Q1 2020 Earnings Call
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Good afternoon, well be your call first operator at this time.
Like a welcome everyone to applied Optoelectronics first quarter, two talking at 20 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
So ask a question you might start and then one on a touched on sad.
And to withdraw your question. Please press Star then too.
Please note that is being recorded.
I'd now like to pass the call ever to Monica Gold Investor Relations for Aon why the school you may begin.
Thank you I'm Monica Gould Investor Relations for applied Optoelectronics.
We used to welcome you to you I first quarter 2020 financial results Conference call.
After the market close today, a why issued a press release announcing its first quarter 2020 financial results provided outlook for the second quarter of 2020.
It really is also available on the company's website at eight Oh gosh Inc. Dotcom. This call is being recorded and webcast slide a link to the recording can be found on the Investor Relations section of the why web site will be archived for one year.
Joining us on today's call is Dr. Thompson, Lin, Hey, why founder Chairman and CEO Dr., Stephen marry a wise Chief Financial Officer in Chief Strategy Officer.
Counting will give an overview of a wife Q1 results and stuff and will provide financial details and the outlook for the second quarter of 2020, a question answer session will follow our prepared remarks.
Before we begin I'd like to remind you to review a wife 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 companys actual results to differ materially from those anticipated in such forward looking statements.
In some cases he can identify forward looking statements by Terminologies such as believes anticipates estimates intense predict expects plans may should could would will or thanks 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, let's statements regarding the companys outlook for the second 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.
Also with the exception of revenue all financials discuss today or in 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 the results prepared in accordance with GAAP a reconciliation between our GAAP and non-GAAP measures as well as a discussion.
Before 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 a why management will virtually present at the count 40, Eightth annual technology Media and Telecom conference on May 29, and at the Stifel Cross sector Insight conference on June 10th.
These discussions will be webcast slides and linked to the what links to the webcast will be available on the Investor Relations section of the why website.
We hope to have the opportunity to interact with many of you virtually additionally, I'd like to note that the data versus second quarter 2020 earnings call is currently scheduled for August 620 20.
Now I would like to turn the call over to Dr. Thompson Lin applied Optoelectronics, founder Chairman and CEO Thompson.
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Thank you Tom.
I'd first like to address the cobot 19 crisis and how a wide has proactively responded and adapted to the current environment.
Given our presence in China, we had early indications of the possible impact of the virus global.
Took action to protect our workforce earlier that many companies.
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We have adopted recommendations from the CDC.
Safeguards in our factories and offices to maintain safe working conditions for our employees to keep our manufacturing capabilities on track.
Well, we had significant disruption and operations in our China factory during Q1.
We believe we are largely back to normal operating capacity.
The Corona virus has led to a significant rise in the number of employees working from home.
Which we believe has resulted in increased demand from our datacenter customers as they work to meet the heightened network capacity.
Our team has been working tirelessly to support our customers through this crisis.
Looking ahead to Q2.
We're expecting nearly 45% sequential revenue growth at the midpoint guidance range.
Improvement in our gross margins to the low to mid 20% range.
Turning to our quarterly performance.
Revenue for the first quarter was $40.5 million, which was below our guidance range.
Our Q1 financial performance was impacted by the shutdown of our China factory during the quarter virus prices there.
Unanticipated shipping delays out of China, and Taiwan due to the cobot 19 pandemic.
At higher costs as a result of shifting manufacturing to higher cost locations in the U.S. in Taiwan.
Additionally, certain cost reductions we had planned for Q1 were pushed out due to a pandemic related work slowdown in China.
We had approximately $2.3 million in revenue associated with delayed shipments from China, and Taiwan push into Q2.
Shipping times have improved somewhat but are still longer than normal and shipping costs out of Asia also remained elevated relative to our prior expectations.
Our datacenter revenue came in at $33.3 million compared with $38.5 billion in Q1 of last year.
In the first quarter, 31% of our datacenter revenue was from our 40 G transceiver products and 60% was from our one hundredg products.
As Tom noted.
This makes Q1 2020, the first quarter of year over year growth in our one hundredg business since the end of 2018.
Importantly, we saw increased data center demand during Q1 for my diverse set of customers.
Overall for the quarter, our top 10 customers represented 84.8% of revenue, which is down from 92.1% in Q1 of last year and also a decrease sequentially from 87.5% last quarter.
We're pleased to see that our efforts in diversifying our customer base continue to show tangible result in terms of reduce customer concentration.
Turning to our cable television product segment.
Revenue from Sea TV products was $4.2 billion compared to $12 million in Q1 of last year.
Primarily driven by continued weakness among misos, particularly in North America.
However.
Our production capacity for see TV products was also negatively impacted by the Corona virus since the majority of our see TV production occurs in China.
We expect CAC need to be stronger in the second half of the year than the first half as several and vescos or in the process of contemplating or making plans to begin upgrade later this year.
We believe that alewife remains well positioned as these new technologies rollout given our strong product portfolio at the segment.
Our recent announcement of the collaboration with ATX networks is also expected to bolster our sales in the segment as ATX is working with it and meso customers to qualify our 1.2 gigahertz amplifier products as a replacement for legacy one gigahertz products.
Revenue from our telecom products was $2.6 million compared to $1.7 million in Q1 of last year.
Primarily driven by increased sales of newer products such as those designed for Fiveg network deployments.
Specifically during the first quarter, we saw increased fiveg demand in China as carriers, there recovered from the virus locked down and continue to upgrade their mobile networks.
For the quarter.
82% of our revenue from datacenter products, 10% from CHP projects with the remaining 8% from FTT H telecom and other.
In the first quarter, we had to 10% or greater customers, both as a data center market that contributed 43% and 18% of total revenue respectively.
In Q1, we generated a gross margin of 19.5% compared to 25.5% in Q1 in the prior year.
Gross margin was below our guidance range of 23% to 25% due to increased expenses during the quarter associated with the Corona bars.
In addition, as I mentioned earlier planned cost reductions for Q1 were pushed out due to work disruptions in China related to the shutdown.
We will be rolling these cost reductions out over the next several quarters and we expect to see incremental improvements in gross margin as a result.
Total operating expenses in the first quarter were $19.4 billion, 48% of revenue.
Paired with $20.3 million or 38.4% of revenue at the same quarter last year.
Operating expenses declined from last year, due mainly to tighter control of R&D expenses.
R&D and China was also reduced during the shutdown there as consumption of R&D supplies and parts was reduced activity there seats.
Operating loss and the first quarter was $11.5 million compared to an operating loss of $6.8 million in Q1 of last year.
GAAP net loss for Q1 was $16.8 million or loss of 83 cents per basic share.
Compared with GAAP net loss of $10.5 million or 53 cents per basic share in Q1 of last year.
On a non-GAAP basis net loss after tax for Q1 was $8.8 million or loss of 44 cents per basic share, which was below our guidance range of a loss of $6.8 million to $8.3 billion or loss of 34 cents to 41 cents per basic share.
And compares to a net loss of $5.4 billion or loss of 27 cents per basic share in Q1 of last year.
The basic shares outstanding used for computing the net loss in Q1 were $20.2 million.
Turning now to the balance sheet.
We ended the first quarter with $62.5 billion in total cash cash equivalents short term investments have restricted cash.
This compares with $67 million at the end of 2019.
Reflects $8.2 billion in cash used for operations.
In addition to the cash on hand, we had $28.8 million unused borrowing capacity at the end of Q1.
As of March 31, we had $87.1 million inventory compared to $85 billion in Q4.
Increase in inventory was mainly driven by finished goods that were not received in the quarter.
Along with some increase in work in process as production ramped up after the China shutdown.
We made a total of $2.8 million to capital investments in the quarter, including $1.8 million and production equipment and machinery and zero point $7 million on construction and building improvements.
Most of these expenditures were committed to prior to the koby crisis and in light of the uncertainties surrounding the pandemic, we're still evaluating our level of capex for the year.
Moving now to our Q2 album.
We expect Q2 revenue to be between $55 million and $60 million and non-GAAP gross margin to be in the range of 23% to 25%.
Non-GAAP net loss is expected to be in the range of $4.1 billion to $5.7 million.
Non-GAAP loss per basic share between 20 cents and 28 cents using a weighted average basic share count of approximately 20.4 billion shares.
With that.
I will turn it back over to the operator for the Q today's session operator.
Thank you well now begin the question and answer session to ask a question that press Star then one on your touched and but they are using a speakerphone. Please pick up your handset before pressing the king.
To withdraw your question. Please press Star then too.
But this time, we will pause for a moment to some bar roster.
My first question today will come from Simon Leopold Oh frame and James. Please go ahead.
Great. Thanks for taking the question I first I wanted to see if we could talk a little bit about the big picture.
Datacenter trends.
Obviously, we have all sort of her all the headlines about traffic growth and I understand you're not necessarily going to be able guide for the full year, but just maybe if you could update us on your you're thinking about how to how to trend. This particular vertical longer term and beyond just the second quarter, maybe some of the puts.
And takes you're seeing.
Sure Simon well you know as we noted in our prepared remarks, I think you know given.
All the uncertainties at this time surrounding the virus and the progression and what have you.
Yes, it's really difficult to put a precise any kind of precise guide on that.
Do you think in general we're hearing from our customers that.
You know their networks are under.
Pressure from the remote work and what have you.
And that the.
They need and in many cases to address capacity constraints on their networks and and I would expect that that will result.
You know some incremental improvement to the business, but again, you know, we guide one quarter out and especially in times of uncertainty like this it's really difficult to give you a whole lot more than that I would say directionally.
It's somewhat better than that.
I might have expected.
Maybe one of the things that we imagine is occurring in the crisis is that new technology, maybe gets pushed out in time.
Wondering if that's the case for 400 gig technology for intra data center and if you view that as a good thing by extending the life of your 40, and 100 gig products or or a bad thing and that it keeps you from enjoying benefits of a new product cycle.
Well, it's a little again, its little hard to say exactly how that's going to play out too I.
I do think that.
A number of our customers have you know engineers Requalification labs that are.
Not operating or operating at less efficiency than they would have normally in other words engineers are working from home and they may not be able to have access to their test equipment and what have you. So I think at least in the short term.
We expect some of those qualifications to be pushed out.
Although I would.
I would emphasize again that we actually had an all time high of of design wins in the first quarter. Despite the virus.
But nevertheless for some of the four hundredg stuff in particular, we are seeing customers, they're saying look we're gonna have to delay a little bit the final qualification efforts.
That were previously ongoing.
Whether that results in a delay in the ramp up or the deployments.
It's not clear at this point I think that they.
They are.
If anything there they are more motivated now to try to get these newer technologies in I think they will add capacity and they'll certainly improve operating.
Expenses and things like that for the customers in many cases, so I think there they want to get these technologies in.
Third their employees are limited and their ability to do what they need to do to be able to start these technologies and it's really going to depend on how fast recovery happens as to whether they'll be able to.
When it when things do normalize whether there will be able to get the qualifications, Don and get all that wind up in time to ramp up on schedule or whether it might be delayed a little bit.
And maybe just quickly gross margin can you bridge. The would you have met your guidance if it wasn't on gross margin if it wasnt for their shipping issues you mentioned.
So it wasn't really related to the shipping issues as we mentioned in our prepared remarks the.
The.
China It a lot of the cost reduction efforts that we that we intended to do during the quarter.
We're not able to be completed during the quarter because of the shutdown in China. So we had an additional three week shutdown almost three weeks shutdown.
There and so we weren't able to finish a lot of the cost reduction work that we intend to do so that will roll out over the next couple of quarters. So it wasn't only related to the shipping. It was also related to to the to the.
Delay in completing the cost reduction.
And just one last one if I might I didn't notice you filed an 8-K in in April taking roughly 6 million of of the Triple P. money.
Just wanted to see if you can give us some context was this essentially being opportunistic or is there.
Some reason, we should think theres theres need for taking on additional debt and do you expect you have to repay this or should we consider this a grant how to think about that in the context of the business. Thanks.
Yeah, so that the PPP loan.
It is something that's really very much in flux at this point I think.
Hundred G. versus 40 G. products.
For the number here it is about 60%.
100 G. products.
31% from 42 products. So you know at this point hundred gig as clearly driving the bus so to speak in terms of data Center <unk> 40 gig, we expect to continue to see 40 gig business and and maybe business. That's you know.
Close to where we are today, but most of the growth I think is expected to come from from 100 gig or even 400 gate, perhaps towards the the Andrew it'd be here depending on.
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Oh, Okay, great. Thanks, and then just pay back it off the design one question.
Given any update just specifically on foreign gig and.
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Only along those lines, you're expecting I guess.
By the end of this year.
Yeah, we did not have a 400 gig a design when during quarter. We did have one design when on a 200 gig.
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Hi next question today, well <unk>, let's pay calming company. Please go ahead.
Hi, Thanks for taking my question most of my questions have been answered, but I I may have missed it can you remind me what the top 10 customers, whereas the percentage of the revenue in a quarter and how that compared with last quarter and and last year.
Sure. So this quarter.
Touching customers were 84.8% of revenue.
In the same we're in the prior year it was 92.1%.
And in the prior quarter, so that would be <unk>.
We're 2019 it was 87.5%. So again, if you won last year, 92% last quarter, 87.5% and this quarter 84.8%.
So selling some good diversification going on and the I think of the 12, new customers five where new T.U.
On to it related to time JE deployments in China, and I Miss before that.
Yeah. So so we had just to make sure. We're on the same page, we had 12 design wins in the quarter.
Five of those were new customers.
So that's five total of five new customers one design.
You mean, each and one was the data center customer and to work related to five G. business.
Okay, great. Thank you.
Once again, okay I'd like to ask a question. Please press bar and then in one.
Hi next class Huh, it's from day K.C. Riling up they are please go ahead.
Hey, this is actually Danny on four days.
I was wondering if you guys. Good comments on the crowded ness of a 400 g. market.
And then color you can give on that.
I I'm not sure what you mean by the crowded just said to 400 G. market.
Can you elaborate definitely.
Like I guess, yeah by the time line of the 400 G. launches pushed out.
Hey, what I'm anything at his <unk> with the agree a increase competition from competitors.
Oh, well I can't really speculate on that I I first of all I I as I mentioned in my remarks assignment.
It's.
It's not clear that the 400 g. deployment is going to be pushed out I think you know customers are very interested in getting those deployments under way as quickly as they can in many cases, if that were not to happen for whatever reason I I really can't speculate on whether there'd be more more competitors or not I I do think that.
The technology at 400 gig is is you know.
Significantly trickier in terms of design and manufacturing than earlier generations of products.
And that generally has it affected making you know the the competitive landscape smaller rather than bigger, but you know how that would play out with the push out specifically is just.
Yeah.
Exactly.
Got it thanks, that's that's helpful and I.
I guess.
I was wondering if you got guys could comment on pricing environment, and a 400, he and 100 and a 100 g.
Markets.
So you know 400 G. pricing is is really not Oh, sorry did I say I'm into 40, just now to 440, G. and 100, G., a relatively pretty stable pricing in terms of different products, we have seen some.
Average.
Average price declines over the last couple of quarters do do some product mix issues and hundred gig I mean, you know more P.S.M. unless U.W.D.M.'s, we talked about in earlier call.
But but as far as price on.
Individual products, it's it's been fairly stable.
Okay got it thanks a lot.
I think in 10 minutes, while can clay at our question and answer.
And at this time of like that turned a complex back over to the Doctor Thompson, one credit closing remark.
Okay.
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You can deal with the pole.
What you receive any of you and I'll I'll call me convinced.
Yeah.
And ladies and gentlemen, Thank conference has now come clear that we thank you for a 10 day today's present.
Okay and you May now that's cannot Caroline.
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