Good afternoon. I will be your conference operator. At this time, I would like to welcome everyone to the Applied Optoelectronics Fourth Quarter and Full Year 2019 Earnings Conference Call. All participants have been placed on mute to prevent any background noise.

[Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I will now turn the call over to Lindsay Savarese, Investor Relations for AOI. Ms. Savarese you may begin..

Thank you. I'm Lindsay Savarese, Applied Optoelectronics' Investor Relations, and I am pleased to welcome you to AOI's Fourth Quarter and Full Year 2019 Financial Results Conference Call.

After the market closed today AOI issued a press release announcing its fourth quarter and full year 2019 financial results and provided its outlook for the first quarter of 2020. The release is also available on the company's website at ao-inc.com. This call is being recorded and webcast live.

A link to that recording can be found on the Investor Relations section of the AOI website and will be archived for one year. Joining us on today's call is Dr. Thompson Lin, AOI's Founder Chairman and CEO; and Dr. Stefan Murry, AOI's Chief Financial Officer and Chief Strategy Officer.

Thompson will give an overview of AOI's Q4 results and Stefan will provide financial details and the outlook to the first quarter of 2020. 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 can identify forward-looking statements by terminology such as believes, anticipates, estimates, intends, predicts, expects, plans, may, should, could, would, will or thinks and by other similar expressions that convey uncertainty of future events or outcomes.

Forward-looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of our products into new markets and customer responses to our innovation as well as statements regarding the company's outlook for the first 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 our 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, 2018.

Also with the exception of revenue, all financials discussed today are on a non-GAAP basis, unless specifically noted otherwise. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

A reconciliation between our GAAP and non-GAAP measures as well as a discussion of why we present non-GAAP financial measures are included in our earnings press release that is available on our website.

Before moving to the financial results, I'd like to announce that AOI management will present at the Raymond James Institutional Investor Conference on March 3 and will host an investor session at OFC on Tuesday, March 10 at the San Diego Convention Center.

This discussion will be webcast live and a link to the webcast will be available on the Investor Relations section of the AOI website. We hope to have the opportunity to see many of you there. Additionally, I'd like to note the date of our first quarter 2020 earnings call is currently scheduled for May 7, 2020.

Now, I would like to turn the call over to Dr. Thompson Lin, Founder, Chairman and CEO.

Thompson?.

Thank you, Lindsay, and thank you everyone for joining us today. We delivered revenue in line with our guidance range and achieved better-than-expected results on the bottom line. AOI delivered Q4 revenue of $48.7 million, non-GAAP gross margin of 27.6% and a non-GAAP net loss of $0.18 per share.

During the quarter, the datacenter demand environment remained consistent with our expectations. While we are continuing to see improved order pattern among two of our hyperscale datacenter customers, we remain cautiously optimistic as demand continues to stabilize among our customers.

We are pleased to report that we recently received a design win for our 400G product with a Tier one network equipment manufacturer and we are encouraged by the customer interest we are seeing with this product. In CATV, the overall CATV demand environment continued to be soft.

While we expect this condition to influence, our performance in the near term, we believe AOI remains well positioned, given our innovative technology as MSO move to next-generation architectures. We continue to make good progress in diversifying our customer base.

And during the quarter, we secured nine design wins with eight out of nine design wins coming from new customers. We had 31 total design wins for the year, which is nearly 20% higher than our total design wins in 2018.

We believe that this market trend of new custom design wins activity, reflects favorably on our technology domain and manufacturing execution and it also demonstrates the ongoing success of us to extend sales beyond our core hyperscale customer base.

Before turning the call over to Stefan for additional details in our outlook, I would like to first address the coronavirus outbreak as a result of the COVID-19 outbreak in China. We experienced change in our operation there in Q1. Our operation in Ningbo was shut down for approximately 2.5 weeks beyond our normal Lunar New Year holidays.

We are currently up and running again at approximately 70% of our normal capacity, which is improving steadily as our staff is able to return to work. In order to reduce the impact of the shutdown on our customers, we have taken measure to increase production at our factory in Taiwan and in the U.S.

And while we anticipate reduced revenue and some additional expense in Q1, we are working hard to minimize the impacts. We included our current estimates of the impact in our guidance. However, I will cautious that there are still significant unknowns with respect to the extent and duration of the impact to operations.

At this point, we expect that these issues will be temporary as the situation in China gradually gets back to normal. Stefan will provide additional detail, but I wish it will come to send our staff and leadership in China for their dedication in dealing with this rapidly evolving situation.

And our thoughts go out to all those individuals in China and around the world, who are suffering from this illness. We are encouraged by the traction we are seeing with our 400G products and the continuous sign of recovery from several of our data center customers. And also we continue to be pleased with our design wins.

We remain focused on delivering innovative technology to our customers and are well positioned to capitalize on opportunities ahead of us as the market improve. We are looking forward to strengthen our technology solution and meeting with many of you at OFC next month.

With that I will turn the call over to Stefan to review the details of our Q4 performance and outlook for Q1.

Stefan?.

one, reduced manufacturing capacity in the quarter due to the shutdown and lower-than-typical head count in the factory; two, additional expenses incurred as a result of the outbreak; and three, supply chain issues.

As many of our suppliers are in China, we are working closely with them as they return to work, to assess whether they will be able to supply necessary raw materials for production.

At this point, the vast majority of our suppliers in China have returned to work and we currently believe that we will not have constraints on our production capacity in Q1 due to virus-related supply chain disruption.

In order to reduce the impact of the shutdown on our customers, we have taken measures to increase production at our factories in Taiwan and in the U.S.

The flexibility that we have in maintaining multiple manufacturing locations is an essential part of our strategy and our ability to ramp production outside of China has allowed us to offer product to certain customers whose regular suppliers were more acutely affected by the virus than we have been. Our production cost in Taiwan and the U.S.

are typically higher than in China so this may also temporarily pressure margins. But as China returns to full operations, we anticipate this margin pressure will be short-lived.

So while we have many challenges in dealing with this very fluid situation, we feel that our diversified manufacturing strategy and relatively high level of automation have allowed us to address these challenges proactively. Moving now to our Q1 outlook.

We expect Q1 revenue to be between $43 million and $47 million 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 $6.8 million to $8.3 million and non-GAAP loss per share between $0.34 per share and $0.41 per share using a weighted average basic share count of approximately 20.3 million shares. With that, I will turn it back over to the operator for the Q&A session.

Operator?.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Samik Chatterjee of JPMorgan. Please go ahead..

Yeah. Hi, guys. Thanks for taking my question. This is actually Bharat on for Samik. So the first question I had on the data center side, it looks like the 100-gig revenues were up sequentially quite a bit. And then if I'm not wrong you highlighted three data center customers that were greater than 10%.

So that one large hyperscale customer that we had talked about in the last call that had a higher inventory and was at reduced spending levels.

So, are you seeing that return to normal? And are you seeing normal CapEx levels return from that customer?.

So, just to clarify during the quarter, we had two 10% or greater customers in the data center segment..

Okay..

That were 39% and 28% respectively. So, not three but two. With respect to the -- we did have -- for the year, we had three data center customers, just to clarify. So, two in the fourth quarter and three for the year.

I would say, the -- as we noted in our prepared remarks two of our data center customers are increasing their orders and one continues to order from us but with a reduced level from what it had been historically..

Okay. Yeah. Thanks for that. And then one follow-up I have is the new 400-gig design win that you talked about.

How should we -- can you quantify probably the magnitude of that? And how should we think about the benefit of that coming through? Do you expect that meaningfully come -- starts to benefit the revenue towards the later half of this year? Or that's more a 2021 kind of story? Thanks..

We may see some contribution late this year. I'm expecting it frankly to be more of a 2021 ramp, but it could come early as later this year depending on how things play out. This particular win is a sizable opportunity for us.

But I think more than the absolute dollars that could come from this win, I think it really is a testament that the technology that we have is playing well with customers. As we noted in our prepared remarks, we have a number of ongoing qualifications with other customers.

And I think this provides some tangible evidence that the product is working as intended and customers are accepting the product and the pricing and other aspects of the product that we have. So, we're -- we think it demonstrates our capabilities, and we're excited about the other qualifications that we have ongoing now..

Yeah. Great. Thanks for taking the questions. Thank you..

My pleasure..

[Operator Instructions] The next question comes from Joe Flynn of Craig-Hallum. Please go ahead..

Hi, guys. I'm on for Richard Shannon. Just a quick question regarding the 400-gig products.

Would you be able to tell us if they're a 4-channel or 8-channel product design?.

It's a 4-channel design..

Okay. Thanks.

And I guess, looking out forward, what does the path of breakeven look like? Anything you can offer like maybe like, on sales levels, gross margin? And maybe the main market drivers that will get you there?.

Yeah. I think, obviously, there are a couple of different knobs that we can turn. One is, increasing gross margins. And the other is increasing revenue. I think our operating expenses are likely to be relatively well controlled at around this level. They may -- on a quarter-by-quarter basis they may bounce around a little bit.

But overall, I don't expect major changes in our operating expenses, at this point. And so really it comes down to revenue increase in gross margin. And I think, as far as revenue contribution, I think, the main factors that we expect to see are improvement, especially in the back half of the year, in our cable TV market.

Q1 is always a seasonally down, quarter for us in cable. And as we noted in our prepared remarks, we're also kind of a natured in terms of industry, revenue. I believe, at least from the commentary that I've heard from other companies in the industry, so far this reporting season.

It seems like revenues are generally depressed across the cable TV space. We do believe that, several MSOs are in the process of contemplating or making plans to begin upgrades, later on in the year. And that should be good for the industry as a whole and hopefully AOI in particular, participating in that.

We do think some of our newer technologies like Remote PHY. And some of our other newer products for the cable space could contribute positively, to both obviously revenue and gross margins as well. So that's one factor, I think, that could lead us to improving conditions. The other is continued growth in our 100-gig, data center products.

As you noted, in our 100-gig -- sorry it wasn't you. It was -- previous question noted that the 100-gig was up sharply, it was nearly double what it was last quarter. And as long as that trend can continue, I think, that's positive for us. It portends revenue growth as well.

400-gig as I noted in my answer to the previous question, is likely to be not that big a contributor in 2020. But longer-term, could meaningfully contribute to both revenue and gross margin. And then, the 5G network build out.

Currently, I think, with the coronavirus that does put a little bit of a question mark on the pace of rollouts, particularly in China where some of the early rollouts were expected to happen. But nevertheless, I think, over the longer-term, as we move past the virus-related concerns that certainly should be positive for us in terms of revenue growth.

We also think it could be positive in terms of gross margin. It depends a little bit on product mix there, but there's an opportunity where we can extract higher gross margin certainly than our current levels there. So, those are all the kind of knobs that we expect to turn, and the market dynamics that are playing out.

And overall, I think, we're pretty optimistic that data center recovery is underway. Cable TV is still not recovering yet. But I think, there's reason to be optimistic about the back half of the year. And then, 5G should be a contributor to us as well.

And all three of those things are kind of pointing in the right direction, if not immediately, evident in this quarter..

All right. Thanks this helpful..

Okay. Thank you..

[Operator Instructions] At this time, we have no further questions. And I will turn the call over to, Dr. Thompson Lin, for closing remarks..

Okay. And thank you for joining us today. As always, thank you to our investors, customers and employees for your continued support. And we look forward to see many of you, at our upcoming investor conference, at OFC..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..