AAOI - Earnings call transcript Q4 2018 | Applied Optoelectronics, Inc.

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Operator

Good afternoon. I will be your conference operator. At this time, I would like to welcome everyone to Applied Optoelectronics Fourth quarter and Year 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. this being note Please Instructions] call recorded. is [Operator turn over AOI. to would now Riley, call to like for I Maria the Investor Relations Ms. Riley, you may begin.

Maria Riley

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

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

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

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

to discussion moving X This there. live opportunity webcast Relations a AOI San on of to the the on many the the that we you at and will I'd see announce the be have at financial Before Session to March to website. Investor be Investor the page will OFC results, an hope Center. link Convention Diego host like to webcast We available will of

May first for our earnings of of date scheduled quarter call the note to like is X, I'd currently Wednesday, Lastly, XXXX XXXX.

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

Thompson Lin

non-GAAP non-GAAP $X.XX, us today. line everyone, which loss our the revenue Maria. EPS with for delivered in you, Thank a thank Good and was you quarter, $XX.X of in of of afternoon, guidance. joining we performance our In and summarizing million

inventory experienced cost gross margin as issues However, resolve incurred we the quarter. expectations to our last our we below was higher-than-anticipated

ahead, gross Looking begin gradually to to quarter. expect improve margin we this starting

of XX.X% $X.XX generating share. non-GAAP gross earnings a For and of the AOI of revenue million, delivered diluted year, per $XXX.X margin

believe a few have overall I strengthened would that While position we the like our the for and our market for had note optics in XXXX its to AOI, accomplishments long-term. challenges of

U.S. our We datacenter are favorably of wins, in new customers, All which progress Diversifying front during in XX quarter. made with of a secured were customer a large summer, design center XX we a this with in while that initiative data a And We AOI. progress our customers. customer XXXX. in purchase continues compares a emphasis to to total a gained total with and our And priority base [ph] design customer base. win customer operator customer in we our the we we diversifying base including based broaden on from large has large have design this where the XX XX with for First, for bear on top started this we to had the year, hyperscale put] believe secured that based datacenter [the year the a we made new with the concentrated, is China. in commitment pleased be fruit. we base we early continued in wins new This XXXX, U.S. with have

we difficult believe building to of [While have customers, we continue require we maintained we relationships can in that that our continue to XXXX customers. to proud say top that make choices[indiscernible], [ph] us demonstrate focus I'm Second, our strong commitment this our are customers. all and times] beyond. to to our our develop at on

datacenter CATV advance expand This in included Third, advanced in and our PHY we Remote innovate customers. technology the and XXXG dealership for optics. and continue to XXXG in our

will leading-edge to for confident module very our last Just sampling. diversification innovation as XXXG for now networks. optical beyond technology need we perform customers customers available remain used optical monetize will to adopts demanding us our by telecom generation well response market. positive in tested XG infrastructure shipping is be photonics-based platform this our We condition released ability in efforts customer to these in and have customer optical the The market believe Fourth, evolves This we will a outdoor next-generation in we foothold technologies. to applications suite Many that been for CATV second. per scale And currently conditions. under the secure for in our our next temperature our similar to month, experience datacenter that XG silicon enable a products devices continue terabits products market X.X to ultimately use several mobile of products. manufacturing XXXG of has

early we XG While still be are with in made achievement believe this component I of in this dedication hard want have cycle, for customer team technical met market expanding and work later base, the year. starting existing thank and support the our progress their we customers. the the our AOI are optical year, we our the continued this we of year. to pleased high-speed XG driver Overall, we will likely significant

I in the recent the in call I see a to would dynamics more Before weeks like discuss datacenter comments datacenter on over situation turn the Stefan in in the market. make visibility commented currently other we about the few market to inventory Several excess in poor China industry our has to result market. and players detail, the

immune to in to clear the not inventory with chain part It customers, conversation are our dynamics. deployment, datacenter ahead that our is transition to from XXXG. in of due hyperscale these We supply has gotten the

of still early XXXX we inventory out limited, year in over While half that it next is second is as the believe of is first than and quarters. the worked the couple will visibility be stronger the

remain in due China their growth We country. CapEx a more datacenter conservative underlying both concerns rapidly companies our trends approach of for status taking for fundamental has evolving to in the in also with have deployment dynamic for [indiscernible] demands slowing most changed power nor We factor, in serve seen product this some and and has journey [Indiscernible] world, economic some their outlook of not our believe business. customers our computing and their customers. driving high-speed the of

and a our the next expanding leader optical technology strong performance believe are will turn to outlook developed to to address as QX and footprint in a market, have remain over in to foundation focused within customers' demand details we on we improves. technology our we Stefan as the position strong review that, I plan the on of quarter. With our the building With to We needs bring and call for competitive our market. Stefan? advanced

Stefan Murry

Thank you, range our $XX million, million. to the Thompson. with $XX.X million Non-GAAP guidance quarter $XX revenue fourth in line for which was was of

at revenue from our was $XX of XX% the in Our quarter, our million last In and QX in products. was $XX.X with derived datacenter from datacenter XX% million, products compared came XXG our of year. revenue datacenter XXXG

including production quarter potentially remained in capacity due implemented testing for devices Our our screen We steps. work-in-process. from the constrained to to additional last inventory, troublesome laser product the any quarter

the temporary remedied inventory. discussed track our of number and that times steps quarter, We and to of we additional testing to screen end affected by on of a identified steps problem return added quarter. the we lead normal to the root As this last small lasers existing remain including cause

a This a $XXX,XXX quarter customer. credit we issued also to

non-recurring be We have expect to out of and it therefore our this adjusted GAAP credit revenue.

first; with on to We expect hyperscale XXXX. our will the to of the over the expect and the is the however, half recent datacenter customers based there we in We first supply our Thompson early believe As transitioned year be year second sequentially the mentioned customers, in two some in are will visibility year build-up in quarters from currently as most this quarters. was demand inventory XXXG. improve chain visibility the of currently and down we obfuscate demand conversations still limited. believe We

believe good relationships we of conditions our in with a to shift our solid customers to have We improve. expand are them continue business hyperscale and to position all when market with and

us of to X.X after We the demonstrating customers, advanced datacenter by with module several release have optical enable on for response partners. the have positive Communications on the significant These continued OFC reduction of feedback gathered technologies well subassembly per ultimately our position of will Optical the to generation while R&D This a to is at of now year cost years new beyond We XXXG diversify and developing sampling. next available products believe customer our currently scale we very broad and customers that innovative good it optical customer customer incorporates including, products. our we of adhere is and a datacenter silicon our technical the making are to showcasing customer's because to European similar month. to to new to infrastructure. base. modules AOI the technology result and silicon engagement Last group prototypes technologies month, of efforts future photonics-based next generation technologies, seeing reach optics of continue this thereby suite continue conference terabits onboard XXXG progress early at effort announced expand We enabling modules an and second, requirements photonics-based the module that of and of scaling forward strong that developed look the our next is our incorporates technology last and

AOI. will partially million, number new ship our this four large totals on datacenter in volume This concentrated to we weakness qualification quarter, customer, demand our last a XXXX started in top three continuing our efforts $XX.X new North technology. Europe with In of in base wins number number is demand offset in This result our we additional and wins activity brings of design reported which PHY based wins, year. and This million effectiveness by a this design Remote customer in with our $XX.X rely customer U.S. MSOs. revenue AOI. and the some always with Asia, to American customer product a XX In customers, for While year, with television remains our customer was We for had of relatively business, priority. wins active trials base. demonstrating including total diversifying quarter, generated by market. a customers to remain the the of of diversify new a we to design XX with exceeds mainly both orders to of we including our of the customers remain cable QX customer the in In encouraged we one from compared

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

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

represented For and respectively revenue. XXXX, customers of XX% the XX%, same four XX% these total year XX%,

of margin quarter. in Moving recorded a generated the with beyond revenue, quarter, XX% gross we XX.X% compared last

margin came we the in incurred anticipated Our quarter. to while expectations below higher our gross worked we to costs due last inventory experienced than issue resolve

due the in loss $X.X in prior gradually share QX our basic basic GAAP improve net million to share margin operating with quarter, the operating or per were shares compared XX.X% per quarter $X.XX QX of $XX.X Total net compared share, performance gross last loss the of a used million sequentially million the million quarter. accruals XX.X% loss $XX.X computing after operating of share expenses $X.XX million tax compared of QX or was expect Operating revenue of income XXXX. a starting the as $X.X QX fourth QX with or in of quarter the $XX.X outstanding loss we decreased for compared quarter. $X.XX net In bonus or our for in ahead, quarter. to shares. was loss this an diluted of revenue were a $XX.X prior The Looking expenses with the in or year. year. income the result or of million per loss loss in $X.XX of lower $X.X in Non-GAAP million with net million $X.X for million, per diluted in GAAP was of $X.X basic net

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

of from QX. decrease million we million had a $XXX.X the in As in December XX, inventory, $XX.X

$X.X equipment equipment year investments the made construction $XX.X and investing million cash we reflects capital time million $XX.X total including cash use brings line quarter. equipment building the volume was below quarter. million maintain as the machinery most to in new last $XX.X our Our investments implemented in on all in same to which approximately the operations balance This $XX.X during of requirements the capital $XX for meet the certain total and production improvements. testing our to CapEx production to approximately and in demand, quarter, of with purchases in million million, the in fund a forecast additional recent of reduced testing needed at We

which Looking to million, ahead, expenditures continuation new capital in factors XXXX factory we of China. in $XX in construction the a expect approximately our be of

to our We necessary. conditions end plans may market as spending continue and adjust monitor

maturities at $XX end the XXXX. out extending debt at with of total several approximately debt million, capital was with Our from end year activities Much up years. is this associated million of our $XX expansion

structure we we match of continuously operations ensure assess mix we for have regularly spending the as plans our Just monitor right current funding to expansion. market and conditions, capital our to future

Moving outlook, be now $XX $XX to our QX to we between million expect QX revenue million. and

non-GAAP million basic of per loss QX a the gross average be share of to is the in per $X.XX expect XX.X%. to $X.X in We $X.XX share $X.X range and of to using per million expected between approximately weighted be to margin non-GAAP million, share share, XX.X% count range XX.X and loss Net shares.

over turn non-GAAP We net between on it that, our our session. will rate With back for I the Q&A tax effective Operator? income XX%. the and to XX% be expect QX to operator

Operator

We at [Operator question Simon Our is Raymond first James. begin will Leopold from the Instructions] session. question-and-answer now

Simon Leopold

question you taking the for here. Thank

Could this make I your canceled. clarify. that but that remarks, changed been year think your there's relationships customers been of you key that in you either talked your standing you the revised or I speculation stated sure the please? clarify to web-scale made has that you or know I remain lot just I I a Facebook, sound. that ago with Facebook about a believe prepared want deal with just

Stefan Murry

Simon. Yeah,

obviously individual So, to on due customers. I specific agreements can't comment non-disclosure

customer all out pointed believe in our relationships again, prepared say I'll hyperscale intact. However, remain and remarks, as datacenter our of we major we

Simon Leopold

the How inventory two three that's inventory with the in customer, when Great. on, And customers, think concentrated about you to is concentration we referred buildup this you one customers? talked should about just channel, the follow the of to?

Stefan Murry

of first that's company little all, talked I this the think, not about a reported only Well, bit. we're that's

of see obviously, which inventory what But depending about. kind or you're some is extent we on customers, talking to of buildup lesser a customer think I we're consistent industry. across the greater across multiple seeing

Simon Leopold

a quarterly some one caught loan is regarding And the bank line, filed last asking in that if you one sentence X-K credit my an agreements, recently us for somebody's flag one surprised And modifying of attention you credit what reports, of Thanks. yellow that behind was classic about monthly Could there might, financial I agreement. me. that concerned reports understand rather cash flow. That's kind a than sort help that?

Stefan Murry

more agreed did one point I just than loan some want Actually, to think has when been amend to bank for mean, it the there's that. that I had I time. previously we item. much for really I mean, And that another to agreement. I at requesting don't some it didn't

Simon Leopold

for questions. Thank Okay. taking you the

Operator

from at Cowen. is Najam question Fahad Next

Fahad Najam

you the Thanks of as granular the little pricing last by happening Stefan, see inventory issues. of you help same then level Or for environment, picture, markets decline pricing if taking XXX dynamics And saw and the the year? in be terms could product heightened environment my in Is us do can PSM-X, it broader beginning more help gig question. normalize? maybe understand us the understand also the about CWDM? then, might that bit price beyond a what's to you you

Stefan Murry

quarter by don't as product know, Fahad, not than guide a product generally basis. Well, Yeah. more one out we on and you

declines give in guidance granular this to to number. sort of out expect we're what break about as but CWDM a less, And same overall going bit that year going is again, not pricing, a we to little as similar of PSM, far year, perhaps terms that of to on were be what basis. they think the between that's and how for I see to pricing last sort

Fahad Najam

a there's by products. broader Luxtera space. degree is CATV the of with yours got of for certain consolidation customer picture, Cisco, a been sticking you, of ask this a acquired may - I in which If number

got noticeable was think just of Lumentum; ebbs being you of the your are development on risk and apparently process that to in front? financial that maintaining market quarterly share buyers, can competitive acquired share that To some extent, And that change a flows? losses any and now sold of or Oclaro any seeing prospective got you you comment purely you a ColorChip, function by in in customers, You've in Chinese do it Are your also, which is the distress. dynamics?

Stefan Murry

Okay.

questions So, embedded couple them one a time. to a there. there's try I'll address in at

consolidation, think kind have that based regarding say on about, they've that ultimately, talked aligns needs, all, of future with could roadmap of fair their shrinks, less metrics the First choose well of for and decision-making really topic things broader to want And of bode a variety from. past suppliers the always that their decision customers of roadmap, the that generally perhaps, same like well to think used how in that to have like I and they group the always it's When I AOI. But that. and things quality, your is kind we've price technology choice.

I So, say. hurt think consolidation I would doesn't is it on the AOI probably But balance, neutral.

about specifically asked Luxtera Luxtera. acquisition of or You Cisco's

I AOI that that hasn't to Cisco front that supplied with any products I can Luxtera's products. think say on just compete would

mentioned As question, of mainly those you cable supplier - TV my so Luxtera didn't have and a knowledge any to in we're your product products.

any you think repeat don't sorry, could risk question was I And business there there. really there, in that. I to was. forgot more I'm it there's what one AOI's So

Fahad Najam

each respective share customers? think at Do customers. maintaining share on you of comment If are hyperscale you at those your your can you

Stefan Murry

think again, about obviously ahead think say remarks. XXXG in and mentioned can XXXG, of on particularly we're and customers term I tenor that comment that us is so hyperscale term. indication customers, we major start to of prepared to look specific level and I we're relationships of longer our think the that our as in good a part customers of very detailed excited plans having, as we large there's to now our And we really a customers. all And be with discussion have we're what discussion What can't So, very I those I is near in very excited that about not discussion, no is the the we're the going both for promising transition.

Fahad Najam

I will answers, the cede the Appreciate floor.

Operator

from Our comes Instructions] at next Kang [Operator question B Dave Riley.

Lee Krowl

my this actually Kang. Thanks is for filling guys Hey, for Lee Dave taking questions. Krowl in

trend, just double to I you'll - to with it's off, this in more demand your volume XXXG near-term maybe relative ask, First that trivial. still wanted But is versus it tepid to expectation prior XXXX little be your a comments? able

Stefan Murry

what to we that is where want I think the I demand When half a of we in year to uncertain particularly the mark the go. picture we and exactly terms say speak can on in so second map of the put mean that's wouldn't

- developments with an there's limited second indication start of you that visibility. is think design those wouldn't or That's demand again, some to some a talked looking earnings in the in that that the There an we're exciting. so could customers to that are very could But actually want calls last said be We've of to see on the some wouldn't I new and working I increasing based cadence extent near-term go positive the and want the that in wins year, try year particularly later happen very - goes. that we our muted. for I is visibility sure. to wins how back to the contribute, limited could through of about design and for give to as half you of year few if the

Lee Krowl

can QX could but second sequentially terms are Got ticks it. in grow the trough indicating QX down, half QX? guess any I answered specific of, in you drivers then of And but the you leading of point confidence that that indicated kind there it, kind in would you you demand to give revenue of into sort the revenue,

Stefan Murry

excited mean adoption customers, early certain technology. also that in we're we're the technology XG of terms indications for of of hearing Yeah, about by XXX-gig And I making progress we're very example.

we haven't to lot sales that XXXX and really think take a of there. more improve been market of But is previously. design it And probably a wins I one our a into player that's that dynamic Now doesn't thing. telecom where major market

Remote-PHY, TV bigger Remote-PHY to half I going there's also we So it the first. year second that about think the is every indication certainly in the is than of the market technology part talked cable of be in a

positive there. there's of trends So demand a number

that talked uncertain only uncertainty company surrounding, I is demand an that's in we're think obviously about counterbalancing environment China. particularly, the China. the - not Again, certainly

I think many means trying around of there looking that a the customers business. they And for our at in are over sort economy and reevaluating plans there their they're slowing all of what of to their think make determination. potential of a process that

I China, to of is of And are risk going point upside the downside the we go. things quite out, number have. that sure I things so, not will in design wins China suppose and The our we're not of how not revenue newer wins has have A been large we percentage know, our - a China. China. derived been, you terms in however, design been have of of number from historically, in

earlier but to wins there's it's And year point. the design expected the we year. business now is there, much a like to the extent may occur existing be kick the we're so, calibrate they at in of a little be difficult little later in so some going not losing that that this they in which to And look

Lee Krowl

backup in delineate relative Got the to Could then inventory from maybe last one channel the inventory you and a And situation XXG maybe talk it. the just XXXG? me. about

Stefan Murry

I But that backup really the can't probably for think quantify is about inventory it exact more XXXG backup I XXG. you. than is about

Lee Krowl

taking my Thank you questions. it. Got for

Stefan Murry

No problem.

Operator

from is at Shannon question Craig-Hallum. Richard next The

Richard Shannon

my for little questions. so on I apologize. and Thompson late I a missed taking I Stefan the have may some things. Thanks, jumped call

hear First of Stefan, was I you that say XX% all, data did center? XXX-gig of

Stefan Murry

right. that's believe I

check me was the number Datacenter our revenue. here. of Let XX% just

XXX-gig versus are You XX-gig? about asking

Richard Shannon

Yes, please.

Stefan Murry

XX% revenue you. me XXX-gig from XX% number from Let find is for and XX-gig. datacenter our that of

Richard Shannon

Okay.

XX% bit a up the right? from XX% quite So quarter is then, prior

Stefan Murry

That's correct. Yep.

Richard Shannon

about year, speed Okay, that a like that detail, you design excellent. on to customer. revenues Can expect you with you eventually and datacenter how generating progress describe This to large there? any win U.S. in volume specifically a talked

Stefan Murry

as under our big, name, imagine. larger is details, non-disclosure of that some this of many this the in give it's other, terms I as with not too a but can't can customers. you But agreement recognizable would We're as one customer customer I classify customer. - datacenter hyperscale scale, if a

is customer. likely of this as some be meaningfully, it's to as smaller customers. So a other, not contributing certainly, our larger And datacenter

toward successful. think I to what efforts being that broadening our trying customer out it's worth base pointing However, are here that really demonstrate is our we're

what's in types But incrementally I and AOI. those foothold managing there. these a new of is many coming just gain we're aren't very new customers wider a as from aren't we're wins There large, going to customers' work business to So out those hyperscale for lot of attention customers. previously swath over customers. really it's big We're customers of customers. say hard many healthy our as time, getting with And some of strong to design a needs, adding yes, and of these that of announced be fair customers, which that think long-term

Richard Shannon

mix whatever. to helpful. see when your know for the you That's the of see at that. Stefan, Thanks from the don't want exposure, if can XXX gig and I XXX Okay. more understand - of But gig. from or year or in end it me, talk A it you terms help you'll could about us couple contributions you

Stefan Murry

Yeah, so to be it's XXX we've gig, been in consistent XXX gig, think I that market. relatively small saying a pretty going

think seeing the - small remain I few likely part purchasing we're are it, interested of from customers some or it's relatively us. a that are in not But to there I certainly a from who've market. are purchased us think who

gig I market. is potential a think bigger XXX much

from I I've we customers. gig I think said in XXX that's lot earlier, some the lot our next think see And steppingstone for interest of as a a customers. of

they that competitors I'm And we're for our will so important like that gig very year. it's Some industry. AOI the are in XXX decides in we'll ecosystem think and that customers timeframe. well, see, hard achieve sure would to steppingstone be that the that certainly hopefully, hopefully customer there. an take And I as because to leap production are to And indicating working later that the see

Richard Shannon

think last But of to Okay, margins, was all from we on helpful. about quarter the you, given my I question, think first guidance? My to said don't about low-XXs. you in where the was the you in the communicated of trending of office traveling I here. levels Stefan, details - margins And going gross last context have the it's gross goals just should probably get couple for I think how previously high-XXs then can't been to or in remember. second quarter. have quarters the I and grow honestly I your thinking it

gross about with of the help great, please. If that'd context think you that be margins can us

Stefan Murry

Yeah.

generally to speaking, gross do mean, is expect starting margin. order margins we throughout revenue expect talked think year. lot of to gross little to margins quarter. But measures gross conditions in also bit we way we the gradually regarding sort uncertainty improvement get I a additional to I In think And market I those work improve gross our So general have need that all the to testing the of and we'd we to extends a this see what higher through margins, about. that

the goals. we're going end finished materials by we this with that in to we've building that line going - our bill of that's in-sourcing As previous said quarter. should the And been be prepared more to of our continue remarks in largely of be

resume that our be be again, I that low-XXs get the think of achievable. range efforts a implemented. some well. us. implementing some don't I as I into and of see we as of we additional we'll of towards line fall on benefits backseat kind to think And as some of the in-sourcing I think processes margins to gross able put that took to those for achievable testing an as changes range needed see the the gross of to going And margin can future, of timeframe there, the I want in to but a we where far think is high-XXs when kind the it's

Richard Shannon

Okay. of all I'll from That's Thank that. questions the you line. jump for out me. the

Operator

turn this Thompson will At closing And the questions. for show call Dr. we no time, I Lin to remarks. further over

Thompson Lin

for today. Okay. Thank joining you us

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

Applied Optoelectronics (AAOI) 21 Feb 192018 Q4 Earnings call transcript