祥茂光電 (AAOI) 2015 Q1 法說會逐字稿

Goody day, and welcome to the Applied Optoelectronics Q1 2015 Financial Results Conference Call.

Later we will conduct a question-and-answer session.

(Operator Instructions).

Today's conference is being recorded.

At this time, I'd like to turn the presentation over to Ms. Maria Riley.

Please go ahead.

Thank you.

Thank you all for joining us today.

I am Maria Riley, Applied Optoelectronics Investor Relations, and I am pleased to welcome you to AOI's first quarter 2015 financial results conference call.

After the market closed today, AOI issued a press release announcing its Q1 2015 financial results.

The release is also available on the company's Web site at www.ao-inc.com.

This call is being recorded and webcast live.

A link to that recording can be found on the Investor Relations page of the AOI Web site and will be archived for 90 days.

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 an update on AOI's strategy and market.

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 to differ materially from those anticipated in such forward-looking statements.

You can identify forward-looking statements by terminologies such as may, expect, plan or believe, and by similar expressions.

Except as required by law, we assume no obligation to update on 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 and uncertainties that may impact the company's business are set forth in the risk factor section of the company's prospectus and Form 10-K on file with the SEC.

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 a substitute for results prepared in accordance with GAAP.

A reconciliation between our GAAP and our 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 Web site.

Before moving on to the financial results, I'd like to announce that AOI management will present at the Craig-Hallum Institutional Investor Conference in Minneapolis on May 27th, and at the Cowen and Company Annual Tech Media and Telecom Conference in New York City on May 28th.

We hope to have an opportunity to see many of you there.

Now, I'd like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics' President, Founder and CEO.

Thompson.

Thank you, Maria.

Thank you for joining us today.

We delivered fourth quarter revenue of $30.2 million, up 22% year-over-year but below our initial expectations for the quarter.

Revenue for our cable TV product was up 23% in line with our 2015 growth as a main.

And we've delivered datacenter revenue growth of 41%, but as we previously announced datacenter revenue was below our expectations, due to continued supply delay for an [extraordinary] slot 40G datacenter component, even though our revenue fell short our gross margin remained above 33%, which speaks to the fundamentals and efficiencies of our structure.

Demand remained very strong and we exited the quarter with a better of 2.4, I am pleased to report that we are receiving steady shipments from our internal vendors of 40G components.

Additionally, our internal 40G light engine manufacturing capacity is ramping to our plan and we are working our way through our backlog.

We are on track with our Q2 goal to produce more than 50% of the 40G light engine; we need by the end of the quarter.

We estimate that external global supply for 40G light engine will be constraint through at least the third quarter.

We believe our ability to internally ramp production for this component has given us a strong competitive advantage that we plan to leverage in order to maximize our market opportunity and satisfy by customer demand.

This internal light engine capacity will also not be possible without internal manufacture of the laser diodes which is another key differentiator for AOI.

The management team is focused on ramping our capacity, driving AOI goals, growing our market share, investing in R&D to enhance our comparative position as a leading provider of advance, optical advanced equipment and diversifying our customer base across all three of our end customer markets.

We thank all our employees for their hard work and look forward to delivering meaningful top-line and bottom-line goals in this year.

With that, I would turn the call over to Stefan to review the details of our Q1 performance and outlook for Q2.

Stefan?

Thank you, Thompson.

Total first quarter revenue was $30.2 million, up 22% from $24.9 million in the first quarter of 2014 and a 17% sequential decrease when compared to $36.4 million in the fourth quarter.

Our datacenter revenue in the first quarter amounted to $16.3 million, representing a 41% year-over-year increase from Q1 of last year and up 9% from Q4.

This quarter 48% of our datacenter revenue was derived from our 40 gigabit per second data center products.

With the ramping production of 40G light engines, we expect the majority of data center revenue to be weighted towards 40 gigabit per second transceiver product.

Based on current orders in hand, internal and external 40G supply forecast and our production schedule, we remain confident that we can still achieve our goal of drawing datacenter revenue by more than 45% when compared with 2014.

Leading Internet and Web 2.0 companies are investing heavily in their datacenters to keep pace with the rapid surge in Internet traffic.

These investments are fueling significant demand for AOI's industry leading advanced optical modules to transmit data signals over longer distances and at faster speeds such as 40 gigabits per second and 100 gigabits per second.

The development of our 100G products remains on track and we expect first volume deliveries in early Q4 this year.

As we announced in March at OFC, we expanded our datacenter product portfolio with three new types of 100 gigabit per second optical modules.

Turning to our CATV market, revenue from CATV products in the first quarter were $12.0 million, up 23% from Q1 of last year.

The year-over-year increase was driven by continued shipments of recent new design wins and initial purchases tied to DOCSIS 3.1 upgrade.

Several cable operators are now engaged in field trials and we anticipate demand to continue to ramp through the year with large scale roll outs likely to commence in 2016.

We believe that DOCSIS 3.1 upgrade will be a good growth driver for AOI for several years to come.

As you know, we have been working on developing DOCSIS 3.1 technology since 2013 and were first to market with the line of high frequency laser components that are compliant with the new technology standard.

We are the CATV market leader and have long standing relationships with the top cable TV equipment makers, as well as the supplier and design partner.

For example, we recently announced the partnership with Harmonic to develop our remote DOCSIS optical node that will help simply head-end design and enhance service flexibility for Harmonic's cable edge device that enables the delivery of video, data, and voice services over coax cable.

This technology will help service providers better leverage their existing coax networks to more effectively delivered triple-play services to dense pockets of infrastructure such as multiple dwelling units, office buildings, and college campuses.

We believe we're on track with our CATV product initiatives and the market is currently tracking to our expectation therefore we continue to expect to grow CATV revenue by more than 20% this year compared with 2014.

Revenue for our FTTx segment came in at approximately $0.1 million.

We expect revenue for this segment to fluctuate from quarter-to-quarter in the $0.1 million to $1 million range for the near-term.

In the first quarter we had two end customers that contributed more than 10% to our total revenue.

One datacenter customer at 45% and one CATV customer at 16%.

Moving down to income statement.

Q1 total gross margin came in at 33.3%, a decline of 267 basis points when compared with the 36.0% reported in Q4 of 2014 and a decline of 161 basis points from Q1 of last year.

Our Q1 gross margin reflects product mix as well as temporary expediting production costs related to 40G supply constraint.

Turning now to operating expenses, which totaled $10.4 million compared with $9.5 million in Q4.

The increase in Q1 OpEx was related to a full quarter impact that's having our new and expanded production facility in Taiwan and we're modeling our OpEx to remain at this run rate for the near-term.

R&D expense was $4.8 million or 16% of revenue compared with $4.2 million or 12% in Q4 of 2014.

Sales and marketing expense was $1.5 million or 5% of revenue, a decline from $1.6 million or 4% of revenue in the fourth quarter of last year.

G&A expense was $4.1 million or 14% of total revenue up $0.4 million when compared to the previous quarter.

Non-GAAP operating loss in Q1 was $0.3 million compared with operating income of $3.6 million in the prior quarter.

Non-GAAP net income after tax for the first quarter was $0.3 million or 0.9% of revenue compared with 4.0 million or 11.1% of revenue in the previous quarter and 0.8 million or 3.3% of revenue in Q1 of last year.

We generated non-GAAP net income of $0.02 per share down from $0.27 last quarter.

GAAP net loss for Q1 was $0.7 million or a loss of $0.05 per basic share compared with GAAP net income of $0.7 million or $0.04 per diluted share in the prior quarter.

The Q1 weighted average basic share count was 14.8 million shares and the fully diluted share count was approximately 15.3 million shares.

Turning now to the balance sheet, we ended Q1 with $28.1 million in total cash, cash equivalents, short-term investments and restricted cash compared with $40.9 million at the end of the previous quarter.

Cash flow used by operations was $15.1 million comprised in large part of an increase in inventory and the decrease in accounts payable during the quarter.

We made a total of $6.3 million in capital investments for the quarter.

The majority of this spending was directed towards the light engine and 40G and 100G transceiver capacity expansion investment.

As of March 31, we had $43.6 million in inventory an increase or $9.8 million from Q4.

The inventory increase is primarily due to material on hand for use in orders for 40G products.

As we noted earlier we exited the quarter with the large order backlog and we expect inventory to be reduced during this quarter to between $35 million and $40 million.

Accounts receivable decreased to $30.0 million compared with $31.6 million last quarter.

Moving now to our outlook.

We ended the first quarter with the tremendous backlog of 2.4 book-to-bill.

Based on the orders currently in-hand forecast from our customers and supply and production plans we expect Q2 revenue to be between $43 million and $45 million, representing 32% to 38% year-over-year growth.

At the midpoint our guidance reflects growth of 29% for the first half of 2015.

We expect Q2 non-GAAP gross margin to be in the rage of 34% to 35%.

Non-GAAP net income is expected to be in the range of $3.8 million to $4.5 million, and non-GAAP EPS between $0.25 per share and $0.30 per share using a weighted average, fully diluted share count of approximately 15.3 million shares.

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

Operator?

Thank you.

(Operator Instructions).

We will go first to Troy Jensen with Piper Jaffray.

Maybe for Stefan, could you talk about bookings date in Q2, obviously we've been exceptionally strong in Q4 and Q1 if we can sustain a book-to-bill ratio of over one in the quarter.

The bookings have been very strong or continue to be strong in the first, correction, the second quarter so far.

So, I would anticipate a book-to-bill greater than one in this quarter.

Okay, great, interesting.

And then how about capacity expansion, where you guys maybe the new facility down in Houston and then into that point can you talk about the balance sheets stuff and as far as whether or not you think you guys have sufficient funds on hand?

The expansion here in Houston I mean is ongoing, we're doing construction right now.

So there is not an expansion in terms of production at this point, but the facility construction is ongoing.

We are continuing to increase the production of chips here just based on existing facilities that we have.

As far as the balance sheet goes, we're comfortable with where we're at, as we noted in the prepared remarks we had an increase in inventory and a decrease in accounts payable during the quarter that accounted for a lot of this cash burn, but that will be reverse because that was basically timing.

If you recall, we have this lack of 40G component supply in the first quarter, we noted that on our earnings prerelease.

And as a result we had material, so there is the light engine part and then there is everything else that we provide to make the 40G product.

So the total amount of that other material is -- has been an inventory waiting for the light engines to become available to ship out, it's a lot of -- inventory and then because some of that was purchased in the fourth quarter and earlier in the first quarter obviously we had to pay some of our vendors for that.

So really that the cash burn in the quarter was primarily associated with timing issues related to inventory and payables.

And then we will go next to Simon Leopold with Raymond James.

This is Victor in for Simon.

I wanted to ask about the supplier for the component ramp in back-up.

So when they ramp back-up for full capacity, what will production look like for you guys I guess now that you've kind of developed your own internal production as well?

We're going to expect to balance our internal and externally sourced production capacity, as we see the demand evolving.

Ideally for us I think the more than we can produce internally, the better.

But at the same time we also cognizant that we don't want to over build the capacity especially in light of the fact that we're going to need to dedicate some of that capacity to 100 gig production in the future.

So we're looking at all those factors and balancing that appropriately.

As I said all things equal, the more we can produce and how consistent with not over investing in excess capacity the better.

So I guess, how does that impact gross margins, I mean if you swing more towards your own internal production for whatever reason into that imply that, we could see margins materially better than kind of what we're looking at for the June quarter or maybeE

I think in general the in-house production gives us the potential to have higher gross margin.

However, I cautioned that in the near-term and particularly when we're in a state where we have a large backlog that we are working our way through, we're doing things in a non-optimized way in a lot of cases that is we're doing overtime and we're doing other things that can potentially drive up our expenses a little bit in the near-term and help to offset to a certain extent, what would otherwise be a higher gross margin.

So, I guess what I am saying is directionally we expect in-house produced light engines to give us higher gross margin, but it may take us a little time to get to that sort of normalized production plan to where that we start to see that effect.

And just one question on the market overall in general you said that, you're expecting supply will be constrained to about 3Q still.

Does that imply that for this defect issue that your market position was maybe stronger than average I guess or you guys hadE.

What we said was that the supply of light engines we think it's going to be constrained through at least Q4 and the only reason why I say -- through at least Q3 and the only reason why I said Q3 really is just because that's kind of the visibility that we have at this point, it may very well be that supply constraint continues into Q4 and beyond, it's just, I don't have that level of visibility into the overall market, in other words I don't know what all of our competitors might be doing in terms of capacity, but I have been told that our customers see it being constrained at least through the third quarter.

But you're saying that hadn't impact you as much this issue because supply has been constrained in general overall?

I mean obviously the issue has affected us in terms of clearly our Q1 results being lower than we had originally guided.

So form that standpoint we've been affected, but in terms of losing orders or -- so seeing a long-term decline in business, I haven't seen any effect there.

We will go next to Paul Silverstein with Cowen and Company.

This is Fahad in for Paul.

Just a quick question regarding your datacenter customers.

Any new wins this quarter, how is the pipeline for new opportunities looking like?

We continued to have ongoing discussions with several new datacenter customers, nothing really to report there, we did talk about our shift datacenter customer last time having some design wins.

We still continue to expect those to ramp up in the near-term to revenue.

We haven't seen much increase in revenue from this quarter but we do expect them to continue to ramp probably into the second quarter and certainly in the third quarter.

And then going back to the supply constrains, we've done some checks it seems like there are more than one vendor capable of developing those light engines.

So just -- as we look at it more broadly what drives your confidence that your end customers would continue to be there for you given this pent-up backlog.

Would they not switch to other suppliers given other potential suppliers could be out there in the market.

What gives me confidence is the fact that while we have these supply constrains we've continued to get new orders from them.

In addition to that we obviously have quite an active ongoing dialogue basically pretty much daily conversations with our key customers, especially the ones that are affected by the supply constraints.

And that commentary leads to me to believe that suppliers are constrained and that while we've had some issues they continue to see AOI's vertical integration as the primary means that they can address the capacity issues in the market generally that is because we have greater capabilities and we're bringing more and more capacity online like our internal light engine they believe that we're the route or the method that they are going to be able to use to alleviate what would otherwise be more sever supply shortages to them in the future.

So just so we understand clearly the end demand from your customers, albeit is so large that if still the pipeline future of demand is so strong that it's still there, but is it possible that they may have sourced their 40G components from other suppliers while you guys?

Well we know that they have multiple sources, we've always said we're not the sole supplier to our customers.

So we know that they are sourcing from other suppliers.

There is no evidence that I'm aware of that there has been any shift in the mix or the amount that they are sourcing from us percentagewise versus other suppliers.

So, in other words that, your share of the business hasn't materially shifted in -- away from you?

That's correct.

(Operator Instructions).

We will go to Krishna Shankar with ROTH Capital.

So in terms of your internal production of 40 gig light engines, is it fully qualified now in Q2?

Do you expect to ship from your internal production outflow?

Yes, we do expect in Q2 to ship from our internal production.

And then on cable TV usage you have good visibility on demand there, this is mainly DOCSIS 3.0 upgrades or do you see kind of recovery in international cable demand also?

Most of the demand that we're seeing is coming from DOCSIS 3.0 capable products.

Many of those are new and recent design wins.

We believe that there are some ongoing trials as we mentioned in the prepared remarks, from several MSOs those are not large scale at this point.

We would expect to see larger scale trials probably in 2016.

But the MSOs are beginning to purchase DOCSIS 3.0 capable equipments simply because its backwards compatible with 3.0 and they don't want to make investments in capital equipment today that would be potentially obsolete in a short period of time.

And then given your higher mix of 40 gig internal production do you any -- can you update us on longer term targets for gross margins for the business beyond Q2?

Our target model has for a long time had gross margins between 33% and 35% and previously we've said we expect it to be towards the upper end of that range.

So that's still where we believe we can come in.

We will take our last question from Richard Shannon with Craig-Hallum Capital Group.

This is actually Jorge sitting in for Richard.

So, I wanted to ask a question on cable TV, just wondering what's your take on the recent this the Comcast-Time Warner merger, since both have said in the past they need to invest in the networks, I just wonder whether this will accelerate those investments and possibly travelling to higher growth for your cable TV business for the year and now you are sticking to your target of 20% year-over-year, but I am wondering what you're hearing now that from your customers whether Comcast and Time Warner being more proactive for their investments?

I think we've said this for a long time that the worst case I think for our business is uncertainty in the landscape among the MSOs.

So, in the near-term I think any resolution of the Comcast-Time Warner merger which of course is what we've seen in this quarter, that resolution is bound to be good in the near-term.

Longer term I think as you pointed out, both of those networks needed to be upgraded anyway and I am not really sure that it makes a lot of difference in aggregate whether those upgrades are done as part of combined entity or separately.

So I guess what I would say is we're happy that the situation with Time Warner and Comcast has been resolved, that should be a near-term plus, longer term I think we're kind of neutral on it.

And then my last question any updates in light of customers for your [WBM] products that you can test today?

Nothing really notable during the quarter, we continue to have good discussions with some other customers and additional interest, but nothing beyond that at this point to report.

Can I ask one last question?

Sure.

Was there any change in the mix within your cable TV business this quarter?

There is always some product mix, shifts around -- there is probably a little more activity on the return path or note side this quarter compared to last quarter, but it's nothing just like unusual, it's within the kind of bounce that we've seen historically.

That concludes today's question-and-answer session.

Mr. Lin, I'd like to turn the conference back to you for any additional or closing remarks.

Thank you for joining us today.

We continue believe we are very well positioned to benefit from continues strength in the datacenter market and future enabled upgrade in the cable TV market.

We are actually proud about the margin leadership and very good integration model.

As always, we thank our investors, customers and employees for your support.

That does conclude our conference.