Q4 2022 Applied Optoelectronics Inc Earnings Call

February 23, 2023

Good afternoon.

I'll be your conference operator at this time I would like to welcome everyone to applied Optoelectronics fourth quarter and full year 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After.

After the Speakers' remarks, there will be a question and answer session to ask a question you May Press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two.

Please note that this call is being recorded.

I'll now turn the call over to Lindsay <unk> Investor Relations for eight O Y Ms. <unk> you may begin.

Thank you Lindsay Savarese Investor Relations.

And I'm pleased to welcome to the AMRI fourth quarter 'twenty to 'twenty two.

As a result conference call.

After the market close today.

I asked you to possibly fourth.

Fourth quarter and full year 'twenty two.

And provided its outlook for the first quarter, that's one time right.

Release is also available on the company's website.

Boston Dot com.

Cause being recorded and webcast live.

According to what he found on the Investor Relations section.

Why web site 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 Allied Q1 result.

Stefan will provide financial details and the outlook for the first quarter of 2023.

A question and answer session will follow up with a lot.

Before we begin I would like to remind you to review <unk> Safe Harbor statement.

On today's call management will make forward looking statements.

Forward looking statements involve risks and uncertainties of Bos assumptions and current expectations, which could cause the company's actual results levels of activity performance or achievements of the company or 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 forecasts anticipate estimate intend predict.

That's fine.

May should could would will potential well thanks.

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, including important factors such as risks related to the company's ability to complete the Transat transaction described on this call on the proposed terms and schedule or at all.

At certain closing conditions may not be timely satisfied or waived.

Failure or delay 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.

Cool.

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.

Statements regarding the company's outlook for the first quarter of 2023.

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.

Fourth in the risk factors section of the company's reports on file with the SEC.

The company's annual report on Form 10-K for the year ended December 31 2022.

Also all financial results and other financial measures discussed today on a non-GAAP basis, unless specifically noted otherwise non.

non-GAAP financial measures are not intended to be considered in isolation.

Obstacle for results prepared in accordance with GAAP.

Reconciliations between our GAAP and non-GAAP measure 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.

I'd like to note the date of our first quarter earnings call is currently scheduled for paper for 123, now I would like to turn the call over to Dr. Thompson Lin applied Optoelectronics, founder Chairman and CEO Thompson.

Thank you Lindsey.

Thank you for joining our call today, we are pleased to repay fourth quarter to John Rielly.

All expectations.

Margin.

And then on good loans to shoot that again, our expectations. We continue to see strong demand in the CATV market.

And Jim Ritchie.

Quarterly.

<unk> company.

In Q2.

During the fourth quarter would give you the liberty of $61 $6 million.

You saw a guy doesn't reach <unk> 8 million to $64 million.

<unk> non-GAAP gross margin of 21, 4%.

Above our guided range.

17, five to 19, 5%.

David.

We're talking close to reduction.

Favorable product mix.

Our non-GAAP loss per share was <unk>.

<unk> 96.

Hey, Paul.

Our guidance range, although rose R 22.

Two studies dosing.

Although globally.

PV Sidney.

So the airport to a meeting.

53% year over year.

22% sequentially.

Our strong Q3.

We continue to see robust demand in the CATV market.

Total revenues for all data has been approved out of $16 5 million.

5% year over year.

7% sequentially.

This customer continues to manage inventory label of older product doing a trend issue too far on that.

This was partially offset by increased influenza.

Good evening, which more than doubled sequentially.

In Q4, we signed an agreement with a major Hyperscale data center operator.

Our development program to make next generation lasers.

The data center.

One is <unk>.

Why are the development of.

<unk> will take several quarters to be complete.

We view this come to award.

<unk> on the basis of our KOL laser fabrication.

With that I will turn the call over to Stephen to review the details of our Q4 and Q.

Steven.

Thank you Thompson.

As Thompson mentioned, we are pleased to report our fourth quarter results with revenue in line with our expectations gross margin above our expectations and a non-GAAP loss per share better than our expectations.

We continue to see strong demand in the CATV market and generated the highest quarterly CATV revenue in the company's history in Q4.

Before turning to the quarter I wanted to provide an update on the transaction that we announced last September .

<unk> entered into an agreement with Johan Opto electronics technology.

The sale of our manufacturing facilities located in the People's Republic of China.

Certain assets related to our transceiver business and multichannel optical sub assembly products for the data center Telecom and <unk> markets.

Purchase price of $150 million.

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 <unk> in ODI.

We continue to advance work on these required regulatory approvals as.

As part of this process Johan has disclose additional details regarding their financials, including new details regarding the composition of their ownership group and based on this new information we continue to be optimistic that regulatory approval of this transaction both in the U S and China is achievable.

Turning to the quarter, our total revenue for the fourth quarter increased 13% year over year to $61 6 million.

Which was in line with our guidance range of $58 million to $64 million.

As Thompson noted earlier, we made progress on our strategy to focus our efforts on AR.

Higher margin laser business during Q4.

We are pleased to announce that during the fourth quarter, we signed an agreement with a major hyperscale datacenter operator for a development program to make next generation lasers for their data center.

For 400 gig and beyond.

This customer has agreed to provide approximately $4 million in R&D funding for the first phase of this project with the first $3 million paid in Q4.

Currently this is reflected on our balance sheet as deferred revenue.

We expect to recognize this revenue throughout the next several quarters as we progress through the development program.

We believe that the significant financial investment made by this customer provides further validation of our strategy of focusing on our core high margin laser business, even as we advanced with our plans to divest the data center optical transceiver business to Johan as discussed above.

Turning back to the quarter, we secured two design wins, both of which were in our CATV business for the full year and we secured 12, new design wins compared to 20 design wins in 2021.

During the fourth quarter, 62% of our revenue was from our CATV products, 27% was from our data center products with the remaining 11% from <unk> Telecom and other.

And our CATV products segment, the overall demand environment remains robust as Msos, particularly in North America continued purchasing additional networking products in order to upgrade their networks.

CA TV revenue in the fourth quarter was a company record of $38 2 million.

Which was up 53% year over year and 22% sequentially.

Looking ahead as a reminder, our CATV results are typically negatively impacted in Q1 by the loss of production days that occurs during the lunar new year holiday in China, where most of our CATV products are produced.

We continue to have good visibility throughout the first half of the year and are carefully monitoring MSL plans to move to DOCSIS four <unk> networks, perhaps as early as later this year.

Broadly speaking we are encouraged by some of the commentary that we've heard regarding the DOCSIS four <unk> transition as it relates to long term continued investment in network upgrades.

For example, as you may have seen in December charter announced plans to spend approximately $5 $5 billion over the next several years on network upgrades.

We believe much of this spending will be on outside plant equipment, such as nodes and amplifiers, which are the products that have been driving Cumulus TV business growth over the last several years.

Announcements like that from charter bolster our belief that the network upgrades that have begun will continue for the next several years, which we believe will continue to drive our CATV business.

Our Q4 data center revenue came in at $16 5 million down 35% year over year, and 7% sequentially as customers continue to manage inventory levels of older products during the transition to 400 G.

This was partially offset by an increase in 400, G revenue, which more than doubled sequentially.

In the fourth quarter, 71% of our datacenter revenue was from our one <unk> products.

11% was from our 40 G transceiver products and 8% was from our 204 hundred G transceiver products.

Now turning to our telecom segment.

Revenue from our telecom products of $6 4 million.

It was up 94% year over year and down 7% sequentially.

Looking ahead, we currently expect telecom revenue in Q1 to be slightly down due to the lunar new year, and then expect to see slow improvement in this segment as deployments of <unk> products continue.

For the fourth quarter, our top 10 customers represented 90% of revenue up from 88, 4% in Q4 of last year.

We had two greater than 10% customers one in the CATV market and one in the datacenter market.

These customers contributed 58% and 16% of total revenue respectively.

For the full year, we had 210% or greater customers one in the CATV market and one of the datacenter market.

These customers contributed 47% and 18% of total revenue respectively.

In Q4, we generated non-GAAP gross margin of 21, 4%, which was above our guidance range of 17, 5% to 19, 5% and was up from 18% in Q3 of 2022 and up from 17, 6% in Q4 of 2021.

The increase in gross margin was driven mainly by our favorable product mix and our cost reduction efforts.

We continue to be very focused on improving our bottom line.

We believe the key to this is improving our gross margin performance.

In addition to our ongoing cost reduction efforts during the quarter, we exited several low profit legacy products. Additionally, we have shifted R&D resources away from some low margin projects to focus our resources on areas, where we can maximize margin.

Recently, we have also had some success in executing price increases with some customers, which will help to relieve some of the margin pressure we've been experiencing.

Together, we expect these efforts to cumulatively improve our gross margin and bottom line performance over the next several quarters and our management team and operating teams are all focused intensely on this improvement.

Total non-GAAP operating expenses in the fourth quarter were $21 million or 34, 2% of revenue.

Which compared to $16 9 million or 31% of revenue in Q4 of the prior year.

R&D expenses increased 7% year over year to $8 9 million.

As we noted in our last earnings call. Our non-GAAP operating expenses in Q4 included approximately $3 million or <unk> 11 per share of additional employee bonus accrual related to the China divestiture.

These payments were authorized by the board in order to retain key employees, who are critical to the success of the divestiture.

These additional bonus payments are not expected to occur in 2023.

Looking forward, we continue to expect non-GAAP operating expenses will moderate this year to between $19 million $20 million per quarter.

non-GAAP operating loss in the fourth quarter was $7 9 million compared.

Compared to an operating loss of $7 3 million in Q4 of the prior year.

GAAP net loss for Q4 was $20 3 million or a loss of <unk> 71 per basic share compared with a GAAP net loss of $14 5 million or loss of <unk> 54 per basic share in Q4 of 2021.

On a non-GAAP basis net loss for Q4 was $5 4 million or.

Or loss of <unk> 19 per basic share.

Which was better than our guidance range of a loss of $8 1 million to $9 8 million or a loss per share in the range of 28 to 34 cents per basic share and compares to a net loss of $5 5 million or a loss of <unk> 20 per basic share in Q4 of the prior year.

The basic shares outstanding used for computing the net loss in Q4 were $28 5 million.

Turning now to the balance sheet.

We ended the fourth quarter with $35 6 million in total cash cash equivalents short term investments and restricted cash.

This compares with $34 6 million at the end of the third quarter.

We ended the quarter with total debt, excluding convertible debt of $69 4 million up from $65 $1 million last quarter.

As of December 31, we had $79 $9 million in inventory compared to $94 3 million at the end of Q3.

Inventory decreased primarily due to utilization of inventory for customer orders, along with the impact of exchange rates on our phone inventory.

We made a total of <unk> 8 million in capital investments in the fourth quarter, bringing our total capex for the year to $3 4 million, which is down from $11 $6 million in 2021, reflecting lower capital needs as most of the equipment necessary to produce our current generation products was purchased last year.

Moving now to our Q1 outlook.

We expect Q1 revenue to be between $52 million and $55 million.

And non-GAAP gross margin to be in the range of 23% to 24%.

non-GAAP net loss is expected to be in the range of $4 4 million to $5 3 million and non-GAAP loss per basic share between 15 and 19 using.

Using a weighted average basic share count of approximately $28 9 million shares.

With that I will turn it back over to the operator for the Q&A session operator.

Thank you we will now begin the question and answer session.

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 our roster.

Our first question comes from Simon Leopold from Raymond James. Please go ahead.

Thanks for taking the question I appreciate the seasonal factors in terms of that the Chinese new year effect than the March quarter.

And so I guess, what I'm struggling with is how to really think about maybe the normalized run rate.

Given that you didn't provide a full year forecast can you give us some color or quantification about how youre thinking about the full year, particularly for the cable unit.

Yes.

Well.

As we noted in our prepared remarks.

Did we had an all time record in terms of cable TV production.

In Q4.

I think part of that is probably some orders that were pulled into Q4 from Q1, just because they knew that there would be an impact from.

Lunar new year and wanted to make sure that they have adequate inventory on hand. So so that number is probably a little bit high for that for an average run rate, but it's certainly what we were able to produce in Q4, so consistent with demand.

We probably come in at a number that's slightly less than that perhaps but.

But not too far off after we finish off.

We can get out of the lunar new year period.

That being said I mean, we're actually monitoring pretty carefully.

The activity around DOCSIS, four <unk> or at least specifically.

The MSL plans to move to two upgraded networks. It certainly is something that we've spent a lot of time developing products for and we're excited about that transition. So we're waiting to see whether that occurs later this year early into next year and how that will impact volumes. Both on the current generation of $1 two gig products and the next generation one eight gig products.

Sure.

And just to make sure I understand.

What you are alluding to there.

If we were to make the assumption that DOCSIS four <unk>.

Spending were to ramp in 2020 for the activity in 'twenty three seems like maybe preparation for that and therefore 2024 should give you further growth. If we think thats when DOCSIS four <unk> ramps is that the right interpretation.

Yes, I think Thats I think thats, an accurate description of the DOCSIS four <unk> components. In addition to <unk>.

In addition to being just kind of more complicated in their own right because of the greater frequency response associated with access for women.

Products also.

Especially the amplifier products contain a great deal of intelligence in the products, which is something new.

It Hasnt really been incorporated into those products. So the bottom line is that the cost and price of those products is higher than the DOCSIS. The current generation DOCSIS three one products.

So that alone.

Dependent.

Volume plans by the Msos just the cost increase alone, we certainly tend to drive higher revenue numbers.

And can you give us the names of the customers that were over 10% that the cable TV vertical in the data center vertical.

Sure ATX networks and Microsoft.

Great.

Thanks ill yield the floor. Thank you.

Thanks.

Our next question comes from Tim <unk> from Northland Capital markets. Please go ahead.

Hi, good afternoon.

Congrats on the results, especially on the gross margin side and I guess I'll start.

There and I think your drivers for Q Q4 pretty straightforward.

I'm talking about mix I guess, that's more cable unless datacom.

My first question there was on the Q1 gross margin guide, which is higher still despite this seasonal pullback in revenue I Wonder if you could I don't know if thats some of that.

Funding coming in or if you can talk about what the drivers might be there.

I mean theres not much of the NIH funding in Q1 actually in terms of the forecast.

I mentioned in our prepared remarks that we've actually been successful in pushing through some price increases which is rather unusual for our for our industry.

And so we'll start to see the impact of some of those price increases.

During the quarter and then the continued cost reduction efforts I've mentioned this treaty.

Instantly over the last I don't know three or four quarters.

Because of the nature of the cost reduction and specifically when youre talking about.

Product redesigns or substituting components that maybe have lower costs.

And that takes some time to play out because you have inventory that you have two older inventory at a higher cost that you have to use up before the new inventory at a lower cost comes in and so the cost improvements don't happen all at once they tend to happen over a period of a couple of quarters. So there will be some some additional.

Impact from those cost reductions in Q1 as well.

Got it so.

It sounds like if youre in a situation where revenue.

It comes back.

Post your seasonal quarter.

Didn't seem like there is a lot of one time stuff in the Q1 gross margin guide it seems like you could possibly build on that with higher volumes.

Yes, I think that's I think that's right I mean, we've certainly been.

Talking about returning to certainty.

<unk> mid to upper 20 range gross margins and I think we can definitely.

We see especially over the last couple of quarters, we can certainly see a pathway to that later this year so to units at Thompson.

But Q4, the CEO of course the margin.

Should be 30% for us.

And the next CEO with dose the pulpwood and all.

In the unit price, especially would be much higher.

The notes have a new product out in the <unk>.

However, we.

We believe we have.

Based on what advantage in technology and performances.

And the <unk> data so the next vehicles, maybe even major.

So we see right now and we see very strong demand.

Ron.

The key customers.

Great and I wanted to.

Kind of following that was my next question actually is.

We seem to be talking about.

Cable TV infrastructure demand.

Two different ways, which is.

One year current demand profile.

Which seems pretty strong.

Maybe some of that got pulled into Q4, but.

You grew 25% or so in cable TV and <unk>.

Calendar 'twenty two.

And obviously much faster than that in Q4, but.

Does that represent a normalized growth rate.

Is that something can you maintain double digits, there regardless of the timing of afford auto it sounds like what you were trying to say is to the extent we see.

Okay.

Some of this Ford auto activity start to really happen in the second half of 'twenty three versus 24 that could be a swing factor.

For your cable TV growth.

I'm just trying to set a baseline for.

Demand picture and what might be incremental to that.

Yeah. So.

At the moment I mean, we're sort of capacity limited in terms of production.

And so until we get a more clear line of sight on exactly how fast the adoption of <unk> is going to go I'm not anticipating that we're going to add a lot of production capacity.

For the 4.1.

<unk> products and so for the next several quarters I would say, we're likely to be capacity constrained.

Now I mentioned earlier that Q4 was a little bit higher than I think we would do on an average basis I mean, we sort of.

As I said the customer trials.

Holding some revenue and we did some things to try to ship as much product as we could so I wouldn't necessarily predict that number exactly in Q4 as a four quarter run rate.

But.

Going back a quarter or so probably is a reasonable estimate of what we would be able to do.

Quarter on quarter this year.

Absent any.

Change in the demand picture beautiful winter.

Great. Thanks very much.

Okay.

There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Dr. Thompson Lin for any closing remarks.

Okay. Thank you for joining us today as always we want to extend a thank you to all investors customers and employees.

For your continued support we look forward to seeing many of you at OFC and updating you along the next earning call.

Conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yes.

Okay.

[music].

Yes.

Okay.

[music].

Yes.

Okay.

[music].

<unk>.

Thanks.

Yes.

[music].

Okay.

Yes.

Okay.

Yes.

[music].

Yes.

Okay.

[music].

Okay.

[music].

Yes.

[music].

Yes.

Okay.

Yes.

[music].

Yes.

Okay.

[music].

Okay.

[music].

Yes.

Okay.

[music].

Yes.

[music].

Yes.

Okay.

[music].

Yes.

[music].

Yes.

[music].

Yes.

[music].

Okay.

[music].

Alright.

Yes.

Okay.

[music].

Okay.

Yes.

Sure.

[music].

Okay.

[music].

Yes.

[music].

Okay.

Yes.

Okay.

[music].

Yes.

[music].

Yes.

[music].

Okay.

[music].

Yes.

Okay.

[music].

Yes.

Okay.

Yes.

Okay.

Sure.

Yes.

[music].

Okay.

Yes.

[music].

Okay.

[music].

Yes.

Okay.

[music].

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Yes.

Okay.

Thanks.

Thank you.

[music].

Thanks.

Yes.

Thank you.

Sure.

Okay.

Yes.

Okay.

Sure.

Okay.

Sure.

[music].

Yes.

[music].

Okay.

Yes.

Good afternoon, I will be your conference operator at this time I would like to welcome everyone to applied Optoelectronics fourth quarter and full year 2022 earnings conference call. All lines have been placed on mute to prevent any background noise.

Please note that this call is being recorded.

I will now turn the call over to Lindsay <unk> Investor Relations for.

MS <unk> you may begin.

Thank you Lindsay Savarese Investor Relations App.

And I'm pleased to welcome to <unk> fourth quarter.

2022.

To wrap up the conference call.

After the market as soon as possible.

Quarter on Sarnia tunnel.

Financial results and provide a look outlook for the first product one time right.

Alright.

That's helpful.

Fossil dot com.

<unk> is being recorded and webcast live.

And accordingly, we found on the Investor Relations section of <unk> and will be archived for one year.

Joining us Anklebone call is Dr. Thompson, Lin Aoi's, founder, Chairman and CEO and Dr. Stefan Murry, Aoi's Chief Financial Officer.

<unk> started to Africa.

Thompson will go to the <unk> results.

Catherine will provide finance, Santa Clara and the outlook for the first quarter of 'twenty.

A question and answer session will follow up on that.

Before we begin I would like.

To remind you of Carrefour IRI both harbor.

Harbor statement.

On today's call management will make forward looking.

All forward looking statements involve risks and uncertainties.

Assumptions and current expectations, which could cause the company's actual.

Actual results levels of that clinical performance or achievements of the company.

From Macquarie.

No.

Such forward looking statements.

For example, we can identify forward looking statements by terminology such.

<unk> forecast.

The whole ethanol.

Good luck.

No sure correct or well.

Potential.

Whereby the mobile channel.

Our next question Beckenbauer uncertainty applecare events right.

The company has.

Statements on our current expectation.

Esther.

Our projection.

While the company believes.

Colson.

Estimates and projections and.

Bob.

That's part of that.

Predictions and involve known and unknown.

Right.

Many of which are beyond the company's control.

Important factors such as.

The company is comparable.

Okay.

Baxter described on the call.

Tom.

Alright, I'll correct that certain closing conditions may not hold pattern.

Great.

Oh barrier or delay.

Thank you reply or other government approval.

The transaction.

And the occurrence of any event change or other circumstance backlog won't rise to the termination of the transaction.

Alright.

Also Portland, Oregon.

And expectation.

Expansion of the reach of our product Okay Marco at customers Bancorp.

As.

Regarding the company's outlook for the first quarter, our planet right.

Except as required by law.

Allegations update forward looking statements.

Our political.

Paul.

Finally.

Actual results.

And a couple of expectation.

More information about other risks that may impact the company.

As 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 <unk> for the year.

And global.

'twenty two.

Also our financial results and other financial measures discussed today.

non-GAAP unless specifically noted otherwise.

GAAP financial measures are not in Congress that will come later Tonight for Olson.

Okay.

Pat.

Okay.

A reconciliation between our GAAP and non-GAAP measures as well as a discussion of why we think that non-GAAP financial measure are included in our earnings press, though that are available on our website.

I would like to note for both of our first quarter earnings call. That's currently purchase from us.

Sure.

Final 'twenty sorry.

Now I would like to turn the call over to Dr. Thompson Lin applied Optoelectronics, founder Chairman and CEO Thompson.

And you will later be Singapore join our call. Today, we are pleased to report fourth quarter <unk> was literally with our expectations.

Margin above our expectations and our non-GAAP loss per share, but again, our expectations. We continue to see strong demand in the CATV market.

And generated the highest quarterly CATV living in company history in Q4.

During the fourth quarter, we delivered revenue of $61 $6 million.

In line with our guidance range of <unk> million dollars.

To $64 million.

We delivered non-GAAP gross margin.

21, 4%.

Above our guided range.

17, potent fly to 19 pulling to 5%.

Even by our talking close to reductions and favorable product mix.

Net loss per share was.

19 sits about our guidance range on the rolls.

He has been two studies for <unk>.

Yes.

Although liberty CFPB settlement, while the company the weaker of the airport to a million dollars up 53% year over year.

And 22% sequentially pulp a strong Q3.

We continue to see robust demand in the CATV market.

Total revenue for Allstate has been approved out of 16 pulling the $5 million dike.

Decreased 35% year over year and 7% sequentially.

Customers continue to manage inventory label of older poured outs during the transition to 400.

This was partially offset by increased influenza revenue, which more than doubled sequentially.

In Q4, we signed an agreement with a major Hyperscale data center operator for development program.

To make next generation lasers for their data center, both for <unk> and beyond.

Under development.

<unk> will take several quarters to be complete.

We view this come to award a litigation or debate.

Our core laser fabrication ability.

With that I'll turn the call over to Stephen to review the details of our Q4 globally and now for Q1 stood at.

Thank you Thompson.

As Thompson mentioned, we are pleased to report our fourth quarter results with revenue in line with our expectations.

Gross margin above our expectations.

And a non-GAAP loss per share better than our expectations.

We continued to see strong demand in the CATV market and generated the highest quarterly CATV revenue in the Companys history from Q4.

Before turning to the quarter I wanted to provide an update on the transaction that we announced last September that we have entered into an agreement with you on opto electronics 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 sub assembly products for the data center Telecom and <unk> markets for a purchase price of $150 million.

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 <unk> in ODI.

We continue to advance work on these required regulatory approvals.

As part of this process Johan has disclosed additional details regarding our financials, including new details regarding the composition of their ownership group and based on this new information we continue to be optimistic that regulatory approval of this transaction both in the U S and China is achievable.

Turning to the quarter, our total revenue for the fourth quarter increased 13% year over year to $61 $6 million, which was in line with our guidance range of 58 million to $64 million.

As Thompson noted earlier, we made progress on our strategy to focus our efforts on our higher margin laser business during Q4, we.

We are pleased to announce that during the fourth quarter, we signed an agreement with a major Hyperscale data center operator for a development program to make next generation lasers for their data center.

For 400 gig and beyond.

This customer has agreed to provide approximately $4 million in R&D funding for the first phase of this project with the first $3 million paid in Q4.

Currently this is reflected on our balance sheet as deferred revenue.

We expect to recognize this revenue throughout the next several quarters as we progress through the development program.

Turning back to the quarter, we secured two design wins, both of which were in our CATV business for the full year, we secured 12, new design wins compared to 20 design wins in 2021.

During the fourth quarter, 62% of our revenue was from our CATV products, 27% was from our data center products with the remaining 11% from FTE Th telecom and other.

And our CATV products segment, the overall demand environment remains robust as msos, particularly.

Continued purchasing additional networking products in order to upgrade their networks.

The TV revenue in the fourth quarter was a company record of $38 2 million.

Which was up 53% year over year and 22% sequentially.

We continue to have good visibility throughout the first half of the year and are carefully monitoring MSL plans to move to DOCSIS four <unk> networks, perhaps as early as later this year.

Broadly speaking, we're encouraged by some of the commentary that we've heard regarding the DOCSIS four Plano transition as it relates to long term continued investment in network upgrades.

For example, as you may have seen in December charter announced plans to spend approximately $5 $5 billion over the next several years on network upgrades.

We believe much of this spending will be on outside plant equipment, such as nodes and amplifiers, which are the products that have been driving cable TV business growth over the last several years.

Announcements like that from charter bolster our belief that the network upgrades that have begun will continue for the next several years, which we believe will continue to drive our CATV business.

Our Q4 data center revenue came in at $16 5 million down 35% year over year, and 7% sequentially as customers continue to manage inventory levels of older products during the transition to 400 G.

This was partially offset by an increase in 400, G revenue, which more than doubled sequentially.

In the fourth quarter, 71% of our datacenter revenue was from our one <unk> products, 11% was from our 40 G transceiver products and 8% was from our 200 Mg and 400 G transceiver products.

Now turning to our telecom segment.

Revenue from our telecom products of $6 4 million was up 94% year over year and down 7% sequentially.

For the fourth quarter, our top 10 customers represented 90% of revenue up from 88, 4% in Q4 of last year.

We had two greater than 10% customers one in the CATV market and one in the datacenter market.

These customers contributed 58% and 16% of total revenue respectively.

For the full year, we had 210% or greater customers one in the CATV market and one of the datacenter market. Please.

These customers contributed 47% and 18% of total revenue respectively.

In Q4, we generated non-GAAP gross margin of 21, 4%, which was above our guidance range of 17, 5% to 19, 5% and was up from 18% in Q3 of 2022 and up from 17, 6% in Q4 of 2021.

The increase in gross margin was driven mainly by our favorable product mix and our cost reduction efforts.

We continue to be very focused on improving our bottom line.

We believe the key to this is improving our gross margin performance.

Recently, we have also had some success in executing price increases with some customers, which will help to relieve some of the margin pressure we've been experiencing.

Total non-GAAP operating expenses in the fourth quarter were $21 million or <unk> 34, 2% of revenue.

Which compared to $16 9 million or 31% of revenue in Q4 of the prior year.

R&D expenses increased 7% year over year to $8 9 million.

These payments were authorized by the board in order to retain key employees, who are critical to the success of the divestiture.

These additional bonus payments are not expected to occur in 2023.

Looking forward, we continue to expect non-GAAP operating expenses will moderate this year to between $19 million $20 million per quarter.

non-GAAP operating loss in the fourth quarter was $7 $9 million.

Compared to an operating loss of $7 3 million in Q4 of the prior year gap.

GAAP net loss for Q4 was $20 3 million or a loss of <unk> 71 per basic share compared with a GAAP net loss of $14 5 million or loss of <unk> 54 per basic share in Q4 of 2021.

On a non-GAAP basis net loss for Q4 was $5 4 million or a loss of <unk> 19 per basic share.

Which was better than our guidance range of a loss of $8 1 million to $9 8 million or.

Our loss per share in the range of 28 to 34 per basic share and compares to a net loss of $5 5 million or loss of <unk> 20 per basic share in Q4 of the prior year.

The basic shares outstanding used for computing the net loss in Q4 were $28 5 million.

Turning now to the balance sheet.

We ended the fourth quarter with $35 6 million in total cash cash equivalents short term investments and restricted cash.

This compares with $34 6 million at the end of the third quarter.

We ended the quarter with total debt, excluding convertible debt of $69 4 million up from $65 1 million last quarter.

As of December 31, we had $79 $9 million in inventory compared to $94 3 million at the end of Q3.

Inventory decreased primarily due to utilization of inventory for customer orders, along with the impact of exchange rates on our foreign inventory.

Moving now to our Q1 outlook.

We expect Q1 revenue to be between $52 million and $55 million.

And non-GAAP gross margin to be in the range of 23% to 24%.

non-GAAP net loss is expected to be in the range of $4 4 million to $5 3 million and non-GAAP loss per basic share between 15 and 19.

Using a weighted average basic share count of approximately $28 9 million shares.

With that I will turn it back over to the operator for the Q&A session operator.

Thank you we will now begin the question and answer session.

I ask a question you May press Star then one on your Touchtone phone.

Our first question comes from Simon Leopold from Raymond James. Please go ahead.

Thanks for taking the question I appreciate the seasonal factors in terms of the Chinese new year effect than the March quarter.

And so I guess, what I'm struggling with is how to really think about maybe the normalized run rate.

Given that you didn't provide a full year forecast can you give us some color.

Wanted vacation about how youre thinking about the full year, particularly for the cable unit.

Yes.

Well.

As we noted in our prepared remarks.

We did we had an all time record in terms of cable TV production.

In Q4.

I think part of that is probably some orders that were pulled into Q4 from Q1, just because they knew that there would be an impact from.

Today, we probably come in at a number that's slightly less than that perhaps but.

But not too far off after we finish off.

Get out of the lunar new year period.

That being said I mean, we're actually monitoring security carefully.

The activity around DOCSIS, four <unk> or at least specifically.

The MSL plans to move to two upgraded networks, it's something that we've spent a lot of time developing products for and we're excited about that transition. So we're waiting to see whether that occurs later this year early into next year and how that will impact volumes. Both on the current generation of $1 two gig products in the next generation one eight gig products.

<unk>.

And just to make sure I understand.

What you are alluding to there.

If we were to make the assumption that DOCSIS four <unk>.

Spending were to ramp in 2024.

Given the 23 seems like maybe preparation for that and therefore 2024 should give you further growth. If we think thats when DOCSIS four <unk> ramps is that the right interpretation yes.

Yes, I think Thats I think thats, an accurate description of the DOCSIS four <unk> components. In addition to.

In addition to being just kind of more complicated in their own right because of the greater frequency response associated with excess short window the products also.

Especially the amplifier products contain a great deal of intelligence in the products, which is something new.

Isn't really been incorporated into those products. So the bottom line is that the cost and price of those products is higher than the DOCSIS. The current generation DOCSIS three one products.

And so that alone independent of volume plans.

Msos just the cost increase alone, but certainly tend to drive higher revenue numbers.

And can you.

Give us the names of the customers that were over 10% that the cable TV vertical in the datacenter vertical.

Sure ATX networks and Microsoft.

Great.

Thanks.

The floor. Thank you.

Thanks Sam.

Our next question comes from Tim <unk> from Northland Capital markets. Please go ahead.

Hi, good afternoon.

Congrats on the results, especially on the gross margin side and I guess I'll start.

There and I think your drivers for Q Q4 pretty straightforward.

I'm talking about mix I guess, that's more cable unless datacom.

My first question there was on the Q1 gross margin guide, which is higher still despite this seasonal pullback in revenue I Wonder if you could I don't know if thats some of that.

And are you funding coming in or if you can talk about what the drivers might be there.

I mean theres not much of the energy funding in Q1 actually in terms of the forecast.

I mentioned in our prepared remarks that we've actually been successful in pushing through some price increases which is rather unusual for.

For our industry.

And so we will start to see the impact of some of those price increases.

During the quarter and then the continued cost reduction efforts I've mentioned this.

Pretty consistently over the last I don't know three or four quarters.

Because of the nature of the cost reduction and specifically when youre talking about.

Product redesigns or substituting components that maybe have lower cost debt.

Impact from those cost reductions in Q1 as well.

Got it so.

It sounds like if you're in a situation where revenue.

Comes back.

Post your seasonal quarter. It doesn't seem like there is a lot of one time stuff in the queue.

Q1 gross margin guide it seems like you could possibly build on that with higher volumes.

Yes, I think Thats I think thats right I mean, we've certainly been.

Talking about returning to certainty.

Upper Twenty's mid to upper 20 range gross margins in.

We can definitely see especially over the last couple of quarters, we can certainly see a pathway to that later this year.

So that's the only PD, but Q4, the CEO of course the margin.

Should be 30% for us.

The next CEO with both the pulpwood and all.

In the unit price, especially would be much higher.

The notes have a new product out and thats been the AOE behavior would be do we have.

Based on what advantage in technology and performance.

In the Gulf might be beta so the next vehicles even Pedro.

This all we see right now and we see based on demand.

Ron.

The key customers.

Great and I wanted to kind of follow that was my next question actually is because we seem to be talking about.

Cable TV infrastructure demand.

Two different ways, which is.

One year current demand profile.

Which seems pretty strong.

Maybe some of that got pulled into Q4, but.

You grew 25% or so in cable TV and <unk>.

Calendar 'twenty two.

And obviously much faster than that in Q4, but.

Does that represent a normalized growth rate.

Can you maintain double digits, there regardless of the timing of afford auto it sounds like what you were trying to say is to the extent we see.

Some of this forward auto activity start to really happen in the second half of 'twenty three versus 24 that could be a swing factor.

For your cable TV growth.

I'm just trying to set a baseline for.

How you see the current demand picture and what might be incremental to that.

Yeah. So.

At the moment I mean, we're sort of capacity limited in terms of production.

And so until we get a more clear line of sight on exactly how fast the adoption of <unk> is going to go I'm not anticipating that we're going to add a lot of production capacity.

For the for <unk>.

And so for the next several quarters I would say, we're likely to be capacity.

Capacity constrained.

Now I mentioned earlier that Q4 was a.

A little bit higher than I think we would do on an average basis I mean, we sort of.

As I said, the customer trying to pulling some revenue and we did some things to try to ship as much product as we could so I wouldn't necessarily predict that number exactly in Q4 as a four quarter run rate.

But going back a quarter or so probably is a reasonable estimate of what we would be able to do.

Quarter on quarter this year.

Absent any.

Change in the demand picture due to for winter.

Great. Thanks very much.

Okay.

There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Dr. Thompson Lin for any closing remarks.

Okay. Thank you for joining us today as always we want to extend a thank you to all investors customers and employees.

For your continued support we look forward to seeing many of you at OFC and updating you along the next earning call.

Conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Q4 2022 Applied Optoelectronics Inc Earnings Call

Request a DemoDemo

AAOI

Applied Optoelectronics

Earnings