Applied Optoelectronics(AAOI) - 2023 Q4 - Annual Results

Company Overview & Executive Summary Applied Optoelectronics, Inc. (AAOI) is a leading fiber optic network product provider that achieved its first non-GAAP net profit in Q4 2023, driven by improved gross margins and expense management, despite a projected Q1 2024 revenue decline Company Profile Applied Optoelectronics, Inc. (AAOI) is a leading provider of fiber optic access network products for internet data centers, cable broadband, telecom, and FTTH markets, with engineering and manufacturing facilities in Texas, Taipei, and Ningbo - Applied Optoelectronics, Inc. (NASDAQ: AAOI) is a leading provider of fiber optic access network products for internet data center, cable broadband, telecom, and Fiber-to-the-Home (FTTH) markets[1] - AOI supplies optical networking lasers, components, and equipment to tier-one customers across all four markets, with corporate headquarters, a wafer fab, and advanced engineering and production facilities in Sugar Land, Texas, and engineering and manufacturing facilities in Taipei and Ningbo, China[14] CEO Commentary The CEO expressed satisfaction with continuous gross margin improvement and expense management, leading to the company's first non-GAAP net profit in Q4 2023 despite lower-than-expected revenue, with Q1 2024 revenue projected to decline due to Lunar New Year and price reductions but significant improvement expected in Q2 - The company is pleased with the continuous improvement in gross margin and expense management, which led to a small non-GAAP net profit in the fourth quarter for the first time[2] - Despite fourth-quarter revenue being below expectations, gross margin exceeded guidance, and non-GAAP EPS reached the high end of the guidance range[2] - First-quarter revenue is expected to decline due to Lunar New Year and price reductions, but a significant improvement is anticipated in the second quarter[2] Fourth Quarter 2023 Financial Summary In Q4 2023, GAAP revenue was $60.5 million, slightly down year-over-year and quarter-over-quarter, while gross margins significantly improved to 35.7% GAAP and 36.4% non-GAAP, resulting in a non-GAAP net profit of $1.6 million ($0.04 diluted EPS), reversing prior losses Fourth Quarter 2023 Financial Highlights | Metric | Q4 2023 (Millions) | Q4 2022 (Millions) | Q3 2023 (Millions) | | :--------------------- | :----------------- | :----------------- | :----------------- | | GAAP Revenue | $60.5 | $61.6 | $62.5 | | GAAP Gross Margin | 35.7% | 10.1% | 32.3% | | Non-GAAP Gross Margin | 36.4% | 21.4% | 32.5% | | GAAP Net Loss | $(13.9) | $(20.3) | $(9.0) | | GAAP EPS (Basic) | $(0.38) | $(0.71) | $(0.27) | | Non-GAAP Net Income | $1.6 | $(5.4) | $(1.7) | | Non-GAAP EPS (Diluted) | $0.04 | $(0.19) | $(0.05) | Full Year 2023 Financial Summary For FY 2023, GAAP revenue was $217.6 million, a slight decrease from 2022, but gross margins significantly improved to 27.1% GAAP and 29.8% non-GAAP, with GAAP net loss narrowing to $56.0 million ($1.75 basic EPS) and non-GAAP net loss to $13.3 million ($0.42 basic EPS), both substantial reductions from 2022 Full Year 2023 Financial Highlights | Metric | FY 2023 (Millions) | FY 2022 (Millions) | | :--------------------- | :----------------- | :----------------- | | GAAP Revenue | $217.6 | $222.8 | | GAAP Gross Margin | 27.1% | 15.1% | | Non-GAAP Gross Margin | 29.8% | 18.5% | | GAAP Net Loss | $(56.0) | $(66.4) | | GAAP EPS (Basic) | $(1.75) | $(2.38) | | Non-GAAP Net Loss | $(13.3) | $(28.0) | | Non-GAAP EPS (Basic) | $(0.42) | $(1.01) | First Quarter 2024 Business Outlook Applied Optoelectronics projects Q1 2024 revenue between $41 million and $46 million, with non-GAAP gross margin between 21% and 23%, and an anticipated non-GAAP net loss ranging from $18.9 million to $20.8 million, or $0.28 to $0.33 per share First Quarter 2024 Business Outlook | Metric | Q1 2024 Guidance Range | | :--------------------- | :--------------------- | | Revenue | $41M - $46M | | Non-GAAP Gross Margin | 21% - 23% | | Non-GAAP Net Profit | $(18.9)M - $(20.8)M | | Non-GAAP EPS (Loss) | $(0.28) - $(0.33) | | Shares Used | ~38.4M | Conference Call Information Applied Optoelectronics held a conference call and webcast on February 22, 2024, at 4:30 PM ET, to discuss its Q4 and full-year 2023 financial results and Q1 2024 outlook, with details provided for public access and replay - A conference call and webcast were held on February 22, 2024, at 4:30 PM ET, to discuss Q4 and full-year 2023 results and the Q1 2024 outlook[7] - The conference was accessible domestically at 844-890-1794 and internationally at 412-717-9586, with a live audio webcast available on the company's website investors.ao-inc.com[7] - A telephone replay was available within one hour after the conference for five business days, accessible domestically at 877-344-7529 and internationally at 412-317-0088, using passcode 8106099[7] Forward-Looking Information This press release contains forward-looking statements regarding the Q1 2024 outlook, subject to various risks and uncertainties including COVID-19 impacts, changes in customer orders, product demand, manufacturing operations, supply chain disruptions, pricing pressures, and general market conditions for internet data centers, cable broadband, telecom, or FTTH, with no obligation for the company to update these statements - This press release contains forward-looking statements, identifiable by words such as 'believe,' 'may,' or 'estimate,' reflecting management's views on the Q1 2024 outlook[8] - These statements involve risks and uncertainties, including the impact of the COVID-19 pandemic, changes in customer order volume or size, product demand, manufacturing operations, supply chain disruptions, potential pricing pressures, and general conditions in the internet data center, cable TV broadband, telecom, or Fiber-to-the-Home markets[8] - Additional risks include changes in the world economy (particularly the US and China), international trade regulations and taxes, exchange rate fluctuations, negative seasonal effects, and other risks and uncertainties detailed in the company's filings with the U.S. Securities and Exchange Commission[8] Non-GAAP Financial Measures This section defines Applied Optoelectronics' non-GAAP financial measures, including gross margin, net income (loss), adjusted EBITDA, and EPS, explaining their rationale for excluding certain items while also outlining their inherent limitations and non-comparability with GAAP metrics Definition and Rationale Applied Optoelectronics provides non-GAAP gross margin, net income (loss), adjusted EBITDA, and EPS to exclude items not representative of its overall operating performance, such as share-based compensation, intangible asset amortization, non-recurring expenses, unrealized foreign exchange gains/losses, and discontinued product costs, believing these metrics aid investor evaluation - The company provides non-GAAP gross margin, non-GAAP net income (loss), adjusted EBITDA, and non-GAAP EPS to exclude items not representative of its overall operating performance[10] - Excluded items include amortization of intangible assets, share-based compensation expense, non-recurring income and expenses, loss on disposal of idle assets, unrealized foreign exchange gains and losses, and depreciation on certain reconfigured equipment[10] - The company believes non-GAAP metrics offer better comparability with past financial performance, period-over-period results, and peer companies, expecting investors and analysts to use them as a supplement to GAAP measures for evaluating overall operating performance[10] Limitations of Non-GAAP Measures Non-GAAP measures should not be considered substitutes for GAAP net income (loss), EPS, or any other GAAP-calculated financial performance metrics, as the company's non-GAAP measures may not be comparable to similarly titled measures from other organizations due to differing calculation methods, and forward-looking non-GAAP guidance is not reconciled to GAAP due to the difficulty in prospectively determining GAAP items - Non-GAAP measures should not be considered a substitute for GAAP net income (loss), EPS (loss), or any other financial performance measures calculated and presented in accordance with GAAP[12] - The company's non-GAAP measures may not be comparable to similarly titled measures of other organizations, as other organizations may calculate such non-GAAP measures differently[12] - The company has not reconciled the non-GAAP measures included in its guidance to the corresponding GAAP financial measures because GAAP measures such as share-based compensation expense, non-recurring expenses, amortization of intangible assets, unrealized foreign exchange gains and losses, asset impairment charges, and loss on disposal of idle assets cannot be reasonably predicted on a forward-looking basis[12] Financial Statements The financial statements reveal a decrease in total assets and liabilities as of December 31, 2023, an increase in stockholders' equity, significant Q4 2023 datacenter revenue growth, improved gross profit, and a reduction in both quarterly and full-year net losses, with detailed GAAP to non-GAAP reconciliations provided Preliminary Condensed Consolidated Balance Sheets As of December 31, 2023, total assets decreased to $389.2 million from $408.3 million in 2022, primarily due to reduced accounts receivable and inventory, while total liabilities significantly decreased to $174.3 million from $223.6 million, mainly from lower notes payable and current portion of long-term debt, and stockholders' equity increased to $214.9 million from $184.7 million Preliminary Condensed Consolidated Balance Sheets (Key Data) | Metric | Dec 31, 2023 (Thousands) | Dec 31, 2022 (Thousands) | Change (Thousands) | | :-------------------------- | :----------------------- | :----------------------- | :----------------- | | Total Current Assets | $172,605 | $183,164 | $(10,559) | | Total Assets | $389,186 | $408,263 | $(19,077) | | Total Current Liabilities | $93,358 | $138,582 | $(45,224) | | Total Liabilities | $174,317 | $223,593 | $(49,276) | | Total Stockholders' Equity | $214,869 | $184,670 | $30,199 | - Cash, cash equivalents, and restricted cash increased from $35.6 million in 2022 to $55.1 million in 2023[16] - Net accounts receivable decreased from $61.2 million in 2022 to $48.1 million in 2023, and inventory decreased from $79.7 million to $63.9 million[16] Preliminary Condensed Consolidated Statements of Operations In Q4 2023, total revenue was $60.5 million, driven by significant growth in datacenter revenue to $44.5 million from $16.5 million in Q4 2022, while CATV revenue declined; total gross profit surged to $21.6 million from $6.2 million in Q4 2022, with full-year 2023 total revenue at $217.6 million and net losses improving to $13.9 million for Q4 and $56.0 million for FY 2023 Q4 2023 Revenue by Business Segment | Segment | Q4 2023 (Thousands) | Q4 2022 (Thousands) | YoY Change (Thousands) | | :--------- | :------------------ | :------------------ | :--------------------- | | CATV | $12,551 | $38,216 | $(25,665) |\ | Datacenter | $44,481 | $16,485 | $27,996 |\ | Telecom | $2,818 | $6,365 | $(3,547) |\ | FTTH | $0 | $4 | $(4) |\ | Other | $603 | $514 | $89 |\ | Total | $60,453 | $61,584 | $(1,131) | FY 2023 Revenue by Business Segment | Segment | FY 2023 (Thousands) | FY 2022 (Thousands) | YoY Change (Thousands) | | :--------- | :------------------ | :------------------ | :--------------------- | | CATV | $59,942 | $118,169 | $(58,227) |\ | Datacenter | $141,213 | $77,094 | $64,119 |\ | Telecom | $13,831 | $24,727 | $(10,896) |\ | FTTH | $56 | $129 | $(73) |\ | Other | $2,604 | $2,699 | $(95) |\ | Total | $217,646 | $222,818 | $(5,172) | Key Profitability Metrics | Metric | Q4 2023 (Thousands) | Q4 2022 (Thousands) | FY 2023 (Thousands) | FY 2022 (Thousands) | | :----------------- | :------------------ | :------------------ | :------------------ | :------------------ |\ | Total Gross Profit | $21,604 | $6,225 | $58,921 | $33,627 |\ | Operating Loss | $(4,531) | $(18,364) | $(41,349) | $(58,998) |\ | Net Loss | $(13,858) | $(20,251) | $(56,048) | $(66,397) | Reconciliation of Statements of Operations under GAAP and Non-GAAP The reconciliation of GAAP to non-GAAP performance shows significant adjustments, transforming a Q4 2023 GAAP net loss of $13.9 million into a non-GAAP net profit of $1.6 million primarily by adding back share-based compensation, non-recurring expenses, and non-GAAP tax benefits, with full-year 2023 GAAP net loss of $56.0 million adjusted to a non-GAAP net loss of $13.3 million, and adjusted EBITDA for Q4 2023 significantly improving to $4.8 million from a $4.2 million loss in Q4 2022 GAAP to Non-GAAP Net Income/(Loss) Reconciliation | Metric | Q4 2023 (Thousands) | Q4 2022 (Thousands) | FY 2023 (Thousands) | FY 2022 (Thousands) | | :--------------------- | :------------------ | :------------------ | :------------------ | :------------------ | | GAAP Net Loss | $(13,858) | $(20,251) | $(56,048) | $(66,397) |\ | Share-based comp. exp. | $3,297 | $2,357 | $11,885 | $9,602 |\ | Non-recurring expense | $9,603 | $15 | $11,907 | $233 |\ | Non-GAAP Tax Benefit | $1,908 | $4,793 | $10,146 | $14,638 |\ | Non-GAAP Net Loss | $1,576 | $(5,414) | $(13,329) | $(28,015) | Adjusted EBITDA | Metric | Q4 2023 (Thousands) | Q4 2022 (Thousands) | FY 2023 (Thousands) | FY 2022 (Thousands) | | :-------------- | :------------------ | :------------------ | :------------------ | :------------------ | | Adjusted EBITDA | $4,768 | $(4,155) | $(364) | $(18,503) | Non-GAAP Diluted Earnings Per Share | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :-------------------------- | :------ | :------ | :------ | :------ | | Non-GAAP Diluted Net Gain/(Loss) per Share | $0.04 | $(0.19) | $(0.42) | $(1.01) |