Alliance Fiber Optic Products' (AFOP) CEO Peter Chang on Q2 2014 Results - Earnings Call Transcript

Jul.28.14 | About: Alliance Fiber (AFOP)

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

Q2 2014 Earnings Conference Call

July 28, 2014 4:30 PM ET

Executives

Peter Chang - CEO

David Hubbard - EVP, Sales and Marketing

Analysts

Alex Henderson - Needham & Company

Dave Kang - B. Riley & Company

Chris Longiaru - Sidoti & Company

Operator

Good afternoon, and welcome to the Alliance Fiber Optic Products Inc. Second Quarter 2014 Conference Call. Thank you for joining us on today’s conference call to discuss AFOP second quarter 2014 financial results. This call is also being webcast by accessing on the Investor Relations page at afop.com and a replay will be available at AFOP’s Web site 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 & 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, 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 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 quarters ended March 31, 2014.

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 at AFOP. Please go ahead.

Peter Chang

Thank you, operator and thank you for joining us today. And the midpoint of 2014 I am pleased with AFOP’s accomplishment to-date as we position AFOP for another record year. In the second quarter despite great momentum coming-off the stronger than expected Q1, we experienced a slowdown in orders from our number one customer in the last month of the second quarter. This resulted in a dragged shortfall of revenue from our earlier expectations and the guidance given in the previous conference call. Our understanding is that this slowing was temporary and we have seen a return to a more regular older pattern from the customer recently. With 27th year-over-year totaling earnings growth in Q2 and effective expense management, AFOP met our operating and the financial performance objectives.

In addition, our balance sheet continue to growth stronger as the year continues we are encouraged by an improving macroeconomic environment, increasing bandwidth demand across the communications market landscape and exciting customer engagements for AFOP product and technology. I want to thank our growing base of various customers our exceptional team for their execution and our investors for their confidence in AFOP.

And now, let me turn the call to David to review the progress 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 go ahead.

David Hubbard

Thank you, Peter. Coming off a strong Q1, we saw continued strength as Q2 rolled out. As Q2 progressed we saw robust orders with most top customers. However, our leading customer tapered their demand towards the end of the quarter. We do not believe that there was any share loss associated with this slowdown and order patterns as Peter mentioned has shown a recovery more recently. Our outlook with this customer remains bullish even with the lumpiness demonstrated with this business.

Consistent with that narrative AFOP connectivity sales in Q2 were down sequentially, but increased year-over-year. Connectivity sales were derived principally from sales into datacenter applications for 10G, 40G, and 100G Ethernet in particular. We continued making success through our OEM customers gaining additional OTT datacenter footprints both domestically and in Asia. Datacenter market CapEx growth continues with the transition to 10G server communications along with the architectural shift to more connectivity intensive fiber-rich high-speed spine-and-leaf type networks in new datacenters. AFOP is targeting these trends which provide significant opportunities for AFOP fiber connectivity solutions.

Our vertical connectivity technologies provide leverage with AFOP passive products as well. A recent example, OEM transceiver manufacturers are beginning to utilize AFOP receptacle designs integrated with AFOP NANOMUX CFP sub assemblies to form next-generation CFP2 and CFP4 transceiver optics with high performance and much smaller size than previous generations. This is just another example of connectivity passive product synergy enabled with AFOP core technology.

AFOP passive products were up sequentially and increased significantly as well from the year ago quarter. We saw continued momentum with CWM products in the telecom, metro access markets. Passive datacom products continued volume shipping current generation NANOMUX CFP transceiver multiplexers to key customers. There has been production starts with our customers for their smaller higher density second-generation transceiver CFP2 design. 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 on and enjoyed significant business in both the datacom and telecom segments of the fiber optics industry with our strong connectivity and passive technology platform. In Q2 2014, our telecom sales came in with good sequential and year-on-year improvement while datacom sales suffered a sequential decline, but year-on-year growth. Overall AFOP sales to telecom customers throughout this quarter due to ongoing strength in CWM products in metro access network deployments. A large percentage of the success is based with European deployments.

Our ratio of sales in datacom and telecom adjusted to approximately 60-40, in this quarter from 70-30 in the previous two quarters, as a result of the strength of telecom activity and the decline sequentially in datacom. We are optimistic that both telecom and datacom segments offer ongoing growth opportunities for our connectivity and passive product line. More importantly the combined integration of these core technologies allows AFOP to provide unique customer solutions for next-generation network requirement as I described.

We had three 10% or near 10% customers in the second quarter. Geographically, sales were up sequentially in Europe and Asia and declined in the U.S. Sales were up in all geographies on a year-over-year with similar growth rates posted in the U.S. and Asia and a stronger year-on-year growth rate in Europe based on the activity in metro mentioned. Increasing bandwidth demand continues to drive the need for further network investments in both telecom and datacom communication markets. Even with the migration challenges from existing platforms to new, more open software controlled networks, the demand for fiber-optic infrastructure to facilitate higher bandwidth connections is gaining momentum.

We continue to invest and engage customers leveraging our complementary spend in both optical passives and fiber connectivity technology. We believe these trends and our technology synergies will offer many opportunities for AFOP product innovations and significant new business prospects in the remainder of 2014 and beyond.

Now let me turn the call back to Peter.

Peter Chang

Total revenue for second quarter in 2014 came in at $24.2 million, an increase of 27% compared to a year-ago $19 million over a 3% decline from the previous quarter while the revenue of about $24 million quarterly level continuing the operational excellence and favorable product mix gross margin in Q2 improved to a record level of 40.1% compared with 39.8% the last quarter. The better gross margin and well managed operating expenses we generated operating profit of $6.6 million in Q2, which is 48% higher than $4.4 million recorded in the year ago quarter and slightly higher than $6.5 million in the previous quarter. Thanks again to the efforts by our exceptional team adjusting to customer’s requirements during the quarter.

Our net profit, excluding income tax effect adjustment, come in at about $5.9 million or $0.32 earnings per share, compared with net profit of $4.3 million or $0.34 earnings per share in year ago quarter. This is -- it's really a secondary quarter AFOP has delivered a profitable quarter nine. On EBITDA non-GAAP basis, net profit in Q2 grew about $7.8 million or $0.35 earnings per share, which represent a profit margin at 32%-33% level this compared to a $5.3 million or $0.27 earnings per share in the year ago quarter and a profit of $7.8 million or $0.35 earnings per share in the previous quarter. Please refer to the press release about reconciliation between GAAP and non-GAAP earnings.

Turning to the balance sheet. Our balance sheet became stronger with continuously improve the quarterly financial performance with CapEx of $2 million our net cash, cash equivalents, and the long-term investment, increased by $4.7 million and ended at about $67 million, which includes a $10.5 million five year pension and fee. In the first year of 2014, our net cash and cash equivalents increased by more than $9 million. Accounts receivable DSO was a healthy 54 days in Q2 inventory for Q2 was decreased from last quarter to $9.2 million. The inventory balance for Q2 improved to 6.3 much better than 5.7 in Q1. We expect inventory level to be in similar level or higher to serve the customers who has the better lead-time but support our potential growing demand.

Now let me talk about the forward guidance. Although, we are optimistic with the recent demand from our number one customers based on current backlog and the sum of build on euro, we expect the sales in the current quarter to be in a similar level as last quarter. We expect gross margin and effective tax rate will remain in the similar level. With quarterly sales about $23 million for three quarter in a row, we are optimistic of delivering record annual sales and annual operating profit in 2014 from our 2013 record level.

While telecom demand continued increasing the next growth cycle of fiber optic industry is emerging and we are excited with the finished prospects in the remaining 2014 and the coming years. This expectation of the assumption of continued economic recovery continue to finish our key customers optical networking spending up at the current year level favorable product mix, stable pricing and the continuation of the efficiency improvement in our operations.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Alex Henderson from Needham & Company. Please go ahead.

Alex Henderson - Needham & Company

Couple of quick questions first can you tell us what the percentage of revenues from your top customer was?

Peter Chang

Down to mid 30s from the low 40s in Q1.

Alex Henderson - Needham & Company

So on 35ish.

Peter Chang

Yes, in that area.

Alex Henderson - Needham & Company

And can you tell us whether you would expect that customer to be sequentially flat or given the pickup would you expect them to rebound from there?

Peter Chang

Yes. Our forward view is a little bit of an increase there but maybe not as high as Q1, so picking up and offsetting some of the European declining at this space.

Alex Henderson - Needham & Company

I see, and looking at the other portions of your business, the other datacom customers you’ve mentioned OTT players that you are selling through OEMs and to -- can you give us some sense of what’s the trajectory of that business was?

Peter Chang

You mean relative -- previously it was up sequentially. Is that the question asked?

Alex Henderson - Needham & Company

So, was up sequentially quarter-to-quarter?

Peter Chang

Yes.

Alex Henderson - Needham & Company

Okay, so would that help to offset some of the decline, I get it. Okay. Can you talk a little bit about what the pricing environment looks like? Any change in pricing conditions?

Peter Chang

Yes, generally it has been fairly stable. I mean we come off the -- beginning of the year it was in telecom negotiations, but generally in the last quarter it’s been relatively stable, in this environment.

Operator

Thank you. And our next question will come from David Kang from B. Riley. Please go ahead.

David Kang - B. Riley & Company

So first on numbers, what was the CapEx in the quarter and what was your budget for the year?

Peter Chang

CapEx in Q2 was $2 million and depreciation interest $700,000. So for Q3 we expect in the range of $1 million to $2 million and Q4 in the similar range.

David Kang - B. Riley & Company

Got it. So you talked about your top customer. What about your number two customer, I am assuming it is a Chinese customer, how did they do in the quarter and what’s baked into the third quarter guide?

Peter Chang

No, the number two customer was not Chinese.

David Kang - B. Riley & Company

Okay.

Peter Chang

We had strong growth in Europe for metro.

David Kang - B. Riley & Company

So the telecom growth was really a European customer, not necessarily Chinese customer?

Peter Chang

That’s right, yes.

David Kang - B. Riley & Company

Okay, are we seeing the Chinese customer picking up or can you just, talk about their activities?

Peter Chang

Yes, they were up sequentially as well.

David Kang - B. Riley & Company

So were they like a third 10% or near 10% customer?

Peter Chang

Yes they are in at the third of the top 3.

David Kang - B. Riley & Company

Got it, got it, okay. Actually I think that was it, thank you.

Operator

We have another question from Alex Henderson, please go ahead.

Alex Henderson - Needham & Company

One other question, can you tell us what your top 10 customer were as a percent?

Peter Chang

I don’t have the number right in front of me can get back to you on that.

Alex Henderson - Needham & Company

Yes, and what about employee headcount? Do you have a number for that?

Peter Chang

We are about 600 -- between 1600 and 1700. The last was for the Q1 ended with 1700. I believe we now have about a 100 people roll off by the end of Q2.

Alex Henderson - Needham & Company

I think the question that was just being trying to ask was that could you give us some sense of what you are seeing in the Chinese market in general? There has been a lot of discussion about China is a driver, that’s stronger than expected, or weaker than expected depending on who you are talking to and specifically what applications you see pulling your products there?

Peter Chang

As you know, we’re not a huge supplier of products into China, so we cannot say if more prospective that I think it could well characterizes our activity with datacom related products picked up and our activity with telecom I think was fairly neutral, fairly flat, not huge demands.

Alex Henderson - Needham & Company

Peter, one more question, I’ve gotten from a couple of clients, so I just wanted to put it on the floor. Some of my customers were asking me, if there has been a fair amount of insider selling there, if you could talk a little bit about the trends, and the reasoning for that occurring?

Peter Chang

I believe what we know in trending in last few months is right. So and you know it is verified, right. So I don’t know why they have these questions.

Operator

Thank you, and our next question comes from Chris Longiaru from Sidoti & Company, please go ahead.

Chris Longiaru - Sidoti & Company

So my question is to do -- well I have a couple of questions. First, just on the tax rate, tax rate seems a little higher this quarter, what should we be modeling going forward on tax rate?

Peter Chang

Actually if you take out so far BTA, okay before tax adjustment all it has played into long 11%-12%, 10 as in Q1. Okay. So as mentioned in the press release that was a total before tax adjustment. Okay.

Chris Longiaru - Sidoti & Company

So that should stay pretty flat going forward. And then just in terms of your visibility with all your customers but specifically your large customers. What does that look like, are they giving you forecast for the year for changing orders quarter-to-quarter. Could you comment on how that’s trending?

Peter Chang

Well, the information we get comes in various forms, whether we’re talking long-term or short. We do have a certain degree of visibility, which allows us to prepare the factory and they were put us on that. Trending wise, I think we’ve seen a good robust program this year. And as I said we’re kind of bullish on it. But I don’t want to characterize it up or down it all just generally postponed.

Chris Longiaru - Sidoti & Company

And just in terms of OpEx, should we expect the OpEx to trend at these levels or is there anything internally or other expenses that you expect to incur over the course of the year, could you give us a little guidance there?

Peter Chang

You mean our OpEx?

Chris Longiaru - Sidoti & Company

Yes, and over the course of the next couple of quarters. Is this kind of level we should the OpEx will be…?

Peter Cheng

Yes obviously I mean if you take out is on a non-GAAP basis, our R&D expenses as I said that in Q1 and our sales and G&A is only up slightly. So to answer your question it’s two and rather again I expect them into Q1 and Q2 level on a non-GAAP basis.

Chris Longiaru - Sidoti & Company

Okay, great. Thanks I’ll jump out.

Operator

And I am not showing any further questions. I’d like to turn the call back over to Mr. Cheng for any further remarks.

Peter Cheng

Thank you. So 2014 has developed the more stronger than a year ago and our effort has been generating many new good opportunities with our customers and our products. All these make us optimistic of continuous growth in the coming years. Although remains to generate higher profitability through business expansion and the revenue growth, but we will continue to stay on positive but our demonstrated operational excellence by investing carefully in the technology and the solutions that will best serve our growing customer base and will expand our market share in the long-term. All this effort reflects where 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 you again in October 2014.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program you may all disconnect. Everyone have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Alliance Fiber Optic Products (NASDAQ:AFOP): Q2 EPS of $0.32 beats by $0.01. Revenue of $24.19M (+27.0% Y/Y) misses by $1.02M. Shares -9.28% AH.