Alliance Fiber Optic Products's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 3.14 | About: Alliance Fiber (AFOP)

Alliance Fiber Optic Products, Inc. (NASDAQ:AFOP)

Q4 2013 Earnings Conference Call

February 3, 2014 4:30 PM ET

Executives

Peter Chang - President and CEO

David Hubbard - EVP of Sales and Marketing

Analysts

Dave Kang - B. Riley

Dmitry Netis – William Blair

Operator

Good afternoon, and welcome to the Alliance Fiber Optic Products, Incorporated Fourth Quarter and Fiscal Year 2013 Conference Call. Thank you for joining us on today’s conference call to discuss AFOP’s fourth quarter and fiscal year 2013 financial result. This call is also being webcast by accessing on the Investor Relations page at the top, at AFOP.com and a replay will be available on AFOP’s website 90 minutes after the live 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 actual 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, and the need for the 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 shifts 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 September 30, 2013.

These forward-looking statements speak only as of 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. 2013 has proven to be a very sudden year of growth for AFOP. We have seen a dramatic increase in the scale of our operations as we responded well to an increased customer demand and the new business opportunities.

I'm very pleased to report that in the last quarter we met our objectives and the revenue [currently] received our guidance range, despite a generality, highway and adverse weather conditions. With such a short ending AFOP delivered a record annual sales in 2013, 63% higher than the previous record sales in 2012.

More importantly, AFOP’s operating and financial performances achieved new milestones in gross margins, operating margins, operating profit, and net profit, all ended in record levels. In addition, our balance sheet continued to grow stronger, even with the increased annual dividend in December and higher CapEx.

This improvement and the greater performance in fact were on the strengths of our strategy, our executions over the long run, and our commitment to improving shareholder value in AFOP. I want to just thank our growing list of valued customers and our exceptional teams for their accomplishments, and thank our investors for their confidence in AFOP.

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

David Hubbard

Thank you, Peter. 2013 was a banner year for AFOP. In the fourth quarter, demand remained strong and we continued to ramp our new products. This resulted in year-over-year 80% quarterly revenue growth and only a modest sequential decline from our record Q3 2013 performance. While Q4 is generally seasonally soft in our industry, we found stronger than normal demand from our datacom customer base this quarter. Datacom sales came in flat sequentially while telecom related sales saw a modest decline based primarily on the normal sector seasonality.

We believe these results are consistent with or outpaced industry's results in general. Our annual business showed significant gains from 2012 and reflects the range of opportunities, the strength of our execution, as well as a healthier market environment in 2013 relative to 2012.

AFOP connectivity sales were up slightly sequentially, but significantly increased year-over-year, both annually and for the fourth quarter. Connectivity annual gains in this regard were derived principally from datacenter applications for 10G, 40G, and 100G Ethernet in particular. Datacenter applications require a new generation of cable plant with higher densities and lower losses to accommodate higher speed fiber optics.

AFOP continues targeting these areas successfully with our vertical connectivity technology with both new devices and value added products, which also leverage well with our AFOP passive product line. AFOP passive products were also up slightly sequentially and significantly increased year-over-year, both for the fourth quarter and annually. We saw solid annual gains as we continued a rapid production ramp of our newest AFOP NANOMUX component for datacom's 40 gig and 100 gig CFP transceiver integration, which offset some seasonality in the telecom access market.

While we are shipping [volume] production into current generation of NANOMUX to key customers, we have been working closely with existing and new customers on their smaller, higher density second generation design, which will be brought to market in 2014 and beyond. We believe there are significant long-term volume opportunities for AFOP with this advanced free space optics’ passive platform, and we continue to invest to gain additional design wins in this growing market.

AFOP is focused and enjoys significant business in both the datacom and telecom segments of the fiber optics industry with our strong connectivity and passive technology platform. In Q4, datacom related sales accounted for nearly 70% and telecom nearly 30% of revenues. AFOP sales to datacom customers benefitted from robust demands as mentioned. We were also pleased with additional design wins and production customers for our exact tap line of passive optical taps , the datacenter, and general enterprise applications.

There is an increasing trend from network optical tapping to ensure link performance optimization and improved network security response time. We’re well positioned to capitalize on these emerging applications. Overall, AFOP’s sales to telecom customers were up slightly this quarter due to seasonality in access network deployment.

As reported previously, we are seeing interest in next generation fiber-to-home NGPON development and believe that next generation systems will incorporate multiwavelength components appropriate for multiflexing solutions based on (inaudible) filters and consistent with core AFOP technology. We are also excited with the emergence of CWM requirements in the cellular market and have gained a new major customer here. We had two 10% customers in the fourth quarter.

Geographically, sales were up sequentially in Asia and Europe and declined slightly in the U.S. For 2013, sales were up significantly in all geographies and in both datacom and telecom markets.

Strong bandwidth demand continues to drive the need for further network investment in both telecom and datacom communication markets, and from the core to the edge of the network. We’re encouraged by the opportunities for the application of our passive technologies in the growing datacenter market and likewise by new design requirements for our connectivity solutions in the next generation telecom application. We continue to invest and drive customer engagement leveraging our complementary strength in both optical passive and fiber connectivity technologies. We believe these synergies will offer many opportunities for AFOP product innovations and significant new business prospects in 2014 and beyond.

Now let me turn the call back to Peter. Peter?

Peter Chang

Total revenue for Q4 2013 (inaudible) $21.8 million, an increase of 79% compared with the year-ago quarter, but 5.5% lower from previous quarter. On an annual basis, the strong sales in the last three quarters resulted in record annual 2013 revenues of $76 million, an increase of 63% from 2012 and again to the effort of our exceptional teams meeting customers’ requirements during the quarter and finishing the year so strong.

With continuous operational excellence, favorable product mix and the high revenue level, gross margin in Q4 2013 improved to a record level of 39.3% compared with 34.8% and 38.4% in the year-ago quarter and the last quarter respectively. On an annual basis, gross margin for the year improved significantly as well to a record of 38.3% as compared to 34.3% for 2012, and overall CapEx increased significantly from $1.5 million in 2012 to over $7.8 million in 2013. Our annual operating expenses have increased much less than our annual sales increase. With better gross margin and a well-managed operating expenses level, we generated operating profit of $5.2 million in Q4, which is 215% higher than $1.7 million reported in the year-ago quarter and is just slightly lower than $5.7 million in the previous quarter. On an annual basis, we generated new record operating profit of $17.1 million in 2013, which is three times the record operating profit of $5.7 million reported in 2012.

Our net profit in Q4 accounted about $4.7 million or $0.26 earnings per share compared with $5.6 million or $0.35 earnings per share in the previous quarter. This compared to net profit of $5.6 million or $0.31 earnings per share in the year-ago quarter. As reported in last year, improvement in the net profit for the fourth quarter of 2012 was a one-time tax benefit of $3.7 million. Excluding this benefit, earnings for Q4 2012 year-ago quarter coming at $1.9 million or $0.11 per share.

Annual AFOP net profit was $16.5 million or $0.93 per share for 2013, a new record and was 80% greater than the 2012 previous record of $5.9 million or $0.34 per share which excluded the one-time tax benefit of $3.7 million. On a GAAP basis, this is the 34th consecutive quarter and seven years in a row AFOP has delivered a profitable (inaudible).

On EBITDA non-GAAP basis, net profit in Q4 was about $6.6 million or $0.36 earnings per share which brought a profit margin at 30% level. This compared to $2.4 million or $0.14 earnings per share in the year ago quarter and profit of $6.8 million or $0.38 earnings per share in the previous quarter.

For the whole year of 2013, total annual net profit was $21.2 million on EBITDA non-GAAP basis which is much higher than the total annual net profit from year 2011 and the year 2010 combined which was $6.1 million and $8.4 million respectively.

Turning to the balance sheet, our balance sheet becomes stronger with continuously great quarterly and year performance. Our net cash, cash equivalent and the long term investments increased by more than $1 million and ending with $57.1 million which is after the increased annual dividend in last December and much higher CapEx deposit earlier which is $3.10 million in last quarter and $7.8 million for the whole year in 2013.

Account receivable for AFOP was a healthy 50 days in Q4 similar to 47 days for Q3. Inventory for Q4 was increased from last quarter to $10.8 million to serve the customers where the battery time end with the support of a continuously growing demand our AFOP products. The inventory turn for Q4 were 4.9 lower than 5.5 in Q3.

Now regarding for guidance, I am glad to report that even with the fourth quarter's Chinese New Year impact we expect revenue to increase sequentially and will be above $22.5 million to [indiscernible] almost double a year ago in quarter year sales. Despite annual [indiscernible] negotiation with niche revenue levels and a favourable product mix, we expect gross margin and the profit margin will remain in a similar level or better but [indiscernible] demand continue increasing and the next growth factor of the Fiber Optic industry is emerging and they’re always encouraging further company call made some other optical communication companies. We are excited with the business prospects in this year and the coming years.

We are optimistic of the possibility of delivering another record annual sales and the annual operating profit from the 2013 record levels. These expectations are based on the assumptions of a continuous economy recovery, continuously from our key customers, optical networking spending up at the current level, favorable product mix, stable pricing and a continuation of efficiency improvements in our operations.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Dave Kang with B. Riley. Your line is open.

Dave Kang - B. Riley

Thank you. Good afternoon. First question is regarding the tax rate, so it was a little bit higher than expected for fourth quarter. What should our expectation be for this year?

Peter Chang

I think first half of this year probably in the single range. Second half of this year will probably go higher because our (inaudible) revenues are up, but that (inaudible) as soon as we make more money and we come to build the tax revenue.

Dave Kang - B. Riley

Sure, so like 13% to 14% something like that?

Peter Chang

[Multiple speakers].

Dave Kang - B. Riley

Okay. All right and then I’ll try but regarding your tough customer, you said there were two 10% customers, really interested in your top customer, what was the percentage of sales and what's baked into your first quarter guidance?

David Hubbard

Well, the sales were about the same levels as the previous quarter Dave .

Dave Kang - B. Riley

So that was -- you’re talking in terms of dollars, right?

David Hubbard

Yes.

Dave Kang - B. Riley

Okay what's baked into your guidance for first quarter?

David Hubbard

Yes, we don't really go into customer specific forecasting, but clearly you know they’re a contributor.

Dave Kang - B. Riley

Can you just provide a little bit more, just because it is a pretty significant customer, can you provide any color, what your expectations are for this year? Have they peaked in the September quarter or do you expect them to be even higher this year, just any comments?

David Hubbard

Well, I’ll just say we’re very happy to have good strong key customers, not just our top customer, but all of our top customers who have been with us for a while, and we’re proud that we're able to satisfy their demand. I don’t have a specific outlook for them or other top customers [indiscernible]. I think that it’s generally part of a rolling trend in the datacenter market as we commented on that we see good opportunities.

Dave Kang - B. Riley

Okay and then just couple of numbers, Peter, depreciation and amortization, what that was and then what is your CapEx budget for this year?

Peter Chang

We'll probably reach at a similar level of CapEx for this year, because if you see growth opportunities beyond 2014, okay.

Dave Kang - B. Riley

And then depreciation, what was that?

Peter Chang

Depreciation for last quarter is about $660,000.

Operator

Our next question comes from the line of Dmitry Netis with William Blair. Your line is open.

Dmitry Netis – William Blair

Thank you. Hello gentlemen. Couple of questions again on the customers, I think last quarter you guys had three top 10 or three 10% plus customers, this quarter there is two. Can you give us some color on that last customer that dropped off? Was is it a datacom, telecom, and any color you can provide whether that customer might potentially snap back in the future would be helpful?

David Hubbard

Yes, we had one customer that crossed that line from 10%, but they are a good steady customer who had been with us for at least five years and I think it just reflected on the seasonality effect.

Dmitry Netis – William Blair

Was that a telecom or datacom side?

David Hubbard

I think it’s classified in our telecom.

Dmitry Netis – William Blair

Telecom, okay. Yes, telecom was a bit weak this quarter, certainly it sounds from your comments that and maybe you can reiterate what you said is its sounds like you saw declines in telecom, clearly U.S. was down slightly, all the other regions were up quarter-over-quarter and then datacom I think you said was flat with expectations. So maybe give us a little bit of a color there on the telecom side, what exactly you’d seen, is it specific to certain projects or the pause that you're experiencing, is it just a pause, or is it something else to it?

David Hubbard

Yes, so the reason why we,ve characterized their seasonality principally is that our participation in the telecom market is towards, I mean it’s across the market, but it’s more heavily weighted towards the access side of the market. The access side of the market tends to suffer more seasonal effects because of weather and deployments in cold weather in United States in particular, this time of year. So I think that got caught up in some of the effects. We don’t sell as much to end users as much as to OEM customers so that we’re one step removed from all the specific causes; you know deployments and things like that. So we’re just kind of passive through the general message but I think there was overall seasonal effects this quarter reported from other customers as well.

Dmitry Netis – William Blair

Okay, great and then on the datacom side is that you know continuing just fine, you’re not experiencing any seasonality there?

David Hubbard

Well I think that we countered some seasonality in certain areas with certain customers with better opportunities with some new products, how we kind of characterize it for the offset. I think there is general seasonality in the fourth quarter in the market from our past experience, but we seem to beat it back and get to about a flat performance in datacom.

Dmitry Netis – William Blair

Okay, great and then on the telecom side, given the guidance and you’re guiding for the sequential revenue increase there. Are you basically assuming that telecom comes back in Q1, is that a fair assumption and just sort of comment on that and comment what you’re expecting there on the datacom side as well, if that’s possible?

David Hubbard

Yes, I think we see telecom generally emerging stronger towards the end of Q1 well into the summer months, that’s the gold season and so that does factor into our plans for the year and the comments Peter made about during the year, and there’s you know new product introductions that are going to contribute to our story as well as a fairly robust market environment except for today on Wall Street wasn’t too good, but otherwise it’s been pretty good month so far.

Dmitry Netis – William Blair

All right, cool. I appreciate that comment. Maybe just the last one, I wanted to touch on pricing. You know given that we’re heading into this Q1 period where price negotiations typically happen, sounds like you guys are still guiding for margins to be similar or better this quarter but if you could comment generally what you’re seeing out there in terms of pricing environment, is it less severe, more severe than last year? If you could provide some commentary it would be really helpful.

Peter Cheng

I think we did try the negotiation as our peer is doing, always in the end of the year, okay? And what I reported in the investor conference always saying we do prepare your lunch, so we had some [indiscernible] items, and some item we don’t even do any kind of [indiscernible] which end up maybe already commodity right. So we don’t get a big share there, so now we have a new product opportunity, that’s how you blend them together. We call it a favorable product mix and that’s AFOP strategy and we’ll be continuing doing that well, okay.

Dmitry Netis – William Blair

Okay and then with your major customers, are you seeing any more or less of a pressure there?

Peter Cheng

We’ll continue to provide pricing reduction to all our three customers and we [indiscernible] and we know it’s very important to support our customers with a competitive pricing so that our customers can [indiscernible] or can make more profit and we’ve been doing that for years and we’ve been doing good on those things too.

Dmitry Netis – William Blair

Okay, thank you Peter. I appreciate and Dave thank you for your comments. I’ll jump back in queue.

Operator

At this time there are no further questions. Mr. Cheng would you like to make any closing remarks?

Peter Cheng

Thank you. 2013 concluded significantly stronger than a year ago for AFOP. Our effort has been generating many good opportunities with our customers and our products. All these make us optimistic about the continued growth in 2014 and the coming years. Our goal remains to generate higher profitability through business expansion as our revenue grows. We may continue staying our report with our demonstrated operational excellence by investing carefully in technology and solutions that will best serve our growing customer base and will expand our market share in the long term. All these effort reflects where our commitment to continuously improving AFOP value for our important shareholders.

Thank you for your continued support and interest in our company and we look forward to reporting you again in April 2014. Thanks.

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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