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Operator
Hello, and welcome to the Applied Optical Electronics Q1 2021 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To answer your question, please press star then two. Please note, today's event is being recorded. I'd now like to turn the conference over to your host today, Lindsay Severese. Ms. Savarese, please go ahead.
Lindsay Severese
Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics, and I am pleased to welcome you to AOI's first quarter 2021 financial results conference call. After the market closed today, AOI issued a press release announcing its first quarter 2021 financial results and provided its outlook for the second quarter of 2021. The release is also available on the company's website at ao-inc.com. This call is being recorded and webcast live. A link to the recording can be found on the investor relations section of the AOI website and will be archived for one year. Joining us on today's call is Dr. Thompson Lin, AOI's founder, chairman, and CEO, and Dr. Stephen Murray, AOI's chief financial officer and chief strategy officer. Thompson will give an overview of AOI's QM results, and Stefan will provide financial details and the outlook for the second quarter of 2021. A question and answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AOI's safe harbor statements. On today's call, management will make forward-looking statements. These forward-looking statements involve risks and uncertainties, as well as assumptions and current expectations which could cause the company's actual results to differ materially from those anticipated in such forward-looking statements. In some cases, you can identify forward-looking statements by terminology, such as believes, anticipates, estimates, intends, predicts, expects, plans, may, should, could, would, will, or thinks. and by other similar expressions that convey uncertainty of future events or outcomes. Forward-looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of our products into new markets and customer responses to our innovations, as well as statements regarding the company's outlook for the second quarter of 2021. Except as required by law, we assume no obligation to update forward-looking statements for any reason after the date of this earnings call to conform these statements to actual results or to changes in the company's expectations. More information about other risks that may impact the company's business are set forth in the risk factors section of the company's reports on file with the SEC, including the company's annual report on Form 10-K, for the year ended December 31, 2020. Also, with the exception of revenue, all financials discussed today are on a non-GAAP basis unless specifically noted otherwise. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation between our GAAP and non-GAAP measures, as well as a discussion of why we present non-GAAP financial measures, are included in our earnings press release that is available on our website. Before moving to the financial results, I'd like to announce that AOI Management will virtually participate at the Needham Technology and Media Conference on May 20th and the Callum Annual Technology, Media, and Telecom Conference on June 2nd. The presentations at these conferences will be webcast live, and links to the webcast will be available on the Investor Relations section of the AOI website. We hope to have the opportunity to interact with many of you virtually. Additionally, I'd like to note the date of our second quarter 2021 earnings call is currently scheduled for August 5th, 2021. Now, I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics founder, chairman, and CEO. Thompson?
Lindsay Savarese
Thank you, Lindsay, and thank you for joining our call today. We delivered revenue and gross margin enough with our expectations and a narrower non-GAAP loss per share than we anticipated. Total revenue for the fourth quarter of $49.7 million grew 22.8% compared to the fourth quarter in the prior year and was down 5.8% sequentially. As we expected, we experienced generally soft Q1 conditions in the data center segment. We expect their standard business to increase in the second half of the year as our customers begin full energy upgrades and inventory issues along 100G normalized. Nungat gross margin of 24.6% was in line with our guidance range of 23.5% to 25%, and Nungat net loss was narrower than our previous guidance coming at 21 cents per share. In our CATV segment, the overall demand environment was strong as MSO, particularly in North America, continued to upgrade their networks. Total revenue for our CATV products increased to more than four times its prior year level and was increased 17% sequentially of a strong fourth quarter to 18.6 million dollars. This is the highest quarterly revenue for this segment in over three years. Following the pause in 5G deployments from several of our China telecom customers, as we anticipated, we started to see a nice recovery in the fourth quarter. As a result, revenue from our telecom products of $4.5 million was up 75% year-over-year and 28% sequentially. Looking ahead, We believe China will continue to make investment in both their 5G and fiber-tool home infrastructure, and we believe we are well-positioned to sell laser in both of these markets. We look forward to meeting again in person hopefully soon. With that, I will turn the call over to Stephen to review the details of our Q1 performance and outlook for Q2. Stephen.
Lindsay
Thank you, Thompson. As Thompson mentioned, we delivered revenue and gross margin in line with our expectations and a narrower non-gap loss per share than we anticipated. The market dynamics we anticipated played out as expected. While we continue to see softness in the data center market, we are pleased with the nice recovery we saw in the telecom market and continued strength in the CATV market. In total for the first quarter, we secured four new design wins among four customers. Among these four design wins, two were in our data center business, including one with a new customer, which is a large US-based social media-focused data center operator. One was in our 5G business, and the other design win was in our FTTH segment. Total revenue for the first quarter of $49.7 million grew 22.8% compared to the first quarter in the prior year. Our Q1 revenue was down 5.8% sequentially, and was in line with our guidance range of $47 million to $51 million. We currently believe that the headwinds we are seeing in the data center market related to the inventory normalization following the shift to working from home early last year will persist through the first half of the year and then begin improving in the second half and beyond as several of our customers begin to ramp 400G later in the year and inventory conditions in our 100G business fully normalize. On the 400G front, we have continued to work on qualifications and delivered samples to new customers during the quarter. We have also received several new inquiries from hyperscale customers for our 400G products, and we are working to deliver samples to these customers as well. In the first quarter, 52% of our revenue was from our data center products, 38% was from our CATV products, with the remaining 10% from FTTH, Telecom, and other. Our data center revenue came in at $25.9 million, compared with $33.3 million in the first quarter of the prior year. In the first quarter, 25% of our data center revenue was from our 40G transceiver products, and 68% was from our 100G products. Turning to our CATV product segment, the overall demand environment remains strong, as MSOs, particularly in North America, continue to upgrade their networks. We generated revenue of $18.6 million, up 17% sequentially, and up 341% from $4.2 million in Q1 of the prior year. Our CATV performance represents a record for our first quarter, which is typically seasonally down and was just shy of our highest quarter in the company's history. In our CATV business, we have seen some component shortages. We are working with our suppliers to improve delivery schedules for these critical components, and in some cases, adding additional suppliers. We do not anticipate that these shortages will hamper our ability to continue to grow revenue, but we may continue to have longer than usual backlogs for several quarters while we work to improve supply. We ended the first quarter with a strong backlog of CATV products, which we expect to continue to drive growth in this segment going forward. As we anticipated, revenue from our telecom products of $4.5 million increased 28% sequentially and 75% from $2.6 million in Q1 of the prior year. Looking ahead, we believe China will continue to make investments in both their 5G and FTTH infrastructure, and we believe we are well positioned to sell lasers into both of these markets. Also notable during the quarter, we received our first 5G design win from a customer outside of China. We are excited to see that the success we have had with our China-based 5G customers is beginning to spread to other regions as 5G itself begins to ramp in other areas outside of China. For the first quarter, our top 10 customers represented 90.5% of revenue compared to 84.8% in Q1 of the prior year. This increase in revenue among the top 10 customers is largely related to the strong results in CATV, as several customers in this segment contributed significantly to the increased revenue this quarter. We had four 10% or greater customers in the first quarter, two of which were in the data center market, and two of which were in our CATV market. These customers contributed 19%, 16%, 16%, and 14% of total revenue, respectively. In Q1, we generated non-GAAP gross margin of 24.6%, which was in line with our guidance range of 23.5% to 25%, and compared to 19.5% in Q1 of the prior year. Total non-GAAP operating expenses in the first quarter were $20.6 million, or 41.4% of revenue, compared with $19.4 million, or 48% of revenue, in Q1 of the prior year. As we mentioned on the Q4 call, we experienced additional costs during the first quarter due to the historic storm that hit Texas in February, which totaled $0.5 million. Non-GAAP operating loss in the first quarter was $8.4 million, compared to an operating loss of $11.5 million in Q1 the prior year. Gap net loss for Q1 was $15.6 million, or a loss of 59 cents per basic share, compared with the gap net loss of $16.8 million, or a loss of 83 cents per basic share in Q1 of 2020. On a non-gap basis, net loss for Q1 was $5.5 million, or a loss of 21 cents per basic share, which was narrower than our guidance range of a loss of $5.9 million to $7.3 million, or a loss in the range of $0.23 to $0.28 per basic share, and compares to a net loss of $8.8 million or a loss of $0.44 per basic share in Q1 of the prior year. The basic shares outstanding used for computing the net loss in Q1 were $26.4 million. Now turning to the balance sheet. We ended the first quarter with $49.3 million in total cash, cash equivalents, short-term investments, and restricted cash. This compares with $50.1 million at the end of the fourth quarter and reflects $15.2 million in cash used for operations. As of March 31, we had $106.3 million in inventory compared to $110.4 million at the end of Q4. Inventory decreased due to utilization of inventory as orders, especially for telecom and CATV products, increased. This inventory reduction is consistent with our long-term plan as we focus on rationalizing inventory levels. We made a total of $2.7 million in capital investments in the quarter, including $2.3 million in production equipment and machinery, and $0.3 million on construction and building improvements. The construction on our new China facility is largely complete, with all heavy construction done. In total, we currently expect 2021 CapEx to be approximately $16 million, Although, as we have noted in prior years, there can be significant variability in this estimate as the year progresses. I would also like to provide a quick update on the at-the-market offering that we announced in February of 2020. To date, we have completed this program, raising the total of $55 million in gross proceeds, including $14.7 million raised in Q1. As we disclosed in February, we have initiated a new at-the-market offering. To date, we have raised $0.6 million under this new program. We intend to use these proceeds to continue to make investments in the business, including new equipment and machinery for production and research and development use. Moving now to our Q2 outlook. We expect Q2 revenue to be between $51 million and $56 million, and non-GAAP gross margin to be in the range of 25.5% to 27.5%. Non-GAAP net loss is expected to be in the range of $3.8 million to $5.6 million, and non-GAAP loss per basic share between $0.14 and $0.21 using a weighted average basic share count of approximately 27.2 million shares. With that, I will turn it back over to the operator for the Q&A session. Operator?
Operator
Thank you. Yes, we will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To try a question, please press star then two. At this time, we will pause momentarily to assemble the roster. And the first question comes from David Kang with B. Riley.
David Kang
Hey, guys. Thanks for taking the question. This is Danny on for Dave. I was wondering if you guys could talk about the competitive landscape in 400G that you guys are seeing.
Lindsay
Yeah, I mean, it's pretty consistent with what we've said in prior calls. Overall, I don't think there's any significant change from the landscape at 100G. The competitors that we saw there tend to be continuing to be what we expect to be the strongest competitors at 400 gig as well.
David Kang
Got it. And I guess on the chip shortage situation, I was wondering... You guys said that you don't expect it to negatively impact revenues, but I guess we're wondering how long you guys kind of expect that to persist.
Lindsay
Well, it's a little hard to say precisely. I think it's fair to say that we expect it to persist at least a couple more quarters. And you're correct that we aren't expecting it to result in reduced revenues. We expect to continue to be able to grow revenue, but we're just sort of – capped in the rate at which we can grow based on component availability, probably over the next couple quarters. Beyond that, it becomes really hard to say. Our suppliers are telling us that they're, you know, adding production capacity and ramping up. And if all those plans come to fruition, as we expect, then I think we're probably looking at, you know, maybe two quarters. If it lasts a little longer than that, it may stretch beyond then. We're also, you know, up against I guess you could say a good problem to have. I mean, the cable TV business is growing very nicely for us. We're seeing good demand picture really through the end of this year and into next year. And so it's harder for our suppliers to catch up because they're getting hit by higher demand than we've seen certainly in the last several years. So it's a combination of sharply increased demand with somewhat reduced supply due to COVID considerations. And the two of those things together are what's causing that shortage.
David Kang
Got it. And you said into next year. So does that imply throughout 2022 you'll also see this momentum from CATV?
Lindsay
Right now we're pretty much booked up in CATV through the end of the year. And, you know, there's no indication that – you know, that that's going to slow down next year. It's obviously, you know, being a few quarters out, that's still a little bit murky, but I think the MSOs are really, you know, at the beginning of their upgrade process. Some of them have yet to even start the upgrade process in earnest. So, you know, I think it's reasonable to expect that that process will take several years to complete. And so, yeah, I believe, you know, that we'll see pretty strong CATV performance into 2022, not just this year. Great. Thank you for the color.
Operator
Thank you. And the next question comes from Tom Diffley with DA Davidson.
Tom Diffley
Yeah. Good afternoon. I wanted to get a little more color on just the data center recovery in the second half. I know a quarter ago you thought maybe it'd be in the second quarter, but just what are the puts and takes and what kind of gives you the confidence level?
Lindsay
Yeah. I mean, I don't think anything's really wholesale changed in our outlook. Um, I think the over inventory situation, particularly with one of our large hyperscale customers, is just taking a little bit longer to resolve itself than we earlier thought. We expect it to recover at some point in Q2, but it's probably a little later than we earlier anticipated, and so for the total Q2 you know, revenue generation from, at least from that customer, you know, it's a little bit less than what we had earlier expected. It's not a big change in what we had earlier expected. I think what we talked about on the last call remains true today, which is that the really good growth that we expect to see is going to come from the 400 gig cycle as that starts to take hold with several of our customers. And on that front, as I mentioned in our prepared remarks, you know, we're seeing – Increased interest, we had several new customers come and approach us during the quarter looking for samples, looking to begin qualification efforts. The qualification efforts that were already ongoing in 400 gig continue to go well, and the discussions with the customers continue to indicate to us that we can expect a successful conclusion from those efforts. And so we're excited about 400 gig ramping in the second half of the year. The inventory situation that we talked about with, again, with one of our large customers, that should also resolve itself late in the second quarter for a second half ramp. And then, as I mentioned, cable TV, telecom, even fiber to the home in China seem to be looking very good in the second half as well.
Tom Diffley
Okay, great. Maybe, if you're willing, a little more color on the chip shortage. Are there particular types of chips, or how would you characterize where the shortage is most acute, custom, off-the-shelf, whatever details you might be able to provide?
Lindsay
Yeah, it's all off-the-shelf stuff that we're seeing shortages on. There's no easy way to characterize it. I would say, in general, what we're seeing shortages on are not necessarily brand-new cutting-edge chips. In some cases, it's actually kind of older technology that I think we're just seeing unprecedented, maybe not unprecedented, but certainly higher demand than we've seen in the last several years. And I think some of our suppliers were caught maybe a little bit by surprise. by that. And at the same time, FAB capacity and other things are very, very tight, as we've seen in the automotive industry and across other calls that we've listened in on just this last earnings cycle. And it really kind of runs the gamut across multiple different chipsets and things across the industry. But I think the one common trend is that there's just a very, very tight FAB capacity. So whereas in prior times, a supplier of one of these components might have been able to drop a wafer production run into a schedule that already existed because there were some gaps in there or some slack time. Now that slack is just nonexistent, and so it's taking longer for them to get new wafer starts going and therefore longer to ramp up that production than it had been in years past.
Tom Diffley
Okay. That probably was very helpful. I appreciate it, and thanks for your time today.
Operator
My pleasure. Thank you. And once again, please press star and then 1 if you would like to ask a question. And the next question comes from Sam Peterman with Craig Callum Capital.
Sam Peterman
Hi, guys. This is Sam. I'm for Richard. I just want to ask a little bit more on the data center. It sounds like your largest, or I guess first I want to ask if your largest data center customer in past quarters was a 19%. customer this quarter, if that's fair to think about, and then, you know, if that's the case on a dollar basis, that's the lowest sales you've had there in about two years, it looks like. I'm curious how you would see sales of that customer trending over the course of the year as data center recovers.
Lindsay
Yeah, so that customer was not the 19% customer. And, you know, as we've talked about, one of our customers has a, you know, has an over inventory situation. We've talked about that in the last couple of calls and I reiterated it, you know, in our prepared remarks and again on one of the earlier questions. So I won't, you know, waste everybody's time going over that once again, but, but we do anticipate that that'll be resolved here in the second quarter and, and portend a second half ramp.
Sam Peterman
Okay. Thanks for that. And then on telecom, I'm curious with 5G starting to roll out more in the second half, what kind of upsides, you think you could see to that business in the second half? And could you talk about how we expect that to ramp between the second half of 2021 and then in 2022, whether there's kind of a step up at some point or if it's kind of a linear ramp from your perspective, any color there would be helpful.
Lindsay
Well, I think, you know, 2021, I think we, we expect a stronger, you know, second half than, than first half. Certainly we, you know, we've already started to see some incremental improvement, but we're not back to the levels where we were, you know, let's say middle part of last year. And so I think there's some room to grow there. We're very excited about, you know, the progress that we've made in 5G and also, as I mentioned in our prepared remarks, the FTTH business in China also seems to be picking up. But more exciting perhaps than that within China is the fact that we have our first design win with a 5G customer outside of China. And I know that's been a question that's come up a lot over the last several quarters on these calls is, you know, well, okay, you guys seem to be doing well in China, but, you know, what about the rest of the world? And I think, you know, that provides some tangible evidence that we're able to be successful with customers outside of the China market as well, and that's also very exciting.
Sam Peterman
Sure. Thanks for that. That's it for me.
Operator
My pleasure. Thank you. And the next question comes from with Northern Capital Markets.
spk04
Hi. Good afternoon. A couple of questions. So as you look at your Q2 guide and you're guiding up kind of mid-high single digits sequentially, given the data center commentary, it sounds like you expect cable TV to be the primary driver of that sequential growth, maybe a little telecom as well. Or as you look across your segments, how do you see that? progressing?
Lindsay
Yeah, I think that the cable TV, again, I think we can see some revenue growth in there. You know, telecom, again, you know, it remains to be seen, you know, how much that's going to grow in the next quarter, but certainly the trends are good so far. And the data center, It really depends pretty sensitively on how fast, and particularly the customer that we've seen this inventory issue with, how fast they can resolve that inventory. We believe it'll be at some point in this quarter, but whether it happens in mid-quarter or late in the quarter will kind of set the trajectory in terms of how much revenue we can actually book in this quarter. And so that's kind of the wild card in the forecasting picture.
spk04
Got it. And just to follow up on design wins, I think you said two data center, one fiber to the home, and one 5G. Correct me if I'm wrong there. But in the data center, is the customer you called out there, is that a new customer for Applied Opto or perhaps a former customer?
Lindsay
No, it is. It's a brand-new customer that we haven't sold to before. It's a California-based, social media-focused data center operator.
spk04
Great. Thanks for the breadcrumbs.
Operator
My pleasure. Thank you. And this concludes our question and answer session. I would like to turn the conference back over to Thompson Lin for any closing comments.
Lindsay Savarese
Again, thank you for joining us today. As always, thank you for our investors, customers, and employees for your continuous support, and we look forward to virtually seeing many of you at our upcoming investment conference.
Operator
Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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