Applied Optoelectronics, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited consolidated results, compared with Q1 2019. AOI designs and manufactures fiber-optic networking products for data center, CATV, telecom and FTTH markets, with facilities in the U.S., Taiwan and China.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $40.5 | $52.7 | Down 23.2% |
| Gross profit / margin | $6.3 / 15.7% | $12.4 / 23.4% | Margin down 7.7 percentage points |
| Operating expenses | $24.1 | $24.2 | Down 0.4% |
| Operating loss | $(17.8) | $(11.9) | Loss widened |
| Net loss / diluted loss per share | $(16.8) / $(0.83) | $(10.5) / $(0.53) | Loss widened |
| Operating cash flow | $(8.2) | $0.04 | Turned negative |
| Capital expenditures | $2.8 | $12.8 | Lower year over year |
At March 31, cash and cash equivalents were $55.9 million and restricted cash was $6.6 million. Current assets were $182.7 million and current liabilities $95.5 million. Carrying-value debt included $53.4 million of notes and long-term debt, $77.2 million of convertible notes, and $9.6 million of bank acceptance payables. The filing reports $28.8 million of unused borrowing capacity and covenant compliance at quarter-end. Management said existing cash, operating cash flows and available credit should cover anticipated needs for the next 12 months.
Material changes and management commentary
- Data center revenue fell 13.6% to $33.3 million; CATV revenue fell 64.7% to $4.2 million. Telecom revenue rose 47.3% to $2.6 million. Data center products were 82.2% of revenue.
- Management attributed lower revenue to weaker demand for 40G and 100G transceivers and CATV equipment, including lower demand from a major customer and CATV operators’ reduced capacity-investment spending. COVID-19-related disruption in China delayed some shipments.
- Gross margin declined with a less favorable data center product mix, production inefficiencies, higher raw-material costs and pandemic-related shipping costs. Inventory write-down expense was $1.6 million, versus $2.3 million a year earlier; direct inventory write-offs were $2.5 million, versus $2.8 million.
- Top ten customers generated 84.8% of revenue, compared with 92.1% in Q1 2019. The filing says the company generally lacks long-term customer purchase commitments.
- Operating cash use reflected the net loss, a $4.5 million inventory increase and a $7.1 million decline in accrued liabilities, partly offset by an $8.8 million reduction in accounts receivable and a $3.4 million increase in accounts payable.
Outlook, risks and unusual items
- The filing gives no numerical revenue or earnings guidance. Management’s 12-month liquidity assessment is subject to uncertainty, including ongoing COVID-19 effects on customers, shipments and operations.
- AOI repaid its $20.0 million Truist revolving line on April 1, 2020. On April 17, it entered into a $6.23 million unsecured PPP loan at 1% interest; the amount eligible for forgiveness was not yet quantifiable. The filing notes potential review and scrutiny of the loan.
- AOI had $80.5 million principal amount of 5% convertible senior notes due 2024. Interest expense rose to $1.5 million from $1.0 million, primarily due to higher average debt balances.
- AOI incurred a triggering event assessment for long-lived assets because of its continuing losses, but reported no impairment charge after concluding expected undiscounted cash flows exceeded carrying value.
- A shareholder securities class action remained in discovery; the company said it could not estimate the likelihood of loss. A related derivative action was stayed. A separate securities class action was dismissed with prejudice in January 2020.
- Key risks include customer concentration, volatile and cyclical demand, COVID-19 disruption, China-U.S. trade measures, manufacturing and supply constraints, inventory obsolescence, debt and covenant obligations, foreign-exchange exposure, and ongoing litigation.
Important facts for investors to verify
- Equity and ATM disclosures: The filing’s ATM table reports 4.3 million shares sold in March at a weighted-average $9.2131 and net proceeds of $38.824 million, but nearby text says gross sales were immaterial and the full $55 million remained available. The reported share counts also appear inconsistent across the balance sheet, equity statement and ATM disclosure.
- Debt and liquidity: Verify the composition and near-term repayment schedule of debt, including the $20 million line repaid after quarter-end, and the availability and terms of remaining credit facilities.
- Demand and margins: Track customer orders, data center product mix, CATV spending, and whether pandemic-related production, shipment and cost pressures persist.
- PPP loan and litigation: Monitor loan forgiveness and review developments, as well as potential exposure from the shareholder class action; the filing does not provide a clear loss estimate.