Applied Optoelectronics, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. AOI designs and manufactures fiber-optic networking products for CATV, data center, telecom and FTTH markets. Amounts below are in millions of U.S. dollars unless otherwise stated.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $56.7 | $53.3 | $161.2 | $157.2 |
| Gross profit / margin | $9.7 / 17.2% | $8.1 / 15.3% | $27.4 / 17.0% | $29.6 / 18.8% |
| Operating loss | $(13.5) | $(15.5) | $(40.6) | $(43.1) |
| Net loss | $(15.6) | $(15.8) | $(46.1) | $(39.6) |
| Basic and diluted loss per share | $(0.56) | $(0.58) | $(1.67) | $(1.48) |
- Q3 revenue increased 6.4% year over year. CATV revenue rose 35.3% to $31.3 million, while data center revenue fell 26.0% to $17.7 million. Telecom revenue increased 32.5% to $6.8 million.
- Nine-month revenue increased 2.6%. CATV grew 15.3% to $80.0 million and telecom grew 41.7% to $18.4 million; data center declined 16.1% to $60.6 million.
- Q3 gross margin improved year over year, primarily from product mix. Nine-month gross margin declined, reflecting weaker product mix and higher raw-material costs earlier in the year. Supply-chain substitutions also pressured costs and profitability.
- Operating expenses were $23.2 million in Q3, down 1.4%, and $68.0 million for nine months, down 6.5%. Lower R&D and sales and marketing costs were partly offset by higher general and administrative expenses.
- Nine-month other expense was $5.5 million, versus $3.5 million of other income in 2021. The prior-year period included $6.2 million of PPP loan forgiveness; 2022 also included foreign-exchange losses. Q3 2022 other expense was $2.1 million.
Cash flow, liquidity and debt
- For the first nine months, operating cash use was $10.5 million, investing cash use was $3.2 million, and financing provided $5.6 million. Cash, cash equivalents and restricted cash decreased $6.6 million to $34.6 million; unrestricted cash was $26.3 million.
- At September 30, current assets were $187.8 million and current liabilities were $130.9 million. Inventory was $94.3 million. Management said existing cash, operating cash flows and available credit should meet anticipated needs for the next 12 months.
- Debt included $51.4 million of current notes and bank borrowings, $13.8 million of bank acceptance payables, and $79.3 million carrying value of 5% convertible senior notes due March 2024. Unused borrowing capacity was $12.5 million. The company reported compliance with Truist credit-facility covenants.
- Subsequent event: AOI repaid $16.3 million on its Truist revolving line on October 6, 2022.
Outlook, significant developments and risks
- Management cited strong CATV demand for products enabling additional bandwidth and expected elevated CATV demand to continue into 2023, based on customer forecasts and backlog. It also reported increased orders for 400G data-center products from several large customers, with expected demand growth through the end of 2022.
- AOI agreed to sell its China manufacturing facilities and certain transceiver and optical-subassembly assets to Yuhan for the equivalent of $150 million in Renminbi, less a holdback. Closing was expected in 2023 and is subject to conditions including CFIUS approval. AOI anticipated investing 4%–10% of estimated proceeds for a 10% equity interest in the purchaser. The assets and liabilities were not classified as held for sale at quarter-end.
- The proposed divestiture carries closing, regulatory, execution and business-disruption risks; failure to close could adversely affect operations and the share price. The filing also notes possible transaction costs, a potential approximately $3 million termination fee in specified circumstances, and risk of lost revenue, impairment charges or post-closing claims.
- Other risks include COVID-related disruptions and delayed semiconductor-component shipments, inflation in shipping, labor and raw-material costs, customer concentration (top ten customers were 85.8% of Q3 revenue), and foreign-exchange exposure. The filing says there were no material changes to previously disclosed market risks.
- Management identified continued losses as an impairment trigger but reported no long-lived-asset impairment after its recoverability test. A Texas sales-and-use-tax audit remains contested; management estimated additional exposure of $0.2–$0.4 million. The company maintained a full valuation allowance against net deferred tax assets.
- Management reported disclosure controls and procedures were effective at September 30, 2022, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the China divestiture receives required approvals and closes on the expected terms, including the final holdback, reinvestment and any transition or supply arrangements.
- Whether CATV demand and 400G data-center orders convert into sustained revenue, and whether data-center weakness, customer concentration or mix changes affect margins.
- Cash burn, working-capital needs, borrowing availability and repayment/refinancing of debt, particularly the 2024 convertible notes and short-term facilities.
- Whether supply constraints, inflation and currency movements continue to raise costs, and the eventual outcome of the Texas tax assessment.