Applied Optoelectronics, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial statements are unaudited; amounts below are in millions of U.S. dollars unless stated otherwise.
Business context
AOI designs and manufactures fiber-optic networking products for internet data centers, cable television (CATV), and fiber-to-the-home (FTTH), with manufacturing and R&D operations in the U.S., Taiwan, and China. Data-center products were the largest business, accounting for 74.7% of Q2 revenue; the company said demand was led by 40G and 100G transceivers.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $55.3 | $49.6 | $105.7 | $79.9 |
| Gross profit / margin | $17.3 / 31.3% | $16.7 / 33.7% | $31.6 / 29.9% | $26.8 / 33.5% |
| Operating income | $2.0 | $5.9 | $0.4 | $4.6 |
| Net income (loss) | $0.6 | $6.1 | $(0.7) | $5.4 |
| Diluted EPS | $0.03 | $0.38 | $(0.04) | $0.34 |
- Q2 revenue grew 11.3% year over year; six-month revenue grew 32.3%. Data-center revenue rose 39.4% in Q2 and 74.8% for the first half. CATV revenue fell 42.0% in Q2 and 39.3% in the first half.
- Gross margin contracted as production costs for certain 40G/100G products increased, prices on some products declined, and CATV revenue weakened. R&D expense increased 66.2% in Q2, primarily from product-development costs and equipment investment; total operating expenses rose 41.4%.
- Q2 other expense was $1.3 million, versus $0.3 million of other income a year earlier, mainly reflecting foreign-currency losses. Six-month interest expense doubled year over year to $0.9 million, which management attributed to borrowings for expansion.
Cash flow, liquidity, and debt
- For the six months, operating cash flow was $22.1 million, compared with cash used of $11.4 million in 2015. Cash generation benefited from lower inventory and increased accounts payable and accrued liabilities, partly offset by higher receivables.
- Investing cash outflow was $26.4 million, including $33.8 million of property, plant, and equipment purchases, partly offset by $7.7 million of investment maturities. Financing provided $18.4 million. Cash and cash equivalents increased $14.2 million to $42.3 million.
- At June 30, cash, restricted cash, and short-term investments totaled $47.3 million; current assets were $153.7 million and current liabilities were $78.2 million. Total notes payable and long-term debt were $84.9 million, up from $64.9 million at year-end 2015. The company reported $36.1 million of unused borrowing capacity and compliance with its debt covenants.
- Capital investment continued for the expanded Sugar Land campus. The company amended U.S. credit arrangements, increasing revolving capacity from $25 million to $40 million and reducing stated borrowing spreads to LIBOR plus 2.0%; $25.9 million was drawn on the revolver at quarter-end. The construction loan had $17.8 million outstanding.
Outlook, commentary, and risks
- No specific revenue or earnings guidance is provided in the filing. Management expects data-center revenue to continue increasing as a share of sales and believes cash, operating cash flow, and borrowing availability will cover anticipated needs for the next 12 months. Longer-term capital needs may require additional debt or equity financing.
- Management reported that the new Sugar Land buildings were completed and began to be used in Q2, though not all equipment and facilities were fully operational. Risks include ramp-up delays or underutilized capacity, high fixed costs, product qualification and execution, and gross-margin pressure.
- Customer concentration is substantial: the top ten customers accounted for 91.6% of Q2 revenue and 91.5% for the first half. The filing also identifies customer dependence, demand volatility, competition, supply constraints, foreign-exchange movements, and operations in China and Taiwan as material risks.
- Inventory obsolescence charges were $1.5 million in Q2 and $1.8 million for the first half. On July 31, 2016, AOI contributed assets, liabilities, and contracts relating to its Taiwan branch to a wholly owned subsidiary, subject to Taiwanese regulatory approval. The filing reported no material pending legal proceedings and effective disclosure controls.
Important facts for investors to verify
- Whether data-center demand and 40G/100G product growth persist, and whether CATV weakness continues.
- Whether production costs, pricing, product mix, and inventory reserves allow gross margins to recover.
- Customer-level concentration and purchase-order trends; the filing says the top ten represented over 90% of revenue.
- Facility ramp-up, capital spending, debt maturities, borrowing availability, and continued covenant compliance.
- Foreign-exchange exposure and the effect of currency movements on earnings; management reported no material change in market-risk exposure since year-end.