Good afternoon.
I will be your conference operator. After the speakers' remarks, there will be a question and answer Please note this event is being recorded. Now I'll turn the call over to Maria Riley, Investor Relations for AOI. Ms. Riley, you may begin.
Thank you. I'm Maria Riley, Applied Optoelectronics' Investor Relations, and I'm pleased to welcome you to AOI's 2nd Quarter 2019 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its 2nd Quarter 2019 financial results and provided its outlook for the third quarter of 2019. The release is also available on the company's website ata0 inc.com. This call is being recorded and webcast live.
A link to that recording can be found on the Investor 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. Pompson will give an overview of AOI's Q2 results and Stefan will provide financial details and the outlook for the third quarter of 20 team.
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 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 things. And by other similar expressions that can be 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 third 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 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 Ten K for the year ended December 31, 2018. Also, with the exception of revenue All financial numbers discussed today installation 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 attend the D. A. Davidson Technology Conference in New York on September 4, and the Doherty And Company 2019 Institutional Investor Conference in Minneapolis on September 5th. We hope to have the opportunity to see many of you there. Additionally, I'd like to note the date of our third quarter 2019 earnings call currently scheduled for Wednesday, November 6, 2019.
Now, I'd like to turn the call over to Doctor. Thompson Lynn, Applied Optoelectronics' Founder, Chairman and CEO Thompson.
Thank you, Maria, and thank you, everyone, for joining us today. We are pleased with our execution during the quarter. We delivered revenue in line with our guidance and achieved better than expected result on the bottom line. Ever developed revenue of $43,400,000, non GAAP gross margin of 27.2 percent and a non GAAP net loss of $0.26 per share. In looking at the dynamics in the quarter, the development remained consistent with our expectation.
We are starting to see early signs of recovery among 2 of our hyperscale datacenter customers. While one customer has yet to begin a recovery. We are encouraged by late a resign of recovery and believe the fundamental need for higher bandwidth within hyperscale data center will drive long term growth. However, in the short term, we remain cautiously optimistic on the market dynamics as the demand environment continue to stabilize among our hyperscale customers. In CATV, we remain encouraged by customer activity, especially interest in our Remote PHY products.
However, the overall CATV market demand continued to be soft, resulted in tepid demand for some of our legacy products. Additionally, CATV demand in China is weaker than we had expected as a result of trade tensions. Diversifying our customer base remains a top priority for AOI. In the quarter, we secured 5 new design wins, including 4 with an equipment OEM for data centers and 1 with data center later. In summary, we are pleased with our execution this quarter, which contributed to our better debt, effective bottom line results.
We remain focused on fostering relationship with both existing and new customers and expanding our technology leadership. We believe our platform proprietary manufacturing process and vertical integration are keys to our success in the market, and we remain confident in our ability to monetize our innovation as the market improves and move to the next generation technologies. With that, I will turn the call over to Stefan to review the details of our Q2 performance and outlook for Q3 7.
Thank you, Thompson. Overall, the demand environment in the quarter was consistent with our expectations. Total revenue for the second quarter was $43,400,000, which was above the midpoint of our guidance range of $40,000,000 to $45,000,000. Our data center revenue came in at $31,800,000 compared with $69,000,000 in Q2 of last year, In the quarter, 72% of our data center revenue was from our 40g transceiver products, and 23% was from our 100g products. The data center market dynamics played out in Q2 as expected.
We are
starting 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. As Thompson mentioned, while we are encouraged by these early signs of a recovery, we remain cautiously optimistic on the near term market dynamics. We continue to believe that we to their business. We are focusing our efforts on continuing and expanding our technology leadership, which we believe will best position AOI for growth when market conditions improve. We are also encouraged by the pace and quality of the design wins we are seeing with new customers, many of whom are data center operators or equipment OEMs that supply the data center vertical.
Building upon our strong foundation as a leader in advanced optical technology, we recently showcased the ability of AOI's 400g QSFP transceivers to break out into 4 individual 100 G FR transceivers and interoperate with a leading 12.8 terabit per second switch fabric ASIC. As data center operators continue to demand greater bandwidth, the migration from 100g to 400g will be the next major step in data center architecture. As data center customers add 400g connectivity to their 100g infrastructure, they are looking for validated and interoperable solutions to gain confidence and reduced deployment timelines. We are very pleased to have a solution with the demonstrated interoperability that our customers demand. Turning to our cable television market, revenue from CATV products decreased 31% year over year to 9 $800,000 compared with $14,200,000 in Q2 of last year, as demand has weakened somewhat with North American MSOs, and the China CATB market continues to lag expectations due to trade tensions and concerns about domestic economic growth in China.
Despite these near term challenges, MSOs, particularly those in North America, continue to forge plans for distributed access architectures. We believe that our Remote PHY product is a key enabling technologies for these new distributed access networks and we are excited about the customer interest in Remote PHY. We expect to receive our first significant orders for our Remote PHY products soon. Our telecom products delivered revenue of $1,600,000 compared with $4,200,000 in Q2 of last year, reflecting lower sales in China given geopolitical trade tensions In telecom, we continue to see 5G network deployments poised to become a large driving factor for the optical industry as a whole. We believe AOI is well positioned to grow our share as the 5G optics market develops, given our deep optical expertise in harsh outdoor environments, and our highly automated module production process.
We remain in qualification with a number of vendors for both front and mid haul applications. With that said, please keep in mind that given this is an emerging market, the timing of qualification and deployment schedules are difficult to predict. For the quarter, 73% of our revenue was from data center products, 23% from CATV products, with the remaining 4% from FTTH, telecom and other. In the second quarter, we had 3 10% or greater customers, 2 in the data center business that contributed 30% 29% of total revenue, respectively, and 1 in the CATV business that contributed 14% of total revenue. We continued to build on our earlier success in diversifying our customer base and are pleased with the steady progress we have made.
In the quarter, we secured a total of 5 new design wins among 2 U. S.-based data center customers, one of which is a data center operator. I will also note that several of these design wins expand on a new customer relationship we secured last quarter with an OEM supplier to the hyperscale and enterprise market. Moving beyond revenue, we generated gross margin of 27.2 percent, a 170 basis point improvement from 25.5 percent reported last quarter and slightly higher than our guidance. Total operating expenses in the quarter were $19,500,000, or 44.9 percent of revenue compared with $20,300,000 or 38.4 percent of revenue in the prior quarter.
We continue to be targeted with our investments with an emphasis on developing and enhancing our next generation of optical products while also tightly managing expenses. Operating loss in Q2 was $7,700,000 compared with an operating loss of $6,800,000 Non GAAP net loss after tax for the second quarter was $5,200,000 or a loss of $0.26 per basic share, which was better than our guidance. This compares to net income of $12,900,000 or GAAP net loss for of $8,000,000 or $0.40 per diluted share in Q2 of last year. The basic shares outstanding used for computing the net loss in Q2 were 19,900,000 shares. Turning now to the balance sheet.
We ended Q2 with $84,000,000 in total cash cash equivalents, short term investments and restricted cash compared with $77,500,000 at the end of the previous quarter. This reflects $7,200,000 in cash generated from operations. As of June 30 we had $81,500,000 in inventory, a decrease of $3,000,000 from Q1 This inventory reduction is consistent with our long term plan as we continue to rationalize inventory levels. We made a total of $13,500,000 including $6,200,000 in production equipment and machinery and $6,900,000 on construction and building improvements. Looking ahead, we now expect capital expenditures in 2019 to be approximately $56,000,000, which factors in a continuation of the construction of our new factory in China.
We continue to monitor end market conditions and may adjust our spending plans as necessary. Moving now to our We expect Q3 revenue to be between $46,000,000 $49,000,000 and non GAAP gross margin to be in the range of 27% to 29% Non GAAP net loss is expected to and non GAAP loss per share between $0.21 per share and $0.28 per share using a weighted average basic share count of approximately 28,000,000 shares. With that, I will turn it
We will now begin the question and you. And the first question comes from Simon Leopold with Raymond James.
Great, thank you for taking the question. Just a quick clarification, if I might. I think you mentioned your 10% customers. I didn't get down the color you offered on that. Could you just repeat that comment?
Yes, we had 3 10% customers, during the quarter, were in the data center business, they contributed 30% 29%, respectively, of total revenue, and then there was one customer in the CATV business that was 14% of total
Great. Thank you very much for that. Sorry. So on the cable TV business, clearly, we've heard from the major operators spending less money, but, it seems as if we're still very early in the fiber deep remote PHY. And so I think you made a comment suggesting that you were only just beginning to ship your, your, your remote 5 boxes.
If you could give us a sense of how you see this playing out? And I guess what I'm really getting at is, how should we think about the trending of this business both near term third quarter? And then really looking at kind of 2020?
Yes, so the comment that we made, I think on the last few conference calls, we've mentioned that we have been selling Remote PHY products. The comment that we made is that we're expecting to start getting our first what we would term sort of significant orders that something that, that would be the beginning of more of an ongoing business for those remote five products and one that we hope would grow into a larger number over time. As far as the the overall cadence on cable TV, I think if you look year over year, what we've seen is primarily related to to China, slowing down. We've seen some slowdown in North America in the last quarter or 2. So it depends if you're looking on a sequential basis or year over year in terms of what's causing the downturn.
When we look ahead, I think we're looking for the North American MSOs to, begin to invest in these distributed access architectures. And as I mentioned in our prepared remarks, we're a technology leader in Remote PHY, which is a key aspect of these distributed access architectures moving forward. So it's hard to say exactly when they're going to do that. I think they're poised to. I think some of the slowdown that we're seeing now among the North American MSOs is probably related to the immediacy of their transition to this remote 5 based architecture.
That is they're kind of minimizing their investments in legacy networks while they look to Ag Remote PHY. The precise timing behind that is difficult to predict. I think we're probably, it's probably not a Q3 or Q4 kind of thing before we start to see a real resurgence, but it's hard to predict at this point.
So I guess I'm sort of reflecting back on the cable TV business in 2017 where it was very much transmission oriented, you did about $60,000,000. I'm just wondering if we should think about that as a reasonable expectation for at 2020 or at least the timeframe where these initiatives really get going. Is that a reasonable way to think about that line of business?
I mean, again, I want to give you a sort of precise number. I think there's every reason to believe we can get back to two levels, similar to or greater than what we've been in the historical periods. It does require this transition to Remote PHY, I think, to happen in North America. And like I that I would expect that that would happen in 2020, although the cable TV market is notoriously difficult to to project, specifically the timing of when they start to get going. I think the overall trend we can be fairly certain of, but exactly when they get going and how fast they ramp up is still a tough to forecast.
Thank you. Just one more if I might. You mentioned the 400 gig products starting to come out. Just if you could help us think about how you could be competitive versus the Silicon Photonics variance that coming out from some of the OEMs and, some of the larger semiconductor companies. Just wondering how Silicon Photonics sort of plays into the competitive landscape when you're in the market at 400 gig inside the data center?
Thank you.
Sure. I mean Silicon Photonics is not a new technology. As you know, we've had Silicon Photonics at 100 gig and there's been Silicon Photonics solutions at lower data rates even before that. Our competitive advantage is built upon our vertical integration. That is our ability to manufacture, a significant port of the cost driving elements of the transceiver in house.
And also on our manufacturing expertise, I think we've talked extensively in the past about form technology that has allowed us to automate those processes. So it's not just the automation itself, but it's having a design for our our 100g products and our 400g products and even future generations where we can manufacture those in an automated way in a very cost effective manufacturing that's what gives us the ability to compete with those other technologies.
And Simon, this is Thompson. And I want to emphasize for 400g and 800g, making EML in house will give us, give ARR even stronger advantage. Or I compared to 100g used in the DML.
Great. Thank you very much for taking my questions. Appreciate that.
Thanks, Simon. Thank you. And the next question comes from Samik Shatterjee with JP Morgan.
Hi, thanks for taking my question. If I could just start off with a clarification as well, I know you mentioned the 100 gig and 4 40 gig mix the data center revenues. Could you just repeat that? Sorry, I missed that.
Sure. No problem. The 72% of the data center revenue was from 40g and 23% was from 100g in the quarter.
Got it. And so, I think that kind of implies, kind of decline in the 100 gig mix overall a strong decline in the revenues. Is that primarily driven by the, kind of the lack of recovery that you see saw with one of the hyperscale customers that data center customers call them or was that more driven by something else that I'm not really thinking about?
No, it's almost entirely driven by the one customer who has yet to to recover. We are seeing strength in our 40g, which I think is actually, it's a good thing for AOI. We've been a leader at 40g for some time. The fact that our customers continue to be interested in 40g and continue to find new use cases for 40g and are continuing to buy significant quantities of 4G, I think, is very, very good for us. But the 100G downturn is not related to other customers that's pretty much isolated to the one customer.
Got it. And just a question on the tariffs, like with the proposed 10% tariff now on incremental, goods coming from imported from China. Are you expecting any impact to your gross margins? Additionally, I believe you have a facility in Taiwan. Are you seeing pickup in interest from customers in expanding, expanding kind of their business in that facility?
And if you were to ask to expand capacity there, how much flexible capacity do you have there?
We are we do have a facility in Taiwan that can manufacture the data center transceivers. In fact, it does already manufacturing a portion of our data center transceivers. We have had a significant interest from customers in our ability to manufacture in Taiwan, And what we can do is, move some of the manufacturing operations between our Taiwan and China factories such that we can add additional capacity if needed as these tariffs come on board. And in other words, what I mean is we can take some of the for other ancillary products that are maybe not data center related, move those to China and increase the capacity in Taiwan. The data center products.
And where we stand right now, we think we're pretty well positioned to be able to manufacture what the customers are asking us in the Taiwan factory. At least for customers that are U. S. Based. I mean, I want to remind everyone that even among the U.
S. Hyperscale customers, not all of their transceiver usage is actually in the U. S. So We won't necessarily be manufacturing all of our data center transceivers in Taiwan, but for the ones that need to be imported into the U. S, it's certainly a possibility ability for us to manufacture this in Taiwan.
And that's our plan should the tariffs come in place.
You're welcome.
And the next question comes from Fahad Nahmad with Cowen and Company.
I apologize for the tough question, but did I hear you correctly that 100g was 23% of data center revenue?
Yes, you did.
If I look at the broader landscape going forward, why should investors believe that you would meaningfully have any success in 400 gig and 30 or 40 gig rolls off, when you have had little to no meaningful set off late since the quality issue with your lasers in 100 gig. What would you tell investors you have hoping in your story. I apologize for the broad ended question, but I'm just struggling to see how if you're not succeeding in 100 gig, how will you succeed in 400 gig?
Well, I think it's a mischaracterization to say that we're not succeeding in 100 gig. As you noted, we have a sizable sales of 100 gig last year. In fact, it was our largest selling product line by far. I would not call that not having success. What I would say is that, different customers purchase different applications and different data rates for different applications at different times Not every customer, as we've noted in our prepared remarks, has yet begun a recovery cycle.
And we would expect that in that recovery cycle, if they're still purchasing large quantities of 100 G, that is if they haven't moved on to 400 G, then, we'd expect to be a part of that. Now With respect to your sort of more blunt question about, why would we be a player at 400g? We were we are actively involved in a number of qualifications right now. I think if customers had decided they weren't going to use AOI or they weren't attracted by what AOI had to offer they're not going to waste their effort and resource working with us on these qualification efforts. Now, those qualifications are ongoing.
I can't tell you for sure what the results of all those are going to be, but so far the results are good. And, I would expect, that they would, that they would, some of them at least would be concluded successfully, maybe perhaps all of them. The other thing I'd like to say is, I mean, 40g and 100g weren't our first data rates. We've been involved in the data center market, for a long, long time. We've been a leader in the data center market for a long time, and I don't see any reason why 400G would be materially different.
As Thompson mentioned earlier, technologies like our electro absorption modulated laser or the cost structure of the 400 G transceivers. And by having that technology in house, we think that gives us a really good position to be a technology leader, but a cost leader in 400 G as we were at 100 G, as we were at 40 G, as we were at 10 G, as we expect to be at 800 G when that comes to fruition in the future. So I think it's wrong to say we haven't been successful and the technology that we've developed for 400 G is very compelling, which is why we have ongoing qualifications going with customers.
But let me answer that 2 points. 1, for EML, 100G, EML, they're very few surprised okay, compared to 25 GT ML. So making EML in house, the cost of it is very big, much, much bigger. Than 25g EML for 1 identity transceiver, whether number 1. Number 2, yes, we are quite issued by we have mentioned we of the problem.
And in the past few quarters, we have many design wins of 100g transceiver with many new customer. Okay, now in U. S, including Asia, including many big equipment OEM company and many hyperscale operator, okay, worldwide. The slowdown related to this specific customer it's not the core issues. It's that demand really stalled out, okay.
And we are confident and we believe when the demand come back with the 1 of the major supplier, okay, in the future. Could be sometime next year, all right? All
right. If I may ask on the 200 gig, I know 400 gig is still a second half twenty twenty for you, most of your customers, but 2 of the largest hyperscale cloud tires are moving with 200 gig in the interim. One of them happens to be a customer of yours. Are they doing any 200 gig? Are you shipping 200 gig?
Do you have any share in 200 gig at the moment?
Yes, we've been shipping 200 gigs since last year. It's not a huge quantity. Obviously, if you look at the percentages for the 40 gig and 100 gig, but we do have design wins at 200 gig.
Thank you. And the next question comes from Michelle Waller with Needham And Company.
Hi guys. I'm on for Alex Henderson. Just a quick question on the gross margin you guys give any color can you guys give any color on, 40 gig gross margins or 100 gig just trying to wonder here if, you know, gross margins are positive for 100 gig or no?
Oh, they're definitely positive for 100 gig. We don't give specific guidance on individual product gross margins, but certainly they're positive.
Okay.
No. The growth of mine for 100 of these are pretty good. As we said, we have a very strong cost advantage compared to other suppliers. Because of the vertical integration because of the automation of the transceiver manufacturer in Taiwan and China.
I'm sorry, was there a follow on question?
No, no, that's good. Thanks. All right.
Very good. Thank you.
Thank you. And as there are no more questions, I would like to return the call back to Thompson Lynn for any closing remarks.
Okay, and thank you
for joining us today. As always, we send our investors, customers and employees. Your continued support, and we look forward to seeing you at our upcoming conference.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.