AES Semigas


27 November 2020

AOI’s post-COVID rebound continues

For third-quarter 2020, Applied Optoelectronics Inc (AOI) of Sugar Land, TX, USA – a designer and manufacturer of optical components, modules and equipment for fiber access networks in the Internet data-center, cable TV broadband, fiber-to-the-home (FTTH) and telecom markets – has reported revenue of $76.6m, up 17.5% on $65.2m last quarter and 66% on $46.1m a year ago.

“We recorded good growth in each of our three major business segments,” notes founder, president & CEO Dr Thompson Lin.

However, revenue was at the low end of the $76-83m guidance range as AOI began to see some slowing in orders from certain data-center customers in the later part of Q3, related to inventory normalization as previous orders are digested (following the surge in demand in first-half 2020 that was driven by the shift to working from home).

Data-center product revenue was hence $55.3m (72% of total revenue), up only 5% on $52.5m last quarter and up 63% on $34m a year ago. Of data-center revenue, just 28% was from 40G transceiver products and as much as 68% was from 100G products (for which revenue rose 13% sequentially and nearly 350% year-on-year).

Cable television (CATV) product revenue was $11.6m (15% of total revenue), up 90% on $6.1m last quarter and 32% on $8.8m a year ago. “We began shipping newly designed line extender amplifier products in the quarter and plan to ship initial quantities of system amplifier products in Q4,” says chief financial officer & chief strategy officer Dr Stefan Murry.

Telecom product revenue was $8.9m (12% of total revenue), up 44% on the record $6.2m last quarter and more than tripling (up 209%) from $2.9m a year ago, driven by increased demand for 5G mobile deployments in China.

FTTH product revenue has rebounded from just $1000 last quarter to more than double the $39,000 a year ago, but is still just $67,000.

“Results were broadly in line with our expectations and reflect continued progress on our revenue and customer diversification efforts,” says Murry.

The top 10 customers comprised 84.9% of revenue (down from 88.3% a year ago) and the top five represented 75% of revenue (down from 82%). This included two 10%-or-greater customers (both in the data-center segment), contributing 40% and 10% of revenue, respectively. Three other customers each contributed 5-10% of revenue (two in the data-center segment and one in CATV). This compared with two 10%-or-greater customers and just one 5-10% customer a year ago.

During the quarter, AOI had seven design wins with six customers. Two of the design wins were in the CATV segment, three in the data-center segment, and one in the telecom segment.

On a non-GAAP basis, gross margin was 27.4%, down on 28.8% a year ago but up from 23.1% last quarter (and above the guidance range of 25-26.5%) due to cost-reduction benefits coupled with a favorable product mix (particularly in the telecom segment, for which gross margin continued to expand, rising by 230 basis points sequentially).

Operating expenses have risen from $18.4m a year ago and $20.6m last quarter to $22.3m, but cut as a percent of revenue from 39.9% a year ago and 31.6% last quarter to 29.1%, reflecting efficient expense management.

Net loss was $1.4m ($0.06 per basic share), cut from $2.9m ($0.15 per basic share) a year ago and $5m ($0.24 per basic share) last quarter, and towards the top end of the guidance range of $0.6-4.6m ($0.03-0.20 per basic share).

Cash used for operations was $6.1m (more than halving from $15.5m last quarter). Capital expenditure (CapEx) was $3.5m, including $1.2m in production equipment & machinery and $2.2m in construction & building improvements (below expected, as the firm continues to tightly manage CapEx, despite resuming spending on its new factory in Ningbo, China following the COVID-related pause in construction in Q2/2020).

Regarding its at-the-market share offering announced in February, AOI has so far raised gross proceeds of $23.2m (including $8.9m in Q3). The firm intends to use the proceeds for continued investment, including new equipment and machinery for production and R&D.

Overall, during the quarter, cash, cash equivalents, short-term investments and restricted cash hence fell by just $0.8m, from $58.9m to $58.1m.

Inventory rose from $97.3m to $111.4m, driven mainly by the buildup of raw material and semi-finished goods inventory, which AOI is preparing prior to year-end and in anticipation of the Lunar New Year holiday in China.

For fourth-quarter 2020, AOI expects revenue to drop to $50-55m and net loss to rise to $4.5-5.8m ($0.19-0.25 per share), despite gross margin growing further, to 28.5-29.5% (driven by the cost-reduction benefits and continued favorable product mix).

“Recently we have been informed by several of our China telecom customers that 5G deployment there has been paused by several large network operators as they re-plan their supply chains following the disruption caused by Huawei’s component shortages,” says Murry. “We anticipate that revenue will be down sequentially in Q4. However, we believe that growth will resume in Q1,” he adds. “Overall, we remain optimistic about telecom spend in 2021 as we believe that China deployments will resume with vigor after the Lunar New Year.”

Regarding CATV products: “Demand from North American MSOs [multi-service operators] for HFC [hybrid fiber coaxial] equipment appears to be stronger than it has been in several years and we currently expect this demand to continue for at least the next several quarters as MSOs upgrade their networks, particularly to address congestion in the return path,” says Murry.

Regarding the data-center market, AOI expects near-term headwinds in Q4 as some hyperscale customers adjust their inventories back down to more normal levels. “Several of them anticipated more supply chain disruption during COVID than actually occurred. So they prepared extra inventory in anticipation that there would be some problems. Those problems maybe didn’t materialize as much as they thought they might,” says Murry. “In the next few quarters, as inventory at our customers returns to normal levels, we will resume revenue growth in this segment,” he believes. “We continue to have good relationships with our data-center customers… The fundamental needs for higher bandwidth within hyperscale data centers will drive long-term growth, particularly during this time as our customers remain focused on improving network performance in light of the increased traffic related to the shift towards working from home.”

“We recently secured our second technical qualification for a 400G product with a sizable tier-2 data-center operator who is an existing customer, and we are encouraged by the customer interest we continue to see for this product,” says Lin. “This qualification will be recorded as a design win once we receive an order from this customer for the 400G product, which we expect will happen in this quarter [Q4],” he adds.

As AOI continues to tightly manage its CapEx plans, it has now reduced its expectation for full-year 2020 CapEx from $42m to about $22m. This is due mostly to a reduction in equipment purchases and building improvements as it works with customers to anticipate the timing of the 400G ramp next year. “We will continue to re-evaluate our spending needs as our plans evolve,” says Murry.

“Looking ahead, while we expect headwinds in the fourth quarter as our hyperscale data-center customers adjust their inventory levels downward, and we see effects of what we believe to be a temporary pause in 5G deployments in China, we believe our customer relationships and market share position remains strong, while the continued demand for higher bandwidth will drive long-term growth,” says Lin.

“The recent notable highlight in our FTTH segment is our involvement working on the 25GS-PON MSA [multi-source agreement] alongside Nokia and three Asia-Pacific service providers,” says Murry. The MSA “positions us well in the next-generation PON ecosystem, and we believe this could be a long-term growth driver for our fiber-to-the-home segment.”

See related items:

AOI’s revenue rebounds by 61% in Q2 post-COVID

Tags: Optical transceivers Laser diodes




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