Q2 2022 Applied Optoelectronics Inc Earnings Call
Good afternoon, everyone.
Welcome to the applied Optoelectronics second quarter 2022 financial results Conference call.
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I would now like to turn the conference over to Lindsey salaries. Please go ahead.
Thank you I'm Lindsay salaries Investor relations for applied Optoelectronics and I'm pleased to welcome you here today.
Second quarter 2022 financial results conference call.
After the market close today <unk> issued a press release announcing second quarter 2022 financial results and provided its outlook for the third quarter of 2022.
The release is also available on the company's website at Ao, Inc. Dot com.
This call is being recorded and webcast live a link to the recording can be found on the Investor Relations section of the ally 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 Q2 results and Stefan will provide financial details and the outlook for the third quarter of 2022.
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.
Five 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 third quarter of 2022.
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.
Fourth and 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 31st 2021.
Also all financials discussed today are on a non-GAAP basis, unless specifically noted otherwise non.
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.
Like to note the date of our third quarter 2022 earnings call is currently scheduled for November 3rd 2022 now.
Now I'd like to turn the call over to Dr. Thompson Lin applied Optoelectronics, founder Chairman and CEO Thompson.
Thank you Lindsey and Sydney Airport join our call today.
Begin with some highlights one of the colder people.
I'll turn the call over to Stefan Murray, who would discuss a more detailed review of all lots of good quarters as long as shown as jobs and always sort of a so called them.
Almost every quarter.
Yes.
Becky.
And the completion of several older wrong a lot.
Cosmos.
We expect to ship in Q2.
During the quarter because it will be quick so it didn't change to some old news, but due to well known supply chain issues.
We were unable to adjust production and procure Goldman accused to agree these changes prior to quarter end.
Joe who slipped into Q3.
We have seen huge substantially all of this older.
Awesome.
Pete.
Weird localize that'd be jockeying Liberty.
She couldn't delay negatively impact our Q2 really.
Crush money gets posted.
Cool.
Any thoughts.
I guess, it's jobs or total revenue for the second quarter.
While at the same year over EUR $252 million.
Which one.
<unk>.
Turning to our rate of all the jobs or the margin was in line with our expectations.
non-GAAP EPS was above our expectations.
Although I believe Nokia television signals of $23 million was down 14, 1% year over year.
And was down by four 1% sequentially.
To the region.
Abbas.
Richie two loan relationships.
So overall, if you bought them.
But it may slow.
Most of the medical competing put additional lingual per dose.
In order to upgrade their network.
Although biomarin for all data center product or $21.5 million decreased 4% year over year.
And what essentially freights creatures.
We have disclosed previously.
So that year over year decline.
Yeah.
You too.
140 G.
Which is nearly the end.
And all these lifecycle.
This decline was partially offset by increased.
As for energy continued to the way they did.
<unk>.
We expect year over year goals will all total data center revenue to be.
We continue to see good customer traction.
Yes.
Today, we have received nearly $5 million in orders for.
While all 400 G products, most of which we expected to be shipped in Q3 and Q4.
During the second quarter with Q.
<unk>.
Well at least he's always tool for our 400 G products.
Both of these existing Hyperscale, yes or no.
Our peripheral customers.
We have to do that.
One O G per dose.
Hyperscale customers.
Two one of the wins.
Cleveland Pictures surprising data center industry.
So every minute to do that we will in all fiber to the home Peyto com and other categories.
With that I will turn the call over to Steffen to me.
We view the details of our Q2 performance and audible cues you Steffen.
Thank you Thompson.
As Thompson mentioned, our second quarter revenue was adversely affected by the delay in the completion of several orders from our largest CATV customer than we had expected to ship in Q2.
During the quarter the customer requested certain changes to several orders, but due to the well known supply chain issues, we were unable to adjust production and procure raw materials to address these changes prior to quarter end and the revenue therefore slipped into Q3.
We have since shifted substantially all of these orders and although delayed we have recognized the resulting revenue in Q3.
These shipment delays negatively impacted our Q2 revenue by approximately $6 $7 million.
As a result, our total revenue for the second quarter decreased three 5% year over year to $52 $3 million, which was below our expectations and essentially flat compared to Q1.
While our revenue came in below our expectations, we delivered gross margin in line with our expectations and non-GAAP EPS above our expectations.
We're encouraged by the strong CATV environment the recovery in the telecom market and the traction we are seeing with our 400 G products.
During the quarter, we secured eight new design wins.
All of these design wins two were for our 400 G products, both with existing Hyperscale datacenter operator customers.
We also had two wins for our 100 G products with Hyperscale customers.
We had two 100 G wins with network equipment manufacturers supplying the data center industry.
The remaining two design wins were in our F T th telecom and other category.
We continue to see good customer traction on 400 G and we expect orders will ramp up in the second half of this year.
On our Q1 call we had discussed how our major hyperscale datacenter customers selected <unk> as a vendor for several of our 400 G products.
We're pleased to have completed the interoperability testing with the company's other prospective vendors and we have begun to receive sizable orders for shipments beginning in Q3.
This was in addition to the two new design wins for 400 G. In the quarter that I just mentioned.
One was with a major hyperscale, operator, and the other was with a smaller operator.
These new wins further bolster our expectations for continued ramp in 400 G. Later, this year and into 2023.
Turning to our second quarter results.
45% of our Q2 revenue was from our CATV products.
41% was from our datacenter products.
And the remaining 14% from F T th telecom and other.
And our CATV product segment.
The overall demand environment remains robust as the Msos, particularly in North America continued purchasing additional networking products in order to upgrade their networks.
However for the reasons I mentioned earlier related to the orders that slipped from Q2 into Q3, we generated CATV revenue of $23 $7 million down 14, 1% year over year and down five 1% sequentially.
Looking ahead, we currently expect strong sequential improvement in CATV revenue in Q3.
Further out we continue to have good visibility with C. A T D orders as we see our backlog stretching throughout 2022 and into 2023.
We have significantly increased production capacity for CATV products, and we believe that we are well positioned to deliver on the demand you're seeing.
Our Q2 data center revenue came in at $21.5 million down, 4% year over year and up 0.4% sequentially.
In the second quarter, 71% of our datacenter revenue was from our 100 G products.
21% was from our 40 G transceiver products and 1.1% was from our 204 hundred G transceiver products.
As Thompson noted earlier, we have booked nearly $5 million in orders already for 400 G products and with our production capacity ramping we expect to ship most of these in Q3 and Q4 this year.
Now turning to our telecom segments.
Revenue from our telecom products of $6 $3 million was up 88, 3% year over year and up 19, 2% sequentially.
Our strong second quarter performance was driven by a recovery in the China Telecom market.
Looking ahead, we continue to expect to see fluctuations in revenue in telecom is the outlook for China Telecom remains somewhat murky.
For the second quarter, our top 10 customers represented 87, 1% of revenue up from 86, 8% in Q2 of the prior year.
We had 210% or greater customers in the second quarter, one in the CATV market and one in the data center market.
These customers contributed 40% and 22, 2% of total revenue respectively.
In Q2, we generated non-GAAP gross margin of 16, 7%, which was within our guidance range of 16, 5% to 18% and was down from 17, 5% in Q1 of 2022 and 25% in Q2 of 2021.
The decline in our gross margin was mostly due to continued challenges with the supply chain.
Total non-GAAP operating expenses in the second quarter were $18 2 million or 34, 9% of revenue.
<unk> from $20 million or 36, 9% of revenue in Q2 of the prior year.
R&D expenses decreased year over year, reflecting the timing of certain R&D projects, which we believe will come back next quarter.
And our sales and marketing expenses benefited from some reduced shipping costs as well as lower personnel costs.
Looking forward, we expect non-GAAP operating expenses to hover around $20 million per quarter for the rest of the year.
non-GAAP operating loss in the second quarter was $9 $5 million compared to an operating loss of $6 $5 million in Q2 of the prior year.
GAAP net loss for Q2 was $14 5 million or a loss of 52 cents per basic share compared with a GAAP net loss of $8 $2 million or a loss of 31 cents per basic share in Q2 of 2021.
On a non-GAAP basis net loss for Q2 was $7 6 million or a loss of 28 cents per basic share, which was better than our guidance range of a loss of $8 $4 million to $9 5 million or a loss per share in the range of 30 to 34 cents per basic share and compares to a net loss of $4 1 million.
Or a loss of 15 cents per basic share in Q2 of the prior year.
The basic shares outstanding used for computing the net loss in Q2 were $27 6 million.
Turning now to the balance sheet, we ended the second quarter with $40 $7 million in total cash cash equivalents short term investments and restricted cash.
This compares with $40 $1 million at the end of the first quarter.
We ended the quarter with total debt of $63 $8 million down from $67 $2 million last quarter.
As of June 30, we had $98 $2 million in inventory compared to $92 million at the end of Q1 <unk>.
Inventory increased primarily due to the delay in shipment of the CATV orders that we discussed earlier.
We made a total of $1 million in capital investments in the second quarter, including zero point $7 million in production equipment, and machinery and zero point $2 million in construction and building improvements.
For the first half of the year, our total capex spend has been about $2 million.
Looking ahead to the second half, we would expect flat to slightly higher capex spending so for the year. We currently expect between $4 million and $6 million in total capex.
Before turning to guidance I would first like to provide an update on the supply chain environment.
We continued to see challenges in some areas of our supply chain, particularly semiconductors as.
As in prior quarters, we have adapted to these challenges by purchasing materials from alternative often higher cost sources.
In some cases, we are able to reduce the impact by redesigning products to utilize components with better availability and cost, but this is not always possible for every shortage.
We currently see approximately $1 million to $3 million in potential revenue reduction in Q3 due to component shortages.
However, this amount represents revenue that will be shifted to Q4, rather than lost revenue.
Moving now to our Q3 outlook, we expect Q3 revenue to be between $57 million and $60 million and non-GAAP gross margin to be in the range of 16, 5% to 18, 5%.
non-GAAP net loss is expected to be in the range of $7 6 million to $9 $1 million.
And non-GAAP loss per basic share between 27 and 32 cents using.
Using a weighted average basic share count of approximately $27 9 million shares.
With that I will turn it back over to the operator for the Q&A session operator.
We will now begin the question answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw to withdraw your question. Please press Star then two at.
At this time, we will pause momentarily to assemble our roster.
Again, if you have a question. Please press Star then one.
Okay.
Alrighty, our first question will come from Tim <unk> with Northland Capital markets. Please go ahead.
Hi, Good afternoon, a question on your Oh your outlook and comment you might have made about datacom. So as you look at the.
The sequential increase you're guiding for for Q3 should we assume that's you know.
Principally all cable T V catch up or is there.
Anything else going on there on the one hand.
And on the other.
Thank Tom submitted.
Comment about returning to year over year growth.
In data center was that comment about.
Q3, the second half for any any particular color on that.
Sure. So the first question was about the.
The.
Nature of the sequential increase that we're forecasting in revenue.
Yeah, that's a lot of that is related to the cable TV increase.
Data center, we think it will be kind of flattish.
Sequentially.
And as far as the returning to sequential growth that wasn't a specific statement on Q3 or Q4, but we said that at some point during the second half, so probably Q3 or Q4.
We should return to two sequentially to two year over year growth.
Okay, and just to follow up on that.
Given the orders in hand and.
You know additional design wins for 400 gig.
It sounds like you expect them.
Got to ramp more material in Q4 or are you seeing any offsets in lower speed too.
To drive that flattish outlook for data center in Q3.
Yes, I mean, a lot of the 400 G orders are going to start shipping later in Q3, so there's not as much effect in Q3, as you might otherwise, but otherwise expect if it was going to be for the entire quarter.
And then there's always some fluctuation in some of the lower stuff as well so.
So we do expect to see some ramp in 400 gig, but it'll be towards the end of the quarter more material in Q4.
Okay, and then maybe just one more when you talk about the.
5 million and 400 G orders should we assume that's primarily from your kind of as well and I guess recently historically top customer maybe you've just added your.
Other historical top customer, but should we assume that's concentrated with one major cloud operator.
And how does that initial kind of batch of orders in hand, compared up compared to the kind of total opportunity that you see with either that cloud customer or.
The two major cloud customers.
Yeah. So.
The orders that we've gotten so far are bought for 400 G by and large are not for the.
The largest the most recent largest major customer.
Just for a couple of other hyperscale operators.
Yes.
As far as how we look at this opportunity I mean this is very much at the beginning that $5 million represents an accumulation of orders that we've received.
During the quarter.
So it's not you know.
Not like that just all happen.
See this month or this week or something where we would expect that to be some sort of a run rate.
But the purpose of that is really just to point out that we are you know we are starting to see a sizable backlog for orders, we're ramping our production capacity to be able to accommodate those orders.
And that will be delivering on those orders and presumably additional orders that will receive between now and the end of the year.
Okay. Thanks.
Our next question will come from Paul Silverstein with Cowen. Please go ahead.
Stefan what visibility if any to.
Two margin improvement.
What needs to happen.
Everyone's doing a bunch of folks employed change will conclude.
Two hoffman for gross margin.
Got up to a more meaningful level from here.
Yeah.
You know I think as we highlighted in our prepared remarks earlier you know the the biggest factor that's been affecting US recently has been just.
There's not one particular supply chain issue that I can point to you theres been a lot of various different issues that we've had I think this is not.
Untypical for for other companies of course, but thats, an excuse but.
It's a little bit difficult to predict exactly what the trajectory of those pricing is going to be as we noted in our prepared remarks, we've done quite a lot of work on.
Qualifying second sources finding alternative.
You know in many cases redesigning products or portions of products to be able to accommodate.
The components that are either more available or available at a lower cost or hopefully both so theres been a lot of activity that we've had the difficulty in translating all that activity into.
In <unk> gross margin is it you know.
We have to if it's a redesign or something like that we'd have to burn through the existing inventory.
In some cases the inventory that we're getting.
Products that were able to get our actually higher costs, so that kind of offsets what would otherwise be cost savings from other areas. So I think we're going to see improvement in gross margin towards the end of the year.
Based on you know.
Some of the new products that we have kicking in more meaningfully contributing.
Contributing to revenue at that time.
And also some of the.
Anticipated cost reduction and the combination of some of the cost reduction efforts that we have had.
So our current expectation is from sort of an uptick in gross margin in Q4.
But I will hedge that a little bit by saying that that assumes that the supply chain situation doesn't get materially worse, which it seems like it's unlikely at this point, but one never knows.
Yes.
Youre talking about getting back to the mid high twenties.
For the incremental impact from supply chain.
Or you are not even talking about getting back to that level and I guess, we're always trying to do it.
Get to 30 plus.
Beyond supply chain, what needs to happen what can supply to just reparation supply chain, what can that get you back to.
And then could get to 30, plus what needs to happen beyond supply chain normalization.
Yes, I think the supply chain, probably gets us back into the low to mid twenties.
To get to 30% you know, we would need to see contribution significant contribution from some of our higher margin newer higher margin products.
So so a mixed shift in addition to the supply chain normalization.
<unk> grew to 400 gig.
Oh I'm.
I'm sorry.
No go ahead Paul.
Typically to 400 gig.
Speaking more generically in terms of new Ross.
And then more generically about it I mean 400 gig can be a contributor there that's certainly part of it but other new products as well.
And like I said the timeframe on the.
On the supply chain normalization, we think is sort.
Q4 ish.
Barring any other.
Any other things that happen.
The new products again will start to kick in probably in Q4, but it will probably contribute more meaningfully and quarters after that so into 2023.
And then I apologize I know you've addressed this in the past, but to get to breakeven what does that assume in terms of volume and gross margin your assumption.
Alright, well, we gave some guidance on operating expense.
Going to hover, probably between $19 520 million something like that through the rest of the year. So you can you can kind of.
And I don't expect that to change meaningfully next year really either we've been fairly consistent and operating expense.
So you can kind of do the math on the on the gross margin and revenue numbers.
That it would take to get to breakeven.
We said before I think we I think we can get back to the upper twenty's or even 30, maybe touch 30% at some point, it's not likely to happen in the next couple of quarters.
Given the trajectory that we just talked about.
So if you kind of assume that in and.
Plug in a say $20 million ish operating expense you can get a pretty rough idea on what the revenue levels that need to be.
I appreciate it thank you.
Okay.
There are no remaining questions at this time and with that we will conclude our question and answer session.
I would like to turn the conference back over to Dr. Thompson Lin for any closing remarks.
Okay.
Singapore join us today as always we want to extend the same.
To our investors customers and employees for your convenience the cold we look for wall.
To updating you allow walkways next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.