Applied Optoelectronics, Inc. (NASDAQ:AAOI) Q1 2024 Earnings Call Transcript

Applied Optoelectronics, Inc. (NASDAQ:AAOI) Q1 2024 Earnings Call Transcript May 10, 2024

Applied Optoelectronics, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome everyone to Applied Optoelectronics’ First Quarter 2024 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to Lindsay Savarese, Investor Relations for AOI [ph]. Please go ahead.

Lindsay Savarese: Thank you. I’m Lindsay Savarese, Investor Relations for Applied Optoelectronics. I am pleased to welcome you to AOI’s first quarter 2024 financial results conference call. After the market closed today, AOI issued a press release announcing its first quarter 2024 financial results and provided its outlook for the second quarter of 2024. 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 details and the outlook for the second quarter of 2024. 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, levels of activity, performance or achievements of the company, or its industry to differ materially from those expressed or implied in such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as believes, forecast, anticipates, estimates, projects, intends, predicts, expects, plans, may, should, could, would, will, potential or things or by the negative of those terms or other similar expressions that convey uncertainty of future events or outcomes.

The company has based these forward-looking statements on its current expectations, assumptions, estimates and projections. While the company believes these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond the company’s control. 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 2024. 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 confirm 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 and the company’s quarterly report on Form 10-Q. Also, all financial results and other financial measures 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 and Consumer Conference on May 16th.

And I’d like to note that the date of our second quarter 2024 earnings call is currently scheduled for August 8, 2024. Now, I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics’ Founder, Chairman and CEO. Thompson?

Thompson Lin: Thank you, Lindsay. Thank you for joining our call today. Our revenue and gross margins for the first quarter came in below expectations. And non-GAAP EPS was in line with our expectations, despite the slow start to the year. Based on our current forecast, and very constructive customer interaction, we remain very positive on improvements in the second half of the year. In the first quarter, we delivered revenue of $40.7 million, which was just below our guidance range of $41 million to $46 million. We delivered non-GAAP gross margin of 18.9% which was below our guidance range of 21% to 23%, mainly driven by difference in quarter mix. Our non-GAAP loss per share was $0.31 per share, which was less of guidance range of a loss of $0.28 to a loss of $0.33.

Total revenue for our data-center products of $29 million was up 42% year-over-year, and was down 35% sequentially. Revenue for our 100G product increased 33% year-over-year, and revenue for our 400G product more than doubled in the same period. Total revenue in our CATV segment was $8.7 million, which was down 59% year-over-year, and down 30% sequentially, largely driven by continued generally slow sales of DOCSIS 3.1 equipment as the industry prepares to transition to DOCSIS 4.0. With that, I will turn the call over to Stephen to review the details of our Q1 performance and outlook for Q2. Stefan?

Stefan Murry: Thank you, Thompson. As Thompson mentioned, our first quarter revenue and non-GAAP gross margin came in below our expectations while our non-GAAP EPS was in line with our expectations. Based on our current forecasts and very constructive customer interactions, we remain very positive on improvements in the second half of the year. We believe that the long-term demand drivers remain strong for both, our data center and CATV businesses, and we believe we are well positioned to capitalize on these opportunities. Looking to the back half of the year, there are a few key items to note that give us a basis for optimistic outlook, despite the slow start to the year. The first is that we have begun to receive forecasted orders for the pixel [ph] based 400G active optical cables for which Microsoft provided development funding last year.

While the pace of product adoption has been somewhat slower than we anticipated, we believe that the fact that we are now receiving forecast for these products for delivery in Q3 is a significant step in seeing meaningful business improvement. The second is that follow-on projects to our 400G AOC program, specifically for our 800G and 1.6 terabit products, have been fast-tracked with our customers as they address an acceleration in demand for infrastructure around AI. We are being asked to compress the time from development to scale production as much as possible in order to meet this accelerated demand. The third is that we have continued to experience significant traction and continue to have meaningful discussions with multiple large data center customers, some of which are new customers to AOI or customers that we have not worked with in many years, specifically for our 400G, 800G and 1.6 terabit products.

We expect one or more of these customers will begin to contribute meaningfully to revenue starting in Q3. And lastly, we believe that the transition to DOCSIS 4.0 will begin to take place in Q3 and that our products are actually designed for the deployment of amplifiers and other network elements required to be DOCSIS 4.0. We shipped our first fully production ready DOCSIS 4.0 amplifier samples to a major customer last week, and the feedback while early, has been exceedingly positive. With the improvement we expect in the second half, we continue to believe that 2024 can be our first full year of non-GAAP profitability since 2018. Turning to the quarter; our total revenue for the first quarter was $40.7 million, which was down 23% year-over-year and 33% sequentially, and which was just below for guidance range of $41 million to $46 million.

As we have discussed on our prior earnings call, the softness in Q1 was largely due to the combined effects of the Lunar New Year holiday in our Asian factories, along with some price reductions which took effect in the quarter. During the first quarter, 71% of our revenue is from our data center products, 22% was from our CATV products, with the remaining 7% from FTTH telecom and other. Turning to our data centers business. Our Q1 data center revenue came in at $29 million, which increased 42% year-over-year and was down 35% sequentially. In the first quarter, 73% of our data center revenue was for our 100G products, 17% was from our 200G and 400G transceiver products, and 3% was from our 40G transceiver products. As we have discussed on several prior earnings calls, we signed two agreements with Microsoft in 2023 for the development of 400G products and beyond.

This included a development program to make next-generation lasers for data center and for the development of its 400G and next-generation active optical cables. While not guaranteed, we continue to believe that the revenue opportunity for our 400G and 800G products could be greater and a longer duration than the revenue contribution we saw for this customer during the peak of the 40G products life [ph], which suggests that revenue from these products may exceed $300 million over the several years of these buildups. We began shipments late last year, and it began to receive new forecasted orders which we expect to contribute to revenue later in Q2, and we believe will continue to ramp strongly in Q3 and Q4. Also, as a reminder, in 2023 we shipped samples of our 800G products to three different data center customers, and have received initial positive feedback.

As we discussed in past, we are in detailed discussions with several hyperscaler data center operators about ramping production for our 800G and 1.6 terabit products starting in Q3 for 800G, and early Q1 of 2025 for 1.6 terabit products. These dates are several months earlier than we had previously been requested to deliver, and we believe the acceleration in the schedule is being driven by faster deployment of technology needed by AI workforce. Turning to our CATV business. CATV revenue in the first quarter was $8.7 million, which was down 69% year-over-year and down 30% sequentially, largely driven by generally slower sales of DOCSIS 3.1 equipment as the industry prepares to transition to DOCSIS 4.0. Looking forward, we continue to expect that our near-term CATV business will be down compared to the historic highs we saw in 2021 and 2022 as the MSOs transition to next-generation architecture.

We anticipate this transition to DOCSIS 4.0 will begin in Q3, and we are optimistic about the second half of the year and 2025. As a reminder, we shipped initial test samples of our 1.8 gigahertz amplifier products to two major MSOs in Q4 of last year, and we received encouraging feedback on their performance and pricing. We are pleased to report that we shipped final qualification units of various amplifiers last week, and we would expect revenue to begin as early as the end of Q2 with significant ramp in the second half as we increase manufacturing capacity for these new products. As Thompson mentioned, we will continue to carefully monitor MSO plans to upgrade to DOCSIS 4.0 networks, and we continue to believe AOI is a leader in technologies that will enable DOCSIS 4.0, and that we have the right portfolio in place to address our customers’ needs.

Now turning to our telecom segment. Revenue from our telecom products of $2.3 million was down 39% year-over-year, and down 19% sequentially, largely driven by ongoing softness in 5G demand, particularly in China. Looking ahead, we continue to expect telecom sales to fluctuate from quarter-to-quarter. In first quarter, our Top 10 customers represented 92% of revenue, down from 93% in Q1 of last year. We have two greater than 10% customers; one in the data center market, and one in the CATV market which contributed 62% and 21% of our total revenue respectively. In Q1 we generated non-GAAP gross margin of 18.9%, which was below our guidance range of 21% to 23%, and was down from 36.4% in Q4 of 2023, and down from 23.2% in Q1 of 2023. The decrease in gross margin was driven mainly by product mix and some pricing reductions which took effect during the quarter.

Looking ahead, we expect improving gross margins throughout the year as product mix improves in our data center business and CATV revenue begins to ramp. We remain committed to the long-term goal of returning gross margin to around 40%, and believe that this goal is achievable. Total non-GAAP operating expenses in the first quarter were $24.8 million or 61% of revenue which compared to $19.6 million or 36.9% of revenue in Q1 of the prior year due to higher R&D spend. Looking ahead, we continue to expect non-GAAP operating expenses to range from $24 million to $26 million for the quarter to account for the acceleration of R&D expenses to improve time to market for our 800G and 1.6 terabit data center products. Non-GAAP operating loss in the first quarter was $17.1 million compared to an operating loss of $7.2 million in Q1 in the prior year.

GAAP net loss for Q1 was $23.2 million or a loss of $0.16 per basic share compared with the GAAP net loss of $16.3 million or a loss of $0.56 per basic share in Q1 of 2023. On a non-GAAP basis, net loss for Q1 was $12 million or $0.31 per share, which was within our guidance of a loss of $10.9 million to a loss of $12.6 million, and in line with our guidance range of a loss per share in the range of $0.28 to a loss of $0.33 per basic share. This compares to a net loss of $7.1 million or a loss of $0.25 per basic share in Q1 of the prior year. The fully diluted shares outstanding used for computing the earnings per share in Q1 were $38.4 million. Turning now to the balance sheet. We ended the first quarter with $17.4 million in total cash, cash equivalents, short-term investments and restricted cash.

This compares with $55.1 million at the end of the fourth quarter. This cash balance reflects a few slow paying AR receipts totaling about $11 million, which were subsequently received in the first two weeks of Q2. Also note, that we used almost $4 million in cash to reduce debt during the quarter — at the end of the quarter with total debt excluding convertible debt of $34.8 million compared to $38.7 million at the end of last year. As of March 31, we have $54.3 million in inventory compared to $63.9 million at the end of Q4. We made a total of $7.8 million in capital investments in the first quarter, which was mainly used for production and R&D equipment. Moving now to our Q2 outlook. We expect Q2 revenue to be between $41.5 million and $46.5 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 $11.6 million to $13.5 million, and non-GAAP loss per share between $.029 per basic share and $0.34 per basic share using weighted average basic share count of approximately 39.2 million shares. Looking ahead, as the widespread adoption of generative AI continues to place increased demands on our customer data centers, we believe these customers will ultimately need to deploy more infrastructure to meet these needs which will provide a long tailwind of demand for the optical industry. Our US based production ability combined with our automated manufacturing capabilities and experience puts us in a unique competitive position to address these needs. Further, as our CATV customers transition to next-generation architecture and implement new technologies like DOCSIS 4.0, we believe that we have positioned ourselves as a leader in technologies that will enable DOCSIS 4.0 and we are confident that we have the right product portfolio, team and strategy in place to capitalize on this upcoming transition.

We have spent several years developing these products and we expect that they were going to market in the next few months. In sum, we believe that the long-term demand drives remain strong for both, our data center and CATV businesses and we believe we are well positioned to benefit from these growing long-term trends. With that, I will turn it back over to the operator for the Q&A session. Operator?

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Q&A Session

Operator: [Operator Instructions] And the first question will come from Simon Leopold with Raymond James. Please go ahead.

Simon Leopold: Thanks for taking the question. A couple of quick ones, maybe. I think on the prior conference call, you had given us some indication that you’ve got the full year revenue, it could exceed $300 million. Given the slower start to the year, it does sound like you still expect a much stronger second half but how do you feel about that full year $300 million target?

Stefan Murry: Well, what we’ve said is that we think we can be profitable for the year. So, if you can run the numbers on that we don’t give guidance, you know — guidance really, so — I wouldn’t have pulled back anything but I think it was a little more challenging considering where we started the year but I think it’s still very achievable.

Simon Leopold: Okay. And then, you did give us some indication of the operating expense expectations for the year at that $24 million to $26 million per quarter. And I think we were anticipating more of a $22 million to $24 million per quarter, and that may simply be just extrapolating too much from the first quarter forecast. Did something change in terms of your expectation of what you need to spend on sales, marketing and R&D?

Stefan Murry: As we noted in our prepared remarks, we’ve increased our R&D spend a little bit because we’re getting — like we talked about, we’re getting customers that are pulling in the request for product development much ahead of schedule. So we need to spend additional R&D — I wouldn’t say additional overall but we’re spending it quicker than we otherwise would. So it does represent a slight increase to our R&D. Sales and marketing; perhaps not so much increase in sales and marketing.

Simon Leopold: And then, I remember at our meeting at RFC [ph], you had talked about sort of a product roadmap going from the vexcel [ph] based solutions to vexcels EMLs [ph] and ramping up to higher per channel speed. Could you give us an overview of the roadmap you expect in terms of launches over the next year or plus?

Stefan Murry: Right. So the vexcel [ph] based products are already in production, and will likely add higher speed to main vexcels [ph] to that portfolio next year. With respect to the EML based products, we have some products in production now with higher speed, data center products with EMLs will go into production in Q3 or Q4.

Simon Leopold: And your — what was your 400 gig in the quarter? I missed that.

Stefan Murry: 17% of the data center; so $29 million — 17% of that.

Simon Leopold: Okay. And that was just 400 gig, not about…

Stefan Murry: 400 doubling [ph].

Simon Leopold: Let’s say that again.

Stefan Murry: That’s a little over doubling compared to that — almost — well, we’re slightly over doubling from the same period last year.

Simon Leopold: Great. Thank you very much for taking the questions. Appreciate it.

Operator: The next question will come from Michael Genovese with Rosenblatt Securities. Please go ahead.

Michael Genovese: To start with, I wanted to ask a question about Microsoft. Like, if you had any more color on why you think that it’s going slower than initially expected? But then secondly, how do you expect orders to trend in the second quarter? Like we see orders in the month of June being above the month of May; is there any visibility to that? And then finally, it sounds like you’re coming from the overall presence of $300 million plus has maybe gotten a little bit more bullish but that — maybe that’s because you’ve added 800G to it. So, if you could help us understand that as well? Thank you

Stefan Murry: I’m sorry, what?

Michael Genovese: I was just raised reminding the first one was, why the delay [ph].

Stefan Murry: Yes. I wouldn’t really say it’s an overall delay. If my prepared remarks sounded that way, that’s not what I was trying to say. There was a slight delay in one particular program which really just reflects the fact that it’s a new product, and sometimes new product launches just take a little longer than expected, there is nothing in particular that I can point to you with respect to that. It is positive that we’re getting new updated forecast now that would indicate shipments beginning later in Q2, and then ramping quickly in Q3 and Q4. So that’s all positive. I wouldn’t read too much into the delay itself. Overall, the revenue in our data center business is about where we expected it to be in Q2. So there’s not really a significant change from earlier thinking.

That small delay in business from Microsoft is being more than compensated by the other data center customers, so it’s not anything that I am trying to point to, it’s just that one particular product that had something to do. Your second question had to do with $300 million target and whether that represents a change. No, fundamentally, other than that we mentioned that we’re having to pull an 800 gig in 1.6 terabits faster. Now, 1.6 terabits won’t be a factor this year, but it will be early next year, but the acceleration in 800 gig is certainly helpful to try to meet that goal. And then — I’m sorry, I forgot your third question. What was it?

Michael Genovese: My next and last question, so — but it was about the orders. If for instance, we think that there’s a reason to think as you’re seeing these forecasts that — for instance, June would be up from, which is up from April; if you’re seeing that kind of trend at this customer. But I wanted to just ask, I mean, you said — you know, once your data center revenues were about where you expected them to be; how do you see them trending in 2Q and 3Q? If you could address that.

Stefan Murry: I want to be clear. Well, first of all, maybe I misspoke earlier, Q1 and Q2 data center numbers are about what we expected them to be. Cable TV in Q2 is coming in a little lighter than what we had expected. And that explains to the extent that we didn’t give guidance until now in Q2, but to the extent that there was some change in our thinking, it had to do with cable TV, not data center. Data center, overall, is doing almost — actually its slightly ahead of plan compared to where we thought it was going to be. I mentioned earlier Microsoft had a delay in one product, but the rest of them went fine. And that’s slightly — and that one product is more than compensated for in Q2 by growth in other customers. So, with respect to…

Thompson Lin: So, maybe at times we said that, its [indiscernible]. I have been — we feel more positive right now compared to a few months ago. The main reason is [indiscernible]. Right now I think the inlays [ph], we can see several big customer, especially to [indiscernible] for energy. Our Cable TV — you know, Cable TV is quite a sloppy because all parts are working for 1.0 edgy [ph] products. So, usually the delay in Cable TV is not surprisingly; I think you can see from other companies.