祥茂光電 (AAOI) 2022 Q1 法說會逐字稿

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 2021 (sic) [First Quarter 2022] Earnings Conference Call. (Operator Instructions) Please note that this call is being recorded. I will now turn the call over to Cassidy Fuller, Investor Relations for AOI. Ms. Fuller, you may begin.

Thank you. I'm Cassidy Fuller, Investor Relations for Applied Optoelectronics, and I'm pleased to welcome you to AOI's First Quarter 2022 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its first quarter 2022 financial results and provided its outlook for the second quarter of 2022. 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 1 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 of 2022. 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. In some cases, you can identify forward-looking statements by terminology such as believes, anticipates, estimates, intends, predicts, expects, plans, may, should, could, would, will or thinks, and by other similar expressions that convey uncertainty of future events or outcomes.

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 our customer responses to our innovations, as well as statements regarding the company's outlook for the second quarter of 2022. 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 the 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 for the year ended December 31, 2021.

Also, all financials 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 the earnings press release that is available on our website. I'd like to note the date of our second quarter 2022 earnings call is currently scheduled for August 4, 2022.

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

Thank you, Cassidy, and thank you for joining our call today. Turning to the first quarter, we delivered revenue and gross margin in line with our expectations and non-GAAP EPS above our expectations. During the quarter, we continued to see strong demand in the CATV market and improving conditions in the silicon market.

Total revenue for the first quarter increased 5.1% year-over-year to $52.2 million. Total revenue in our CATV segment of $25 million was up 34% year-over-year and was slightly higher compared to Q4. The overall CATV demand environment remains strong as we see increased activity and orders throughout the year and into early 2023. We are working to add additional capacity to meet this elevated demand.

Total revenue for our data center products of $21.4 million, decreased 17.4% year-over-year and 15% sequentially, as several of our customers continue to reduce their 40G and 100G purchase, while our run on next-generation 400G is still in the early stage. We can only see strong customer traction on 400G, and I'm very pleased to report that during the quarter, AOI was selected by a major hyperscale data center customer as a vendor for several of our 400G products.

We have a long relationship with this customer and have historically been a significant supplier of their early 40G and 100G transceiver needs. Pending the completion of final interoperability testing with the company's other prospective vendors, we expect orders to begin in Q3, with deliveries late in Q3 or in early in Q4.

During the first quarter, we secured 1 new design win, which was a 400G transceiver product for hyperscale data center operators.

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

Thank you, Thompson. As Thompson mentioned, we delivered non-GAAP EPS above our expectations, and revenue and gross margin in line with our expectations. During the quarter, we saw continued growth in the CATV market and improving conditions in the telecom market. During the quarter, we secured 1 new design win, a 400G transceiver product for a hyperscale data center operator. As Thompson mentioned, we are pleased to report that AOI was selected by another major hyperscale data center customer as a vendor for several of our 400G products. We have a long relationship with this customer and have historically been a significant supplier of their earlier 40G and 100G transceiver needs. Pending the completion of finer interoperability testing with the company's other prospective vendors, we expect orders to begin in Q3 with deliveries late in Q3 or early in Q4.

Total first quarter revenue of $52.2 million increased 5.1% compared to the first quarter of 2021, and decreased 4% sequentially. Our Q1 revenue was in line with our guidance range of $51 million to $54 million. In the first quarter, 48% of our revenue was from our CATV products, 41% was from our data center products, with the remaining 11% from FTTH, telecom and other.

In our CATV products segment, the overall demand environment continues to grow as MSOs, particularly in North America, continue purchasing additional capacity to upgrade their networks. We generated CATV revenue of $25 million, up 34% year-over-year and up 0.2% sequentially. As a reminder, our CATV results are typically negatively impacted in Q1 by the loss of production days that occurs during the Lunar New Year holiday in China, where most of our CATV products are produced. The slight sequential growth reflects the increased capacity that we have added, which more than compensated for the loss in production days.

Looking ahead, we continue to have good visibility with CATV orders as we see our backlog stretching throughout 2022 and into 2023. We are working to add additional capacity in both our China factory and our Taiwan factory to meet this growing demand. We believe the conditions in our CATV market are likely to remain highly favorable into 2023. Our Q1 data center revenue came in at $21.4 million, down 17.4% year-over-year and down 15% sequentially. In the first quarter, 73% of our data center revenue was from our 100G products, 18% was from our 40G transceiver products, and 1.4% was from our 200G and 400G transceiver products.

Now turning to our Telecom segment. Revenue from our telecom products of $5.3 million was up 17.5% year-over-year and up 60.1% sequentially. We were pleased to see telecom rebound this quarter as the China telecom market recovered. Looking ahead, we expect telecom revenue to remain lumpy quarter-to-quarter, however, especially given the challenging environment in China due to COVID-19. For the first quarter, our top 10 customers represented 88.6% of revenue, down from 90.5% in Q1 of the prior year. We had two 10% or greater customers in the first quarter, one in the CATV market and one in the data center market. These customers contributed 39% and 19.4% of total revenue, respectively.

In Q1, we generated non-GAAP gross margin of 17.5%, which was at the high end of our guidance range of 15.5% to 17.5%. And was down slightly from 17.6% in Q4 of 2021 and 24.6% in Q1 of 2021. The decline in our gross margin was mostly due to continued challenges with the supply chain. Total non-GAAP operating expenses in the first quarter were $19.6 million or 37.5% of revenue, down from $20.6 million or 41.4% of revenue in Q1 of the prior year.

Looking forward, we expect non-GAAP operating expenses to hover around $20 million per quarter for the rest of the year. Non-GAAP operating loss in the first quarter was $10.4 million, compared to an operating loss of $8.4 million in Q1 of the prior year. GAAP net loss for Q1 was $16.1 million or a loss of $0.58 per basic share compared with a GAAP net loss of $15.6 million or a loss of $0.59 per basic share in Q1 of 2021.

On a non-GAAP basis, our net loss for Q1 was $7.9 million, or a loss of $0.29 per basic share, which was better than our guidance range of a loss of $8.3 million to $9.5 million or a loss per share in the range of $0.30 to $0.35 per basic share. And compares to a net loss of $5.5 million or a loss of $0.21 per basic share in Q1 of the prior year. The basic shares outstanding used for computing the net loss in Q1 were 27.5 million.

Turning now to the balance sheet. We ended the first quarter with $40.1 million in total cash, cash equivalents, short-term investments, and restricted cash. This compares with $41.1 million at the end of the fourth quarter. We ended the quarter with total debt of $67.2 million, up from $62.9 million last quarter. As of March 31, we had $92 million in inventory compared to $92.5 million at the end of Q4. Inventory decreased primarily due to utilization of inventory for customer orders. We made a total of $1 million in capital investments in the first quarter, including $0.7 million in production equipment and machinery and $0.2 million in construction and building improvements.

Before turning to guidance, I would first like to discuss the supply chain environment. We saw supply constraints continue to lessen throughout Q1, and we did not see significant impact from shortages in the quarter. However, towards the end of the quarter, lockdowns in Shanghai began to affect several of our suppliers for our CATV products. We expect that these shutdowns will negatively impact our revenue in Q2 by approximately $3 million. We do expect to recover this delayed revenue once conditions in China normalize.

Moving now to our Q2 outlook. We expect Q2 revenue to be between $56 million and $59 million. And non-GAAP gross margin to be in the range of 16.5% to 18%. Non-GAAP net loss is expected to be in the range of $8.4 million to $9.5 million and non-GAAP loss per basic share between $0.30 and $0.34 using a weighted average basic share count of approximately 27.6 million shares.

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

(Operator Instructions) The first question comes from Richard Shannon with Craig-Hallum.

Great. And Thompson and Stefan, thanks for getting me on the queue here. Let's see, a couple of questions. Maybe starting with the sales guidance for the second quarter. Stefan, you just mentioned the supply chain of about a $3 million impact, and it sounds like, at least I would guess, it's mostly from cable TV. Can you verify that that's where you're seeing most of the impact? And then just maybe talk generally speaking about the relative growth of each of your primary segments and sales for the quarter?

Sure. Yes. So the supply chain issues that we called out that we expect to result in about a $3 million revenue hit compared to what we would otherwise have due to that supply chain constraint. That was in China, and it was related to our cable TV product, as you mentioned. Your second question had to do with the relative...

Growth within the major segments, cable TV, data center, et cetera, that leads to your...

Yes. I mean, I'm not sure what exactly the question is. But clearly, cable TV is growing relatively robustly. Data center has been in a bit of a decline, as we mentioned in our prepared remarks, because many of our customers are reducing their spend on 40 gig and 100 gig. And the 400 gig for us has just started to ramp. We noted in our prepared remarks that we have a new hyperscale customer that just notified us that we're going to be one of their selected vendors for 400 gig. So that's good news, but the revenue for that won't start until later in Q3 or early Q4, as we noted. So in the meantime, we're seeing a little bit of decline in the data center business.

On the telecom business, we did note that the telecom business grew substantially sequentially. However, most of that growth is coming in China. So I want to be really cautious about trying to project that forward. We've said for the last few quarters that we expect the telecom business in China, especially to be kind of lumpy, up and down. And that's what we've seen, and that's basically what I would continue to expect. The situation in China with COVID definitely exacerbates the expectation that there's not going to be sustained growth until after they can at least get past that period.

That is helpful. Following up on one of your comments on 400 gig, you said -- I think you're not using the word design win, but the notified deal -- you expect it to be a supplier with a major hyperscaler. Maybe just a few key details on this. Is this the U.S. or international hyperscaler. Can you describe which versions of 400 gig there? And then what do you see as kind of the way you characterize the dollar opportunity over a period of time from this win?

Sure. So it's a U.S. customer. It's historically been one of, and in some cases, our largest data center customer. We haven't disclosed what exactly types of 400-gig products over there, for competitive reasons. And as far as the dollar opportunity goes, I mean, it should be a pretty sizable opportunity. We can't put an exact figure on it yet, because we don't know -- as I mentioned in my prepared remarks, we're still finalizing the interoperability testing. And so until that's done and we know kind of who the other players are and what our relative positioning is, it's difficult to project the potential dollar figure for AOI. But I would note -- I mean, and again, this is a customer that we were historically their largest supplier for certain of their applications, including 100 gig, and this is their next-generation product. So it's a sizable opportunity for us.

Okay. I appreciate that perspective. Just one last kind of big picture question for you, Stefan. Obviously, I think the big question for a lot of investors is thinking about your path to breakeven. Obviously, it's going to require some sales scale, some growth here from these levels. And then presumably with that, we should see some gross margins improve here. Maybe you can talk a little bit about how you kind of see your breakeven model now. What's the kind of the possibility of seeing that happen maybe next year or something like that? Just kind of give us a sense of how you see that happening?

Well, as we said in our prepared remarks, I mean, I expect the operating expenses to be kind of stabilized at about $20 million a quarter, where they have been historically for a while. So doing the math, obviously, getting to breakeven then will require growth in sales, as you mentioned, and some growth in gross margin. We discussed last time on call that we think we can get back to the mid-20% gross margin range. It's difficult to project when. Given all the supply issues that we've had and lingering COVID concerns and all that, it's hard to put an exact time frame on that, but we certainly need to be back in the mid-20% range in terms of margin.

And then revenue, you can figure out from there, but it certainly needs to be $70 million or higher under any reasonable circumstance for gross margin. So that's kind of the puts and takes on.

(Operator Instructions) The next question comes from Richard Shannon with Craig-Hallum.

Stefan, maybe I'll throw in one more question here within your data center segments. I think you're calling out some weakness here in 40 gig, not sure if this is kind of flat to declining business over time here, probably most people would expect that to a degree. But maybe you could talk about your 100 gig business here. Kind of, if you look over the last number of quarters, it looks kind of flattish. Some market participants see this as a modestly growing market. I want to get your sense of what you're seeing for that revenue stream?

Yes. I mean it's been -- as you say, it's been relatively flat. I mean, we're not expecting large drops. However, as I noted, one of our customers, a very large customer, is in the process of planning their transition from 100 gig to 400 gig. And we've been selected, as I've mentioned in our prepared remarks, as a 400 gig supplier. So in the meantime, we expect their 100 gig business will decline somewhat in anticipation of that 400 gig. And that's pretty much what we expect to see.

Thank you. At this time, we have no further questions, and I will turn the call over to Dr. Thompson Lin for closing remarks.

Thank you for joining us today. As always, we want to extend a thank to you, to our investors, customers and employees for your continued support, and we look forward to see many of you virtually at our upcoming investor conference. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.