Applied Optoelectronics, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results; amounts below are in U.S. dollars unless stated otherwise.
Business context
AOI designs and manufactures fiber-optic networking products for data center, CATV, telecom and fiber-to-the-home markets. Its manufacturing and R&D operations span the U.S., Taiwan and China. The company operates as one reportable segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $53.3 million | $76.6 million | $157.2 million | $182.3 million |
| Gross profit / margin | $8.1 million / 15.3% | $19.2 million / 25.0% | $29.6 million / 18.8% | $39.3 million / 21.5% |
| Operating loss | $15.5 million | $6.8 million | $43.1 million | $35.7 million |
| Net loss | $15.8 million | $9.6 million | $39.6 million | $45.0 million |
| Loss per diluted share | $0.58 | $0.42 | $1.48 | $2.12 |
- Q3 revenue fell 30.5% year over year; nine-month revenue fell 13.8%. Q3 data-center revenue declined 56.8% to $23.9 million, while CATV revenue rose 98.4% to $23.1 million. For the first nine months, data-center revenue fell 48.8% to $72.3 million, while CATV revenue more than tripled to $69.3 million.
- Gross margin contracted year over year in both periods. Management cited product mix (more CATV sales relative to transceivers), higher raw-material costs and pandemic-related supply disruptions.
- Nine-month other income included $6.2 million of PPP loan forgiveness. This helped reduce the reported nine-month net loss versus 2020; the loan forgiveness was approved in June 2021 and recognized in Q2.
- Nine-month operating cash flow was negative $11.4 million, versus negative $29.9 million in 2020. Investing cash flow was negative $7.9 million; financing cash flow was positive $19.0 million. Cash, cash equivalents and restricted cash decreased $1.2 million to $48.9 million.
Financial position and liquidity
- At September 30, 2021, cash and cash equivalents were $43.5 million; restricted cash was $5.4 million. Current assets were $200.6 million and current liabilities $93.3 million, a reported working-capital balance of approximately $107.2 million.
- Notes payable and long-term debt totaled $60.5 million, including $41.3 million current; convertible senior notes had a $78.5 million carrying value and $80.5 million principal. Bank acceptance payables were $6.5 million. These figures exclude lease liabilities.
- Unused borrowing capacity was $4.9 million at quarter-end. AOI reported compliance with Truist credit-facility covenants. It repaid the $19.3 million Truist revolving line in October 2021, after quarter-end.
- Stockholders’ equity was $264.0 million, compared with $277.9 million at December 31, 2020. Common shares outstanding were 27.175 million at quarter-end versus 25.110 million at year-end. Nine-month net proceeds from common-stock offerings were $15.4 million.
Changes, outlook and risks
- Management attributed weaker data-center sales to customer inventory normalization after the prior-year work-from-home demand surge, and said it expects data-center demand to improve in 2022. CATV demand, particularly products supporting greater upstream bandwidth, was strong; based on forecasts and bookings, management expected it to continue through 2021 and 2022. The filing gives no specific revenue or earnings guidance.
- AOI estimated Q3 revenue lost to supply-chain disruptions at approximately $3 million and expected disruptions to continue through the rest of 2021. Alternative suppliers may improve availability but could raise costs and reduce margins. Management also noted higher shipping and some raw-material costs.
- The top ten customers generated 86.0% of Q3 revenue and 86.5% of nine-month revenue. The company has no customer purchase commitments extending beyond one year and said customer concentration makes forecasting dependent on key-customer forecasts.
- Management stated existing cash, operating cash flows and available credit should cover anticipated needs for the next 12 months, while noting that future needs depend on operating and investment plans and additional financing may not be available on acceptable terms. The China factory construction was substantially complete; approximately $27.4 million of the estimated $27.5 million contract cost had been paid, with remaining payments due in installments. Management expected the factory to enter service in the first half of 2022.
- A shareholder derivative action reached a settlement-in-principle; preliminary approval was granted, with a settlement hearing scheduled for November 4, 2021. AOI agreed to governance reforms, and its D&O insurer was to make a payment in exchange for dismissal and releases. The filing says AOI complied with settlement requirements; the hearing outcome is not reported here.
- AOI reported no material changes to the risk factors in its 2020 Form 10-K, no off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2021. It recorded no impairment of long-lived assets despite identifying its continuing loss history as a triggering event.
Most important facts for investors to verify
- Whether data-center demand recovers in 2022 and CATV orders persist as management expected.
- Whether supply constraints, alternate-supplier costs and product mix continue to pressure gross margins.
- Customer concentration, order visibility and the effects of having no long-term purchase commitments.
- Liquidity and debt after the October repayment of the $19.3 million Truist line, including remaining borrowing availability and upcoming maturities.
- The final outcome and terms of the derivative-litigation settlement, and the timing and cost of bringing the China factory into service.
- The effect of the $6.2 million PPP forgiveness and equity issuance on comparisons and per-share results.