Applied Optoelectronics, Inc. Q4 FY2020 Earnings Call

Good day and welcome to the Applied Optoelectronics' Fourth Quarter 2020 and Full Year Earnings Call. All participants will be in a listen-only mode. Please note that this event is being recorded. I would now like to turn the call over to Lindsay Savarese. Please go ahead.

Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics and I'm pleased to welcome you to AOI's fourth quarter and full year 2020 financial results conference call. After the market closed today, AOI issued a press release announcing its fourth quarter and full year 2020 financial results and provided its outlook for the first quarter of 2021. 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 2021. 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 believe, 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 customer responses to our innovations as well as statements regarding the company's outlook for the first quarter of 2021. 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 for the year ended December 31, 2019. Also, with the exception of revenue, 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 our earnings press release that is available on our website. Before moving to the financial results, I'd like to announce that AOI management will virtually participate at the Raymond James Institutional Investor Conference on March 1st. The presentation of this conference will be webcast live and links to the webcast will be available on the Investor Relations section of AOI website. We hope to have the opportunity to interact with many of you virtually. Additionally, I'd like to note that the date of our first quarter 2021 earnings call is currently scheduled for May 6, 2021.

Thank you, everyone for joining us today. To compare 2020, I'm proud of the entire AOI team and the progress that we have made this year. Despite a slow start and end to the year, it was challenging with evolving market dynamics. We are encouraged by the double-digit revenue growth we generated in 2020, which was driven by growth in each of our three major business segments with a total of 30 design wins last year compared with the record 31 in 2019. Given the difficulty around the pandemic last year, I am very pleased with the wins that we got. We'll continue to expand the reach of our products to a diverse customer base, evident by the declining concentration of revenue from our top 10 customers. We are pleased to report a new customer that accounted for greater than 10% of our revenue during the first quarter in our CATV segment. Turning to the fourth quarter, we delivered revenue in line with our expectations, gross margin below our expectations, and non-GAAP EPS at the high end of our guidance range. Total revenue for the fourth quarter of $52.8 million grew 8.5% compared to the fourth quarter in the prior year, and, as we expected, decreased sequentially by 31.1%. As we mentioned on our Q3 call, we began to see some slowing in orders from some of our data center customers in the latter part of the third quarter, which extended into the fourth quarter. This slowdown was related to inventory normalization following the surge in demand that was driven by the shift to working from home earlier last year. We continue to expect generally slow conditions in Q1 in the data center segment, followed by increased activity in this segment in Q2 and beyond. Non-GAAP gross margins of 27.5% were below our guidance range of 28.5% to 29.5% due mainly to product mix and slightly higher production costs than anticipated. In our CATV segment, the overall demand environment continues to be strong as MSOs, particularly in North America, continue to upgrade their networks. Total revenue for our CATV products more than doubled year-over-year and increased 37% sequentially to $15.9 million, which is the highest quarterly revenue in over three years. We believe that this disruption will be short-lived and expect to see a recovery in our telecom segment in Q1. Looking forward, we are excited about the growth opportunities ahead given the continued need for higher bandwidth and increased capacity within the CATV market and the increased demand for 5G products in our telecom markets. We look forward to meeting again in person soon. With that, I would like to turn the call over to Stefan to review the details of our Q4 performance and our outlook for Q1.

Thank you, Thompson. As Thompson mentioned, we delivered revenue in line with our expectations, gross margins below our expectations, and non-GAAP EPS at the high end of our guidance range. While we saw strong demand in the CATV market, as anticipated, our fourth quarter results were impacted by softness in the data center and telecom markets. Looking back on the year, despite challenging and evolving market dynamics throughout 2020, we are encouraged by the double-digit revenue growth we generated, which was driven by growth in each of our three major business segments. We secured 30 total design wins in 2020, similar to the record of 31 in 2019. Of the 30 design wins, 18 were in our data center market, 5 were in CATV, 4 were in telecom, and 3 were in other markets. In total, for the fourth quarter, we secured three new design wins among two customers, all in our CATV segment. Given the difficulties around the pandemic last year, I am very pleased with these design win results. We have continued to expand the reach of our products to our diverse customer base, which is evidenced by the declining concentration of revenue from our top 10 customers from 2019 to 2020. The concentration of revenue among our top 10 customers decreased from 88.1% in 2019 to 81.8% in 2020. We had three customers contributing 10% or greater of revenue in the fourth quarter, with contributions from one in data center and two in CATV. Overall, for the fourth quarter, our top ten customers represented 85.1% of revenue, down from 87.5% in Q4 of the prior year. For the full year, we had two customers in the data center segment contributing 38% and 12% of total revenue, respectively. In Q4, we generated non-GAAP gross margin of 27.5%, compared to 27.6% in Q4 of the prior year. Gross margin was below our guidance range of 28.5% to 29.5%, due mostly to unfavorable product mix and slightly higher production costs than anticipated. We continued to see increased customer interest in our 400G product portfolio and expect to see revenue contribution from these products in the second half of the year.

Sorry about that. Yes, it was muted. You think I'd know by now. So, thanks for taking the question. What I wanted to ask first about was specifically the new cable customer. So, I'm intrigued by this. I want to get a better understanding when you talk about a new customer, is this a U.S. operator that is new to AOI, or is this a new customer from outside the U.S.? And what's the nature of the deployment; is it a DAA or some other application?

Sure, Simon. First of all, thank you for your comments regarding all of us down here in Texas. We're getting back to normal now. With respect to the cable TV customer. It's not a brand-new customer. They've been with us for roughly a year. It is a U.S.-based company. They're a manufacturer or reseller of cable TV equipment. They are supplying primarily U.S. and North American MSOs with gear for upgrade projects. The specific products that we're selling to them right now are useful in both DAA and traditional applications. I think the deployments going on are a combination of both types of technologies.

I'd like to get an understanding of how you're thinking about the broader trend in your cable TV market. I recall speaking about this a couple quarters ago, at which point you thought that maybe in the construction season spring to summer 2021, you'd be getting back to mid-teens revenue. I want to recheck where you're thinking today about the cadence of your cable business through 2021?

I think we probably can be significantly higher than that level later in the year. We're sitting right now on the strongest backlog of cable TV products I think we've ever had. The fourth quarter was the best quarter in cable that we've had in several years. I see pretty strong performance in the cable segment through certainly Q3 and probably through the end of the year.

Thanks. And then maybe just one last one for me, if I might, is on your data center business, particularly the hyperscalers. What sort of linearity or expectations do you have for the full year?

I think it's difficult to draw a direct line between capital expenditures on the part of the hyperscale operators and our revenue. Our revenue in that segment, over the years, demonstrates a high-level correlation. But it's very difficult to draw any conclusion on a quarter-by-quarter basis from those CapEx numbers. For us, a lot depends on the trajectory of 400G. As we mentioned, we do see 400G contributing revenue in the second half of the year, and depending on how soon that comes on, will dictate our results for the year. So, I can't give you firm guidance for the year on that.

Good afternoon. I trust from your response to the last question that your visibility regarding communications from your customers is relatively limited? What has been the communication from those customers?

We've been communicating significantly with our customers regarding the near-term trajectory of inventory drawdown. It's not all of our data center customers that had too much inventory; it's limited to a couple of them. Our expectations continue to align with what we said on our last earnings call, which is we saw inventory correction persisting through Q1, then resolving itself in Q2. The second area of discussion is around their 400G plans. Discussions have been quite positive, with many customers now asking about capacity ramp up and timeframe for availability, indicative of a hardening of their plans to deploy in the second half of the year.

Thanks for taking my question. If I can just start off on the 400G wins, what are your expectations in terms of timing of deployments?

I wouldn't say it's late to hear on those wins at this point. We are having discussions with customers about our capacity ramp-up plans in the second half of the year. I would expect that we would have design wins certainly by the end of Q2 or very early Q3. It's not alarming that we don't have more wins at this point.

Hey, good afternoon. I wonder if we might get some commentary on your new 10% customer in cable TV?

It's a switch vendor who's selling largely into the data center, so some hyperscale, a lot of Tier-2, and some enterprise.

Good afternoon. Thank you for joining us today. Thank you to our investors, customers, and employees for your continued support. We look forward to virtually seeing many of you in our upcoming investment conference.

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