Good afternoon, everyone. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to Applied Optoelectronic 3rd Quarter 2019 Earnings Conference Call. After the speakers' remarks, there will be a question and Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Monica Gould, Investor Relations for AOI, Ms.
Gould, you may begin.
Thank you. I'm Monica Gould, Applied Optoelectronics Investor Relations, and I am pleased to welcome you to AOI's third quarter 2019 financial results conference call. After the market closed today, AOI issued a press release announcing its third quarter 2019 financial results and provided its outlook for the fourth quarter of 2019. The release is also available on the company's website atao inc.com. This call is being recorded and webcast live.
A link to that recording can be found on the Investor Relations page of the AOI Web site and would be archived for 1 year. Joining us on today's call is Thompson Lynn, AOI's Founder, Chairman and CEO, and Doctor. Stefan Murray, AY's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AY's Q3 results, and Stefan will provide financial details and the outlook for the fourth quarter of 2019. 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 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 may 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 into new markets and customer responses to our innovations, as well as statements regarding the company's outlook for the fourth quarter of 2019.
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 the 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, 2018. Notably 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 Conference Conference in New York on November 12th, the Raymond James Technology Conference in New York on December 10th, and the Cowen Networking Cyber Security Summit on December 11th.
We hope to have the opportunity to see many of you there. Additionally, I'd like to note the date of our fourth quarter 2019 earnings call is currently scheduled for February 25th, 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. We are pleased with our continued execution in the quarter. For the second quarter in a load, we delivered revenue in line with our guidance and achieved better than expected to result on the bottom line. LTE delivered revenue of $46,100,000, non GAAP gross margin of 28.8 percent and a non GAAP net loss of $0.15 per share. In looking at the dynamics in the quarter, the data center demand environment remain consistent with our expectations.
We continue to see a resize or recovery among 2 of our hyperscale data center customers. We are encouraged by this sign and believe the fundamental need for higher bandwidth within hyperscale data centers will drive long term growth. However, in the near term, we remain cautiously optimistic on the hyperscale market as demand continues to stabilize among our customers. In CATV, we remain encouraged by the growing interest in our Remote PHY products and appraised to report RFO's significant Remote PHY order in the quarter. This month, we demonstrated our Remote PHY solutions at the SCT threshold in New Orleans and had a very positive response from our current and potential customers.
However, the overall cable TV demand environment continues to be solved, resulting in CAFE demand for some of our legacy products. Additionally, CATV demand in China remained weak as a result of trade tensions. We continue to make good progress in diversifying our customer base and during the quarter with fewer 11 new design wins, including 4 brand new customers. In summary, we are pleased with our result and improving gross margin, which led to another quarter of better than expected bottom line result. We remain focused on expanding our relationship with both new and existing customers and maintaining our 10 larger dealerships.
We believe our platform proprietary and the geographically diverse manufacturing and vertical integration are key competitive advantage, and we remain confident in our ability to execute on opportunities to help us as the market improves. With that, I will turn the call over to Stefan review the details of our
Our Q3 results were broadly in line with During the quarter, we continued on our path leading to a narrower net loss than we had anticipated. Total revenue for the third quarter which was within our guidance range. Our data center revenue came in at $34,000,000 compared with $39,000,000 in Q3 of last year. In the third quarter, 69% of our data center revenue was from our 40 G transceiver products and 25% was from our 100 G products. We continue to make good progress with Data center market dynamics played out similarly to last quarter.
We continued to see early signs of recovery among 2 of our hyperscale data center customers. While one customer continues to purchase product from us but with reduced demand. While these improving dynamics are encouraging, we remain cautiously optimistic in the near term. We had 7 design wins in the quarter in our data center segment. Of these 7, 2 are new customers in the quarter, and an additional 2 are incremental wins with a recent new customer.
Turning to our cable television product segment. Revenue from CACB products decreased 38% year over year to $8,800,000, from 14,300,000 revenue quarter last year. Given limited competition in their markets, we believe that MSOs are delaying upgrades pending the availability of new technologies such as DOCSIS 4.0. Despite these near term challenges, we are pleased to report a significant customer. We had a very positive reaction to our latest Remote PHY product at the Society for Cable Telecommunications, engineers, or SCTE Conference, last month in New Orleans.
Using our Remote PHY technology. Extended Spectrum DOCSIS represents a key technology behind the emerging DOCSIS 4.0 standard, which we believe will be formalized by We were a leader in technologies like Remote PHY that will enable DOCSIS 4.0, and we believe we are well positioned to capitalize on this implementation once it begins. Revenue from our telecom products increased slightly to $2,900,000 from $2,700,000 in Q3 of last year. Reflecting the traction that we are as 5G continues to roll out and we are optimistic about the future. We also believe that increased competition from 5G will be another catalyst to increased cable spending.
In addition to the 7 design wins in the data center segment, we had 3 design wins in our telecom segment during Q3. Including one design win related to 5G optical modules with the major supplier of 5g Networking equipment. This 5G win is also with a new customer to AOI. For the quarter, 74% of our revenue was from data center products, 19% from CATV products, with the remaining 6% from FTTH, telecom and other. In the third quarter, we had 3 10 percent or greater customers, 2 in the data center market that contributed 44% and 20% of total revenue, respectively, 1 in the CATV market that contributed 10 percent of total revenue.
In total, for the quarter, we secured 11 new design wins among 8 customers, 4 of whom are new to AOI, bringing our year to date new design wins to 22. As a reminder, For all of 2018, we secured a then record 26 design wins. So our total of 11 wins this quarter demonstrates an acceleration of our design win activity and one that we believe derives from the effort that we have put into further diversifying our customer base. Illustrating the effectiveness vacation efforts. In Q3, our top 10 customers combined to account for 88.3 percent of our revenue compared to 92.9% in the same quarter last year.
On a year to date basis, the This decreasing revenue concentration is in line with our expectations and we think reflects a positive trend for our business. In Q3, we generated a gross margin of 28.8%, up from 27.2% last quarter and at the high end of our guidance range of 27% to 29%, primarily driven by operational efficiencies and a favorable product mix. Total operating expenses in the quarter declined to $18,400,000 or 39.9 percent of revenue from $19,500,000 44.9 percent of revenue in the prior quarter, reflecting our efficient expense management. In the 3rd quarter, we also received economic incentives the China government, these totaled $1,100,000 and are accounted for as other income. Operating loss in the 3rd quarter was 5 $100,000 compared to an operating loss of $7,700,000 in Q2.
GAAP net loss for Q3 was $8,800,000, or a loss of $0.44 per basic share compared with GAAP net loss of $11,400,000 or $0.57 per basic share in Q2. Non GAAP net loss after tax for the third quarter was $2,900,000 or a was favorable to our guidance range of a loss of $4,200,000 to $5,700,000 or $0.21 to $0.28 per share. And reflects an improvement over Q2's net loss of $5,200,000 or $0.26 per basic share. In the first quarter of 2019. In the first quarter of 2018, we ended the year with an increase in total cash, cash equivalents, short term investments and restricted cash compared with $84,000,000 at the end of the previous quarter.
This reflects $5,800,000 in cash used $81,500,000 in Q2. The modest increase was driven primarily by an increase in 40 G orders, which requires inventory additions to meet demand. We continue to believe that inventory levels will rationalize over the long term. We made a total of $6,100,000 in capital investments production equipment and machinery $4,200,000 on construction and building improvements. Looking ahead, we now expect capital expenditures in 2019 to be approximately $46,000,000.
The reduction in CapEx outlook for the year is largely related to delays in the construction of our plant in China. We still expect many of these expenses to be incurred in Q1 of 2020. And tariff dynamics. During the quarter, one of our largest customers qualified our Taiwan factory for shipments of data center products. As we have discussed previously, we believe that our ability to manufacture data center transceivers in both our Taiwan and China factories provides us with an manufactories as we look to minimize the impact for both our U.
S.-based customers, as well as our customers in China. Moving now to our Q4 outlook. And non GAAP gross margin to be in expected to be in the range of $4,300,000 to $5,900,000 and non GAAP loss per share between $0.21 per share $0.30 per share using a weighted average basic share count of approximately 20,100,000 shares. With that, I will turn it back over to the operator for
Our first question today comes from Samik Chatterjee from JP Morgan. Please go ahead with your question.
Yes, hi guys. Thanks for taking my question. This is actually Bharat on for Samik. So the first question I had was one of the networking equipment companies that reported in this earning season has highlighted delayed spending and push out of the refresh cycle at 1 large hyperscale customer, which also happens to be your big customer. So just wanted to check, does that dynamic impact AOI at all and any insight that you can provide there would be helpful?
And then I have a follow-up. Thanks.
If I understand your question correctly and I think we're talking about the same customer, then I think, yes, that, that reflects the same thing that we've seen. I will note, I mean, AOI has been pretty consistent about saying that this customer, was facing some over supply, over inventory conditions for the last several quarters. And, I think we're just starting to hear that maybe now from some other companies. So yes, I think that's the same situation that you're referring to.
Got it. Thanks for that. And then some of the feedback that we've also heard from the supply chain is that one of your larger competitors is being more price aggressive order to take more market share. Is that the same dynamic that you're seeing or are you seeing pricing environment more challenging than usual? Any updates there would be.
No, we haven't seen any real change in the pricing dynamic. I mean, we've been obviously, and we continue to be in a competitive pricing environment has been that way since the data center market really started to grow, I think, a few years ago. We haven't seen any change. I wouldn't say that I wouldn't characterize any of our other competitors as being more price competitive than before. If anything, I think we're likely to see somewhat reduced price competition from some of the industry consolidation that we've seen, less suppliers makes the need for price competition there somewhat less on the margin.
I'm not saying we predict a big change there, but certainly I don't think it's getting any worse.
All right.
Thanks for taking my question. Thank you. You're welcome.
Our next question comes from Simon Leopold from Raymond James. Please go ahead with your question.
Great. Thanks. I have 2. First one is, around the cable space and the cable weakness. I'm imagining there are two headwinds.
And I want to see if you can help me understand the effect of each one being the overall weaker CapEx spending. The other is some indication that at least some of your customer cable OEMs are trying to exit some of their legacy products, which I presume you've been involved in. So just trying to get a sense of how much of this is sort of the top down spending challenges versus maybe bottoms up changes or adjustments in your customer's product portfolios?
Yes, Simon, that's a good question. Thank you. I think the overall effect is really being driven right now by just the weaker spending environment. I think that that weaker spending environment along with particular business challenges for various of the OEM suppliers, has resulted, I think, in some of the suppliers taking a hard look at what their strategy is going to be moving forward. I wouldn't necessarily characterize that as getting out of business, but they're certainly looking at which product lines make sense and how that fits into their overall business strategy.
And so, anytime there's these kind of shifts going on, I think it represents a combination of some risks and some opportunities. I think the risk is that customers may exit certain products and demand for those products necessarily, it just means that those products have to go somewhere else. And so we're pretty We're actually pretty optimistic that as all this plays out, that there will be new opportunities for us. Whether they're with our same partners or other partners or how that's going to play out, it remains be seen, but I think it's going to present, significant opportunities. And when the cable industry begins to grow again, I think those opportunities will become apparent.
Great. And then my follow-up is to get your perspectives on the 400 gig market in terms of timing and how that plays into your business? And couple of thoughts I want to get your impressions of is one, one of the large OEMs suggested that 400 gig would happen later suggesting it begins in the second half of twenty twenty but becomes material on 21. Didn't think that was any different, but they suggested that was later. And then I presume for you, if 400 gig happens later, is that a good thing because you get to reap the sales of 100 gig longer and 40 gig longer or do you want it to happen sooner to be able to participate in that market Could you help us understand your expectations and sort of the implications for you?
Thank you.
Sure. So I think the schedule on 400 G, again, I want to caution, not every OEM, not every supplier, or every end customer is on the exact same schedule, of course. So we have to keep that in mind. But I do think that, not unlike what we saw at 100 gig and indeed even at 40 gig where the initial expectations for deployment schedules were a little bit optimistic. I think we're seeing the same thing 400 gig where there were a lot of end customers of network equipment operators that, that wanted to 400 gig in their network sooner.
I think that, as we've seen with previous cycles, sometimes those, the amount of work and the technology that needs to be ready doesn't always move according to their plans. So I would agree with you. I don't really think that's necessarily later than what we had expected, but I think it's a fair statement that it's perhaps later than what some of the operators may have otherwise liked. When it comes to what's that effect on AOI, I think you're right. We would expect to see a continuation of business for 40g and 100g, until the 400g is there.
I don't think the delay is a bad thing for AOI. I think certainly we've got a good footprint in the 40 gig and 100 gig space. We expect to be a good player, a leading player in the 400 gig space as well. But the delay is one to the extent that there is a delay, I think it's sort of neutral for us and we'll look forward to continued strong sales of 100G and 40G until that time.
Great. Thank you for taking those.
My pleasure, Simon. Our next question comes from Richard Shannon from Craig Hallum. Please go ahead with your question.
Well, Tom, this is Stefan. Thanks for taking my questions. I guess first one on your design, which I think you talked about 7s in the last quarter. 7 from data center and 4 that were new customers. Maybe if you within the data center, could you characterize the types of wins here?
They 400 or excuse me, 100 gig or above and anything about the new customers you can tell us whether Tier 1, Tier 2s or cloud guys or anything like that?
Yes. So the design wins in the quarter, were for the data center space, we're pretty much all 100 gig type of design wins. We continue to be very active in the 4 100 gig qualifications. Those are ongoing. As the previous question was asked, about the schedule.
We would expect those qualifications to be wrapping up here in the next quarter or 2 and then maybe some limited trials and then a a wider spread deployment, in the second half of twenty twenty. And so, that schedule, again, broadly in line with what we expected, but the design wins that we're seeing now are largely for 100 gig. And we did disclose the fact that several of those were with new which I think is very important, because it represents or it reflects, rather, the fact that all the effort that we've put in and all the information that we've we've talked to you about in the past regarding the efforts that we put into diversifying our customer base are actually playing out, not only within the data center space, that is we're becoming less, less dependent on just a few large data center operators, but, but branching out to a wider swath of the data center space. But we also talked about the fact that some of our design wins are coming from areas outside of the data center like telecom, and in particular, the 5G, related telecom qualifications. And I think those are also important for customer diversification going forward.
Okay. Thanks for that detail. One more question for me on the cable TV side here. You mentioned a large order. And I believe said, it's something that will be recognized outside this quarter.
Maybe just a couple of things there. Maybe you can kind of give us a sense of the size of the order. And to the extent you think this conveys a much better environment for at least for your cable business as it relates to remote phis we get into because obviously this year hasn't been the best route in the cable TV business?
Yes. So, the order was actually, I mean, it's the beginning of several orders and we expect to be, hopefully, a more or less continuous stream of new orders for the Remote PHY. In the quarter, I think the magnitude of the orders in some was in the low single digit millions. And it will be delivered over the next couple of quarters. So maybe that amount of revenue doesn't necessarily move the needle that much, although it's relatively significant for our cable TV segment given where it's at right now.
But I think more than that, it reflects a, a strong statement about the acceptability and the necessity of Remote PHY as a new technology. And the fact that it's starting to get adopted by by MSOs. I believe there was at least 2 end customer MSOs who were involved in this order. So it's not just coming from one MSO, but there's some the beginnings of some broad based demand for Remote PHY among the MSO community. So I think that's probably, maybe the message more than the revenue from that specific group of initial orders.
Okay. I appreciate the detail.
I'm sorry. You asked also about kind of the what does this mean for the overall cable TV business, I guess, with AOI I would say, certainly 2019 has been a challenging year in the cable space, as you noted, and as others who already reported, even this cycle have also reported relatively weak results, perhaps even unexpectedly weak results. As we talked about in our prepared remarks, earlier, I think what's happening in cable right now is really a combination of, MSOs just kind of reducing their overall spending largely because perceived it to be a year or 2 ago. But the other factor that's at stake here is the fact that new technologies continue to become available we highlighted DOCSIS 4.0 and in particular, extended spectrum DOCSIS, which is a subset of the DOCSIS 4.0 standard. And those new technologies as we as we have a vendor community start to bring those new technologies to availability.
MSOs are justifiably, reluctant to invest in older technologies when they know that the new technology is imminent. And so I think it's a combination of competitive dynamics and new technology development that's leading to a relatively weak condition right now. Now, all that being said, 5G, I think as it starts to become a real maybe not an actual threat, but at least the perception of that being a near term threat we'll start to drive the MSOs. And I think the availability of, technologies like DOCSIS 4.0 that will enhance the bandwidth dramatically enhance the bandwidth delivery capability of HFC Networks, that will also spur a desire by the MSOs to invest in upgrading their networks.
Okay. I appreciate the perspective, Stefan. That's all the questions for me. Thank you.
Thanks, Richard.
Our next question comes from Tim Savageaux from Northland Capital Markets. Please go ahead with your question.
Thanks. Good afternoon. A couple of questions. First, with regard to a 100 gig transceivers, which remains at a pretty reduced level. I wonder if you could characterize that or update us as function of overall spending at customers or a function of market share and kind of competitive intensity.
Should we be focused on a broad return in spending to see a recovery there or does something need to happen on the market share side?
No, I think market share has been very stable, Tim. I don't think that's meaningfully changed. In fact, if you look the bigger picture, as we highlighted in our prepared remarks, we're actually gaining new customers for 100 G, a number of the design wins that we had as we talked about in the previous with the previous question have to do with Hunter G design win. So I think actually we're seeing very positive dynamics in Hunter G. The 100 G business this quarter, the actual unit sales were up, 49% sequentially.
So quite apart from it being a reduction. I mean, if you look, you can look over year over year decline and that's a true statement. But I think on a sequential basis, as we talked about last quarter, we thought that Q2 represented kind of a, a low point in particular for 100 G sales, but for data center overall. And I think that's so far, at least proven to be true. 100G sales were up sharply and in terms of units and, and as we see the 3rd of our 3 large data center customers starting to starting to pull out of the reduced ordering cycle that they've been in.
I think that'll be positive for the 100 G business. And certainly the new customers that we won, this quarter will also be positive for the 1 energy business.
Okay. And kind of unrelated question here, talking about 400 gig. Do you expect to be able to maintain a vertically integrated strategy with regard to lasers as we move to 400 gig?
Yes, that's our expectation. We believe we have the right devices for the 4 100 gig products. As we talked about, we're in qualification on a lot of those products right now and things are going well.
Okay. Thanks.
Turn the conference call back over to Doctor. Thompson Lynn for closing remarks.
Okay, and thank you for joining us today. As always, We thank our investors, customers and employees for your continued support and look forward to see many of you at our upcoming investment conference.
Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining. You may now disconnect your lines.