Q2 2019 Earnings Call
At this time I would like to welcome everyone to participate electronics second quarter 2019 earnings Conference call.
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After the speakers remarks, there will be a question and answer session.
Well that's a good question. Your press Star then one on your telephone keypad to try a question. Please press Star then two please note. This event is being recorded an elderly call over to Maria Riley Investor Relations for AOL Ms. Riley you may be.
Thank you I'm Maria Riley applied Optoelectronics Investor Relations and I'm pleased to welcome you to <unk> second quarter 2019 financial results Conference call.
After the market close today ill I issued a press release announcing its second quarter 2019 financial results and provided an outlook for the third quarter of 2019.
The release is also available on the company's website at eight Oh, gosh, I N C dot com.
This call is being recorded and webcast live a link to that recording can be found on the investor relations page or the AOAC website and will be archived for one year.
Joining us on today's call is Dr. Thompson Lin <unk>, founder, Chairman and CEO and Dr., Stephen Marie <unk>, Chief Financial Officer, and Chief Strategy Officer.
Thompson will give an overview of Aon <unk> Q2 results and Stefanie will provide financial details and the outlook for the third quarter of 2019.
A question and answer session will follow our prepared remarks.
Before we begin I would like to remind you to review Alewives Safe Harbor statement.
On today's call management will make forward looking statements. These forward looking statements involve risks and uncertainties as well as assumptions and current expectations, which could cause the company's actual results to differ materially from those anticipated in such forward looking statements.
In some cases, you can identify forward looking statements by terminology, such as believes anticipates estimates and pens.
Predicts expects plans may should could would well 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 innovations as well as statements regarding the company's outlook for the third quarter of 2019.
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 forth in the risk factor section of the Companys reports on file with the FCC, including the company's annual report on Form 10-K for the year ended December 31 2018.
Also with the exception of revenue all financial numbers 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 they substitute for results prepared in accordance with GAAP.
A reconciliation between our GAAP and non-GAAP measures as well as a discussion of why we present non-GAAP financial measures are included in our earnings press release that is available on our website.
Before moving to the financial results I'd like to announce that <unk> management will attend the D.A. Davidson Technology Conference in New York on September 4th and the Daughtery in company 2019, institutional Investor Conference in Minneapolis on September fit.
We hope to have the opportunity to see many of you there.
Additionally, I'd like to note the date of our third quarter 2019 earnings call is currently scheduled for Wednesday November six 2019.
Now I'd like to turn the call over to Dr. Thompson Lin applied Optoelectronics, founder Chairman and CEO Thompson.
Thank you Maria and thank you everyone for joining US today, we are pleased with as Q issued during the quarter with TD, but revenue in night, we saw guidance and achieved better than expected we jobs on the bond at night and what have you been revenue of $43.4 million.
non-GAAP gross margin of 27.2% in alone cabin windows of 26 cents a share.
In looking at about aiming in the quarter. So thats one of the many environment remained consistent with all your quotation.
We are starting to see early cycle recovery amount to all Hyperscale data center customers.
Quite one customer has yet to begin to recover.
We are encouraged by late cycle recovery and believe the fundamental need for higher bandwidth within hyperscale destined to withdraw that long term goals.
However in the short term, we do in men cautiously optimistic.
On the market dynamics and that the menu button up and continue to stabilize among all hyper scale husbands.
You can see a TV will be many encouraged by customer activity, especially into it you know we more byproducts.
However, the almost the TV market demand continues to be salt resulted in tape. It the men for some of our legacy bird dogs.
Additionally, we see if you meet the many China is weaker than we had expected as the region or trade tensions.
Diversifying our customer base remains a top priority for you I.
In the quarter, we secured five new design wins, including four with any equipment OEM for data centers and one with a death an operator.
In summary, we are pleased with execution this quarter, which contributed to our better than expected. He bought unlikely jobs. We remained focus on fostering relationships with both existing and new customers and expanding our technology leadership, we believe all powerful proprietary manufacturing process and what are you going to question our key.
Our success in the market that we do remain confident enough ability to monetize Oh, you know base you as the market improves.
I moved to the next generation technologies.
With that I will turn the call over to Steffan to leave you with the details of our Q2 performance in our book you'll see Stephen.
Thank you Thompson.
Overall, the demand environment in the quarter was consistent with our expectations.
Total revenue for the second quarter was $43.4 million, which was above the midpoint of our guidance range of $40 million to $45 million.
Our data center revenue came in at $31.8 million compared with the $69 million in Q2 of last year.
In the quarter, 72% of our data center revenue was from our 40 G transceiver products and 23% was from our one hundredg products.
The data center market dynamics played out in Q2 as expected.
We are starting to see early signs of recovery among two of our Hyperscale data center customers well, one customer continues to purchase product from us, but with reduced demand.
As Thompson mentioned, while we are encouraged by these early signs of a recovery we remain cautiously optimistic on the near term market dynamics.
We continue to believe that we have good relationships with all of our Hyperscale data center customers and that their need for high speed optical connectivity remains fundamental to their business.
We are focusing our efforts on continuing to foster relationships with both existing and new customers and expanding our technology leadership, which we believe will best position alewife for growth when market conditions improve.
We're also encouraged by the pace and quality of the design wins, we are seeing with new customers. Many of whom are data center operators or equipment Oems that supply the data center vertical.
Building upon our strong foundation as a leader in advanced optical technology.
We recently showcased the ability of a wise four hundredg Qs a few transceivers to breakout into four individual one hundredg fr Transceivers and inter operate with a leading 12.8 terabit per second switch fabric a sick.
As data center operators continue to demand greater bandwidth.
The migration from one Hundredg to 400 G will be the next major step in data Center architecture.
As data center customers add 400, g. connectivity to their one hundredg infrastructure. They are looking for a validated and interoperable solutions to gain confidence and reduce deployment timelines.
We're very pleased to have a solution with the demonstrated interoperability that our customers demand.
Turning to our cable television market.
Revenue from CA, TV products decreased 31% year over year to $9.8 million compared with $14.2 million in Q2 of last year as demand has weakened somewhat but north American MSM goes and the China see TV market continues to lag expectations due to trade tensions and concerns about domestic economic growth in China.
Despite these near term challenges MSR, particularly those in North America continue to forge plans for distributed access architectures.
We believe that our remote phy product is a key enabling technologies for these new distributed access networks and we are excited about the customer interest in remote phy.
We expect to receive our first significant orders for our remote phy product soon.
Our telecom products delivered revenue of $1.6 million compared with $4.2 million in Q2 of last year.
Reflecting lower sales in China.
Given geopolitical trade tensions.
In Telecom, we continued to see Fiveg network deployment is poised to become a large driving factor for the optical industry as a whole.
We believe ally is well positioned to grow our share as the fiveg optics market develops given our deep optical expertise in harsh outdoor environments and are highly automated module production process.
We remain in qualification with a number of vendors for both front and mid haul applications.
With that said please keep in mind.
Given this is an emerging market the timing of qualification and deployment schedules are difficult to predict.
For the quarter, 73% of our revenue was from data center products, 23% from see TV products with the remaining 4% from th telecom and other.
In the second quarter, we had 310% or greater customers too and the data center business that contributed 30% and 29% of total revenue respectively.
And one of the CA TV business that contributed 14% of total revenue.
We continued to build on our earlier success in diversifying our customer base and are pleased with the steady progress we have made.
In the quarter, we secured a total of five new design wins, among two U.S. based data center customers, one of which is a data center operator.
I will also note that several of these design wins expand on a new customer relationship we secured last quarter with an OEM supplier to the Hyperscale and enterprise markets.
Moving beyond revenue, we generated a gross margin of 27.2% a 170 basis point improvement from 25.5% reported last quarter and slightly higher than our guidance.
Total operating expenses in the quarter were $19.5 million or 44.9% of revenue compared with $20.3 million or 38.4% of revenue in the prior quarter.
We continue to be targeted with our investments with an emphasis on developing and enhancing our next generation of optical products also tightly managing expenses.
Operating loss in Q2 was $7.7 million compared with an operating loss of $6.8 million in Q1.
non-GAAP net loss after tax for the second quarter was $5.2 million or a loss of 26 cents per basic share, which was better than our guidance.
This compares to net income of $12.9 million or 64 cents per diluted share in Q2 of 2018.
GAAP net loss for Q2 was $11.4 million or a loss of 57 cents per basic share.
Compared with GAAP net income of $8 million or 40 cents per diluted share in Q2 of last year.
The basic shares outstanding used for computing the net loss in Q2 were 19.9 million shares.
Turning now to the balance sheet.
We ended Q2 with $84 million in total cash cash equivalents short term investments and restricted cash compared with $77.5 million at the end of the previous quarter.
This reflects $7.2 million in cash generated from operations.
As of June 30, we had $81.5 million in inventory a decrease of $3 million from Q1.
This inventory reduction is consistent with our long term plan as we continue to rationalize inventory levels.
We made a total of $13.5 million in capital investments in the quarter, including $6.2 million in production equipment, and machinery and $6.9 million on construction and building improvements.
Looking ahead, we now expect capital expenditures in 2019 to be approximately $56 million, which factors in a continuation of the construction of our new factory in China.
We continue to monitor and market conditions and may adjust our spending plans as necessary.
Moving now to our Q3 outlook.
We expect Q3 revenue to be between $46 million and $49 million and non-GAAP gross margin to be in the range of 27% to 29%.
non-GAAP net loss is expected to be in the range of $4.2 million to $5.7 million.
And non-GAAP loss per share between 21 cents per share and 28 cents per share using a weighted average basic share count of approximately 20 million shares.
With that I will turn it back over to the operator for the Q and a session operator.
Yes. Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to a sort of a question. Please press star then too.
At this time, we will pause momentarily to assemble the roster.
And the first question comes from Simon Leopold with Raymond James.
Great. Thank you for taking the question I just a quick clarification, if I might I think you mentioned your 10% customers like I Didnt get down the color you offered on that could you just repeat that comment.
Yeah, we had.
310% customers.
During the quarter.
Two were in the datacenter business that contributed 30% and 29% respectively of total revenue.
And then there was one customer and they see a TV business that was 14% of total revenue.
Great. Thank you very much for for that sorry.
So on on the cable TV business clearly, we've heard from the major operators spending less money, but.
It seems as if we're still very early in the fiber deep remote phy and so I think you made a comment suggesting that you were only just beginning to ship your your.
Your remote phy boxes.
If you could give us a sense of how you see this playing out at night I guess, what I'm really getting at is how should we think about the trending of this business both near term through third quarter, and then really looking at kind of 2020.
Yes, so the comment that we made I think you know.
On the last few.
Conference calls Weve mentioned that we have been selling remote phy product. The comment that we made is that we're expecting to start getting our first what we would term sort of significant orders that is.
Something that.
That would be the beginning of more of an ongoing business for those remote phy products and one that we hope would grow into a larger number over time.
As far as the.
The overall cadence on on a cable TV I think if you look year over year, what we've seen is primarily related to to China.
Slowing down.
We've seen some slowdown in North America in the last quarter or two.
So it depends if you're looking on a sequential basis or or year over year in terms of what's causing the downturn.
When we look ahead I think.
We're looking for.
The North American Emmis those too.
Begin to invest in these distributed access architectures and as I've mentioned in our prepared remarks.
You know, we're a technology leader in remote Phy, which is a key aspect of these distributed access architectures moving forward. So you know it's hard to say exactly when theyre going to do that I think they are poised to I think some of the slowdown that we're seeing now among the north American MSM is probably related to.
The immediacy of their transition to this remote phy based architecture that is.
They're kind of minimizing their investments in legacy networks, while they look to to add remote phy the precise timing behind that is difficult to predict.
I think we're probably it's probably not a Q3 or Q4 kind of saying before we start to see a real resurgence, but it's a little hard to predict at this point.
So I guess I'm sort of reflecting back on the cable TV business in 2017, where was very much transmission oriented.
You did about 60 million I'm, just wondering if we should think about that as a reasonable expectation for.
At 2020 or at least the timeframe, where these initiatives really get going is that a reasonable way to think about that line of business.
I mean, you know again I want to give you a sort of precise number I think there's every reason to believe we can get back to levels similar to or greater than what we have been at in the historical periods.
It does require this transition to remote phy I think that happened in North America, and like I said I would expect that that would happen in 2020, although that the cable TV market is notoriously difficult to.
The project specifically the timing of when they start to get going I think the overall trend we can be fairly certain of but exactly when they get going and how fast the ramp up is still a bit.
Tough to forecast.
Thank you and just one more if I might.
You mentioned 400 gig products starting to come out.
Just if you could help us think about how how you could be competitive versus the silicon photonics variants that are coming out from some of the Oems and.
Some of the larger semiconductor companies, just wondering how silicon photonics sort of plays into the competitive landscape when you're in the market at 400 gig inside the datacenter. Thank you.
Sure I mean silicon Photonics is not a new technology as you know, we've we've had silicon photonics at 100 gig and Theres been silicon Photonics solutions that lower data rates, even before that.
Our.
Competitive advantage is built upon our vertical integration that is our ability to manufacture.
A significant part of the cost driving elements of the transceiver in house.
And also on our manufacturing expertise I think weve talked extensively in the past about our.
Automated manufacturing processes and our platform technology that has allowed us to automate those processes. So it's not just the automation itself, but its having a design for our.
Our one hundredg products and our four hundredg products and even future generations, where we can manufacture those an automated way in a very cost effective manufacturing process and thats what gives us the ability to compete with those other technologies and Simon.
And I want to emphasize.
For 400 DNA energy.
Make him an email in house will give us.
Okay or you just don't go the vintage ROI compared to one that is used in the email.
Great. Thank you very much for taking my questions I appreciate that.
Thanks.
Thank you and the next question comes from somebody shutter GE with JP Morgan.
Hi, Thanks for taking my question, if I could just start off with a clarification as well I know you mentioned the 100 gig and 440 gig makes indeed datacenter revenues could you just repeat that I'm, sorry, I missed that.
Sure no problem the.
The.
72% of the data center revenue was from 40 G and 23% was from one hundredg and of course.
Got it and so I think that kind of implies oh.
Decline in the 100 gig mix overall, a strong decline in revenues is that primarily driven by the kind of the lack of recovery that you see you saw with one of the Hyperscale customer if you listened to customers as you call them or was that.
More driven by something is that I'm not really thinking about.
No it's almost entirely driven by the one customer who has yet to to recover.
We are seeing strength in our 40 G, which I think is actually.
Yeah. That's a good thing for why we've been a leader at 40 G for some time.
The fact that our customers continue to be interested in 40 G and continue to find new use cases for 40 G and are continuing to buy.
Significant quantities of 40 G. I think is very.
Very good for us.
But but the one energy downturn is not related to two other customers is pretty much isolated to one customer.
Got it and just a question on the status of liquid the proposed 10 person that it now on in commodity.
Quotes coming from imported from China are you expecting any impact to your gross margins. Additionally, I believe you have a facility in Taiwan are you seeing any pickup in interest from customers and expanding oh, expanding kind of their business in that facility and if you want to us to expand capacity bad how much fixed capacity do you have there.
So.
We are.
We do have a facility in Taiwan that can manufacture the data center Transceivers in fact, it does already manufacturing a portion of our data Center Transceivers.
We have had.
Significant.
Interest from customers in our ability to manufacture in Taiwan.
And what we can do is.
Move some of the manufacturing operations between our Taiwan, and China factory, such that we can you know add additional capacity if needed.
As these tariffs come onboard and other words, but I mean, as we can take some some of the manufacturing for other ancillary products that are maybe not data center related move those to China, and and and increase the capacity in Taiwan for the datacenter products and where we stand right. Now we think we're pretty well positioned to be able to manufacture what the customers are asking us.
In the Taiwan factory at least for customers that are U.S. base, I mean, I want to remind everyone that.
Even even among the U.S. hyperscale customers not all of their transceiver usage is actually in the U.S. So.
Yeah, we won't necessarily be manufacturing all of our data center transceivers in Taiwan, but for the ones that that need to be importing into the U.S.. It's certainly.
A possibility for us to manufacture those in Taiwan, and that's our plan should the tariffs come in place.
Got it thank you for taking my question.
You're welcome thank you.
And once again, please press star and then one if you would like to ask a question.
And the next question comes from for how the how with Cowen and company.
Hi, Stefan high pump then.
I apologize for that question, but did I hear you correctly that 100 G was.
23% on the international revenue.
Yes, you did.
No.
If I.
If I look at the broader landscape going forward, what why should investors believe that you would meaningfully have any success in 100 gig.
30, 140 gig overall.
When you have had little to no not really.
Ultimately the quality issue that youre lesions in 100 gig.
What would you what would you tell investors.
You have hope in your story.
And Paul you from abroad, and the question, but I'm just struggling to see how.
Hi.
Exceeding 100 gig holdings and 400 gig.
Well I think it's a mischaracterization to say that we're not succeeding in 100 gig as you noted we have sizable sales of 100 gig last year. In fact, it was our largest selling product line by far.
I would not call that not having success what I would say is that you know.
Different customers purchase different applications and different data rates for different applications at different times.
Not every customer as we noted in our prepared remarks has yet begun.
Recovery cycle.
And we would expect that a net recovery cycle, if they're still.
Purchasing large quantities of 100 G that is if they haven't moved on to for energy then.
We do expect to be a part of that now.
With respect to your sort of more blunt question about.
Why would be a player for energy.
We are actively involved in a number of qualifications right now I think if customers had decided they weren't going to use a wire they weren't attractive by what do I had to offer they're not gonna waste their effort and resources working with US on these qualification efforts now.
Those qualifications are ongoing I can't tell you for sure. What the result of all of those are going to be but so far the results are good and.
You know I would expect.
That they would that they would some of them at least would be concluded successfully maybe perhaps all of them. The other thing I'd say is I mean, you know 40 G and one energy weren't our first data rates, we've been involved in the data center market.
For a long long time, we've been a leader in the data center market for a long time and I don't see any reason why for energy would be materially different as Thompson mentioned earlier technologies like our electro absorption modulator laser ml are critical to not only to the performance, but to the cost structure of the four hundredg transceivers and by having that technology in house, we think that gives us a really good position to be not only a technology leader, but a cost leader in 400 G. As we were at 100 G. As we were at 40 G. As we were attendee.
As we expect to be at 800, G. when that comes to fruition in the future. So I think it's it's wrong to say, we haven't been successful and the technology that Weve developed for 400. She is very compelling which is why we have ongoing qualifications going with customers, but they may have a 2.14 email what does it email that very few surprises, okay compared to 20 Fiveg email.
So make it.
The house because of his baby must have much bigger than 20 by the email.
Well one of the teachers.
The number one.
Number two yes, we have quality you buy that we had mentioned will solve the problem.
And in the past few quarters, we have many design wins one that is each receiver was in many new cost okay now in use including Asia, including many big.
Equipment OEM company and many.
Hyperscale operator, okay, well what.
The citadel related to this specific customer.
It's not a.
The.
Quality issues is that demand, we just sold out okay, and we are committed and we believe.
When that demand come back with you at one of the major supplier okay in the future could be sometime next year.
All right.
All right.
If I may ask on the 200 gig I know 400 gig is still.
A second half 2020 spending most of your customers.
But two of the large.
Largest hyperscale cloud Titans are moving with the 100 gig and then tell them one of them happens to be.
Oh.
Are they doing any 200 are you shipping 200 gig do you have any shares 200 gig at the moment.
Yes, we've been shipping 200 gig since last year.
It's not a huge quantity obviously, if you look at the the percentages for the 40 gig and 100 gig, but we do have design wins at 200 gig.
Yes.
Thank you and the next question comes from Michel Rollo with Needham and company.
Hi, guys.
On for Alex.
Just a quick question on the gross margins do you guys give any color can you guys give any color on 40 gig gross margins are hundred gig. We're just trying to wonder here. If you know gross margins are positive 400 gig or no.
Oh, they are definitely positive for 100 gig, we don't give specific guidance on individual product gross margins, but certainly there are positive.
Okay, but no the cool well somebody for one other use up when he goes there's always that we have a so called advantage compared to other suppliers.
Because of the what do you think regime because all the automation of the Tresiba may fit you in Taiwan and China.
Okay, sorry was there a follow on question no no.
That's a good thing.
All right very good thank you.
Thank you.
And as there are no more questions I would like to return the call like that but to talk about the Thompson Lin for any closing remarks.
Okay, and then you're able to join US today as always we say in all you investors customers and employees for your continuous support and we look forward to seeing you at our upcoming combos.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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