Applied Optoelectronics, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Financial figures below are in millions of dollars except per-share data. AOI designs and manufactures fiber-optic networking products for data center, CATV, telecom and FTTH markets, with manufacturing and R&D operations in the U.S., Taiwan and China.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $76.6 | $46.1 | $182.3 | $142.2 |
| Gross profit / margin | $19.2 / 25.0% | $12.0 / 26.0% | $39.3 / 21.5% | $34.9 / 24.5% |
| Operating loss | $(6.8) | $(11.0) | $(35.7) | $(36.7) |
| Net loss | $(9.6) | $(8.8) | $(45.0) | $(30.6) |
| Loss per diluted share | $(0.42) | $(0.44) | $(2.12) | $(1.54) |
- Q3 revenue rose 66.2% year over year; nine-month revenue increased 28.2%. Data center revenue was $55.3 million in Q3, up 62.7%, and telecom revenue was $8.9 million, up 209.3%. Nine-month CATV revenue fell 28.0% to $22.0 million.
- Gross margin declined year over year in both periods. Management attributed the pressure to a mix shift toward lower-cost, shorter-reach data center transceivers, production inefficiencies, higher raw-material costs and COVID-related shipping costs.
- Q3 operating loss narrowed, but net loss increased, including a $2.2 million income-tax expense versus a $1.9 million tax benefit in Q3 2019. For the nine months, tax expense was $7.2 million versus a $7.6 million benefit; the filing cites valuation allowances on deferred tax assets.
- Nine-month operating cash flow was $(29.9) million, versus $1.4 million provided in 2019. Higher inventory and trade receivables used $27.3 million and $16.8 million, respectively; increased accounts payable provided $23.3 million. Investing cash outflow was $15.1 million, mainly for property and equipment.
Financial position and liquidity
- At September 30, cash and cash equivalents were $46.8 million and restricted cash was $11.3 million, for total cash, cash equivalents and restricted cash of $58.1 million. Total current assets were $229.9 million and current liabilities $132.3 million.
- Inventory was $111.4 million, up from $85.0 million at year-end 2019. Trade receivables were $51.5 million, up from $34.7 million.
- Notes payable and long-term debt totaled $58.9 million; $44.3 million was current. Convertible senior notes had $80.5 million principal and a $77.6 million carrying amount, bear 5% interest and mature in 2024. Bank acceptance payable was $13.4 million. AOI reported $23.7 million of unused borrowing capacity and compliance with its credit covenants.
- Financing provided $37.0 million in the first nine months, including $22.6 million net proceeds from an at-the-market share offering and a $6.2 million PPP loan. Shares outstanding increased to 22.9 million from 20.1 million at year-end 2019.
Changes, outlook and key risks
- Growth was led by 100 Gbps data center transceivers and laser chips used in 5G telecom deployments. Management linked some data center demand to cloud capacity needs and remote work. Q3 CATV demand also recovered as operators expanded network capacity, while nine-month CATV demand remained lower.
- Top ten customers generated 84.9% of revenue in both the Q3 and nine-month periods. AOI disclosed no long-term customer purchase commitments exceeding one year, making customer concentration and order variability important risks.
- Management said short-term demand had been strong, but the longer-term impact of COVID-19 remained uncertain. The pandemic had affected suppliers, manufacturing, logistics and shipping costs. No specific revenue or earnings guidance was provided. Management believed cash, operating cash flows and available credit would cover anticipated needs for the next 12 months.
- AOI applied for forgiveness of its $6.2 million PPP loan and expected approval, but bank and SBA reviews were pending and timing was uncertain. A subsequent event disclosed repayment of the $18.7 million Truist revolving line of credit.
- A proposed $15.5 million securities-class-action settlement was to be funded by directors’ and officers’ insurance, subject to court approval; AOI recorded no accrual and said it did not expect a material adverse effect. A related derivative action remained pending, with loss likelihood not estimable.
- AOI recorded no impairment after testing long-lived assets despite its continued loss history. Direct inventory write-offs for scrap, discontinued or damaged inventory were $8.4 million in Q3 and $14.7 million for the nine months, higher than the comparable 2019 periods.
Investor verification points
- Track whether data center and 5G demand persists, and whether the recovery in CATV continues; assess the high customer concentration and absence of long-term purchase commitments.
- Monitor gross-margin recovery, inventory growth and write-offs, and working-capital cash consumption.
- Verify PPP loan forgiveness and the final status and insurance coverage of the proposed securities settlement; follow the derivative litigation.
- Review debt maturities, borrowing availability, covenant compliance and the effect of further equity issuance on shareholder dilution.