AAOI - Earnings call transcript Q3 2018 | Applied Optoelectronics, Inc.

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Operator

Hello, and welcome to the Applied Optoelectronics' 3Q '18 Financial Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I'd now like to turn the conference over to Maria Riley, Investor Relations for AOI. Please go ahead, ma'am.

Maria Riley

you. Thank Applied AOI's and Results Third Riley, welcome pleased Conference Investor to you Quarter Optoelectronics Maria I'm Relations, to Call. I'm XXXX Financial release XXXX market its fourth its quarter the closed AOI the a After XXXX. today, outlook for third results financial press quarter of and provided issued announcing the also ao-inc.com. website release is company's The available on at call being recorded is and This webcast live. can website Investor Relations X the AOI and A be the year. link page on to be found that for will recording archived of

is call CEO; QX today's give prepared question-and-answer A Joining fourth Thompson Murry, Lin, Chief financial and on follow us of will and results, session will Chairman Founder, Dr. will the provide quarter Officer. details and AOI's of AOI's AOI's Stefan an remarks. our overview Thompson Stefan and XXXX. Dr. and for Chief the Financial Officer Strategy outlook

remind I well to which These review today's the results management differ will to Before forward-looking make statement. company's those in statements. could risks materially we uncertainties such safe like involve On statements. you current anticipated begin, actual expectations, harbor assumptions statements and and call, to forward-looking cause would from AOI's as forward-looking as

of noted changes or reason may, are risks Risk date these the the You discussed section the Except earnings considered law, or revenue, substitute by Non-GAAP that the financial are statements specifically identify the intended file or such on results as financial a not should, business the measures and earnings to to on measures release as in website. expectations. discussion in basis non-GAAP numbers after no why impact reconciliation press obligation similar GAAP. are measures well SEC. in terminologies we assume with reports believes set unless company's between that isolation this More of to a of our exception call financial statements on we company's today can the prepared present be confirm otherwise. about may plans, our to any with of company's Factors Also, non-GAAP actual in A forth expects, information as available forward-looking with anticipates, other accordance in statements results estimates as for other non-GAAP forward-looking our by by as and is well, for GAAP expressions. our included required update are to all

to like to Conference moving announce AOI results, Before November see Conference Network Needham Security X. December New and Technology you hope on Raymond XX the financial I'd attend to have of opportunity will York management & that James We the to the the on in there. many

like call Additionally, is quarter date the for Thursday, fourth XX, conference of earnings I'd XXXX February our XXXX. scheduled currently to note

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

Thompson Lin

Thank you, today $X.X million gross everyone, Maria. third shares. XX%, reviewing our to delivered or diluted Thank income margin quarter in us for results. of AOI which $XX.X and joining our you, per net grew $X.XX million of revenue

a small delay announced customer. a below revenue lasers, of of we datacenter to to with digital to percentage shipments due issue was we expectations As temporary an our identified XXG X September, receiver led which a our this in

datacenter data the agreement to shipments. quickly revenue with issues, softer-than-expected resulted enact customer, a however, and we in $XX troubleshoot delay, of As work solution of The we resumed million.

engagement solid relationship. active have we with customer this a We continue and to believe have

take to issues, product resolve the to high measure customer we a standard beyond. our aim above and we customer any Here quality We at are AOI, is and our truly believe support. committed and to appreciates of go

market, we especially experiencing the are with CATV, we datacenter also with interest activity performance, are our quarter been by products. seeing demands are we've increased we for pleased in customers. Remote-PHY and we While our other disappointed this our with encouraged In are

We group broad our expanding of base. to customers and on of have diversifying a customer the reach to product continued our focus

the are make in last secured front. other brings with announced progress to X wins total quarter, for wins that in We new of we China with year, for includes wins. wins QX, we datacenter on the the continue which pleased This the this operator datacenter design last Building design to XX we design number on in segments. design our

vertical focused QX to innovating the continue on integration over success review We to our solid progress this and in integration. With our call optical the vertical process manufacturing are of will our the for propriety remain Stefan? to building our we believe also on platform, outlook make and our expanding performance details turn to Stefan keys foundations. that, QX. platform, We I market, across and

Stefan Murry

Thank you, period. third prior compared million the was with the million revenue quarter $XX.X in Thompson. for $XX.X Total year

Our datacenter $XX with $XX.X million last was year. QX revenue million compared in of

believe to to revenue and customer measures standard as to resumed mentioned, in resolve shipments meet we acted in we an hold our high Shipments issue continue resolve the to our a lasers quarter of our expect We a reflect and and our a solution in to a customer, demand a than to were percentage issue the expectations. currently to have our datacenter X% small Thompson issue. identified work earlier we engagement. QX We discussions the quality less of As by lasers. implemented this commitment customers. determined XXXG lasers to strong have this XXG internally to to transceiver with using temporary we ourselves and customer was shipments active the XXG from We troubleshoot this impacted ongoing sourced the delay impacted, continued We customer. took

inventory. QX impacted of capacity implemented these steps have guidance. Most this testing eliminated our our and The measures existing process. will have additional from we continue are base reflected including production any in capacity order work laser However, that be customer potentially lag to devices is demand, further expected testing in temporary reassure sets in QX QX in to primarily is product to that additional our in to by production we screen negatively inventory, our troublesome

cost increase gross our goods margin In capacity, will thus reduced the temporarily our and of addition costs to QX. in impact also sold production negatively these

good continue XX% customers to our our XX% and shipping from XXXG experience other operator. quarter, from with datacenter and our We In began top the transceiver large orders revenue was a volume products to datacenter demand of XXG datacenter Chinese our derived was products.

wins number active X remain wins large products hyperscale continue which X the We X base XX with design customers XXXG customer our diligently equipment in to brings and core of manufacturers. to the In for year, XXXG work design our customer of secured to datacenter for and design design including other diversify outside our U.S.-based This for includes with wins our base. and wins, we quarter, total segments. qualification

As transceiver been historically customer our direct base a on sales to focused reminder, datacenter has customers.

diversify year. So OEMs the cable step of push these revenue continue $XX.X to QX In in equipment momentum We projects. business, quarter of important ongoing the sequentially TV our with below upgrade we slightly due million, an million reported are as we record customer design $XX.X our wins in to generated last our base. the and our continued up

Remote-PHY we are with this We product. activity especially in encouraged customer see by our very the market,

to achievement spectrum will unlock This their Atlanta, well additional MSOs trials X.X We at already gigahertz, to many attendees in received significant capability and Remote-PHY that technology are to our Remote-PHY AOI recent the technical going currently these well. customers product, demonstrate installed be a allow company plants. trials is in was was appear X to for which Conference SCTE the At conference. by first revenue-generating with in Expo the

in generated Our million $X.X of telecom year. in products delivered compared million $X.X QX with last revenue

quarter, the revenue, had with from of and customers; XX% remaining datacenter third in that the CATV the quarter, contributed and we XX% X XX% datacenter of X XX%, For or CATV X% from greater that In our the FTTH in XX% of XX% and from revenue other. telecom XX% respectively; business contributed X total was total the revenue. products, business products,

reported We from the a revenue. quarter. of XX%, decrease beyond Moving gross a last generated XX.X% margin

inventory while quarter. we gross to below to due issue Our came this underutilization experienced expectations in capacity worked margin resolve our we the primarily

Additionally, we million write-downs quality $X.X approximately incurred to inventory related the in issue.

ahead, earlier. costs temporary in in Looking margin gross increases QX due expect mentioned testing decline we to our I to the

R&D XX.X% We in expect the expense and were are XX% or term, end incurred by margin $XX.X experienced target. million gross expected increase be higher Total Longer troubleshoot starting $XX.X quarter or mostly the to in to in costs XX.X% of sequential revenue of and quarter. was of revenue QX. to margins to year compared expenses improve operating issue eliminated the largely quarter. the to the due The these we we the resolve our additional remain prior with million in committed

invest in technologies at a our remain We few as for improve quarters we to elevated an expect level continue to execution. and R&D new

million that stock per QX diluted of approximately QX quarter. or for income the $X.XX XX.X compared count XXXX. and $XX.X million in GAAP $X.X in quarter shares. tax was XXXX. income during of loss options QX last recognized million was $X.X share QX loss $X.X compared diluted Non-GAAP of million share with of divested operating $X.XX from $XX.X QX of or per was million diluted $X tax with diluted million a Our share weighted restricted exercised operating in $X.XX approximately quarter. the fully or after The net loss or in average employee of benefit million million compared income share income with per $X.XX share diluted net We $X.X per GAAP was were third net for

and compared end with in previous sheet. Turning total balance ended now million with quarter. to the equivalents, at cash investments QX $XX.X restricted $XX.X cash of cash, the million short-term We the

equipment to inventory, capital the is to last with compared that We construction flow time year-to-date million. $XX.X had total during and totaled products production $XX made required. XX, September Operating in be The million and to million of our we largely million $X.X $XX.X reliability year. due of testing capital from QX building investments completed on cash As not the in in machinery additional million in of production quarter increase in a $X.X due QX. the investments an in could million $XX.X million improvements. increase total including quarter in in quarter, brings $X.X and This million $XXX.X

a variety diverse outlook, manufactures on with comments a tariff few I China. raw would turning materials make our products. to Before like a the set to AOI of and uses of situation

to of such believe AOI's tariffs are While these changes, for business. number continue tariff contingencies. we adapt impact overall plan a we and well the there situation on the we If tariffs to minimal are will be small that from positioned believe on list,

As with both are capable transceivers, manufacturing all X know, you of Taiwan high our manufacturing and capable volume. in China these of of locations products

QX our outlook. to now Moving

to loss XX% be to $XX of EPS share revenue to in is of XX.X average $X.XX weighted $X.X is expected million XX%. million non-GAAP and income be million be $XX net using of margin and QX of income gross Non-GAAP share, to range of between the the per $X.X expect earnings in per the and Non-GAAP a We between a million, approximately diluted expected $X.XX count million. to range share shares. fully of of loss

We the Q&A session. million income it $X expect With QX turn of tax the back between over Operator? I'll and $X.X for benefit that, to a million. operator

Operator

[Operator Instructions].

comes first Simon from James. question Leopold with Raymond The

Simon Leopold

it? control So problems. fourth to all Basically, understand affected resolved new the do is to limitation. quality the the about by testing the you've it, way order have that Is and correct to that assure I think that you in around as capacity is quarter the the bottleneck

Stefan Murry

in Yes, we're Simon, that -- it, the additional a temporary screen in that's are we're quarter in little temporarily the testing And additional of lot and work those expected as put steps what fourth implementing existing the be some on is more less testing just much us ongoing mentioned, will but process, There are that's steps to correct. we QX. we're having additional inventory, in the quarter. affecting steps, steps, to that to than a be testing seeing color what's

Simon Leopold

try us to in catch-up up you So does shows the beginning point relationship presumably, then X-K dovetail at understand events? Is contractual this prevents disclosed XXXX? like the Is into there of two I'd I some voided contract some because help million the understand in guess the these the that of And is, what that commitment you year. how the between the issues? to that the you agreements? at $XXX Could from achieving

Stefan Murry

issue this is year, say could deliver that continue with customer I What to strong we'll this other relationship as in $XXX of working probably we with as million $XX we this think well very a datacenter million around customers. that we're through them. and And our have

Simon Leopold

there added -- basically sort is whereas $XX I in make the understand on structured, I a between don't $XXX gap based contract's there the guess, is what think $XX million as we to that million, get is, of that? XXXX? and has good way Should that the does of we that it of How we Or should million, it business a gone? should treat way? think that

Stefan Murry

specifics catch-up can't many the read there. I in describing way that to point mean, provision provisions consistent the those filed a give that too knowledge my along on you it to contract than, you can And be X-K, in of so the there There in it. out specific other with with was sort of isn't that I a would you're most

the and still on to periods with commitment this continues take that closely work very time in had fourth we're and us quarter, However, the mentioned, they given with that. as working I to customer them agreed us on they've the

Simon Leopold

address your but understand. you prepared remarks, crystal this want clear And I I did in that make Great. to

In the that the unchanged pricing in about XX% and, assumptions is therefore, environment, you're fourth you the terms talked about that kind of the really presume, and past ultimate certifications essentially, get margin pricing testing your this target, think we commitments extra effect testing are environment fourth XX% prior gross your should margin the your it's gross pricing extra control, that long-term I for margin agreements the quarter, going you the these and gross of when of that quality and from beyond quarter? what once is the

Stefan Murry

the the in The can back we quarter. and that environment we pricing what's think XX% get I mean, correct. consistent expected, sometime we was negatively us with That's additional in what steps impacting fourth future. margin testing are Yes. gross had that the to target

Simon Leopold

if And just might. one I one, last

was the In believe competitor that once suspect to your versus of demand revenue do you it or unmet? business? reason essentially expected, shortfall that the is Or terms in sense what took your that have we a all

Stefan Murry

that a of quarter. then I terms up their be think the business obviously, one the our requirements, of -- wouldn't deliver I of it's that have to customers see their can't some I went that in share, at surprising picked I believe least reasonable temporarily. to mean, think in it datacenter of competitor a it, to all if and suppliers needs competitor

Operator

And Silverstein question Paul from the next Cowen with comes and Company.

Paul Silverstein

to be but the this to I suspect all we're Stefan, revisit issue I'm issue sorry on the revisiting going call.

your I other you XXG there why opposed to respect problem, can more is issue? believe that But that insight with with small now dedicated revenue give and of can had was to the issue the particular lasers, you specific think therefore, that concerned? if us an customer if impact in with and, was the of assume customers. of to larger other not a referenced to this aren't terms What is that anymore lines customers, why I customers turn number with us? In why concern nature is you customer, a that your should where or X customers Why isolated they share you the there's lasers, And as shouldn't even other in future? And is customer? it assume are what issue? is isolated X this I those

Stefan Murry

terms, within sort I context, that's Yes, that expectations. about Paul, our customers, statement, requirements, that different nondisclosure virtually in of many with nondisclosure in has because they very environments I go that a they all performance -- can't broad that, basically, obviously different into given these every in customer-specific customer operate in we every have but can't by this have think, place. we I we're but specific terms of But more agreements of too covered general and And details different different of customer has I right, again, environments so the have agreements and expectations the devices. be recognize very requirements,

what in discussing of of I this proactive addressing thing seen I'm all and proud the cropping have say going that quickly. one customers customers. we been our the very haven't terms We've team found, I other could with to here We and this with problem that them up is, very in major out of issue think we

I customers address the being them talking appreciated other giving the you we very think will, and speed if able our to transparent about customers which the what the were proactiveness, only at not our but in going to problem and data, we found. out

Paul Silverstein

it? So Stefan, don't question the business issues you believe other impacted follow-up direct would Or I be, has that trust customers? the your with

Stefan Murry

with customers. believe business it our don't I other has affected

Operator

question comes Kelleher Mark D.A. with next Davidson. And the from

Mark Kelleher

Maybe we generally could talk competitive about environment. more the

seeing? some pricing there. with you been market? some what the Are that mentioned coming are competitor Are trends they maybe market expecting? new share that seeing of you're any thought competitors the had taken consistent you've What You you to

Stefan Murry

with don't competitors any new are had No. market. Pricing really no, I And trends what into consistent the coming see we expected.

Mark Kelleher

right. All quarter? the new customer, just datacenter that Chinese in The said you began ramping

Stefan Murry

yes. correct, That's

Mark Kelleher

And similar do customer to you customers? expect in opportunity that to datacenter the be U.S. datacenter

Stefan Murry

any the we as Yes. largest the operators datacenter one have customer very It's in the of that the definitely of U.S. that It's potential to be big the has datacenter other world. as customers a in

Mark Kelleher

that Okay. expectations thoughts just know you And there? of a what about bit. highlighted kind I your maybe a CATV. the on little Talk are few

Stefan Murry

on I were particular, show. product we you such Remote-PHY had cable knowledge, of Europe of that product. as currently supplier as say, SCTE, we're cable is product Telecommunications good American North MSOs this MSOs a And Cable think, in are and Engineers well which the we TV I upgrade was recently I or showcasing the just embark receptivity, MSOs at we Latin for A earlier for of well. either sort are the could And only finished and emerging commentary, Society projects. undergoing terms to very a That's as gigahertz In very in good we're X.X Expo, Yes, sort projects guess number or DOCSIS of seeing about the product, signs we both in trends product. were true business. our in to think and X.X very seeing technology America of our had October. upgrade a the very Remote-PHY It my conference the business. To Remote-PHY products existing positive new positive

Operator

next from with Alex And Company. Henderson question the Needham comes &

Alexander Henderson

-- to about 'XX? fully through that to into frame Is operating able on you XXXX because through move that 'XX, where I would that would to the troubleshooting constrained next the process Or you would to level issue. the 'XX this us hoping snapback from a are think the demand our of take a by able problems? haven't testing level got quarter CYXX expectations might been to get have of a like? be capacity a that because back at be we and XXX alternatively, doubling for ramp be the the type quarter how that fourth to lower thinking situation the seeing that of talk we look ultimately at means that the could conceptually we start than haven't we relative them resolution in street add the of and it reasonable much we'll current in gig resources and third to been of rate so that we had been the was kind you as about should that you'd And what numbers time beforehand year implied out get to

Stefan Murry

No.

additional earlier, and part third we've implemented of the that As I primarily fourth confined quarter quarter. is testing mentioned the the to

and to capacity. we'll of won't testing a ramp that, with ability it's production to be doing, our lot there that certainly continue Beyond be consistent additional our

in than our at specific you're year that still give this as quarter think aware, more compared next the we double we look don't but general, overall year. you out can X volumes If to -- guidance

lower admittedly quarter, now in it next expected expect on that's that into to fourth because to we missed we year. the Now have and but the shipments base a to volume some still -- double we're little be able bit third of we

Alexander Henderson

prior other Is expectations could it words, be there or you the into you the think true thought this expectations. relative would before reasonable to you say supply issue? ran capacity to In your that original double to you

opposed back you to is base. totally If prior year-end, once thought by expectations double the this therefore, assuming we'd -- resolved, resolved as original your lower to from from process volume to the be it's

Stefan Murry

to of to the see the place we be So to to demand year, add that it end be don't example. next the will capacity for put achieve have in time. able by ready We needed have at capacity as now the

the think -- can we respect to the too continuing hard really next we're early add it, year, it's With doubling for the as evaluate capacity too to crystal our are or scenarios could given think year, to based we have it there need and So out XXXX to. needed expect feel I ball entire but we we out come in actually double saying certainly where where on XXXX. double where came comfortable to prior we expectations, we we

Alexander Henderson

issue And result is do dividend-ly back of there just share as any the to were would Or it's the you been your otherwise trajectory with? you fully with have this that this resolve once in losses a working a that is where to think core resolved? lingering with you customer

Stefan Murry

products. now. us Thompson have of of new we've XXX-gig what's wins sure as is opposed datacenter base, really highlighted is we as of continuing and that What manufacturers great and It's in I We're say were can design made point. as a them important our really And mentioned and equipment were success, hard can't operators. customer say remarks Several X right say for those for my X right? to for at quarter, well, still working this I with I customers large the to class in through to diversify this,

where in non-datacenter of example. of with customer very products, of terms is in our we diversification, that and new customers, for feel new I operators, terms efforts customers classes both good So are new

now, taking that's for all back I in long that And thing to really the So what's business. been course, the effort most term, we right besides, on primacy keep have deliveries of for of important customers effort now. relative mind our important us to It's that think, I is for to think us. track getting most our

Alexander Henderson

for question, of And to guide the ballpark thinking that Is the last you in the XX% out you rate, are think but that tax I one I still 'XX, talked kind know about for don't 'XX? you past.

Stefan Murry

sounds for It process detail XXXX. in planning our we about done haven't right. Actually,

you bit a but to early it's tax give a guess that the unreasonable. precise So on rate, not sounds

Operator

And the with Kisner Capital from comes next question the James Markets. Loop

James Kisner

just some little what for like I wanted in balance It talk cash obviously, little burned you wondering the burn expecting buildup, about a you sheet product a I'm QX. to just here. anticipating bit. looks And issue, wondering -- all? you inventory of at in that it your QX, Are adapted that just just cash CapEx? expecting to cash do relatedly, of they be your what to off? of to all might the here have flow are able kind sell term? pressure given in near you plans write Or And some are for

Stefan Murry

embedded That there. couple in questions is a

the through in that the manufacturing at able of inventories. cash of was ship We all and all and complete or of of the it process have that lot end into lower all, terms a out manufacturing partway in it of A that was out to the balance, quarter. went the of First we quarter. inventory lot ship we the weren't mentioned

was here. in think probably back we down So We QX the inventory. terms come will of mark expect high-water from that

will back forward. as turning start move that I into So cash, think, we

need and have the the kind in add capital demand's we see mentioned and previous to evaluating capital shaping expenditures, as you additional as our are equipment about we question expenditures of You and answer, up. I what asked the my

example. we that the as demand's to we year quicker buy advance do a can equipment So in have cases, don't see We in up. much shaping for most

defined already of I demand to. $X.X we'll And terms -- had is out that adjust was and should thought the of that's sheet. balance write-downs I that CapEx there our mean really, million the most of inventory as I already continue question see we -- what asked quarters, suspect be So oh, quarter. of need the we another you should inventory embedded about in be or write-downs. over couple next We by in flushed reserves about in -- that to

the expect that Now testing ongoing at have adjustments lot on fourth in a depends inventory huge this the but I of wouldn't that quarter point. we

James Kisner

good Okay. not didn't you bit just mean, shipping. in helps. you're little hyperscale, sort Recently, always maybe have and on view the on Is it general, the just, of But others about talk are we a QX? seeing demand year view slowing begin a thoughts are slowdown environment kind of just And X of in that as that. can be I general this hyperscale seeing? you also and a -- kind better. you mean, exit It you given I --

Stefan Murry

them that about mean, Chinese get. What operator we're operators we datacenter datacenter for particular, diligently a lot is have slowdowns I talked and all yet. this other people we us, slowdowns we of very talked few I about in have or a customers. of think, working had a And in particular matters few customers that to but don't have

customers. adding I matters diversify to new think mostly what to continuing and So is us

base, they their are they customer to of And very -- diligent very, needs bandwidth. so whatever very are very react, of managing about existing happens these terms with course, are in quick our customers,

number that datacenter up base larger so to to example, average that customer is so, change think, I down more segments, over And different that's an will get are a minimize talked can one any they their for with risk customers time, we and as make to diversified to us out a our manufactures we that selling allow and, so like, see customer. a market, that can further if fluctuations that, particularly, completely get we in we to customers. the might the one I we to associated and about and -- large different equipment we And can any sure all the react if earlier, enterprise-type do primarily help of best that that forecast thing dynamic continue they're think,

Operator

And this any for comments. so Thompson like floor Lin turn session, to I concludes back to closing question-and-answer the our would

Thompson Lin

today. for Okay, and us you thank joining

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

Operator

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

lines. You disconnect may your now

Applied Optoelectronics (AAOI) 7 Nov 182018 Q3 Earnings call transcript