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Applied Optoelectronics Inc (NASDAQ:AAOI)
Q3 2020 Earnings Call
Nov 5, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Applied Optoelectronics' Third Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Monica Gould, Investor Relations for Applied Optoelectronics. Please go ahead, ma'am.

Monica Gould -- Investor Relations

Thank you. I'm Monica Gould, Investor Relations for Applied Optoelectronics, and I'm pleased to welcome you to AOI's Third Quarter 2020 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its second quarter 2020 financial results and provided its outlook for the third quarter of 2020. The release is also available on the company's website at ao-inc.com. This call is being recorded and webcast live. A link to the recording can be found on the Investor Relations section of the AOI website that will be archived for one year. Joining us on today's call is Dr. Thompson Lin, AOI's Founder, Chairman and CEO; and Dr. Stefan Murry, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q3 results, and Stefan will provide financial details and the outlook for the fourth quarter of 2020.

A question-and-answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AOI's safe harbor statement. On today's call, management will make forward-looking statements. These forward-looking statements involve risks and uncertainties as well as assumptions and current expectations, which could cause the company's actual results to differ materially from those anticipated in such forward-looking statements. In some cases, you can identify forward-looking statements by terminologies such as believes, anticipates, estimates, intends, predicts, expects, plans, may, should, could, would, will or thinks. And by other similar expressions that convey uncertainty of future events or outcomes. Forward-looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of our products into new markets and customer responses to our innovations, as well as statements regarding the company's outlook for the fourth quarter of 2020.

Except as required by law, we assume no obligation to update forward-looking statements for any reason after the date of this earnings call to conform these statements to actual results or to changes in the company's expectations. More information about other risks that may impact the company's business are set forth in the risk factors section of the company's reports on file with the SEC, including the company's annual report on Form 10-K for the year ended December 31, 2019, and the company's quarterly report on Form 10-Q for the period ended June 30, 2020. Also, with the exception of revenue, all financials discussed today are on a non-GAAP basis, unless specifically noted otherwise. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation between our GAAP and non-GAAP measures as well as a discussion of why we present non-GAAP financial measures are included in our earnings press release that is available on our website.

Before moving to the financial results, I'd like to announce that AOI management will virtually present at the Needham security networking and communications conference on November 17. The Raymond James Technology Conference on December 8, the Cowan networking and cybersecurity conference on December 15, and the mKm partners conference on December 16. The presentations at these conferences will be webcast live and links to the webcast will be available on Investor Relations section of the aeoi website. We hope to have the opportunity to interact with many of you virtually. Additionally, I'd like to note that the date of our fourth quarter 2020 earnings call is currently scheduled for February 25 2021.

Now I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics' Founder, Chairman and CEO. Thompson?

Thompson Lin -- Founder, President, Chief Executive Officer, and Chairman of the Board

Thank you, Monica. And thank you, Eva for joining us today. almost a quarter of the jobs were driven by good growth in each of our Three major business segments, we achieved QC revenue of $76.6 million, which was within our guidance of 76 to $83 million. Because we were in growth 66% compared to the quarter last year, and 70% sequentially, was at the low end of our credit range. As we began to see some slowing in orders from certain of our vendors and customers in the later part of the quarter. We believe that this slowdown in orders is related to inventory normalization, following the church in demand, they were driven by the shift to working from home earlier in the years. And that gross margin of 27.4% was abakada drench of 25 to 26.5% due to favorable predominates, coupled with benefit from our cost reduction. Now telling those of six cents per share, for inline with expectations of a loss, alternate then to a loss of three cent thinner to q2, we saw good demand in the data in the market. during most of the quarter, quarter end of q3, we started to see some some nice, fun, sudden death in the customers, there was a what we believe was digestion or previous orders. And based on what we see today with tech headwinds in q4, as our hyperscale customers are just the inventory levels downward in response to supply chain disruption, the current story appeared to be less severe than fear earlier in the year, our customer relationship and market share position remained strong. And we believe the continued need of higher bandwidth within a data center was driving long term goals.

Additionally, with better Canadian favorable product mix, and of course, reduction efforts to further improve our gross margin in q4. We are pleased to report that we reasonably secure our second technical qualification on the full energy product with a sizable tear to the as an operator who is an existing customer and we are encouraged by the customer interest, we are seeing from this product. This qualification will be recorded as a designer in one will receive an order from the customer for the for the product, which we expect will happen in this quarter. During the quarter, we've had 70 that wins with a stiff customers. problem is that when we're in our car TV segment, three in the data segment and one in our telecom segment. Similar to q2, we can use the brobeck demand for our one of these products for revenue for one of the products increase almost 350% from q3 of last year, and 13% sequentially. In our car TV segment, the overall demand environment continue to be strong, but overwhelming for our TV products increased 32% year over year, and 90% sequentially. As we anticipated learning from our telecom products nearly tripled year over year in q3 to echo $9 million in lost 44% sequentially driven by increased by 80 main channel. However, recently, we have been informed by several our channel sales and customer the 5g deployment there have been posed by deliver large and their operators. Whereas if we pray in the supply chain by No This was caused by Huawei.

Components shortage. We say this pose will lead into q1 and zerbo expect a reduction in terms of demand in Cuba. Although we remain optimistic about circumstance in 2021, as we believe that China deployments will resume with vigor after the Lunar New Year, we remain confident that our technology leadership in Alabama, please give us a strong competitive position to address our customer needs. As demand increases. We'll continue to manage the pace efficiently to drive long term goals and see all the way the water nickel over to Stephen. I want to emphasize that we continue to pray all the light, the health, safety and well being of our employees. As the real dead of our customers and suppliers, I'm proud of the hard work that AI can continue to deliver. Thank you for your session, I can walk you live judging period.

With that, I'll turn the call over to Stephen to review the details of our q3 performance performers in our local people.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Thank you Thompson. Thompson mentioned our q3 results were broadly in line with our expectations and reflect continued progress on our revenue and customer diversification efforts and improvement in our gross margin. We saw good growth across each of our three major business segments. Similar to q2, we saw good demand in the data center market during the third quarter. Notably, our 100 g revenue increased nearly 350% from q3 last year, and 13% sequentially. However, later in the quarter, we started to see some softness in deliveries as our customers began to catch up with the surge in demand in the first half of the year, and focused on digesting previous orders. Based on what we see today, we expect headwinds in q4 at certain of our hyperscale customers adjust their inventory to more normal levels. We anticipate that revenue will be down sequentially in q4. However, we believe that in the next few quarters as inventory and our customers returns to normal level, we will resume revenue growth in this segment. We continue to have good relationships with our data center customers. We believe the fundamental needs for higher bandwidth within hyperscale data center will drive long term growth, particularly during this time as our customers remain focused on improving network performance in light of the increased traffic related to the shift toward working from home. And we expect our gross margins to further benefit in q4 from continued favorable product mix and our cost reduction efforts. Turning to our quarterly performance, total revenue for the third quarter of $76.6 million was in line with our guidance range. revenue increased 66% year over year, and 17% sequentially driven by growth in all of our business segments.

Our data center revenue Rose 5% sequentially and 63% year over year to $55.3 million and accounted for 72% of our total revenue. In the third quarter 28% of our data center revenue was from our 40 g transceiver product, and 68% was from our 100 g products. We are pleased with our progress on our customer diversification efforts. Overall for the quarter, our top 10 customers represented 84.9% of revenue, which compares to 88.3% in q3 of last year, we had 210 percent or greater customers in the corner, both of which were in the data center segment. These customers contributed 40% and 10% of total revenue respectively. During the third quarter, in addition to the 10% or greater customers, we had three other customers who each contributed between 5% and 10% of total revenue. Two of these customers were in our data center segment and one nctb. This compared to to 10% or greater customers, and one customer between 5% and 10% in q3 of last year. Our top five customers represented 75% of our revenue compared to 82% in q3 of last year. Turning to our cipd products, we generated revenue of $11.6 million, up 90% sequentially, and up 32% from $8.8 million in q3 of last year. As expected, we began shipping newly designed line extender amplifier products in the quarter and plan to ship initial quantities of system amplifier products in q4. Demand from North American msos for HFC equipment appears to be stronger than it has been in several years. And we currently expect this demand to continue for at least the next several quarters as msos upgrade their networks, particularly to address congestion in the return path. revenue from our telecom products more than tripled to a record $8.9 million from $2.9 million in q3 of last year. Driven by increased 5g demand in China. revenue from our telecom products accounted for 12% of total revenue, reflecting an increase of 44% from the second quarter and 209% from q3 of last year.

Gross Margin in our telecom segment also continue to expand up 230 basis points sequentially. This growth in revenue, combined with increasing gross margin is one of the factors that contributed to the favorable product mix that allowed us to exceed our gross margin guidance in q3. However, as Thompson mentioned earlier, recently, we have been informed by several of our China Telecom customers. That 5g deployment there has been paused by several large network operators as they replan their supply chains. Following the disruption caused by Huawei is component shortages. We anticipate that revenue will be down sequentially in q4. However, we believe that growth will resume in q1. Overall, we remain optimistic about telecom spend in 2021, as we believe that China deployments will resume with vigor after the Lunar New Year. The recent notable highlight in our ftth segment is our involvement working on the 25 gf Pon MFA, alongside Nokia and three Asia Pacific service providers. We are pleased to be working on this MSA which positions as well in the next generation pond ecosystem. And we believe this could be the long term growth driver for our fiber to the home segment. In q3, we generated non gap gross margin of 27.4% compared to 28.8%, in q3 of the prior year. Gross Margin was above our guidance range of 25% to 26.5%. Due to a favorable product mix, coupled with benefits from our cost reduction actions. We expect these benefits and our product mix to further improve our gross margin in q4, which we anticipate could approach 29%.Total non GAAP operating expenses in the third quarter were $22.3 million, or 29.1% of revenue, compared with $18.4 million, or 39.9% of revenue in q3 of last year. operating expenses as a percent of overall revenue decreased from last year and reflect our efficient expense management. Non GAAP operating loss in the third quarter was $1.3 million, compared to an operating loss of $5.1 million in q3 last year. gap net loss for q3 was $9.6 million, or loss of 42 cents per basic share, compared with a gap net loss of $8.8 million or 44 cents per basic share in q3 of last year.

On a non GAAP basis, net loss for q3 was $1.4 million, or loss of six cents per basic share, which was at the high end of our guidance range of a loss of $0.6 million to $4.6 million, or loss of three cents to 20 cents per basic share, and compares to a net loss of $2.9 million, or loss of 15 cents per basic share in q3 of last year. The basic shares outstanding used for computing the net loss in q3 were 22 point 7 million. Turning now to the balance sheet. We ended the third quarter with $58.1 million in total cash, cash equivalents, short term investments and restricted cash. This compares with $58.9 million at the end of the second quarter, and reflects $6.1 million in cash used for operations. As of September 30, we had $111.4 million in inventory, compared to $97.3 million in q2. The increase was driven mainly by the buildup of raw material and semi finished goods inventory, which we are preparing prior to year end. And in anticipation of the Lunar New Year holiday. We made a total of $3.5 million in capital investments in the quarter, including $1.2 million in production equipment and machinery and $2.2 million on construction and building improvements. This was below our expectations as we continue to tightly manage capex. However as we discussed on the q2 call, we did resumed spending on our new China facility in q3. We now expect total 2020 capital expenditures to be below our prior expectations as we continue to tightly manage our capex plans. Currently, we expect 2020 capex to be approximately $22 million down from our previous estimate of $42 million. The reduction is mostly due to a reduction in equipment purchases, and building improvements as we work with our customers to anticipate the timing of the 400 g ramp next year. We will continue to reevaluate our spending needs as our plans evolve. Before we turn to our outlook, I would like to provide a quick update on the FM Market offering we announced in February.

To date, we have raised $23.2 million in gross proceeds under this program, including $8.9 million raised in q3. As we have stated previously, we intend to use these proceeds to continue to make investments in the business, including new equipment and machinery for production and research and development use. Moving now to our q4 outlook, we expect q4 revenue to be between $50 million and $55 million and non GAAP gross margin to be in the range of 28.5% to 29.5%. That loss is expected to be in the range of $4.5 million to $5.8 million and non gap loss per basic share between 19 cents and 25 cents, using a weighted average basic share count of approximately 23 point 5 million shares.

And with that, I will turn it back over to the operator for the q&a session. operator.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Dave Kang with B. Riley.

Dave Kang -- B. Riley -- Analyst

Hi, thanks for taking my question. I just have a quick one on the 400 G and 100 gene products. I was wondering if you guys could give a little color around the pricing environment. Do you guys see any weakness in pricing there? Also, how's the demand looking? Can you guys give any call around that? Like what are your customers? demands looking like going forward? And how do you guys view strengthen that product?

Thompson Lin -- Founder, President, Chief Executive Officer, and Chairman of the Board

Sure. So regarding your first question on the pricing environment, it's been pretty stable. I mean, within our within our expectations. Note no big change in that. Regarding your question on demand, as we talked about in our prepared remarks, I think there's some near term headwinds in from some of the hyperscale customers we've seen. You know, basically, I think what's going on here is that several of them, you know, kind of anticipated more supply chain disruption during COVID than actually occurred. So they you know, they prepared extra inventory in anticipation that there would be some some problems, those problems maybe didn't materialize as, as much as they thought they might. And so, you know, they're going to adjust their inventories back to more normal levels. Now, that's, that's what's going on. That'll take the next couple of quarters to to normalize itself, we think.

Dave Kang -- B. Riley -- Analyst

Okay, great. Thanks. And on the 200 and 400 gig products that was a progress looking how qualifications coming along. And how does the demand and pricing environment look for that going forward?

Thompson Lin -- Founder, President, Chief Executive Officer, and Chairman of the Board

Sure. So I mean, 200 gig products are, you know, they're not probably the next mainstream product, as we talked about in our previous previous earnings calls and other investor communications, we think 400 gig is really where the next generation is going to land pretty squarely. We do have some 200 gig sales, but it's relatively minor. As far as 400 gigs, the qualifications that are ongoing there. We have some good progress on that this quarter. We did finish a can successfully completed a qualification effort from one of our data center operators this quarter for 400 G. That's our second qualification. The other one was announced, I believe in q2 started with that's in our in q2 for our q1 call.

So that's our second 400 gig qualification. And we think that speaks pretty highly of our technology and our ability to gain traction in that market. We do see the 400 gig market are beginning to pick up in earnest probably the middle part of next year. You know, we're still working with our customers to ascertain the exact timeframe there but it's starting to feel, you know, more more solid that that we'll start to see some orders in the middle part of next year.

Dave Kang -- B. Riley -- Analyst

Sorry, go ahead.

Thompson Lin -- Founder, President, Chief Executive Officer, and Chairman of the Board

No, no, that's it. I think I answered that question.

Dave Kang -- B. Riley -- Analyst

Great. Thanks. That's all for now. Thank you.

Thompson Lin -- Founder, President, Chief Executive Officer, and Chairman of the Board

Okay, very good. Thank you.

Operator

Our next question comes from Paul Silverstein with Cowen.

Paul Silverstein -- Cowen -- Analyst

Right now, I mean, the demand that we're seeing is primarily in China. there there's probably demand, you know, outside of that, but it's not something that we have much exposure to at this point. It's more separated by hearing correctly, you just don't have much exposure on the other side. And that's, that's why you your revenues, how you leverage 5g, China, not so much a very little to 5g outside of China.

Thompson Lin -- Founder, President, Chief Executive Officer, and Chairman of the Board

Yeah, but my suspicion is that there's not I mean, there's obviously 5g activity going on in China. But I want to be really clear that when we talk about 5g, what we're really talking about is ultra wideband 5g. There's certainly 5g deployments going on in areas outside of China. But but for the most part, the the front hall and mid Hall. Links in those applications are similar to 4g. So there's not, you know, there's not a need for the kind of high bandwidth optics that we're supplying. Those optics are needed in the ultra wideband 5g, which right now is primarily being deployed in China. So it's not that we necessarily don't have, you know, inroads or the capability to sell in other parts of the world. It's just that the ultra wideband types of 5g deployments are not really that active outside of time.

Paul Silverstein -- Cowen -- Analyst

Honestly, appreciate the response.

Thompson Lin -- Founder, President, Chief Executive Officer, and Chairman of the Board

My pleasure.

Operator

[Operator Instructions] At this time, we have no further questions. I will now turn the call over to Dr. Thompson Lin for closing remarks.

Thompson Lin -- Founder, President, Chief Executive Officer, and Chairman of the Board

Okay, thank you for joining us today, as always, signal to our investors, customers and employees for your continuous support. And we look forward to virtually seeing many of you at our upcoming investment conference.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Monica Gould -- Investor Relations

Thompson Lin -- Founder, President, Chief Executive Officer, and Chairman of the Board

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Dave Kang -- B. Riley -- Analyst

Paul Silverstein -- Cowen -- Analyst

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