Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Applied Optoelectronics Inc (NASDAQ:AAOI)
Q1 2021 Earnings Call
May 6, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Applied Optoelectronics Q1 2021 Earnings Call. [Operator Instructions] Please note, today's event is being recorded.

I'd now like to turn the conference over to your host today, Lindsay Savarese. Ms. Savarese, please go ahead.

Lindsay Savarese -- Head of Investor Relations

Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics and I am pleased to welcome you to AOI's First Quarter 2021 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its first quarter 2021 financial results, and provided its outlook for the second quarter of 2021. 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 and 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 Q1 results and Stefan will provide financial detail and the outlook for the second quarter of 2021. 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 terminology such as believe, anticipate, estimate, intend, predict, expects, plan, 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 innovation, as well as statements regarding the Company's outlook for the second quarter of 2021. 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 expectation. More information about other risks that may impact the Company's business are set forth in the Risk Factor 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, 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 participate at the Needham Technology & Media Conference on May 20, and the Cowen Annual Technology, Media & Telecom Conference on June 2. The presentations of these conferences will be webcast live and links to the webcast will be available on the Investor Relations section of the AOI website. We hope to have the opportunity to interact with many of you virtually. Additionally, I'd like to note the date of our second quarter 2021 earnings call is currently scheduled for August 5, 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

Thank you, Lindsay, and thank you for joining our call today. We delivered revenue and gross margin in line with our expectations, and a narrower non-GAAP loss per share than we anticipated.

Total revenue for the first quarter of $49.7 million, grew 22.8%, compared to the first quarter in the prior year and was down 5.8% sequentially. As we expected, we experienced generally soft Q1 conditions in the datacenter segment. We expect datacenter business to increase in the second half of the year, as our customers begin 400G upgrades and inventory issues around 100G normalize.

Non-GAAP gross margin of 24.6% was in line with our guidance range of 23.5% to 25%, and non-GAAP net loss was narrower than our previous guidance, come in at $0.21 per share.

In out CATV segment, the overall demand environment was strong as MSOs, particularly in North America continue to upgrade their networks. Total revenue for our CATV products increased to more than 4 times its prior year level and was increased 17% sequentially, off a strong fourth quarter to $18.6 million. This is the highest quarterly revenue for this segment in almost three years.

By the pause [Phonetic] in 5G deployments from several of our China telecom customers, as we anticipated, we started to see a nice recovery in the first quarter. As a result, revenue from our telecom products of $4.5 million was up 75% year-over-year and 28% sequentially. Looking ahead, we believe China will continue to make investments in both their 5G and fiber-to-the-home infrastructure and we believe we are well positioned to sell lasers in both of these markets. We look forward to meeting again in person probably soon.

With that, I will turn the call over to Stefan to review the details of our Q1 performance and outlook for Q2. Stefan?

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Thank you, Thompson. As Thompson mentioned, we delivered revenue and gross margin in line with our expectations and a narrower non-GAAP loss per share than we anticipated. The market dynamics we anticipated played out as expected. While we continue to see softness in the datacenter market, we are pleased with the nice recovery we saw in the telecom market and continued strength in the CATV market. In total, for the first quarter, we secured four new design wins among four customers. Among these four design wins, two were in our datacenter business, including one with a new customer, which is a large US-based social media-focused datacenter operator. One within our 5G business and the other design win within our FTTH segment.

Total revenue for the first quarter of $49.7 million, grew 22.8%, compared to the first quarter in the prior year. Our Q1 revenue was down 5.8% sequentially and was in line with our guidance range of $47 million to $51 million. We currently believe that the headwinds we are seeing in the datacenter market related to the inventory normalization following the shift to working from home early last year will persist through the first half of the year and then begin improving in the second half and beyond, as several of our customers begin to ramp 400G later in the year and inventory conditions in our 100G business fully normalize.

On the 400G front, we have continued to work on qualifications and delivered samples to new customers during the quarter. We have also received several new inquiries from hyperscale customers for our 400G products and we are working to deliver samples to these customers as well.

In the first quarter, 52% of our revenue was from our datacenter products, 38% was from our CATV products, with the remaining 10% from FTTH, telecom and other. Our datacenter revenue came in at $25.9 million, compared with $33.3 million in the first quarter of the prior year. In the first quarter, 25% of our datacenter revenue was from our 40G transceiver products and 68% was from our 100G products.

Turning to our CATV product segment, the overall demand environment remained strong as MSOs, particularly in North America, continue to upgrade their networks. We generated revenue of $18.6 million, up 17% sequentially and up 341% from $4.2 million in Q1 of the prior year. Our CATV performance represents a record for our first quarter, which is typically seasonally down and was just shy of our highest quarter in the Company's history. In our CATV business, we have seen some component shortages. We are working with our suppliers to improve delivery schedules for these critical components and in some cases, adding additional suppliers. We do not anticipate that these shortages will hamper our ability to continue to grow revenue, but we may continue to have a longer-than-usual backlogs for several quarters while we work to improve supply. We ended the first quarter with a strong backlog of CATV products, which we expect to continue to drive growth in this segment going forward.

As we anticipated, revenue from our telecom products of $4.5 million, increased 28% sequentially and 75% from $2.6 million in Q1 of the prior year. Looking ahead, we believe China will continue to make investments in both their 5G and FTTH infrastructure and we believe we are well positioned to sell lasers into both of these markets. Also, notable during the quarter, we received our first 5G design win from a customer outside of China. We are excited to see that the success we have had with our China-based 5G customers is beginning to spread to other regions as 5G itself begins to ramp in other areas outside of China.

For the first quarter, our top 10 customers represented 90.5% of revenue, compared to 84.8% in Q1 of the prior year. This increase in revenue among the top 10 customers is largely related to the strong results in CATV, as several customers in this segment contributed significantly to the increased revenue this quarter. We had four 10% or greater customers in the first quarter, two of which were in the datacenter market and two of which were in our CATV market. These customers contributed 19%, 16%, 16% and 14% of total revenue, respectively.

In Q1, we generated non-GAAP gross margin of 24.6%, which was in line with our guidance range of 23.5% to 25% and compared to 19.5% in Q1 of the prior year.

Total non-GAAP operating expenses in the first quarter were $20.6 million, or 41.4% of revenue, compared with $19.4 million, or 48% of revenue in Q1 of the prior year.

As we mentioned on the Q4 call, we experienced additional costs during the first quarter due to the historic storm that hit Texas in February, which totaled $0.5 million.

Non-GAAP operating loss in the first quarter was $8.4 million, compared to an operating loss of $11.5 million in Q1 the prior year.

GAAP net loss for Q1 was $15.6 million, or a loss of $0.59 per basic share, compared with a GAAP net loss of $16.8 million, or a loss of $0.83 per basic share in Q1 of 2020.

On a non-GAAP basis, net loss for Q1 was $5.5 million, or a loss of $0.21 per basic share, which was narrower than our guidance range of a loss of $5.9 million to $7.3 million, or a loss in the range of $0.23 to $0.28 per basic share and compares to a net loss of $8.8 million, or a loss of $0.44 per basic share in Q1 of the prior year. The basic shares outstanding used for computing the net loss in Q1 were 26.4 million.

Now, turning to the balance sheet. We ended the first quarter with $49.3 million in total cash, cash equivalents, short-term investments, and restricted cash. This compares with $50.1 million at the end of the fourth quarter and reflects $15.2 million in cash used for operations. As of March 31, we had $106.3 million in inventory, compared to $110.4 million at the end of Q4. Inventory decreased due to utilization of inventory as orders, especially for telecom and CATV products, increased. This inventory reduction is consistent with our long-term plan as we focus on rationalizing inventory levels.

We made a total of $2.7 million in capital investments in the quarter, including $2.3 million in production equipment and machinery and $0.3 million on construction and building improvements. The construction on our new China facility is largely complete with all heavy construction done. In total, we currently expect 2021 capex to be approximately $16 million. Although as we have noted in prior years, there can be significant variability in this estimate as the year progresses.

I would also like to provide a quick update on the at-the-market offering that we announced in February of 2020. To date, we have completed this program raising the total of $55 million in gross proceeds, including $14.7 million raised in Q1. As we disclosed in February, we have initiated a new at-the-market offering. To date, we have raised $0.6 million under this new program. 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 Q2 outlook. We expect Q2 revenue to be between $51 million and $56 million and non-GAAP gross margin to be in the range of 25.5% to 27.5%. Non-GAAP net loss is expected to be in the range of $3.8 million to $5.6 million and non-GAAP loss per basic share between $0.14 and $0.21 using weighted average basic share count of approximately 27.2 million shares.

With that, I will turn it back over to the operator for the Q&A session. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] And the first question comes with -- from David Kang with B. Riley.

Danny Cheng -- B. Riley -- Analyst

Hey, guys. Thanks for taking my question. This is Danny on for Dave. I was wondering if you guys could talk about the competitive landscape in 400G that you guys are saying.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Yeah. I mean, it's pretty consistent with what we've said in prior calls. Overall, I don't think there's any significant change from the landscape at 100G the competitors that we saw there tend to be -- continuing to be what we expect to be the strongest competitors at 400 gig as well.

Danny Cheng -- B. Riley -- Analyst

Got it. And, I guess, on the chip shortage situation, I was wondering you guys said that you don't expect it to negatively impact revenues. But, I guess, we're wondering how long you guys kind of expect that to persist?

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Well, it's a little hard to say precisely. I think it's fair to say that we expect it to persist at least a couple more quarters. And you're correct that we aren't expecting it to result in reduced revenues. We expect to continue to be able to grow revenue. But we're just sort of capped in the rate at which we can grow based on component availability. It probably over the next couple of quarters. Beyond that it becomes really hard to say, our suppliers are telling us that they're adding production capacity and ramping up. And if all those plans come to fruition as we expect, then I think we're probably looking at maybe two quarters. If it lasts a little longer than that, it may stretch beyond that.

We're also up against, I guess, you could say a good problem to have, I mean, the cable TV business is growing very nicely for us. We're seeing good demand picture really through the end of this year and into next year. And so, it's harder for our suppliers to catch up because they're getting hit by higher than -- higher demand than we've seen certainly in the last several years. So, it's a combination of sharply increased demand with somewhat reduced supply due to COVID considerations, and the two of those things together is what's causing that shortage.

Danny Cheng -- B. Riley -- Analyst

Got it. And you said into next year, so does that imply throughout 2022, you'll also see this momentum from CATV?

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Right now, we're pretty much booked up in CATV through the end of the year. And there's no indication that that's going to slow down next year. Obviously, being a few quarters out, that's still a little bit murky. But I think the MSOs are really at the beginning of their upgrade process, and some of them have yet to even start the upgrade process in earnest. So, I think it's reasonable to expect that that process will take several years to complete. And so, yeah, I believe that we'll see pretty strong CATV performance into 2022. Not just this year.

Danny Cheng -- B. Riley -- Analyst

Great. Thank you for the color.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

You're welcome.

Operator

Thank you. And the next question comes on Tom Diffely with D.A. Davidson.

Thomas Diffely -- D.A. Davidson -- Analyst

Yeah. Good afternoon. I wanted to get a little more color on just the datacenter recovery in the second half. I know a quarter ago you thought maybe it'd be in the second quarter. But just what are the puts and takes and what kind of gives you the confidence level?

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Yeah. I mean, I don't think anything's really wholesale changed in our outlook. I think the inventory -- the over inventory situation, particularly with one of our large hyperscale customers is just taking a little bit longer to resolve itself than we earlier thought. We expect it to recover at some point in Q2, but it's probably a little later than we earlier anticipated. And so, for the total Q2 revenue generation from -- at least from that customer, it's a little bit less than what we earlier expected. It's not a big change in what we had earlier expected.

I think what we talked about on the last call remains true today, which is that the really good growth that we expect to see is going to come from the 400 gig cycle as that starts to take hold with several of our customers. And on that front, as I mentioned in our prepared remarks, we're seeing increased interest. We had several new customers come and approach us during the quarter, looking for samples, looking to begin qualification efforts. The qualification efforts that were already ongoing in 400 gig, continue to go well, and the discussions with the customers continue to indicate to us that we can expect a successful conclusion from those efforts. And so, we're excited about 400 gig ramping in the second half of the year. The inventory situation that we talked about with -- again, with one of our large customers, that should also resolve itself late in the second quarter for a second half ramp. And then, as I mentioned, cable TV, telecom, even fiber-to-the-home in China seem to be looking very good in the second half as well.

Thomas Diffely -- D.A. Davidson -- Analyst

Okay. Great. Then maybe if you're willing, a little more color on the chip shortage. Are there particular types of chips or how would you characterize where the shortages is most acute, custom, off-the-shelf, whatever details you might be able to provide?

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Yeah. It's all off-the-shelf stuff that we're seeing shortages on. And it's -- there's no easy way to characterize it. I would say, in general, what we're seeing shortages on or not necessarily brand new cutting edge chips. In some cases, it's actually kind of older technology that I think we're just seeing unprecedented -- maybe not unprecedented, but certainly higher demand than we've seen in the last several years. And I think it got -- some of our suppliers were caught maybe a little bit by surprise by that. And at the same time, fab capacity and other things are very, very tight as we've seen in the automotive industry and across other calls that we've listened in on just this last earnings cycle.

And it really kind of runs the gamut across multiple different chipsets and things across the industry. But I think one common trend is that, there's just a very, very tight fab capacity. So, whereas in prior times, a supplier of one of these components might have been able to drop a wafer production run into a schedule that already existed because there were some gaps in there or some slack time. Now that slack is just non-existent. And so, it's taking longer for them to get new wafer starts going, and therefore, longer to ramp up that production than it had been in years past.

Thomas Diffely -- D.A. Davidson -- Analyst

Okay. That color is very helpful. I appreciate it. And thanks for your time today.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

My pleasure.

Operator

Thank you. [Operator Instructions] And the next question comes from Sam Peterman with Craig-Hallum Capital.

Sam Peterman -- Craig-Hallum Capital Group -- Analyst

Hi, guys. This is Sam on for Richard. I just want to ask a little bit more on the datacenter. It sounds like your largest -- or I guess, first I want to ask if your largest datacenter customer in past quarters was a 19% customer this quarter, if that's fair to think about? And then, if that's the case, on a dollar basis, that's the lowest sales you've had there in about two years, it looks like? And curious how you would see that -- see sales from that customer trending over the course of the year as datacenter recovers.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Yeah. So that customer was not the 19% customer. And as we've talked about, one of our customers has an over inventory situation. We've talked about that in the last couple of calls. And I reiterated it in our prepared remarks and, again, on one of the earlier question, so I won't waste everybody's time going over that once again. But we do anticipate that that will be resolved here in the second quarter and portend the second half ramp.

Sam Peterman -- Craig-Hallum Capital Group -- Analyst

Okay. Thanks for that. And then on telecom, I'm curious with 5G starting to rollout more in the second half, what kind of upside you could see for that business in the second half? And could you talk about how we expect that to ramp between the second half of 2021 and then in 2022, whether there's kind of step up at some point or if it's kind of a linear ramp from your perspective? Any color there would be helpful.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Well, I think -- 2021, I think we expect a stronger second half than first half. Certainly, we've already started to see some incremental improvement. But we're not back to the levels where we were, let's say, middle part of last year. And so, I think there's some room to grow there. We're very excited about the progress that we've made in 5G. And also, as I mentioned in our prepared remarks, the FTTH business in China also seems to be picking up. But more exciting, perhaps than that within China is the fact that we have our first design win with a 5G customer outside of China. And I know that's been a question that's come up a lot over the last several quarters on these calls is, well, OK, you guys seem to be doing well in China, but what about the rest of the world? And I think that provides some tangible evidence that we're able to be successful with customers outside of the China market as well. And that's also very exciting.

Sam Peterman -- Craig-Hallum Capital Group -- Analyst

Sure. Thanks for that. That's it for me.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

My pleasure.

Operator

Thank you. And the next question comes from Tim Savageaux with Northland Capital Markets.

Tim Savageaux -- Northland Capital Markets -- Analyst

Hi. Good afternoon. A couple of questions. As you look at your Q2 guide and you're guiding a kind of mid- to high-single digits sequentially, given the datacenter commentary, it sounds like you expect cable TV to be the primary driver of that sequential growth, maybe a little telecom as well, or as you look across your segments, how do you see that progressing?

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Yeah. I think that the cable TV again, I think we can see some revenue growth in there. Telecom, again, it remains to be seen how much that's going to grow in the next quarter, but certainly the trends are good so far. And the datacenter, it really depends pretty sensitively on how fast -- and particularly the customer that we've seen this inventory issue with, how fast they can resolve that inventory. We believe it'll be at some point in this quarter. But whether it happens in mid-quarter or late in the quarter will kind of set the trajectory in terms of how much revenue we can actually book in this quarter. And so, that's kind of the wild card in the forecasting picture.

Tim Savageaux -- Northland Capital Markets -- Analyst

Got it. And just to follow-up on design wins. I think you said two datacenter or one fiber-to-the-home and one 5G, correct me if I'm wrong there.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

That's correct.

Tim Savageaux -- Northland Capital Markets -- Analyst

But in the datacenter, is the customer you called out there, is that a new customer for Applied Opto, or perhaps a former customer?

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

No, it is. It's a brand new customer that we haven't sold to before. It's a California-based, social media-focused datacenter operator.

Tim Savageaux -- Northland Capital Markets -- Analyst

Great. Thanks for the breadcrumbs.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

My pleasure.

Operator

Thank you. And this concludes our question-and-answer session. I would like to turn the conference back over to Thompson Lin for any closing comments.

Thompson Lin -- Founder, President, Chief Executive Officer, and Chairman

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

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Lindsay Savarese -- Head of Investor Relations

Thompson Lin -- Founder, President, Chief Executive Officer, and Chairman

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Danny Cheng -- B. Riley -- Analyst

Thomas Diffely -- D.A. Davidson -- Analyst

Sam Peterman -- Craig-Hallum Capital Group -- Analyst

Tim Savageaux -- Northland Capital Markets -- Analyst

More AAOI analysis

All earnings call transcripts

AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.