Q3 2022 Applied Optoelectronics Inc Earnings Call
Good afternoon, I will be your conference operator at this time I would like to welcome everyone to applied Optoelectronics third quarter 2022 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 you May Press Star then one on your telephone keypad to withdraw from the question queue. Please press Star then two please note. This event is being recorded I will now turn the call over to Lindsay Savarese Investor Relations for ally the salary you may begin.
Thank you Lindsay Savarese Investor Relations for applied Optoelectronics and I am pleased to welcome you to Aoi's third quarter 2022 financial results Conference call.
After the market close today ally issued a press release announcing its third quarter 2022 financial results and provided its outlook for the fourth quarter of 2022.
The release is also available on the company's website at Ao, Inc. Com.
Call is being recorded and webcast live.
The recording can be found on the Investor Relations section of our website and will be archived for one year.
Joining us on today's call is Dr. Thompson Lin.
Why 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 Q3 results and Stefan will provide financial details and the outlook for the fourth 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.
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 level.
Levels of activity performance or achievements of the company for 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.
Predicts expects plans may should could would will potential or things or the negative of those terms or other similar expression at 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.
Forward looking statements are only predictions and involve known and unknown risks and uncertainties.
Many of which are beyond the company's control, including important factors such as restaurants added to the company's ability to complete the transaction described on this call.
On the proposed terms and schedule or at all.
The rest of that certain closing conditions may not be timely satisfied or waived.
The failure or July to receive the required regulatory or other government approvals relating to the transaction and the occurrence of any event change or other circumstance that could give rise to the termination of the transaction.
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 long as statements regarding the company's outlook for the fourth quarter of 2022.
One of <unk>, unless specifically noted otherwise <unk> financial measures are not intended to be considered in isolation, whereas a substitute for results prepared in accordance with gap.
A reconciliation between our gap and non-GAAP measures as well as the discussion of why were you present non-GAAP financial measures are included in our our next press release that is available on our website.
I'd like to note the data of our fourth quarter and full year 2022 earnings call is currently scheduled for February 23rd 2023, now I would like to turn the call over to a Doctor Thompson Lane applied Optoelectronics, founder and chairman and CEO Thompson.
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Thank you Thompson.
As Thompson mentioned, while our revenue came in below our expectations. We delivered gross margin in line with our expectations and a smaller non-GAAP loss per share relative to our expectations.
We're encouraged by the robust demand and the C. A T V in environments. The strength, we are seeing in the telecom market in the early shipments of our 400 G products.
Our total revenue for the third quarter increased 6% year over year $256.7 million, which was slightly below our guidance range of $57 million to $60 million, primarily due to a faster than anticipated decline and 40 G sales.
As Thompson mentioned and as you may have seen on September 15th we announced that we have entered into an agreement with your <unk> electronic technology for the sale of our manufacturing facilities located in the People's Republic of China, and certain assets related to our transceiver business and multichannel optical subassembly products for the data centre telecom.
And F T th markets for a purchase price of $150 million less a whole back amount that is variable depending on working capital and other conditions at the time of closing.
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It would be approximately $7 million, making the total cash consideration for the divestiture approximately $143 million.
I will spend a few moments on today's call to provide more detail on the strategic rationale as well as to discuss what airline looks like as a company post the close of the transaction.
As a reminder, we continue to anticipate that the transaction will be completed in 2023 and is subject to customary closing conditions and regulatory approvals, including Cvs and ODI.
We believe that the transaction would have a number of benefits for a y.
First it would allow us to concentrate our efforts on during our higher margin optical component chip business. Currently the vast majority of the optical components produced in our Texas Fab are used in the internal production of our Transceivers.
There are a number of transceiver manufacturers, who are currently competitors of ours that we feel could become customers for our optical component products. Once we no longer compete with them on transceiver production.
It's successful we believe that this transaction would allow us to unlock an additional potential market for optical component products, which typically earn significantly higher gross margins.
Second we believe that this transaction may also unlocked potential new revenue in China.
Do detentions with the U S. Many Chinese companies have a high degree of sensitivity to purchasing key components like Transceivers from U S companies.
We believe that putting our transceiver manufacturing business into the hands of a domestic Chinese owner should enable the new entity to gain additional business with domestic Chinese customers.
The benefits a y as potentially greater sales of our optical component chips to be used in the production of Transceivers for these new customers.
Third we believe that reducing our dependence is accompany on operations in China. Given recent ongoing events has proved that.
The business environment, there for U S companies has grown increasingly challenging and there is no assurance that these tensions will he's in the foreseeable future.
Finally, the significant cash generated by the transaction would enable us to strengthen our balance sheet.
Would also allow us to make investments in future product development, and our existing markets as well as potential new ones.
After the close of the transaction, we would retain our manufacturing facilities in Taiwan in Sugarland, Texas.
I would exit the data center <unk> supermarket, and instead, we would focus our resources on our data center laser business are CATV broadband business and manufacturing of optical components for other markets such as F. T Th obsessing.
We believe that these remaining businesses should generate free cash flow.
And can achieve EBIT breakeven once the transaction closes.
Turning to our revenue profile would look like once the transaction is closed it is difficult to break out what percentage of our overall datacenter revenue is optical components versus transceivers given that our optical components are used to manufacture our transceivers.
However, based on our internal usage of in-house manufactured optical components, we estimate that roughly 15% of our data center revenue over the trailing 12 months and it's September 30 is attributable to these optical components.
In addition to this embedded component business over the trailing 12 months, we've had direct sales of optical components of approximately $20 million.
Post transaction as noted above we believe that there are significant opportunities to increase both are datacenter optical component revenue and are a direct sales of optical components.
Lastly, with respect to our margin profile, while we cannot estimate with precision our margin structure. After the transaction closes we believe that at clothes are within a few quarters. Afterwards, we can achieve gross margins in the upper 20 per cent range, perhaps approaching 30 per cent.
Turning back to the quarter.
Secured one new design land, which was in our telecom segment. The single designing in the quarter is lower than is typical but we continue to have a robust pipeline for new qualifications that we expect to be completed over the next few quarters.
We continued to see good customer traction on 400 G. As we expected orders began to ramp up in the third quarter and we expect continued growth in shipments in Q4.
Turning to our third quarter results 55 per cent of our queue. Three revenue was from our CATV products, 31% was from our data center products with the remaining 14% from F T Th telecom and other.
And our CATV product segment, the overall demand environment remains robust as msos, particularly in North America continue purchasing additional networking products in order to upgrade their networks.
T V revenue in the third quarter was a company record of $31.3 million, which was up 35% year over year and 32% sequentially.
Further out we continue to have good visibility with CATV orders as we see our backlog stretching into mid 2023.
We have significantly increased production capacity for our CATV products demonstrated by our queue three results and we believe that we are well positioned to deliver on the demand that we are seeing.
R Q3, datacenter revenue came in at $17.7 million down, 26% year over year and 18% sequentially.
In the third quarter 72 per cent of our data center revenues from our 100 G products, 13% was from our 40 G trucks, either products and 3% was from our 200 G and 400 G transceiver products.
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Revenue from our telecom products of $6.8 million was up 32% year over year and up 9% sequentially.
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For the third quarter, our top 10 customers represented 86% of revenue flat with Q3 of the prior year, we had 210% or greater customers in the third quarter, one in the CATV market and one of the datacenter market. These customers contributed 50 per cent at 16% of total revenue respectively.
In Q3, regenerated non-GAAP gross margin of 18%, which was at the high end of our guidance range of 16.5% to 18.5% and was up from 16.7% in Q2 of 2022 and compared to 19.9% in Q3 of 2021 the.
The increase in gross margin was driven mainly by the anticipated impact of the cost reduction efforts that we initiated early in the year.
Total non-GAAP operating expenses in the third quarter were $19.4 million or 34.3% of revenue.
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R&D expenses decreased 8% year over year to $8 $9 million.
Looking forward, we expect non-GAAP operating expenses to increase in Q4 by about $3 million.
Increase is driven by approximately $3.3 million or approximately 12 per share of additional employee bonus accrual related to the China divestiture.
This catch up accrual in queue for is necessary to conform our total year end bonus accrual to current expectations. After the announcement of the transaction but.
But it is not expected to refer after Q4.
Looking ahead, we expect non-GAAP operating expenses to moderate next year to between $19 million and $20 million per quarter.
non-GAAP operating loss in the third quarter was $9.3 million compared to an operating loss of $8.7 million in Q3 in the prior year.
GAAP net loss for Q3 was $15.6 million or loss of 56 cents per basic share.
Compared with the gap net loss of $15.8 million or a loss of 58 cents per basic share in Q3 of 2021.
On a non-GAAP basis net loss for Q3 was seven $1 million or a loss of 26 cents per basic share, which was better than our guidance range of a loss of seven $6 million to $9 $1 million or loss per share in the range of 2007 to 32 cents per basic share and compares to a net loss of $5.3 million or a loss of 2000.
Per basic share in Q3 of the prior year.
The basic shares outstanding used for computing, the net loss in Q3 or 2007 $8 million.
Turning now to the balance sheet, we ended the third quarter with $34 $6 million in total cash cash equivalents short term investments and restricted cash.
This compares with $47 million at the end of the second quarter.
We ended the quarter with total debt of $65 $1 million up from $63.8 million last quarter.
As of September 30, we have $94.3 million in inventory compared to $98 $2 million at the end of Q2.
Inventory decrease primarily due to utilization of inventory for larger shipments during the quarter.
We made a total of zero point $8 million in capital investments in the third quarter almost all in construction and building improvements looking ahead for the year, we expect between $4 million and $5 million in total capex.
Moving now to our queue for outlook.
We expect Q for revenue to be between $58 million and $64 million and non-GAAP gross margin to be in the range of 17% to 19.5%.
<unk> net loss is expected to be in the range of $8 $1 million to $9.8 million and non-GAAP loss per basic share between 28, and 34 cents using a weighted average basic share count of approximately 28.7 million shares.
That I will turn it back over to the operator for the Q&A session operator.
We will now begin the question and answer session.
The question you May pass dog and one on your telephone keypad.
If you're using a speaker phone please pick up your handset before pressing a key.
Withdrawal from your question can you please <unk>.
At this time, we will pause momentarily to assemble our roster.
Again, if you have a question please press nine one.
We have a question from Ethan like out of the Riley. Please go ahead.
Hi, This is Nathan calling it for <unk>. Thanks for taking my question I just have one on my end. So I will send some hyperscalers announcing pretty robust capex plans surrounding their data infrastructure built up. So I was hoping you could provide a little additional color regarding overall optical demand, especially as it pertains to hyperscalers. Thanks.
Sure well.
As we noted I think what we're seeing in the market right now, particularly with the Hyperscalers is that our 400 G business is beginning to ramp as we noted in our prepared remarks earlier I mean, it was up more than three times sequentially.
And we have a pretty strong order backlog for those products, which we've anticipated and I think we've communicated that.
The last couple of quarters that we expected to see 400 gig cramping in the second half of the year. So it's good that we're actually.
Experiencing what we what we projected to see earlier in the year. So.
I think the spending environment for the for the Hyperscalers generally as you noted fairly robust in terms of optical components spent.
We're monitoring that based on you know.
You point moving forward I sort of macro conditions, and how that's going to affect things, but right now where we stand it looks like the spending plans for next year are starting to Crystallise, a little bit on the part of our customers and again, we think the 400 gig ramp.
Is good evidence that that's going to be a positive tourist moving forward.
Good to hear that thank you.
Thank you.
Again, if you have a question please press lot online.
This concludes our question and answer session I would like to turn the conference back over to Doctor Thompson Lane for closing remarks.
Okay. Thank you for join US today, it's always we want to extend a thank you to all investors customers and employees before you can use the pole.
Look for wall to updating you I'll I'll focus next quarter.
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