Good afternoon. I will be your conference operator. And at this time, I would like to welcome everyone to Applied Optoelectronics first quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Please note this event is being recorded.
I would now like to turn the call over to Monica Gould, Investor Relations for AOI. Ms. Gould, you may begin.
Thank you. I'm Monica Gould, Investor Relations for Applied Opto Electronics, and I'm pleased to welcome you to AOI's first quarter 2020 financial results call. After the market closed today, AUI issued a press release announcing its first quarter 2020 financial results provided's outlook for the second quarter of 2020. The release is also available on the company's website at a0 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 1 year. Joining us on today's call is Doctor. Thompson Lynn, AOI's Founder, Chairman and CEO, and Doctor. Stefan Murray, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q1 results and Stefan will provide financial details and the outlook for the second quarter of 2020.
A question and answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AY's Safe Harbor statement. 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 thanks, 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 2020. 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, 2019. 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 the 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. To announce that AOI Management will virtually present at the Cowen 48th Annual Technology Media And Telecom Conference on May 29 and at the Stifel Cross Sector Insight Conference on June 10th. These discussions will be webcast live and linked to the web 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 that the date of our second quarter 2020 earnings call is currently scheduled for August 6, 2020. Now I would like to turn the call over to Doctor Thompson Lynn, Applied Optoelectronics' Founder, Chairman and CEO. Thompson?
Thank you, Monica, and thank you, everyone, for joining us today. 4th, I would like to thank the entire A Y team who has come together to support other and our customers through this crisis. Our thoughts go out to all those individuals around the world who have suffered from risk buyers and forced responders who are protecting our communities, we thank you. We have taken numerous action to ensure the steps and well-being of our employees, while continuing to support our customers' needs. Our offices around the world are generally back to normal operations and we adopted recommendations and safeguards in our factories to maintain optimal working conditions.
These measures include: virtual testing of employees, available, mandatory use of waste masks, other personnel protected equipment increased in Milwaukee and limitation on meeting and employee gathering, I'm pleased to report that no AOI employees has so far tested positive for the virus. However, we'll continue to see in force with new requirements, propriety of our employees and the larger societies of which we are in we are out. Turning to the quarter, Eric delivered a Q1 revenue of $40,500,000. Which was below our expected guidance range due primarily to shipping delays out of China and Taiwan due to the COVID-nineteen pandemic. As a result, with certain shipments from China and Taiwan and approximetics, $2,300,000 in revenue associated with these shipments pushed into Q2.
OI delivered non GAAP gross margin of 90.5 percent and a non GAAP net loss of 44¢ per share. Which were as of below our expected guidance range due to increased spend during the quarter associated with the coronavirus. As we discussed on our Q4 earnings call, in order to reduce the impact of the shutdown is China on our customers, which are major to increase production at our factories in Taiwan and in the US, which resulted in higher costs during Q1. Than we are initially expecting. Given the regularly changing environment during this pandemic, there remain significant uncertainty, but we currently believe that most of its impact to operations from the COVID-nineteen crisis will be faced during Q1 and early Q2.
And our entire team has worked easily to go back on track. Please bear our Q2 results to improve. And ramped up almost 45% prescripts at the midpoint of our guidance range. We are encouraged by the increased data center demand from our diverse set of customers and improving 5G related activities in China. That began in the fourth quarter and is continuing into Q2.
During the quarter, we had an all time record of 12 design wins. This increases the previous record of 11 wins in Q3 of last year. And up from our total of 9 wins in the prior quarter. These design wins achievements is all the more notable due to the record in loading conditions during the quarter as the war began to experience the pandemic. Additionally, we are pleased to report that we saw increased demand for our 100G products in Q1, total revenue for 100G products increased 8% for the same period last year.
Marking the fourth quarter of year over year growth in 1g sales since Q4 of twenty 18. During the fourth quarter, we prioritized sales and shipments due to the backlog of customer demand after returning from shutdown to China. This reduced our CSEV level even machinery slowed Q1. However, we continue to believe that the CSCB segment will improve over the course of the year. As we have already seen improving 4Ks from some CATV customers.
We also finalized a leading relationship with ATX Networks during the quarter, which to the catalyst for growth in the CATV segment later in the year. With that, I will turn the call over to Stefan to review the details of our Q1 promos and our OQ2 segment. Thank you, Thompson.
I'd first like to address the COVID-nineteen crisis and how AOI has proactively responded and adapted to the current environment. Given our presence in China took action to protect our workforce earlier than many companies and safeguards in our factories and offices to maintain safe working conditions for our employees and keep our manufacturing capabilities on track. While we had significant disruptions in operations in our China factory during Q1. We believe we are largely back to normal operating capacity. The coronavirus has led to a significant rise in the number of employees working from home, which we believe has resulted in increased demand from our data center customers as they work to meet the heightened network capacity needs.
Our team has been working tirelessly to support our customers through this crisis. Looking ahead to Q2, we were expecting nearly 45 percent sequential revenue growth at the midpoint of our guidance range. And an improvement in our gross margins to Total revenue for the first quarter was $40,500,000 which was below our guidance range. Our Q1 financial performance was impacted by the shutdown of our China factory during the coronavirus crisis there. Unanticipated shipping delays out of China and Taiwan due to the COVID-nineteen pandemic and higher costs as a result of shifting manufacturing to higher cost locations in the US and Taiwan.
Additionally, certain cost reductions we had planned for Q1 were pushed out due to a pandemic related work slowdown in China. We had approximately $2,300,000 in revenue associated with delayed shipments from China and Taiwan, push into Q2. Shipping times have improved somewhat, but are still longer than normal, and shipping costs out of Asia also remain elevated relative to our prior expectations. Compared with $38,500,000 in Q1 of last year. In the first quarter, 31% of our data center revenue was from our 40 G transceiver products and 60% was from our 100 G products.
As Thompson noted, this makes Q1 twenty twenty, the first quarter of year over year growth in our 100 G business since the end of 2018. Importantly, we saw increased data center demand during Q1 from a diverse set of customers. Overall for the quarter, our top ten customers represented 84.8 percent of revenue, which is down from 92.1% in Q1 of last year, and also a decrease continue to show tangible results in terms of reduced customer concentration. Turning to our cable television product segment. Revenue from CATV products was $4,200,000 compared to $12,000,000 in Q1 of last year, primarily driven by continued weakness among MSOs, particularly in North America.
However, our production capacity for CATV products was also negatively impacted by the coronavirus, since the majority of our CATV production occurs in China. We expect CATV to be stronger in the second half of the year than the first half as several MSOs are in the process of contemplating or making plans to begin upgrades later this year. We believe that AOI remains well positioned as these new technologies roll out given our strong product portfolio in this segment. Our recent announcement of the collaboration with ATX Networks is also expected to bolster our sales in this segment, as ATX is working with its MSO customers to qualify our 1.2 gigahertz amplifier products as a replacement for legacy 1 gigahertz products. Revenue from our telecom products was $2,600,000 compared to $1,700,000 in Q1 of last year.
Primarily driven by increased sales Specifically, during the first quarter, we saw increased 5G demand in China. As carriers there recover from the virus locked and continue to upgrade their mobile networks. For the quarter, 82% of our revenue was from data center products, 10% from CATV products, with the remaining 8% from FTTH, telecom and other. In the first quarter, we had 2 10% or greater customers, both in the data center market that contributed 43% and 18% of total revenue, respectively. In Q1, we generated a gross margin of 19.5% compared to 25 0.5% in Q1 of the prior year.
Gross margin was below our during the quarter associated with disruptions in China related and we expect to see incremental improvement in gross margin as a result. Total operating expenses in the first quarter were $19,400,000, or 48 percent of revenue compared with $20,300,000 or 38.4 percent of revenue in the same quarter of last year. Operating expenses declined from last year due mainly to tighter control of R&D And G And A expenses. R&D in China was also reduced during the shutdown there as consumption Operating loss in the first quarter was $11,500,000 compared to an operating loss of $6,800,000 in Q1 of last year. GAAP net loss for Q1 was $16,800,000 or loss of $0.83 per basic share compared with GAAP net loss of 10 point $5,000,000 or $0.53 per basic share in Q1 of last year.
On a non GAAP basis, Net loss after tax for Q1 was $8,800,000 or loss of $0.44 per basic share. Which was below our guidance range of a loss of $6,800,000 and compares to a net loss of $5,400,000 The basic shares outstanding used for computing the net loss in Q1 were $20,200,000 Turning now to the balance sheet. We ended the 1st quarter with $62,500,000 in total cash, cash equivalents, short term investments and restricted cash. This compares with $67,000,000 at the end of 2019 and reflects $8,200,000 in cash used for operations. In addition to the cash on hand we had $28,800,000 in unused borrowing capacity at the end of Q1.
As of March 31, we had $87,100,000 in inventory compared to $85,000,000 in Q4 The increase in inventory was mainly driven by finished goods that were not received as production ramped up after the China shutdown. We made a total of $2,800,000 in capital investments in the quarter including $1,800,000 in production equipment and machinery and $700,000 on construction and building improvements. Most of these expenditures were committed to prior to the COVID crisis. And in light of the uncertainties surrounding the pandemic, we are still evaluating our level of CapEx for the year. Moving now and non GAAP gross margin to be in the range of 23% to 25%.
Non GAAP net loss is expected to be in the range of $4,100,000, $5,700,000 share count of approximately 20,400,000 shares. With that, I will turn it back over to the operator for the Thank
you. Session. Our first question today will come from Simon Leopold of Raymond James. Please go ahead.
Great. Thanks for taking the question. So I first, I wanted to see if we could talk a little bit about the big picture data center trends Obviously, we've all sort of heard all the headlines about traffic growth. And I understand you're not necessarily going to be able to guide for the full year. But just maybe if you could update us on your thinking about how to how to trend this particular vertical longer term and beyond just the second quarter.
Maybe some of the puts and takes you're seeing?
Sure, Simon. Well, as we noted in our prepared remarks, I think given all the uncertainties at this time surrounding the virus and the progression and what have you, it's really difficult to put a precise any kind of precise guide on that. I do think in general, we're hearing from our customers that their networks are under pressure from the remote work and what have you, and that they need in many cases to address capacity constraints on their networks. And I would expect that that will result in some incremental improvement to the business. But again, we guide 1 quarter out and especially in times of uncertainty like this, it's really difficult to give you a whole lot more than that.
But I would say direct late, it's somewhat better than we might have expected.
So maybe one of the things that we imagine is is occurring in the crisis is that new technology maybe gets pushed out in time. I'm wondering if that's the case for 400 gig technology for Intra Data Center. And if you view that as a good thing by extending the life of your 41100 gig products or or a bad thing and that it keeps you from enjoying benefits of a new product cycle?
Well, it's a little again, it's a little hard to say exactly how that's going to play out too. I do think that we have a number of our customers have engineers or qualification labs that are not operating or operating at less efficiency than they would have normally. In other words, engineers are working home and they may not be able to have some of those qualifications to be pushed out. Although I would emphasize again that we actually had an all time high of of design wins in the first quarter, despite the virus. But nevertheless, for some of the 400 G stuff, in particular, we are seeing customers saying, look, we're going to have to delay a little bit of final qualification efforts that were previously ongoing.
Whether that results in a delay in the ramp up or the deployments, it's not clear at this point. I think that they're if anything, they're more motivated now to try to get these newer technologies in. I think they will add capacity and they'll certainly improve operating expenses and things like that for the customers in many cases. So I think they want to get these technologies in. Their employees are limited in their ability to to do what they need to do to be able to start these technologies.
And it's really going to depend on how fast recovery happens as to whether they'll be able to when things do normalize, whether they'll be able to get the qualifications done and get all that lined up in time to ramp up on schedule or whether it might be delayed a little bit.
And maybe just quickly gross margin, can you bridge the would you have met your guidance if it wasn't on gross margin if it wasn't for the shipping issues you mentioned?
So it wasn't only related to the shipping issues. As we mentioned in our prepared remarks, the a lot of the cost reduction efforts that we intended to do during the quarter were not able to be completed during the quarter because of the shutdown in China. So we had an additional 3 week shutdown, almost 3 week shutdown. There. And so we weren't able to finish a lot of the cost reduction work that we intended to do.
So that will roll out over the next couple of quarters. So it wasn't only related to the shipping it was also related to the delay in completing the cost reduction efforts.
And just one last one, if I might. I did notice you filed an 8 K in April, taking roughly $6,000,000,000 of the BBP money Just want to see if you can give us some context. Was this essentially being opportunistic or is there some reason we think there's there's need for, for, taking out additional debt and and do you expect you have to repay this or should we consider this a grant? To think about that in the context of the business? Thanks.
Yes. So the PPP loan is something that's really very much in flux at this point. I think, I'm going to avoid commenting specifically on that at this point just because the guidance and things like that seems to on an almost daily basis. So, in early April, when we applied for the loan, there was great deal of uncertainty around our operations and really the global economy. Since then, we continue to evaluate the guidance as it comes out and to monitor that as we go forward.
Great. I understand that. Thank you very much.
Our next question will come from Samik Chatterjee of JP Morgan. Please go ahead.
Yeah. Thank you for taking the question. This is Bharat on for Samik. So the first question I had was the data center segment. I mean, can you highlight what are the spending trends there by especially the 3 large customers that you have.
I noticed that you still have about 2 10% customers there and the 3rd customer has been spending at the reduced level. So any incremental visibility you have there, are you still expecting a second half pick up from that customer that would miss those Thank you.
So we don't comment on individual customer trends. As I mentioned, I think there's a lot of positive trends in the data center right now. We discussed the fact that this was the first quarter of year over year revenue growth in 100 gigs since the end of 2018, which was very early in the 20 in the 100 gig cycle. We also discussed that the increase in business that we're seeing in 100 gig is actually very broad based. It's not only just from a couple of customers, but from a number of different customers.
And the design win activity that we had this quarter also continues to bear that out. So again, it's not just about 1 or 2 customers, it's about a much more broad increase in business in the data center, in general and in 100 gig in particular. And as we talked about with Simon, some
of the
dynamics around finishing qualifications on 400 G and when that starts to ramp is
a little difficult to say at this point.
Got it. Thanks for that. And then just one more question on the design wins. I mean, 2019, I think you highlighted 30 plus design wins and you also said that 1Q this year was very strong in terms of design wins. So just any wins in particular that you could highlight?
I mean, any segments that you see could have a potential uptake in the second half be it telecom, be it cable where you are seeing momentum building anything in particular that you could highlight there? Thank you.
Sure. Well, I mean, I can give a little bit of extra color perhaps on that. First of all, the design wins that we had out of the 12 design wins 5 of those were with new customers. So we had 5 new customers, among that list of design wins in the quarter. One of those new customers was the data center customer that we hadn't previously sold to before and 2 of them are related to 5G deployments in China.
So In addition to data center strength, we're also starting to see early signs of demand in China around 5G network builds. I think as things in China started to normalize after the after the coronavirus shut down there, we started to see increased activity from customers trying to finish qualifications and get orders on the books related to 5G. So I think that's another notable area of strength among the new customer base.
All right. Thank you for taking the question.
No problem.
Our next question is from Joe Flynn of Craig Hallum. Please go ahead.
Hi guys. Just a quick question on the guidance. I was wondering if you could either quantitatively or qualitatively give a sense of how much data center is the driver of that 45% Q over Q growth? And within day center, I think you could give us, rather than a higher gig split between 100 gig and 40 gig would be appreciated.
Okay. So as far as how much of the growth is related to data center. I mean, we do expect cable TV to be stronger in the second half as we noted, but most of the growth between Q1 and Q2 is going to come from the data center just by virtue of the fact that cable TV is a relatively much smaller amount of revenue. So I would expect it to come, the growth come mostly in terms of data center growth, if you're looking at the sequential growth rate. As far as the, specifics around the 100g versus 40g products.
It was looking for the number here. It was about 60% from 100g products and 31 percent from 40g products. So at this point, 100 gig is clearly driving the bus, so to speak, in terms of data center revenue. 40 gig. We expect to continue to see 40 gig business and maybe business that's close to where we are today.
But most of the growth, I think, is expected to come from 100 gig or even 4 100 gig perhaps towards the end of the year depending on how they're
going to with some of the growth in the 5G.
And from 5G as well. Yes.
Okay, great. Thanks. And then just piggybacking off the design win question. I was wondering if you have any update just specifically on 4 and gig and I guess a customer pipeline or something along those lines you're expecting, I guess, by the end of this year?
Yes, we did not have a 400 gig design win during the quarter. We did have 1 design win on a 200 gig product tower.
Okay, great. Thanks. That's all for me.
Our next question today will come from Liz Pate of Cowen and Company. Please go ahead.
Hi, thanks for taking my question. Most of my questions have been answered, but I may have missed it Can you remind me what the top 10 customers were as a percentage of the revenue in the quarter and how that compared with, last quarter and last year?
Sure. So this quarter, top 10 customers were 84.8 percent of revenue. In the same quarter, in the prior year, it was 92.1% And in the prior quarter, so that would be Q4 2019, it was 87.5%. So Again, Q1 last year, 92%, last quarter, 87.5% and this quarter, 84.8%.
So showing some good, diversification going on. And the, I think you said, of the 12 new customers 5 were new to you, 2 were related to 5G deployments in China. And I missed what you said before that.
Yes. So we had just to make sure we're on the same page. We had 12 design wins in the quarter. 5 of those were new customers. So that's 5 a total of 5 new customers, 1 design win each.
And, one was the data center customer and 2 were related to 5G business in China.
Okay, great. Thank you.
Our next question is from Dave King of B. Riley FBR. Please go ahead.
Hey, this is actually Danny on for Dave. I was wondering if you guys could comment on the crowdedness of the 400G market. And any color you can give on that?
I'm not sure what you mean by the crowdedness of the 400 G market. Can you elaborate on
that? Just like, I guess, if the timeline of the 400 G launches pushed out, what I'm hinting at is will there be increased competition from competitors?
Well, I can't really speculate on that. First of all, as I mentioned in my remarks with Simon, it's not clear that the 4 energy deployment is going to be out. I think customers are very interested in getting those deployments underway as quickly as they can in many cases. If that were not to happen for whatever reason, I really can't speculate on whether there'd be more competitors or not. I do think that the technology of 4 is significantly trickier in terms of design and manufacturing than earlier generations of products.
And that generally has the effect of making the competitive landscape smaller rather than bigger, but how that would play out with the push out specifically is difficult to speculate. Got
it. Thanks. That's helpful. And I guess, I was wondering if you guys could comment on the pricing environment in the 400g and 100g markets?
So 400 G pricing is really not
Sorry, John, I'd say I meant 40g, not 4
40g and 100g is relatively pretty stable pricing in terms of different products. We have seen some average average price declines over the last couple of quarters due to some product mix issues in 100 gig. I mean, more PSM and less CWDM as we talked about in earlier calls. But as far as price on individual products, it's been fairly stable.
Ladies and gentlemen, this will conclude our question and answer session. And at this time, I'd like to turn the conference back over to Doctor. Thompson Lin for any closing remarks.
Okay. Thank you for joining us today. As always, thank you to our investors, customers. And employees for your continuous support and we look forward to virtually see many of you at our upcoming investment conference.
And ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation and you may now disconnect your lines.