Applied Optoelectronics, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unless noted otherwise, amounts below are in U.S. dollars and millions. The company designs and manufactures fiber-optic networking products for data center, CATV, telecom and FTTH markets.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $49.7 | $40.5 |
| Gross profit / margin | $10.7 / 21.6% | $6.3 / 15.7% |
| Operating loss | $(14.0) | $(17.8) |
| Net loss | $(15.6) | $(16.8) |
| Loss per share, diluted | $(0.59) | $(0.83) |
| Cash used in operating activities | $(15.2) | $(8.2) |
| Cash used in investing activities | $(2.4) | $(3.2) |
| Cash provided by financing activities | $17.5 | $6.9 |
At March 31, cash and cash equivalents were $45.5 million, with another $3.9 million restricted; total assets were $476.4 million and stockholders’ equity was $278.5 million. Current assets of $209.9 million exceeded current liabilities of $98.4 million. Notes payable and long-term debt totaled $64.5 million, convertible senior notes had a $78.1 million carrying value, and bank acceptance payables were $6.3 million. The company reported $21.8 million of unused borrowing capacity and compliance with its loan covenants.
Material changes versus prior-year quarter
- Revenue increased 22.8%. CATV revenue rose to $18.6 million from $4.2 million, and telecom revenue increased to $4.5 million from $2.6 million. Data center revenue fell 22.0% to $25.9 million from $33.3 million.
- Gross margin improved by 5.9 percentage points. Management attributed the improvement to product mix, including stronger CATV sales relative to transceivers, and production efficiencies.
- Operating loss narrowed by $3.8 million. Net loss narrowed by $1.2 million, although Q1 2020 included a $2.0 million income tax benefit and Q1 2021 had none.
- Operating cash outflow increased by $7.0 million year over year. Q1 2021 cash use reflected, among other items, lower accrued liabilities and accounts payable and higher receivables.
Outlook, risks and unusual items
- Management said CATV demand was strong, particularly for products supporting increased upstream bandwidth, and expected demand to continue for at least several quarters based on forecasts and current bookings. Telecom growth included 5G-related sales in China. No numerical revenue or earnings guidance was provided.
- Management believes cash, operating cash flows and available credit will meet anticipated needs for the next 12 months. Future funding needs depend on growth, R&D, capacity and factory improvements; additional financing may not be available on acceptable terms.
- Customer concentration is high: the top ten customers represented 90.5% of Q1 revenue, versus 84.8% a year earlier. The company has no long-term purchase commitments exceeding one year and said forecasts depend on key customers.
- COVID-19 may continue to disrupt suppliers, manufacturing partners and logistics, and could affect customer purchasing. Management anticipated a safe return to offices over the following quarter but noted continuing pandemic uncertainty.
- Winter Storm Uri increased R&D repair and maintenance costs and G&A costs. Inventory write-offs for scrap, discontinued or damaged goods were $6.0 million, versus $2.5 million a year earlier; the lower-of-cost-or-market inventory adjustment was $0.9 million, versus $1.6 million.
- Ongoing derivative shareholder litigation seeks unspecified damages; the company said it could not yet assess the likelihood of loss. A long-lived-asset impairment trigger arose from the continued loss history, but management’s recoverability test found no impairment charge was required.
- The company had applied for forgiveness of its $6.2 million PPP loan; bank and SBA reviews remained pending, with timing uncertain. In April 2021, it repaid the $18.7 million Truist revolving balance and amended the facility to extend maturity to October 15, 2022.
Important facts for investors to verify
- Whether CATV demand and improved gross margins persist, and whether data center demand recovers after inventory normalization.
- Customer concentration, order visibility and the effect of having no long-term purchase commitments.
- Operating cash burn, working-capital movements, debt maturities and the availability of borrowing capacity.
- Completion and outcome of PPP loan-forgiveness reviews, and the implications of the Truist facility renewal.
- Developments in the derivative litigation, COVID-19-related supply risks and any future impairment assessment.
- Potential dilution: the company issued shares through ATM offerings, and 4.6 million potential shares tied to convertible notes were excluded from diluted loss per share as antidilutive.