Applied Optoelectronics, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results; dollar amounts below are in millions except per-share data.
Business context
AOI designs and manufactures fiber-optic networking products for data center, CATV, telecom and FTTH markets, with manufacturing and R&D operations in the U.S., Taiwan and China. It reported one operating segment. Data center products represented 80.5% of Q2 revenue; the top ten customers represented 86.9%.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $65.2 | $43.4 | $105.7 | $96.1 |
| Gross profit / margin | $13.7 / 21.1% | $10.5 / 24.3% | $20.1 / 19.0% | $22.9 / 23.8% |
| Operating loss | $(11.1) | $(13.8) | $(28.9) | $(25.7) |
| Net loss | $(18.6) | $(11.4) | $(35.4) | $(21.8) |
| Diluted loss per share | $(0.89) | $(0.57) | $(1.72) | $(1.10) |
| Operating cash flow | Not separately presented for the quarter | $(23.8) | $7.2 |
Balance sheet and liquidity at June 30: Cash and cash equivalents were $51.1, restricted cash $7.8, and current assets $213.0 versus current liabilities of $119.8 (current ratio approximately 1.78). Total assets were $478.1 and stockholders’ equity $257.5. Inventory was $97.3, up from $85.0 at year-end 2019.
Debt: The filing cites approximately $145.1 of consolidated indebtedness, including $80.5 principal on 5% convertible notes due 2024, other notes and debt, and bank acceptance payables. Unused borrowing capacity was $26.9. The company reported compliance with Truist covenants at June 30. After quarter-end, it repaid $18.6 outstanding on its Truist revolving line.
Material changes versus comparable periods
- Q2 revenue rose 50.2% year over year, led by data center revenue (+65.2%) and telecom revenue (+278.5%); CATV revenue declined 37.5%. For the first half, revenue increased 9.9%, as data center and telecom growth was partly offset by a 52.4% CATV decline.
- Gross margin fell 3.2 percentage points in Q2 and 4.8 points for the first half. Management attributed the pressure to a mix shift toward lower-cost, shorter-reach 100 Gbps transceivers, production inefficiencies, higher raw-material costs and pandemic-related shipping costs.
- Despite higher Q2 revenue and a narrower operating loss, net loss widened year over year. The Q2 tax provision was $7.0, compared with a $3.2 tax benefit in Q2 2019. The first-half tax provision was $5.0, versus a $5.7 benefit in 2019.
- Operating cash flow swung to a $23.8 use from $7.2 provided in the first half of 2019, reflecting working-capital uses including inventory growth of $15.4 and receivables growth of $9.7, partly offset by a $12.7 increase in accounts payable.
Outlook, risks and unusual items
- Management stated that cash, operating cash flows and available credit should meet anticipated needs for the next 12 months. It provided no specific revenue or earnings guidance in the supplied filing text. A new Ningbo factory project was expected to be completed by year-end 2020; about $21.2 of estimated $27.5 construction costs had been incurred by June 30.
- Management linked stronger data center demand to 100 Gbps transceivers and increased cloud-service capacity needs, including remote work. Telecom growth was associated mainly with China’s 5G deployments. CATV weakness reflected lower customer capital spending on outside-plant capacity.
- COVID-19 effects remained uncertain. The company described operational precautions and increased shipping costs; management said the duration and financial impact could not be predicted confidently.
- AOI received a $6.2 Paycheck Protection Program loan. Forgiveness was uncertain, and the company noted potential review and scrutiny of loans exceeding $2 million.
- A shareholder securities class action settlement stipulation filed August 3, 2020 contemplated a $15.5 payment funded by directors’ and officers’ insurance, subject to court approval; AOI had recorded no accrual. Related derivative litigation remained pending, with loss likelihood not estimable.
- The company recorded a $5.2 valuation allowance against Taiwan deferred tax assets, citing cumulative losses. It also recorded inventory lower-of-cost-or-market charges of $2.9 in the first half and direct inventory write-offs of $6.2.
- AOI raised $13.9 net through its at-the-market stock offering in the first half, issuing approximately 1.58 million shares. The filing identifies customer concentration, volatile demand, product mix, manufacturing and supply risks, U.S.-China trade policies, foreign-exchange exposure and leverage as important risks.
Important facts for investors to verify
- Whether the data center and 5G demand gains persist, and whether CATV demand recovers; assess customer concentration and order visibility.
- Whether gross margins improve as product mix, production efficiency, input costs and shipping conditions change.
- Cash burn, inventory and receivables conversion, available borrowing capacity, debt maturities and the effect of the post-quarter revolver repayment.
- PPP loan forgiveness outcome and court approval and insurance coverage for the proposed $15.5 class action settlement; monitor derivative litigation separately.
- Potential further tax valuation allowances and any material updates to COVID-19, trade-policy or China/Taiwan operating risks.