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Alliance Fiber Optic Products Inc (NASDAQ:AFOP)

Q2 2013 Results Earnings Call

July 23, 2013 4:30 PM ET

Executives

Peter Chang - President and CEO

David Hubbard - Executive Vice President, Sales and Marketing

Analysts

Dave Kang - B. Riley

Operator

Good afternoon. And welcome to the Alliance Fiber Optic Products Incorporated Second Quarter 2013 Conference Call. Thank you for joining us on today’s conference call to discuss AFOP’s second quarter 2013 financial results. This call is also being webcast by accessing on the Investor Relations page at afop.com and a replay will be available on AFOP’s website 90 minutes after the live conference call.

Today’s call is being hosted by Peter Chang, President and Chief Executive Officer; and David Hubbard, Executive Vice President of Sales and Marketing. Before I turn the call over to Mr. Chang, I’d like to make the following Safe Harbor statements.

During the course of this conference call, Peter or David may discuss expectations and make projections or other forward-looking statements as to the company’s ability to improve financial results, focus on cost control and operational efficiency, develop products and technologies that customers desire, make prudent R&D investments, the features and benefits of the company’s products, market opportunities, and the company’s future prospects.

We would like to caution participants that these statements and all other statements made by management on this call that are not historical facts involve a number of risks and uncertainties that could cause actually results to differ materially, including, but not limited to, general economic conditions and trends, the impact of competitive products and pricing, timely design acceptance by our customers, the level of order cancellations, the need for and magnitude of future inventory write-downs or impairment charges, timely introduction of new technologies, ability to develop new products, and to ramp new products into volume production, industry-wide shift in supply and demand for optical components and modules, industry overcapacity, failure of cost control initiatives, financial stability in foreign markets and other risks detailed in our SEC reports including AFOP’s most recent Form 10-Q for the quarter ended March 31, 2013.

These forward-looking statements speak only as the date hereof. AFOP disclaims any intention or obligation to update or revise any forward-looking statements.

Now I would like to turn the call over to Mr. Chang, President and CEO of AFOP.

Peter Chang

Thank you, Operator. Thank you for joining us today. It has been an exciting quarter of growth for AFOP. I’m very pleased to report that we executed well to serve our customers higher than anticipated demand and recorded significantly higher record revenue and profit in the quarter as a result. Of course, I want to thanks our valued customers and our exceptional team for these achievements and thank our investor for their confidence in AFOP.

This execution was further highlighted by improvement in gross margins which increased to a record 38% level. We’ve been paying [concern] our operating expenses very well, so net profit up 3.5 times a year ago quarter and more than double sequentially.

We managed our inventory and account receivables very effective as well therefore our balance sheet grew stronger. Most importantly, we ended the quarter with strong backdrop to provide ongoing growth performance in the coming quarter and this gradually increased operating level. All these improvements reflected on the strength of our strategy and our commitment to improving shareholder value in AFOP.

Now, let me turn it over to David to review the progress we made in each product area in more detail in the quarter. Following that, I will go into more details on the financials and end with our forward guidance. David, please.

David Hubbard

Thank you, Peter. As we move further into the middle of 2013, demand continued to increase for AFOP products. While the second quarter generally shows seasonal strength over Q1, here we underestimated the demand levels, which materialized from our customers.

These improvements were driven from both the telecom and enterprise markets, with significant increases in demands for products and solutions for metro access applications and data center build. We found the enterprise activity was particularly strong and gained momentum during the quarter.

As we said earlier, we believe our product line posture with more weight towards the access and enterprise sectors of fiber optics put us in good position to capitalize on the spending priority in the overall market and these trends continued during Q2.

We also recognized our customers performed well in their respective businesses and we were glad we can contribute to their success with the timely response to this unexpected increase demand.

Renewed spending environment for enterprise, metro access and last mile asset markets allowed AFOP to reach these higher performance levels sooner in our plan than expected. Clearly, strong bandwidth demand continue to drive the need for further network investments in both telecom and enterprise applications. And the current deployment of new 40 and 100G platform across both the line and client side networks, we continue to be enabling for market expansion and AFOP growth.

AFOP connectivity sales overall were up significantly in the quarter. Passive products saw large increases as well. Connectivity saw gains particularly in the data center as mentioned but also increases in component and module sales for access application. AFOP passive products continued selling well into the rapidly growing metro access, cellular backhaul and last mile segments in telecom.

We made more progress with our passive products in the emerging fibers to the antenna application and we expect this area to continue more to our sales in 2014 or sooner. In addition, our connectivity solutions offer AFOP opportunities in these segments as well.

Our broad based fiber optics [phone] offering positions AFOP well to take advantage of these growth trends going forward as demonstrated during Q2. AFOP continues to engage opportunities for component and assembly solutions aimed at the 40G and 100G internet market. These infrastructures require a new generation of cable plant with higher density and lower losses to accommodate higher speed fiber optics.

AFOP is targeting these areas with our connectivity line. And we continue to expand AFOP NANOMUX line of submodules for 40G and 100G internet transceiver applications. We continue to gain design wins with customers here that are an early production of next generation 40, 100 gigabit QSFP and CFP, two transceivers. We believe there is significant long-term volume opportunity for AFOP with this advanced passive platform.

As carrier spending continues to concentrate around the access and subscriber end of the network, AFOP is well positioned for these trends and continues to invest in products required by the next generation of access deployments. In addition, we believe these deployments will be coupled to core network upgrades at 100G to support the increased traffic generated with these subscriber services.

With the economies potential for further improvements in 2013, these composite trends will offer significant opportunities for AFOP products in the remainder of 2013 and on into next year.

We had few 10% plus customers for the quarter. Geographically, sequential sales were up in the U.S. and Europe and relatively flat for Asia. Through our review of forecast for the remainder of 2013, most key customers are optimistic about year-on-year growth. Some are acknowledging and they were a little too conservative with their forecast last quarter.

Let me turn it back to Peter for the financials.

Peter Chang

Thank you, David. Total revenue for Q2 2013, coming at over $19 million, an increase of 55% compared to the year ago quarter; and 67% sequentially. I like to thank again to effort by exceptional team, making customers declining during the quarter.

With continuing sale operational excellence, favorable product mix and record revenue level, growth margin in Q2 2013 improved to a record level of that 38.2% compared with 33.9% and the 36.3% in the year-ago quarter and last quarter respectively. With good gross margin and well managed operating expense level, we generated operating profit of $4.4 million in Q2, which is 248% higher than $1.3 million reported in the year-ago quarter and 130% more than the previous quarter of $1.8 million.

Our net profit in Q2 come in at about $4.3 million or $0.45 earnings per share, compared with $1.2 million or $0.14 earnings per share in the year-ago quarter. This compared to a net profit for the previous quarter of $1.9 million or $0.22 EPS. All the above are on a GAAP basis, all increased significantly. This is the 29th consecutive quarter where AFOP delivered a profitable bottom line.

On an EBITDA non-GAAP basis, our profits are more impressive. Net profit in Q2 was above $5.3 million or $0.51 earnings per share. This compares to $1.9 million or $0.22 EPS in the year-ago quarter and the profit of $2.5 million or $0.29 earnings per share in the previous quarter versus. Most importantly, profit margin is above 28%.

Turning to the balance sheet, our balance sheet stood stronger with a record financial performance. Our net cash, cash investments and the long-term investments increased by more than $6 million and ended with $48.8 million.

Accounts receivables of our DSO, Days Sales Outstanding was 49 days in Q2, much better than 53 days for Q1. Inventories for Q2 were increased from last quarter to $9.3 million, in order to serve our customers with better returns and with the support of a continuously growing demand. Nevertheless, the inventory returns for Q2 include significantly to 5 from 4 in Q1.

Now, regarding forward guidance, I am glad to report that the demand for AFOP products have remained strong in the current quarter. With the accomplishment of a second quarter and an encouraging order booking status, we feel positive about the delivering another record quarterly revenue between $19.5 million and $20.5 million for the coming quarter.

This represents revenues at 56% to 55% higher on a year-over-year basis. With another record revenue level and a continuously favorable product mix, we expect the gross margin will continue influencing which could result in record quarterly profit as well. This expectations are based on assumptions of a continuous economy recovery, optical networking spending up at the current level, favorable product mix, stable pricing and the continuation of efficiency improvements in our Asia operations.

So now, I’d like to turn the call back to the operator for Q&A session. Operator, please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions) We do have a question from Dave Kang from B. Riley.

Dave Kang - B. Riley

Thank you. Good afternoon. Couple of questions, first. So regarding the delta between first to second quarter of $7 million, would you say that was through multiple customers or maybe one or two customers or just additional color on that please?

David Hubbard

Yeah. A large percentage of our top customers increased.

Dave Kang - B. Riley

Okay. So, regarding -- you said there were two 10% customers. Can you provide what percentages they were, maybe combined or separately. Separately would be better?

David Hubbard

Yeah. We don’t actually put it down that way in the disclosure.

Dave Kang - B. Riley

Okay. Fair enough. And then, how about this, you said connectivity did -- did better than expected, what was that in terms of percentage of revenue and what was it in the first quarter?

David Hubbard

Generally, the relative percentage of the connectivity increased a little bit more than the passes, where both got pretty good increases.

Dave Kang - B. Riley

Okay. Okay. And how sustainable is this current strength that you are seeing? I mean is this like -- is this a new plateau or just more color on that as far as the connectivity is concerned?

David Hubbard

Dave, we generally give the guidance at another quarter, right, and it isn’t only we have the guidance, we have saying that we have the…

Peter Chang

We have just guided…

David Hubbard

… (inaudible) going on, yeah.

Dave Kang - B. Riley

Right. Right. Okay. Just a couple of numbers please. Depreciation, amortization and CapEx, can I get those numbers?

Peter Chang

CapEx is about $1.3 million, so…

Dave Kang - B. Riley

Is that going to stay there or…

Peter Chang

What?

Dave Kang - B. Riley

Is that going to stay there or given the ramp up do you need to increase CapEx?

Peter Chang

We will increase, for sure…

Dave Kang - B. Riley

Okay. Okay.

Peter Chang

… because we do continue expanding...

Dave Kang - B. Riley

Two or like maybe two or…

Peter Chang

We probably could go to two, right?

Dave Kang - B. Riley

Okay.

Peter Chang

And depreciation is about $470,000, of course…

Dave Kang - B. Riley

$470…

Peter Chang

…it could go higher later on, right?

Dave Kang - B. Riley

Okay. Okay. And then speaking about CapEx, can you talk about capacity situation? I mean 12 to 19 is a big jump. I mean, can you talk about the capacity situation, are you still using? Is Foxconn still the primary CM or would you have another?

Peter Chang

Yeah. We never -- let me make clear, we’ll never use the CM.

Dave Kang - B. Riley

Okay.

Peter Chang

AFOP strength and AFOP success coming from our strategy vertically integrated manufacturing number one. Number two, Foxconn has nothing to do with AFOP’s business, okay?

Dave Kang - B. Riley

Okay.

Peter Chang

So answer your question on the capacity.

Dave Kang - B. Riley

Yeah.

Peter Chang

Of course, there is a big jump. We need to put the actual effort there. However, our capacity very (inaudible) is sufficient enough to support our, that can have business demand. In the meantime, we’re training and working on extension for AFOP’s next three to five years goal and so that we can capture the next optical industry growing cycle.

Dave Kang - B. Riley

Okay. And the last question is regarding the telecom comments that you saw a bit of an improvement in telecom. Just more color, I mean what region, what -- or what areas that kind of stuff?

David Hubbard

We saw particularly better in Europe with some activity there for our passive products, which is where we’ve got a good hold with our CWDM product line and even some increases in United States.

Dave Kang - B. Riley

Okay. And then would you consider then it related to a 100 gig activities or was more of a just general?

David Hubbard

Yeah. Passive products that could pretty much one we can improve which I want, so it’s not important to me, so we won’t comment.

Dave Kang - B. Riley

Got it. All right. Thank you.

Peter Chang

Great. Thanks.

Operator

(Operator Instructions) I’m showing no further questions. I would like to turn the call back over to Mr. Chang for closing remarks.

Peter Chang

Thank you, Operator. So, 2013 has been developing more strongly than a year ago so far, our effort have been generating many good opportunities with our customers, all of this makes us optimistic about continuous growth in the coming years. Our goal remains to generate higher profitability through revenue growth and operating margin improvements. We’ll continue staying on cost with our demonstrated operational excellence while carefully investing in the technology and the solutions that will best serve our growing customer base and expand our market share in the long-term. All this effort reflects our commitment to continuously improving AFOP’s value for our important shareholders. Thank you for your continued support and interest in our company, and we look forward to reporting to you again in October 2013. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again thank you for your participation. You may all disconnect. Have a good day.

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