Applied Optoelectronics, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. AOI designs and manufactures fiber-optic networking products for data center, CATV, telecom and FTTH markets.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $54.2 | $65.2 | $103.9 | $105.7 |
| Gross profit / margin | $10.8 / 19.9% | $13.7 / 21.1% | $21.5 / 20.7% | $20.1 / 19.0% |
| Operating loss | $(13.6) | $(11.1) | $(27.7) | $(28.9) |
| Net loss | $(8.2) | $(18.6) | $(23.8) | $(35.4) |
| Basic and diluted loss per share | $(0.31) | $(0.89) | $(0.89) | $(1.72) |
- Q2 revenue fell 16.9% year over year; gross margin contracted 1.2 percentage points. Operating expenses were nearly flat in dollars, so the operating loss widened.
- First-half revenue declined 1.7%, while gross margin improved 1.7 percentage points and operating loss narrowed. Net loss improved in both periods, but Q2 and first-half results benefited from $6.2 million of PPP loan forgiveness recorded as other income. No income tax expense was recorded in 2021; management maintained a full valuation allowance on net deferred tax assets.
- Q2 product mix shifted sharply: data center revenue was $22.4 million versus $52.5 million a year earlier; CATV was $27.6 million versus $6.1 million. For the first half, data center revenue was $48.3 million versus $85.8 million, while CATV was $46.2 million versus $10.4 million.
- Six-month cash used in operating activities was $14.9 million, compared with $23.8 million in 2020; investing activities used $3.9 million versus $9.2 million. Financing provided $19.8 million, including $15.3 million net ATM proceeds. Cash, cash equivalents and restricted cash were $50.5 million at June 30; unrestricted cash was $44.0 million.
- At June 30, current assets were $208.2 million and current liabilities $90.5 million. Notes payable and long-term debt totaled $61.2 million, convertible senior notes had a $78.3 million carrying value, and bank acceptance payables were $6.5 million. Unused borrowing capacity was $5.3 million. The company repaid its $19.4 million Truist revolving line in July 2021.
Changes, outlook and notable items
- Management attributed weaker data center sales to customer inventory normalization after the work-from-home demand surge. It expected data center demand to improve in the second half and beyond.
- Management said CATV demand—particularly products supporting increased upstream bandwidth—was strong and, based on forecasts and order bookings, likely to continue through 2021. These are management expectations, not guaranteed results.
- Top ten customers represented 86.8% of Q2 revenue and 88.0% of first-half revenue. The filing notes there are no customer purchase commitments longer than one year.
- AOI said existing cash, operating cash flows and available credit should cover anticipated needs for the next 12 months. It also cited potential needs related to R&D, capacity, product introductions and improvements to its Ningbo factory. Factory construction was complete; approximately $27.4 million of estimated $27.5 million contract costs had been paid, with the remainder due in installments.
- COVID-19 could disrupt suppliers, manufacturing, warehousing or logistics and could affect customer purchasing. Other sensitivities include customer concentration, demand changes and reliance on financing capacity. Management reported no material change to the risk factors in its 2020 Form 10-K.
- A shareholder derivative action reached a settlement-in-principle in June 2021; the court stayed deadlines while the parties finalized settlement. AOI said the likelihood and amount of any loss could not yet be determined.
- The company reported effective disclosure controls as of June 30, 2021, and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the expected second-half recovery in data center demand materialized, and whether CATV strength persisted beyond 2021.
- How much of reported loss improvement reflects sustainable operating progress versus the one-time $6.2 million PPP forgiveness benefit.
- Customer concentration, subsequent bookings and revenue by end market, given the steep data center decline and absence of long-term purchase commitments.
- Cash burn, available borrowing capacity and debt repayment needs, including the terms and status of China credit facilities and the 2024 convertible notes.
- Final terms and any financial impact of the derivative-litigation settlement, and the timing and cost of planned Ningbo factory improvements.