2-21-2018 - Excerpts from Applied Optoelectronics' (AAOI) Q4 2017 Earnings Call Transcript
Q&A Session:
Our next question comes from Simon Leopold of Raymond James. Please go ahead.
Simon Leopold
James Kisner
Okay, just. One more sneaking here, I mean, the CapEx spending you’re talking about is a pretty big step up. I’m just wondering – and the plan is not going to be done here until 2020. So should we think about 2018 as being kind of a peak year for CapEx, or what is – and I guess, also, what’s the sort of headwind to gross margin, I think around depreciation expense as we kind of move through the year. Could you help us a little bit on the CapEx plans? Thank you.
Stefan Murry
Yes. So this year we’ll – it’s the heaviest CapEx year that we’ve had as a company. I think it’s worth pointing out the last time that we had a major step up in CapEx just when we invested in production facilities here in Sugar Land. And I think, that’s worked out very well for us.
We were able to expand our capacity and take advantage of the increase in datacenter business, in particular, that we saw, as well as positioning ourselves well for the next couple of years. This new factory, as you mentioned, will come online in 2020. It’s designed to fuel our growth for the period beginning in 2020 and beyond.
As far as whether this is a peak year in CapEx, we’ve often said that we look at CapEx on a pretty short-term basis. I mean, obviously, this particular chunk of CapEx related to the building is a longer-term investment. But generally speaking, our annual CapEx budgets are decided based on what we see our near-term revenue prospects be.
So I can’t really give a sense for whether we think 2019 or 2020 will be higher or lower. But I can say that step ups or increases in CapEx generally are associated with a bright outlook for us in terms of future revenue. And this particular step-up in CapEx is no exception.
Could you just comment on the dynamics you’re seeing in competitive environment? We hear a lot of noise, it’s hard to decipher fact from fiction. Any commentary you can offer on how the competitive environment has evolved over the last several months? Thank you.
Stefan Murry
Sure. So in terms of competition, I mean, I don’t think we’ve seen any new entrants as far as competitors go. I think, the cast of competitors is similar to what we’ve seen. There have been some recent comments by some of our competitors that they are minimizing or changing their strategy with respect to, particularly to 100 gig.
That should result in less pricing pressure perhaps in 2018, compared to what we saw in 2017, which is what – which is consistent with what we said before that we see 2018 the rate of decline of pricing in 2018 being less than what we saw in 2017.
So, I think that’s sort of what we’re seeing. I think, the real wildcard for us as we mentioned before is, so you’ve seen this purchase commitment that we talked about today. And I mentioned earlier and in the 8-K that it is a minimum commitment. This is how we operate with some of our other customers as well in the sense that AOI typically gets a share oftentimes a leading share with our customers as sort of a minimum commitment.
But oftentimes, depending on what competitors can actually produce and ship in a given quarter, we may have opportunities to take additional share. And so, the interplay between what we can produce and what our customers can produce this year will ultimately determine the overall market share for the year.
Operator
Our next question comes from James Kisner of Loop Capital. Please go ahead.
James Kisner
Hi, thank you. So I think, you mentioned inventories choosing one customer having impact here, I think. Maybe you could talk about just sort of the quantify that to some degree, I mean, just $10 million, $30 million like what’s the overhang there? Sounds like you also kind of expected Q2, obviously, you’re not going to be growing.
But you actually say, its – the second-half is going to be bigger than the first-half, I don’t know if you’d help us to bandwidth here at all like I mean could this be a growth year on a full-year basis for you to just given a 100 gig is ramping and these issues are going to be temporary. Just any color and that would be hopeful. Thank you.
Stefan Murry
Sure. So as far as the inventory goes, I can’t really give you a lot of insight into that, because it’s the inventory that the customers have on hand. We’ve got a pretty good idea from them about what their forecast in terms of purchasing look like.
And as far as growth prospects for the year, I think, first of all, it’s very important to emphasize, but we remain very confident in our position as a leading supplier of datacenter optics to all of our major hyperscale data center customers. I think, as you’ve seen in the last few press releases that we put out, we have a very strong product roadmap, really leading technology in the industry in terms of laser and receiver technology for, not only 100 gig, but 400 gig and beyond.
So as we talk about growth prospects this year, it’s not only about our existing hyperscale customers, where we continue to have a very strong position, but also about our prospects for bringing on new customers. And we do have a number of recent design wins and a number of qualifications that are ongoing that we hope to bring in as new customer revenue later on in the year.
And so I think, what I would expect to see is continued strong business from our three hyperscale customers. And layering on top of that some new customers in the datacenter and perhaps other areas as well. And then it’s worth mentioning too, our Cable TV segment has been a very strong grower this year. And the prospects for growth in Cable TV remain excellent.
We have strong growth coming from upgrade projects in North America from several MSOs, as well as some international growth. And later on in the year, we expect our Remote-PHY products to begin to ship in volume. And that’s a product line that I think will contribute meaningfully to our revenue in the back-half of the year. I [expect] [ph]to grow all of those market segments this year.
James Kisner
Okay, just. One more sneaking here, I mean, the CapEx spending you’re talking about is a pretty big step up. I’m just wondering – and the plan is not going to be done here until 2020. So should we think about 2018 as being kind of a peak year for CapEx, or what is – and I guess, also, what’s the sort of headwind to gross margin, I think around depreciation expense as we kind of move through the year. Could you help us a little bit on the CapEx plans? Thank you.
Stefan Murry
Yes. So this year we’ll – it’s the heaviest CapEx year that we’ve had as a company. I think it’s worth pointing out the last time that we had a major step up in CapEx just when we invested in production facilities here in Sugar Land. And I think, that’s worked out very well for us.
We were able to expand our capacity and take advantage of the increase in datacenter business, in particular, that we saw, as well as positioning ourselves well for the next couple of years. This new factory, as you mentioned, will come online in 2020. It’s designed to fuel our growth for the period beginning in 2020 and beyond.
As far as whether this is a peak year in CapEx, we’ve often said that we look at CapEx on a pretty short-term basis. I mean, obviously, this particular chunk of CapEx related to the building is a longer-term investment. But generally speaking, our annual CapEx budgets are decided based on what we see our near-term revenue prospects be.
So I can’t really give a sense for whether we think 2019 or 2020 will be higher or lower. But I can say that step ups or increases in CapEx generally are associated with a bright outlook for us in terms of future revenue. And this particular step-up in CapEx is no exception.
Richard Shannon
Okay, fair enough. I’ll follow-up offline on that one. And Stefa,. maybe a discussion about the 10-year. We’ve talked a little bit about share and pricing out there. But what about the unit market growth? Can you give us a sense of what that market looks like growing this year, and I’m more interested in 100 gig really, if you can characterize or quantify that anyway, would be great, please?
Stefan Murry
I think for us the most important thing is, as we talked about earlier, our ability to attract new customers. I mean, at this point, we have a commanding share among the hyperscale customers, who represent a good portion of the market. But there’s certainly a large base of customers out there besides the hyperscale customers that we already have. And I think that’s where we’re really focusing our efforts, as we look to particularly to the second-half of 2018.
Of course, we’re going to continue to serve and serve well our existing hyperscale datacenter customers. But the opportunity is to expand our customer base is one that we’ve been working very, very diligently on really over the last year. We’ve talked about the number of design wins and things that we have and, in fact, those will start to generate revenue. And so when you look at the overall market size for us, I think, we’ve still got a long way to go before we have to worry about overall market growth kind of limiting the rate at which we can grow.
Our rate of growth is dependent on how well we can bring on new customers, as well as obviously, continuing to serve the existing customers that we have with our existing products and new products like our 400 gig standpoint.
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