Applied Optoelectronics, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. AOI designs and manufactures fiber-optic networking products for CATV, data center, telecom and FTTH markets. Figures below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance and position
- Revenue: $53.0 million, up 1.5% from $52.2 million. CATV revenue rose 11.2% to $27.8 million; data center declined 5.0% to $20.4 million; telecom declined 29.6% to $3.7 million. FTTH revenue was negligible.
- Profitability: Gross profit was $9.2 million and gross margin was 17.4%, versus $9.0 million and 17.3%. Operating loss was $14.2 million, little changed; net loss widened to $16.3 million from $16.1 million. Loss per share improved to $0.56 from $0.58, with a higher weighted-average share count.
- Expenses and interest: Operating expenses totaled $23.4 million, up slightly. Lower R&D and sales and marketing expenses were offset by higher general and administrative costs, including personnel, professional fees and China-divestiture costs. Interest expense rose 52.5% to $2.1 million, primarily due to higher average borrowing rates.
- Cash flow: Operating activities used $9.4 million, compared with $3.6 million used in Q1 2022. Investing activities used $0.8 million; financing activities provided $1.1 million. Cash, cash equivalents and restricted cash fell $8.6 million during the quarter to $26.9 million, including $16.1 million of unrestricted cash.
- Liquidity and debt: At March 31, cash and restricted cash were $26.9 million and unused borrowing capacity was $19.4 million. Notes payable and long-term debt were $50.9 million net of issuance costs, all classified as current; bank acceptance payable was $19.2 million. The $80.5 million face-value 5% convertible notes, due March 15, 2024, had a $79.7 million carrying value and were also classified as current. Total liabilities were $210.9 million. AOI reported compliance with its credit-facility financial covenants.
- Balance-sheet changes: Total assets declined to $383.6 million from $408.3 million at December 31, 2022. Inventory fell to $70.2 million from $79.7 million; shareholders’ equity declined to $172.6 million from $184.7 million.
Material changes and management commentary
- CATV growth was attributed to demand for products supporting higher bandwidth, particularly upstream return-path capacity. Management said it had begun seeing increased orders for 400G data center products and, based on customer forecasts, expected demand to increase through year-end 2023.
- Q1 included approximately $4 million of revenue from a large data center customer for qualification reports intended to support fulfillment and expedite future orders. Management expected additional expedite fees in Q2; these are not presented as a formal revenue outlook.
- Customer concentration increased: the top ten customers represented 93% of revenue, compared with 88.6% in Q1 2022. Management identified diversification as important and noted reliance on customer forecasts.
- Inventory reserve expense was $2.6 million, versus $2.0 million a year earlier; direct inventory write-offs were $3.8 million, versus $1.0 million. Management cited raw-material cost pressure and global supply-chain disruption.
Outlook, significant items and risks
- China divestiture: AOI agreed to sell its PRC manufacturing facilities and certain transceiver and optical subassembly assets to Yuhan for the U.S.-dollar equivalent of $150 million in Renminbi, less a holdback. Closing is expected in late 2023 or 2024 and depends on conditions including U.S. and China regulatory approvals. AOI expects to invest 4%–10% of estimated proceeds for a 10% equity interest in the purchaser. The company said proceeds would support strategic investments, with a greater focus on CATV and laser and laser-component products. The assets and liabilities were not classified as held for sale because completion and immediate availability for sale were not considered sufficiently certain.
- The proposed sale may be delayed or not completed and could disrupt customer, supplier and employee relationships; management also cited possible post-closing claims, lost revenue and asset write-offs. The filing does not provide clear quantified guidance for the full year.
- Liquidity remains sensitive to operating cash use, debt service and future investment needs, including interior work at the Ningbo factory, expected to enter service in 2024. Additional financing may be needed; AOI cautioned that acceptable funding may not be available. Its new $35 million ATM offering had no sales by March 31; the prior ATM generated approximately $0.4 million in Q1.
- Other disclosed exposures include inflation in shipping, labor and some raw-material costs; continuing supply-chain uncertainty; and customer concentration. A Texas sales-and-use-tax assessment dispute concerns approximately $1.0 million including interest, of which $0.4 million was paid; the remaining assessment is in the hearing process. A California sales-tax audit was announced in April 2023, and management could not yet assess any potential liability.
- AOI recorded no impairment after testing long-lived assets despite its continued loss history. The effective income tax rate was 0%, with a full valuation allowance against net deferred tax assets. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and required regulatory approvals for the China divestiture, including timing, final proceeds, holdback and the planned investment in the buyer.
- Whether 400G orders and customer forecasts convert into sustained shipments and revenue, and whether expected Q2 expedite fees recur.
- Customer concentration, order visibility and the risk that changes in major customers’ forecasts affect results.
- Cash burn, borrowing availability and repayment or refinancing plans for the $80.5 million convertible notes due in March 2024, alongside current bank debt and vendor acceptance notes.
- Inventory reserves and write-offs, the Texas assessment dispute and the outcome of the California sales-tax audit.