Applied Optoelectronics, Inc. (NASDAQ:AAOI) Q4 2023 Earnings Call Transcript

Applied Optoelectronics, Inc. (NASDAQ:AAOI) Q4 2023 Earnings Call Transcript February 22, 2024

Applied Optoelectronics, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Please note, this call is being recorded. I would now like to turn the call over to Lindsay Savarese, Investor Relations for AOI. Ms. Savarese, please you may begin.

Lindsay Savarese: Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics. I am pleased to welcome you to AOI's fourth quarter and full year 2023 financial results conference call. After the market closed today, AOI issued a press release announcing its fourth quarter and full year 2023 financial results and provided its outlook for the first quarter of 2024. The release is also available on the company's website at ao-inc.com. This call is being recorded and webcast live. A link to the recording can be found on the Investor Relations section of the AOI 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 Q4 results, and Stefan will provide financial details and the outlook for the first quarter of 2024. A question-and-answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AOI's Safe Harbor statement. On today's call, management will make forward-looking statements. These forward-looking statements involve risks and uncertainties as well as assumptions and current expectations, which could cause the company's actual results, 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, forecast, anticipates, estimates, projects, intends, predicts, expects, plans, may, should, could, would, will, potential or things 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. 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. Forward-looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of our products into new markets and customer responses to our innovation, as well as statements regarding the company's outlook for the first quarter of 2024. 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 are 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 and the company’s quarterly report on Form 10-Q. 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 know that data of our first quarter earnings call is currently scheduled for May 09, 2024.

Now I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics' Founder, Chairman and CEO. Thompson?

Thompson Lin: Thank you, Lindsay, and thank you for joining our call today. While our fourth quarter revenue came in below our expectations, our gross margin outperformed our projections, leading to non-GAAP EPS at a high end of our expectations. We are pleased by the continued progress we have made in improving our gross margin, which combined with our expense management, allow us to generate a small amount of non-GAAP net income in the fourth quarter for the first time in many years. Further, we generated positive adjusted EBITDA of $4.8 million in Q4. During the fourth quarter, we delivered revenue of $60.5 million, which was below our guidance range of $63 million to $67 million, primarily due to somewhat lower than expected data-centered revenue.

As we began to see some softness in demand late in the quarter, we delivered a non-GAAP gross margin of 36.4%, which is the highest quarterly gross margin that we have generated in the last five years, and was above our guidance range of 34.5% to 36%. Mainly driven by improved product mix and some contribution from non-recurring engineering projects, we generated a small non-GAAP net income of $0.04 per share, which was at the high end of our guidance range of a loss of $0.02 to earnings of $0.04. Total revenue for our data-center products of $44.5 million, more than doubled year-over-year, but was down 9% sequentially. Revenue for our 100G products, more than double year-over-year, and revenue for our 400G products increased more than eight times in the same period.

Total revenue in our CATV segment was $12.6 million, which was down 67% year-over-year and up 22% sequentially, largely driven by generally slow sales of DOCSIS 3.1 equipment as the industry prepares for transition to DOCSIS 4.0. With that, I will turn the call over to Stephen to review the details of our Q4 performance and outlook for Q1. Stefan.

Stefan Murry: Thank you, Thompson. As Thompson mentioned, while our fourth quarter revenue came in below our expectations, our gross margin outperformed our projections, leading to a non-GAAP EPS at the high end of our expectations. We're pleased by the continued progress we have made on improving our gross margin, which combined with our expense management allowed us to generate a small non-GAAP net income in the fourth quarter for the first time in many years. Further, we generated positive adjusted EBITDA of $4.8 million in Q4. While we do see some softness in Q1 due to the combined effects of the Lunar New Year holiday in our Asian factories, along with some price reductions which are scheduled to take effect, we expect a strong recovery in Q2 and are currently anticipating a markedly improved second half of 2024.

A technician observing a complex fiber-optic networking set-up in a laboratory.

Despite the softness we are seeing in Q1, we have been experiencing significant traction with several new data center customers recently for both 400G and 800G products, and we expect one or more of these customers to begin to contribute meaningfully to revenue starting in Q2, which gives us a basis for the optimistic outlook, despite the slow start to the year. While not likely to contribute meaningfully to revenue in 2024, we also are very optimistic about our 1.6 terabit products as we move into 2025. With the improvement we expect in the second half, we currently expect our first full year of non-GAAP profitability since 2018. Turning to the quarter, our total revenue for the fourth quarter decreased by 2% year-over-year to $60.5 million, which was below our guidance range of $63 million to $67 million.

As Thompson mentioned, this was largely due to somewhat lower than expected data center revenue as we began to see some softness in demand late in the quarter, which we attribute to timing of orders. During the fourth quarter, 74% of our revenue was from our data center products, 21% was from our CATV products, with the remaining 5% from FTTH, telecom, and other. In line with our expectations, CATV revenue in the fourth quarter was $12.6 million, which was down 67% year-over-year and up 22% sequentially. We are encouraged by the sequential growth that we saw in our CATV business in Q4. Looking forward, we continue to expect that our near-term CATV business will be down compared to historic highs we saw in 2021 and 2022 as the MSOs transition to next-generation architecture.

We anticipate this transition will begin to take place sometime in mid-2024 and are optimistic about the second half of the year. We shipped initial test samples of our 1.8 GHz amplifier products to two major MSOs in Q4. While these are early samples, the feedback we received on their performance and pricing is extremely encouraging. We currently anticipate shipping final qualification units of various amplifier products between April and June this year and expect revenue to begin shortly after the sample qualification is complete. As we stated last quarter, we continue to carefully monitor MSO plans to upgrade to DOCSIS 4.0 networks, and we continue to believe AOI is a leader in technologies that will enable DOCSIS 4.0. Further, we are confident that our products are aptly designed for the deployment of amplifiers and other network elements required for DOCSIS 4.0. Turning to our data center business, our Q4 data center revenue came in at $44.5 million, which more than doubled year-over-year and was down 9% sequentially, as noted above.

In the fourth quarter, 56% of our data center was from our 100G products, 36% was from our 200G and 400G products, and 4% was from our 40G transceiver products. As we had anticipated, revenue for our 100G products decreased 31% sequentially. Revenue for our 200G and 400G products increased 79% sequentially, which we believe is largely driven by AI demand for compute infrastructure. As a reminder, as we have discussed on our prior few earnings calls, we signed two agreements with Microsoft in 2023, including a development program to make next-generation lasers for its data center, both for 400G and beyond, and for the development of its 400G and next-generation active optical cables. While not guaranteed, we continue to believe that the revenue opportunity for our 400G and 800G products could be greater and a longer duration than the revenue contribution we saw from this customer during the peak of the 40G product cycle, which suggests that revenue from these products may exceed $300 million over the several years of these build outs.

During Q3, and as we had discussed on our prior earnings call, we received requests from Microsoft to expedite our production ramp for these products, which I'm pleased to report we were able to accommodate. We began shipments during December and expect to continue to ship in Q1, although at a slower rate than we earlier expected as the data centers worked to install the optics we shipped in Q4. We expect demand to resume later in the quarter with additional capacity coming online then for Q2 and beyond. Another item to note, we believe that the value proposition that we offer to Microsoft is just as strong with other data center operators, and we are working with several of them to evaluate our technology and qualify our products. This includes our 800G products.

We shipped samples to three different data center customers in 2023 and have received initial positive feedback on our 800G products. We expect shipments of 800G to begin in Q3 this year. Now turning to our telecom segment, revenue from our telecom products of $2.8 million was down 56% year-over-year and down 8% sequentially, largely driven by ongoing softness in 5G demand, particularly in China. Looking ahead, we expect telecom sales to fluctuate around current levels. For the fourth quarter, our top 10 customers represented 95% of revenue, up from 90% in Q4 of last year. We had two greater than 10% customers, one in the data center market and one in the CATV market, which contributed 51% and 28% of our total revenue, respectively. In Q4, we generated non-GAAP gross margin of 36.4%, which was above our guidance range of 34.5% to 36% and was up from 32.5% in Q3 of 2023 and up from 21.4% in Q4 of 2022.

The increase in gross margin was driven mainly by our favorable product mix shift, our transition to a direct sales model in our CATV business, and the impact of non-recurring engineering sales during the quarter. We remain committed to the long-term goal of returning gross margin to around 40% and believe that this goal is achievable. As a reminder, with the direct to MSO sales model we implemented late last year, we expect margins in our CATV business to be meaningfully higher than our historical average. Total non-GAAP operating expenses in the fourth quarter were $21.6 million, or 35.7% of revenue, which were in line with our expectations, and compared to $21 million, or 34.2% of revenue, in Q4 of the prior year. Looking ahead, we expect non-GAAP operating expenses to range from $22.5 million to $24 million per quarter, reflecting some acceleration of R&D expenses to improve time to market for our 800G and 1.6 terabit data center products.

Non-GAAP operating income in the fourth quarter was $0.4 million, compared to an operating loss of $7.9 million in Q4 in the prior year. GAAP net loss for Q4 was $13.9 million, or a loss of $0.38 per basic share, compared with a GAAP net loss of $20.3 million, or a loss of $0.71 per basic share, in Q4 of 2022. On a non-GAAP basis, net income for Q4 was $1.6 million, or $0.04 per share, which was above our guidance range of a loss of $0.9 million to profit of $1.2 million, and at the high end of our guidance range of a loss per share in the range of $0.02 to earnings of $0.04 per basic share. This compares to a net loss of $5.4 million, or a loss of $0.19 per basic share in Q4 of the prior year. The fully diluted shares outstanding used for computing the earnings per share in Q4 were $44.8 million.

Turning now to the balance sheet, we ended the fourth quarter with $55.1 million in total cash, cash equivalent, short-term investments, and restricted cash. This compares with $31.2 million at the end of the third quarter of this year. We ended the quarter with total debt, excluding convertible debt, of $38.7 million, compared to $46.6 million at the end of last quarter. Notably, during the fourth quarter, we successfully issued $80.2 million of convertible senior notes due 2026. The notes will bear an interest rate of 5.25% per year. Concurrently with the offering, we exchanged or repurchased approximately all of our 2024 notes. As of December 31, we had $63.9 million in inventory, compared to $67.5 million at the end of Q3. We made a total of $8.7 million in capital investments in the fourth quarter, which was mainly used for production and R&D equipment.

Moving now to our Q1 outlook. We expect Q1 revenue to be between $41 million and $46 million, and non-GAAP gross margin to be in the range of 21% to 23%. Non-GAAP net loss is expected to be in the range of $10.9 million to $12.6 million, and non-GAAP loss per share between $0.28 per basic share and $0.33 per basic share, using a weighted average basic share count of approximately 38.4 million shares. With that, I will turn it back over to the operator for the Q&A session. Operator?

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