Q3 2021 Applied Optoelectronics Inc Earnings Call
Good afternoon, Hi, I'll be your conference operator at this time I would like to welcome everyone to the applied Optoelectronics third quarter 2021 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
To ask a question that you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded and now I'd like to turn the call over to Lindsay Savarese Investor Relations for AOE Miss that worries you may begin.
Thank you Lindsey salaries Investor relations for applied Optoelectronics and I'm pleased to welcome you to Aoi's third quarter 2021 financial results Conference call.
After the market closed today <unk> issued a press release announcing its third quarter 2021 financial results and provided its outlook for the fourth quarter of 2021.
The release is also available on the company's website at Ao bashing dotcom.
This call is being recorded and webcast live a link to that recording can be found on the Investor Relations section of the AOR 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.
<unk>, 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 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 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 managements 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 fourth 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.
Conform these statements to actual results or to changes in the companys 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.
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 a lot of management well virtually participate at the Needham networking security and Communications Conference on November 16, the Raymond James Technology Investors Investors Conference on December 6th through <unk>, and the D. A davidson semi cap laser and optical comm.
On December 15th we.
We hope to have the opportunity to interact with many of you virtually.
Additionally, I'd like to note the date of our fourth quarter and full year 2021 earnings call is currently scheduled for February 3rd 2022.
Now I would like to turn the call over to Dr. Thompson Lin applied Optoelectronics, founder Chairman and CEO Thompson.
Thank you Lindsay and thank you for joining our call today, the third quarter, largely as we expected with Didi Burke.
Gross margin in the <unk>.
Middle market needles relative to expectations.
During the quarter, we continued to see strong demand.
<unk> TV market.
Proving condition datacenter and telecom markets.
However.
As we anticipated.
In the third quarter.
Mostly impacted by approximately $3 million.
We jumped although we have no global component shortage.
Q3 gross margin.
<unk> came in at the low end of our expectations.
Most of these due to unfavorable product mix in our CATV cyclically.
Greece, Kohl's strong component shortage.
We achieved total revenue for the third quarter of <unk> post the meeting.
<unk> decreased 35% compared to the third quarter 2020.
<unk>, one points and emphasis query.
Although globally.
The television segment.
Putting these two equals $1 billion.
It was up 98, 4% year over year.
It was down following the weaker <unk>.
You said it was $6 million.
Second quarter of 2021.
The overall CATV demand environment remains strong and we.
Continuing to see good.
New customer traction with a number of law for votes.
Although liberty for our data center product of $29 million.
Decreased 56% year over year.
Increased six 9% sequentially.
Doing the supportive with Q might design wins amongst customers.
No all the design wins in the quarter was a new <unk>.
Within existing customers.
There is a naval equipment picture surprising enterprise and Hyperscale datacenter customers.
In the tissue.
Two would be that wings are.
<unk> to 'twenty five D pulse.
And now with a large.
Modulation on naval equipment manufacture focus on the critical markets.
Now turning to our telecom what do you mean it came in at $5 1 million.
Down 42% year over year, and up 54, 5% sequentially.
While we are pleased to deliver sequential growth in this segment during the quarter, we see continued volatility in the market condition.
<unk> telecom market.
Is the timing.
Although <unk> did remain somewhat opaque.
We do.
Quarter to quarter.
The ability to your the pace of <unk> rollout in China.
Comps more predictable.
With that I would.
Nicole over to Stefan to review the details of our Q3 performance and outlook.
Well Q4 seven.
Thank you Thompson.
As Thompson mentioned, the third quarter played out largely as we expected and we delivered revenue and gross margin in line with our expectations.
And a narrower non-GAAP net loss relative to our expectations due to slightly lower than expected operating expenses.
During the quarter.
We continued to see strong demand in the CATV market and improving conditions in the datacenter and telecom markets.
However, as.
As we anticipated.
Our results were adversely impacted by approximately $3 million.
Due to the well known component shortages and supply chain disruptions in our Q3 gross margin came in at the low end of our expectations, mostly due to unfavorable product mix and our CATV segment and increased costs from component shortages.
While we were able to mitigate some of these anticipated impacts.
We saw additional component shortages later in the quarter due to the shutdown in Vietnam.
As we work to improve our supply chain, we may continue to have longer than usual backlog for several quarters.
Looking ahead, we expect that the component shortages could adversely affect our fourth quarter by approximately 2 million to $3 million.
We also expect increased costs associated with the shortages to persist through Q4.
Turning to our quarterly performance.
We secured nine new design wins among seven customers.
Of the nine design wins for where with datacenter customers to where with telecom customers to where with FTE th customers and one was with the CATV customer.
As Thompson mentioned one of these design wins was a new 400 G transceiver design win with a network equipment manufacturer supplying enterprise and Hyperscale datacenter customers.
In addition.
Two of the design wins are related to 25 G PON.
With a large multinational network equipment manufacturer focused on the telecom market.
All of the design wins in Q3 with existing customers of Oi. So these design wins represent deeper penetration within our existing customer base.
Total third quarter revenue of $53 3 million.
Decreased 35% compared to the third quarter in the prior year.
And was down one 7% sequentially.
Our Q3 revenue was in line with our guidance range of $51 million to $56 million.
In the third quarter, 45% of our revenue was from our datacenter products, 43% from CATV products with the remaining 12% from FTE Th telecom and other.
And our CATV products segment. The overall demand environment remains very strong as msos, particularly in North America continued to upgrade their networks.
We generated revenue of $23 $1 million in Q3 up 98, 4% from $11 $6 million in Q3 of the prior year.
And down 16, 3% sequentially from record results in Q2, 'twenty, one due largely to the component shortages and reduced sales of certain node transmitter products as inventory rebuilding for these products has largely been completed by one of our customers.
Notably in early October we virtually attended the society for cable Telecommunications engineers or FCT Expo.
Commentary from customers continues to be positive.
Looking ahead, we have good visibility with CATV orders well into next year and we continue to believe that our technologies will play a key part in Msos upgrade plans over the next several quarters.
Notably in the quarter, we began to see an increase in orders associated with so called high split upgrades, which several msos are using to increase CATV network bandwidth.
Our amplifier products and certain of our node products are used in these high split networks and we are seeing particular order strength in this area.
Our Q3 datacenter revenue came in at $23 9 million.
Compared to $55 3 million in the third quarter of the prior year.
In the third quarter, 36% of our datacenter revenue was from our 40 G transceiver products and 57% was from our 100 gig products.
Our datacenter revenue was up six 9% sequentially.
We remain optimistic about our ability to see sequential growth in the datacenter in the second half of this year.
However, we are seeing some supply constraints that are beginning to impact other parts of the 400, GE ecosystem, which may in turn impact the timing of the 400 <unk> rollout and this may limit the extent of the sequential growth we can see in the back half of this year.
Now turning to our telecom segment.
Revenue from our telecom products of $5 $1 million increased 54, 5% sequentially and declined 42% from $8 9 million in Q3 of the prior year.
While we are pleased to deliver sequential growth in this segment during the third quarter, we see market conditions in the China Telecom market is continuing to be lumpy as the timing and cadence of the <unk> rollout there remains somewhat opaque.
Looking ahead, we do expect quarter to quarter variability until the pace of <unk> Rollouts in China becomes more predictable.
Also we are excited about the design wins in 'twenty five G. PON that I mentioned earlier as over time. This will provide an additional growth driver to our <unk> revenue.
For the third quarter, our top 10 customers represented 86% of revenue.
Up from 84, 9% in Q3 of the prior year.
We had 210% or greater customers in the third quarter, one in the CATV market and one in the datacenter market. These.
These customers contributed 29, 4% and 15, 5% of total revenue respectively.
In Q3, we generated non-GAAP gross margin of 19, 9%, which was at the low end of our guidance range of 19, 5% to 21, 5% and was down from 25% in Q2 of 2021 and 27, 4% in Q3 of 2020.
Total non-GAAP operating expenses in the third quarter were $19 3 million or 36, 3% of revenue.
Paired with $22 $3 million or 29, 1% of revenue in Q3 of the prior year.
The reduction in operating expenses is due to a decrease in R&D spend at some of the costs associated with our 400 G development have begun to subside along with decreased shipping expenses due to lower shipments to one of our customers.
Non-GAAP operating loss in the third quarter was $8 7 million.
Compared to an operating loss of $1 3 million in Q3 from the prior year.
GAAP net loss for Q3 was $15 8 million or a loss of <unk> 58 per basic share.
Compared with a GAAP net loss of $9 6 million or a loss of 42 cents per basic share in Q3 of 2020.
On a non-GAAP basis net loss for Q3 was $5 3 million or a loss of <unk> 20 per basic share.
This was better than our guidance range of a loss of $6 9 million to $9 million or a loss in the range of 25.
To <unk> 33 per basic share due to lower operating expenses and forecast.
And compares to a net loss of $1 4 million.
Or loss of <unk> <unk> per basic share in Q3 of the prior year.
The basic shares outstanding used for computing the net loss in Q3 were $27 1 million.
Turning now to the balance sheet.
We ended the third quarter with $48 $9 million in total cash cash equivalents short term investments and restricted cash.
This compares with $50 5 million at the end of the second quarter.
As of September 30.
Had $94 $5 million in inventory compared to $104 million at the end of Q2.
Inventory decreased primarily due to utilization of inventory for customer orders.
This inventory reduction is consistent with our long term plan as we focus on rationalizing inventory levels.
We made a total of $3 8 million in capital investments in the third quarter, including $3 $4 million in production.
Equipment and machinery.
And an immaterial amount on construction and building improvements.
We now expect 2021, capex will be approximately $15 million.
As we disclosed in February of this year.
We initiated a new at the market offering.
To date, we have raised $1 billion under this new program, including 0.1 million raised in Q3.
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 $51 million and $55 million.
Non-GAAP gross margin to be in the range of 18, 5% to 20%.
Non-GAAP net loss is expected to be in the range of $5 5 million.
To $6 6 million.
And non-GAAP loss per basic share between 'twenty.
And 20, <unk> using a weighted average basic share count of approximately 27 4 million shares.
With that I will turn it back over to the operator for the Q&A session operator.
Yes. Thank you as I mentioned, we now will begin the question and answer session to.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And the first question comes from Simon Leopold with Raymond James.
Thank you for taking my question this.
This is more reseal for Simon today.
Can you please listen update on your traction with your 400 gigabit Attunity. Thank you previously disclosed expectations for 400 gig two to ramp on the third quarter and become more meaningful.
In the fourth quarter.
Maybe you can elaborate on the 400 gig traction this quarter and.
How should we think about the opportunity going forward.
Yes, so as we noted in our prepared remarks, we have seen is that there is at least one of our customers. One of the early customers that qualified our 400 G products has.
It seems to be seeing some component shortages in other parts of the.
Of the 400 <unk> network that is it's not optical products its not an inability to supply those products, but they are seeing.
<unk> some other component that's making it.
Difficult for them to ramp there.
There are 400 G efforts as quickly as they would like.
So.
As we noted in our prepared remarks, we continue to expect to see.
Growth overall in the datacenter market, but the 400 G rollout, maybe a little bit later, depending how long this the supply disruption that they're seeing less.
Okay. Thank you and once again. Please press Star then one if you would like to ask a question.
And once more pressing star then one will allow you to speak.
Alright.
Is.
Is there something else at the present time I would like to hand, the floor to Dr. Thompson Lin for any closing comments.
Okay. So thank you for joining us today, we want to lose 10 of things.
To our investors customers and employees for your continuous support and we look forward to see many of you virtually at all coming investment conference.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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