligations to ramp capacity and as soon as they get the signal they've got to deliver many, many units. And so they start production.

They don't -- it's not prudent for them to procure everything, but they start the ramping production in advance. But after the tender is awarded and their share is known, then they could be buying more or less depending upon the size of what their award is. So again, we don't have a complete VMI-level visibility into our customers' inventory positions. And these tenders may have delays like they have had in the past.

But this particular China Mobile backbone expansion has been in the works for a little while.

Dave Kang -- B. Riley FBR and Company -- Analyst

Got it. And my last question is, John, how should we think about the tax rate for second quarter as well as for the rest of the year?

John Gavin -- Chief Financial Officer

Yes, Dave, I think probably not a lot has changed in terms of the outlook from what we see it today. I think it's still going to be in that eight to ten range on a non-GAAP basis.

Dave Kang -- B. Riley FBR and Company -- Analyst

Got it. Thank you.

John Gavin -- Chief Financial Officer

Yes. No problem. 

Operator

Our next question comes from the line of Richard Shannon of Craig-Hallum Capital Group. Please proceed with your question.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

Hi Raj and John, excuse me. Thanks for taking my questions as well. I've got a question on gross margins. So you had a very good result in the first quarter, above your guided range, and now you're midpoint of your new range on higher revenues is a little bit lower.

I wonder if you could help us understand the puts and takes, mix versus -- semis versus modules, pricing, anything else going on there or just being conservative. If you can help us understand your thought process there would be great.

John Gavin -- Chief Financial Officer

Yes. Richard, sure. No problem. So I think in terms if you look at our gross margin performance in Q1, you're correct; it was at slightly above the top end of our 47% range that we guided on in Q1.

A lot of that had to do with the fact that in the semiconductor product group, that group came in, from a revenue basis, somewhat higher than what we had anticipated going into the quarter. There was some strength there in the semiconductor products group. And as you know, that's going to be a, on average, higher-margin basis product group for us. So that does influence the performance of gross margin in Q1.

We expect in Q2 that we'll have some similar mix and some similar continued performance there from the semiconductor group. We'll also see some benefits, we expect, from some additional ramping in some of the embedded module products. So in general, we're keeping the same 45% to 47% range in the Q2 guide as we had had in the Q1 time frame. So we're highly dependent within that range on ultimately where that chip versus module mix will be.

But it was at the higher end. It was in the 30% realm of revenue in Q1. So it's a little bit higher than our normal operating range for the contribution of chips, but certainly we've seen some of those ranges in the past. It is variable quarter to quarter.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

OK. That's helpful, John. My last question related to the CFP2-DCO. I'm wondering if you could talk a little bit about competitive dynamics there.

Obviously, you were first to market by quite a period of time. I think you're enabling a competitor. I'm wondering if you're seeing any others coming in there. And is there any effect on the expected pricing curves that you've had in the past?

Raj Shanmugaraj -- President and Chief Executive Officer

Yes, Richard. Let me take that one. It's not -- I think we see announcements now and then about people, but we really haven't seen anything meaningful in terms of from our customers coming in, which is the reason why we enabled a second source using Meru. But as I said, I think as the product continues to get adopted more widely, we anticipate seeing some competition although we haven't seen that at this point.

But again, even with the competitive factors, we believe we are quite well positioned to benefit from our market position strength. And so yes, in terms of the pricing, we do have the annual pricing that we've talked about in the past and the price reductions. But we haven't seen something more extraordinary than that.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

OK. That's helpful. Thank you. That's all my questions.

John Gavin -- Chief Financial Officer

Thanks Richard.

Operator

Our next question comes from the line of Meta Marshall of Morgan Stanley. Please proceed with your question.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thanks. Maybe first question for me is just if you can kind of give some context for like expected timeline of when you ship kind of AC1200 to NEM customers for the hyperscale market and then kind of timeline for those deployments. Or just kind of rough what we should expect there as far as how much inventory they need to build in their deployment cycles or testing cycles with customers.

And then maybe second question for me just on the hyperscale customer that kind of fell out of 10%. I know that had been an AC400 customer. You mentioned that. Is that something where you -- that's cyclicality and just of their spend? Or is that a project that you think has come to completion and wouldn't expect them to be a 10% customer going forward?

John Gavin -- Chief Financial Officer

Yes, Meta. This is John. So I'll take that. So in terms of AC1200 deployment, I think we've talked about this on prior calls, but in terms of -- we came out of Q4 with the transfer over of the process to get our contract manufacturers set up to get ready for volume manufacturing.

That process kind of ensued through Q1 as well. So as Raj said earlier, we've seen increases in that particular product revenue category for that product from Q4 now into Q1. We expect that we'll see some similar increases from a growth rate standpoint in AC1200 in Q2. That's because some of the larger NEMs will be moving into their deployment cycles.

So they have been through a lot of the early integration and software development and some testing and trial activities has been supported within the last couple of quarters. And they have informed us that they'll be moving more toward deployment activities with their installations and their customers starting in Q2. So we're preparing the manufacturing, scaling of capacity to support that starting toward the end of Q1 and continuing on into Q2 in support of what those customers are anticipating for deployments in Q2. And then in terms of your question on the 400G, we look at that product now, Meta, as something that's in kind of what we'd say a legacy phase or a legacy product phase.

There are still opportunities for continued deployments for that particular product at the hyperscale customer. As you've seen probably in the past, that customer comes in for larger quarters and then they go off, and we've talked about that hyperscale variability a lot. And we certainly saw that in Q1 versus the performance in Q4 and actually expect that to be carried over and maybe even a little lower in Q2. So that is a product that is in that legacy phase.

We don't see that as having additional opportunities to it so it would be moving toward a volume curve that would be more akin to what a legacy product would be. But there are still opportunities there for that product. It just goes in and out on a quarter basis.

Meta Marshall -- Morgan Stanley -- Analyst

Got it. Thanks, guys.

Operator

Our next question comes from the line of Paul Silverstein of Cowen and Company. Please proceed with your question.

Paul Silverstein -- Cowen and Company -- Analyst

Good evening Raj and John. I've been jumping around calls, so I'm hoping you'll indulge me. And I'll apologize to you and others if these questions are repetitive of things that have been asked before. First off, on the previous question Meta asked on that hyperscale customer that's been above 10% and went below 10% in the 400s to your response.

Are they only using the 400 gig or are they not going to AC1200 or any other products?

Raj Shanmugaraj -- President and Chief Executive Officer

Yes, Paul, I think we have talked about a couple of things. We've talked about our direct AC400 hyperscale customer and that is that customer. And then of course, we do have NEMs selling into multiple of those. And so yes, they would be -- we would be viewing them as one of the indirect prospects for the AC1200 as well.

But it's not a direct opportunity.

Paul Silverstein -- Cowen and Company -- Analyst

So Raj, just to be clear, today that particular customer is --

Raj Shanmugaraj -- President and Chief Executive Officer

Sorry, Paul, you cut off.

John Gavin -- Chief Financial Officer

Paul, are you still there?

Operator

Paul, your line is open.

John Gavin -- Chief Financial Officer

Paul, are you still there?

Operator

Paul has disconnected at this time. This is the end of our Q&A session. I would like to turn the conference back over to Raj Shanmugaraj for closing comments.

Raj Shanmugaraj -- President and Chief Executive Officer

Thank you, Tim. Thank you all for joining our call today. We look forward to updating you on our progress next quarter and seeing many of you at our upcoming investor conferences.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Monica Gould -- Investor Relations

Raj Shanmugaraj -- President and Chief Executive Officer

John Gavin -- Chief Financial Officer

Tejas Venkatesh -- UBS -- Analyst

Michael Genovese -- MKM Partners -- Analyst

Brian Yun -- Deutsche Bank -- Analyst

Tim Savageaux -- Northland Capital Markets -- Analyst

Dave Kang -- B. Riley FBR and Company -- Analyst

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

Paul Silverstein -- Cowen and Company -- Analyst

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