Q1 2023 Applied Optoelectronics Earnings Call
Good afternoon, I will be your conference operator at this time I would like to welcome everyone to applied Optoelectronics first quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
I will now turn the conference over to Lindsey summaries Investor Relations for a O I Miss Jefferies' you may begin.
Thank you Lindsey summaries Investor relations.
Electronics and I'm pleased to welcome you to annualized first quarter 2023 financial results conference call.
After the market close today <unk> issued a press release announcing its first quarter 2023 financial results and provided its outlook for the second quarter of 2023.
Or at least that's also available on the company's website at <unk>.
Oh dashing dotcom.
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 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 Q1 results and Stefan will provide financial details and the outlook for the second quarter.
Right.
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.
What could cause the companys actual results levels of activity performance or achievements of the company.
Or 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 forecasts anticipate estimate.
Intends predicts expects plans may.
May should could would will potential or think or by 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.
The company believes these expectations assumptions.
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 risk related to the company's ability to complete the transaction described on this call on the proposed term and ski.
Aw or at all the rest that certain closing conditions may not be timely satisfied or waived.
Or delay to receive the required regulatory or other government approvals relating to the transaction.
The occurrence of any of that change or other circumstance that could be.
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.
Customer responses to our innovation as.
That's all statements regarding the company's outlook for the second quarter of 2023 excel.
Except as required by law, we assume no obligation to update forward looking statements for any reason after the date of this earnings call to conform these statements to actual results or to changes in the company's expectations.
More information about other risks that may impact the company's business.
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 year ended December 31st 2022.
Also all financial results and other financial measures 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.
I'd like to note that the date of our second quarter earnings call is currently scheduled for August 3rd 2023.
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.
Fourth quarter labor, she and a good gross margin.
I was gonna tissues.
Oh no I'm good flows schuh can be below expectations.
Too many.
Bonnie Churchill don't.
Due to first gen.
Appreciation.
On the currency.
To a U S dollar.
We are pleased by the progress we have made and you put it all goes muggy.
Got it.
He's proven demand you saw for what are the jeep toward us and all of that in the business.
We generated another quarter.
Via TV John .
However, recently we have.
No default, even though if you all.
CATV customers.
We spent we had a negative impact of two 2 billion.
During the fourth quarter with Liberty and $53 million, even though.
The two H T.
Two five.
$5 million.
non-GAAP gross margin of 23 people per se.
In the guided range of 23% 24%.
But all pocket cost reduction and favorable forgot me.
All of them get low for Q1 'twenty.
25.
Oh God, it's rich I'll note a few TSA DSA.
Is it due.
Due to the body change in pigs, I've just mentioned.
Well the looming CATV Sidney.
So what he said about $10 million up 11% year over year.
Oh, 27% sequentially.
The rates from Q4.
Largely due to the negative you can peg at a loss.
Touching base do.
Given the new lunar new year holidays.
Yes.
Oh really vaulted us into 'twenty.
$24 million decreased 5% year over year and increased 23% sequentially.
Largely due to the increased demand for all of it.
Well now let's call. It with these calls an agreement we signed with a major Hyperscale data center operator.
Well, it's the depth of Brooklyn.
Next generation leases for each data center, both for energy IPO.
All of a sudden.
Buddy.
As you know with the case.
We see Microsoft.
Who has been a long term customer.
Oh.
Why do that.
Need to adopt.
Several quarters to be complete.
We view this contract award.
Station, all the strength and quality of I'll call it the vacation period.
Oh, it's been a cold over to Steffen to me.
Although two up almost all of it.
These statements.
Thank you Thompson.
Our first quarter revenue and non-GAAP gross margin were in line with our expectations, while our non-GAAP loss per share came in wider than our expectations due mainly to unexpected foreign exchange losses due to faster than expected appreciation of the Chinese renminbi currency relative to the U S dollar.
We're pleased by the continued progress we have made to improve our gross margin.
We are encouraged by the increased demand we saw for a 100 G products in our datacenter business during Q1.
Further we generated another quarter of good CATV result.
However, recently, we were notified of some inventory buildup with certain CATV customers, which we expect will negatively impact our Q2 revenue.
Before turning to discuss our results and outlook I want to provide an update on the transaction that we announced last September with you Hahn auto electronic technology.
As we have previously discussed we entered into an agreement with you Hahn auto electronic technology for the sale of our manufacturing facilities located in the People's Republic of China and.
And certain assets related to our transceiver business and multichannel optical sub assembly products for the datacenter Telecom and F. T T H markets for a purchase price of $150 million.
During the quarter, both <unk> and <unk> made progress in preparing the information that will be needed in order to file for the various regulatory approvals that will be required in order to finalize the divestiture.
As a reminder, this transaction is subject to customary closing conditions and regulatory approvals, including <unk> and OTI.
Although these filings are not yet complete we do expect to submit our application within the next few months.
The timing of the regulatory process is uncertain.
But we believe based on our current schedule that closing the transaction before year end is still possible.
The approval could push the closing timeframe into early 2024.
Turning to the quarter.
Our total revenue for the first quarter increased 2% year over year to $53 million, which was in line with our guidance range of $52 million to $55 million.
During the first quarter, we secured one design win in our CATV business.
Looking ahead due to our intentional efforts to better focus our R&D spend on projects that we expect to have higher revenue and gross margin potential. We expect the aggregate number of design wins to be reduced compared to prior periods.
We do not view this reduction in design wins as indicative of reduced business activity, but rather as a result of the greater discipline, we're applying to our R&D efforts.
CATV revenue in the first quarter was $27 $8 million, which was down 27% sequentially off a record Q4 and was up 11% year over year driven by demand from CATV customers for products designed to improve upstream well return path families.
As I mentioned earlier recently, we were notified by certain CATV customers that they believe that some excess inventory has built up among their various distribution channels.
As a result, these customers reduced their orders in Q2, which is reflected in our guidance.
We are working to evaluate the future extent of this excess inventory.
We continue to believe that overall demand for CATV products from the Msos remains robust and expect that any inventory buildup will be transitory.
Looking ahead, we are carefully monitoring MSR plans to move to DOCSIS 4.0 networks.
While we are cautiously optimistic as the nature of these upgrade cycles can be lengthy.
We believe <unk> remains well positioned to capture a portion of this new infrastructure spend.
Our product development team has met numerous times with several of the largest msos in the U S and we believe our products will be well suited to meet their demands when the push to install amplifiers and other network elements for DOCSIS 4.0 begins.
We believe this could happen as early as later this year or in early 2024.
Our Q1 datacenter revenue came in at $24 million down, 5% year over year and up 23% sequentially.
Given by increased demand for our 100 G products, especially from our largest datacenter customer.
In the first quarter, 78% of our datacenter revenue was from our 100 G products, 6% was from our 40 G transceiver products.
8% was from our 204 hundred G transceiver products.
Looking ahead, we are encouraged by the increased demand we have been seeing and expect continued sequential growth of our datacenter business in Q2.
As Thompson mentioned.
On our Q4 earnings call, we discussed how we signed an agreement with a major hyperscale datacenter operator for a development program to make next generation lasers fluids datacenter Ultra 400 G. M D R.
Our recent 8-K filing gives additional details on this agreement with Microsoft who has been a long term key customer of ours.
The development of these new products will take several quarters to be completed we view. This contract award is validation of the value of our core laser fabrication ability.
As a reminder, Microsoft 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.
Now turning to our telecom segment due to the negative impact from the lunar new year and inventory buildup by some of our telecom customers revenue from our telecom products of $3 $7 million was down 30% year over year and down 42% sequentially.
Looking ahead, we expect to see stronger sequential demand in Q2 as inventory begins to be drawn down to the point that new deliveries will be needed.
For the first quarter, our top 10 customers represented 93% of revenue up from 89% in Q1 of last year.
We had two greater than 10% customers one in CATV market and one in the datacenter market, which contributed 42% and 20% of our total revenue respectively.
In Q1, we generated non-GAAP gross margin of 23, 2%, which was in line with our guidance range of 23% to 24% and was up from 21, 4% in Q4 of 2022 and up from 17, 5% in Q1 of 2022.
The increase in gross margin was driven mainly by a favorable product mix, our cost reduction efforts and the benefit of some of our intentional actions, we took to improve our bottom line that we discussed on our Q4 call.
These actions included the exit of several low profit legacy products shifting R&D resources away from some low margin projects to focus our resources on areas, where we can maximize margin and some success in executing price increases with some customers.
In line with our expectations total non-GAAP operating expenses in the first quarter were $19 6 million or 36, 9% of revenue, which.
Which compared to $19 6 million or 37, 5% of revenue in Q1 of the prior year.
R&D expenses decreased 10% year over year to $8 $2 million.
As a result of a more focused R&D investments I discussed a minute ago.
Looking forward, we continue to expect non-GAAP operating expenses will range between 19 million and $20 million per quarter.
non-GAAP operating loss in the first quarter was $7 2 million compared to an operating loss of $10 $4 million in Q1 in the prior year.
GAAP net loss for Q1 was $16 $3 million or a loss of 56 cents per basic share compared with a GAAP net loss of $16 $1 million or a loss of 58 cents per basic share in Q1 of 2022.
On a non-GAAP basis net loss for Q1 was $7 $1 million or a loss of 25 cents per basic share, which was below our guidance range of a loss of $4 $4 million to $5 $3 million or a loss per share in the range of 15 to 19 cents per basic share and compares to a net loss of $7 $9 million or.
A loss of 29 cents per basic share in Q1 of the prior year.
The basic shares outstanding used for computing the net loss in Q1 were $28 9 million.
Turning now to the balance sheet, we ended the first quarter with $26 $9 million in total cash cash equivalents short term investments and restricted cash. This compares with $35.6 million at the end of the fourth quarter.
Changes in current accounts included a decrease in accounts receivable of $4 $4 million, along with an increase of payables of $9 $4 million, which was offset by a decrease in inventory of $9 $5 million.
We ended the quarter with total debt, excluding convertible debt of $70 $1 million up slightly from $69 $4 million at the end of last quarter.
As of March 31, we had $70 $2 million in inventory compared to $79 $7 million at the end of Q4.
Inventory decreased due to utilization of inventory for customer orders in the period.
We made a total of zero point $8 million in capital investments in the first quarter virtually all of which was for equipment and machinery used in R&D and production.
As we disclosed.
Rose in March we initiated a new at the market offering.
We previously had an ongoing ATM program authorized by our board to sell up to $35 million worth of shares under that program under.
Under the old program, we only sold approximately $2 $7 million out of the $35 million authorized.
When the S. Three expired in January 2023. This old ATM also expired. So we put a new program in place with a fresh $35 million authorization.
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 Q2 outlook.
We expect Q2 revenue to be between $45 million and $47 $5 million and non-GAAP gross margin to be in the range of 25% to 23, 5%.
non-GAAP net loss is expected to be in the range of $6 8 million to $9 million and non-GAAP loss per basic share between 23, and 31 cents using a weighted average basic share count of approximately $29 2 million shares.
With that I will turn it back over to the operator for the Q&A session operator.
Sure.
We will now begin the question and answer session.
I ask a question you May press Star then one on your telephone keypad, if you're using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you'd like to withdraw. Your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Simon Leopold with Raymond James. Please go ahead.
Great. Thanks, Thanks for taking the question.
So a couple of things I wanted to get a little bit of better insight on one is around the Microsoft deal.
In terms of I understand you're going to get some small R&D funding in the fourth quarter, but can you give us some other indication of the scope of of this arrangement and if its affected at all by the transaction the pending transaction of the asset sale in China, because I guess I saw some language about change of <unk>.
Troll, which I assume means the entire company I'm, just a little clarification there would be helpful.
Sure Simon.
Regarding your first question with respect to kind of the scope of it.
The the announcement that we that we made really in December but you know recently released more of the details on it has to do with the fabrication of a new type of laser device, it's going to be used in the creation of a certain data.
Center no transmission products.
For use within you know within Microsoft's datacenter spur.
Specifically for 400 G and beyond as we noted in our prepared remarks.
As we also said we think that it starts to ramp really later on this year.
And then should should grow.
Along with the future 400, G deployments into 2024 and beyond.
With respect to your second question regarding <unk>.
Does anything change with respect to the transaction.
Clearly you know given the timeframe of this announcement and everything you know.
It was subsequent to the announcement of the transaction. So clearly a Microsoft was aware of the transaction and the details that we presented about that transaction.
So no nothing nothing changes with respect to that with respect to the change of control.
You know you can read the provisions there that does refer to change in control of the entire company.
Which this transaction would not I mean, you know that transaction alone would not represent a change of control of the company based on our analysis. So far that's what I thought I'd want that that's what I was checking exactly that so so thank you for that and then the other thing I want to ask about what was your debt schedule because I believe you've got 53 million that was current last quarter.
Now the total current debt I think he is over it was around 130 million could you help me understand sort of the.
Roadmap are planned to how you're going to pay down debt.
Yeah, I mean, I think the transaction that we noted the proceeds from that should should be 150 million minus some you know about a pullback.
That certainly gives us the ability to service that debt and the timeframe in which it's going to come due.
Of course, we're also exploring other options in terms of are there other things that might be possible. If that transaction gets pushed out or what have you. But are you know certainly the cash from the transaction would be very instrumental to the servicing that debt.
So is there a scenario where you would get maybe a bridge loan if it's a century.
The I guess, there's 50, some odd million that comes due during this year.
This calendar year, so with the deal with.
No. It doesn't close until next year, you need to have a gap as I.
Misunderstanding that.
Well.
A lot of that you know a lot of the debt and this has been this has been true for our company for a long time a lot of the debt that we had is in Asia, excluding the convertible debt of course, but and the Asian debt tends to revolve on an annual basis.
And it's generally always revolved it's it's often backed by <unk>.
<unk> that we have in Asia are a real estate for example, or.
Property plant equipment over there.
And so it's always it's always had the ability to revolve and we would continue to expect that it does that so yes. It does show up as a current liability, but it almost always shows up as a current liability and it just kind of rolls over and that's again, but we would expect this year with respect to your question about you know could you get a bridge loan or other options sure. There's there's lots of things that we could do.
To enhance liquidity.
If things don't go according to plan.
But but with respect to the majority of that debt, that's what we would expect.
Great No I appreciate that I have not really thought about the the rollover of the.
Yeah, you can finance since that's helpful. And then just the last one for me is if you could talk about your plans and expectations for a 1.8 gigahertz amplifiers for the cable TV market.
Right. So we mentioned.
Prepared remarks that you do we.
We do think that DOCSIS 4.0 is is the next generation in cable T V in that.
Various msos have been pretty explicit.
With us, but also publicly with respect to their plans to to upgrade their networks using DOCSIS 4.0.
Now, depending on which NSO youre talking about I would say the majority of the Msos are planning to go to 1.8 gigahertz. There are some others that are still looking at you know.
For example, F T X.
We'll duplex DOCSIS or or other technologies, but I would say that the predominant technology that seems to be preferred by most of the Msos. Just 1.8 gigahertz. We've had an active development program ongoing for 1.8 gigahertz for some time.
And we're exceeding well according to our plans on that as we noted in our prepared remarks, we've had numerous discussions with the major msos that we expect to deploy.
This technology.
You know again as early as later this year and we feel like we're pretty well positioned for that technology.
Great. Thanks for taking the questions.
My pleasure.
Again, if you have a question.
Please press Star then one.
The next question comes from Kim <unk> with Northland Capital markets. Please go ahead.
Hi, Good afternoon, excuse me a couple of questions.
First I think you mentioned.
And then R E payment associated with the Microsoft deal of $3 million, but maybe some numbers beyond that do you have kind of a sense.
A sense of the total kind of value there.
And then separately on the cable side you.
I know your top customer there has brought up.
Another contract manufacturer in recent months and quarters.
Can you discern whether that may be having an impact or whether it's all kind of customer inventory driven thanks.
So with respect to the question about the Microsoft and our east. So it's a total of $4 million for this particular tranche.
Tranche, a and are each of which $3 million has already been paid as we as we noted and will it actually will.
Record that as revenue throughout the year as right now most of that $3 million. That's already been paid isn't isn't a prepaid asset because we will recognize it. According to the revenue recognition rules as the project progresses throughout the year.
With respect to your question about the cable.
We do not believe that that the you know our.
<unk> contract manufacturer is as in any way responsible for the inventory. It really is simply an inventory buildup in the supply chain as far as we can tell and I've.
Been fairly involved in trying to discern that.
We do believe that the Msos continue to purchase.
You know gear at a at a relatively robust clip I think that the.
Yeah.
Some of the distribution partners, maybe got a little bit.
You know a little bit out over their skis in terms of their their forecasts are.
And as the interest rates and things like that have picked up everybody is looking at closely at their inventory levels and and I think that's really.
The explanation for it I don't think it has anything to do with any additional competition in terms of contract manufacturing.
Got it thanks very much.
My pleasure.
At this time, we have no further questions I will turn the call over to Dr. Thompson Lin for closing remarks.
Okay and thank you for joining us today as always we want to extend a thank you to all your investor.
Employees.
We are continuing with the poll, we look forward to updating you along the next earning call.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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