10-18-2017, 01:21 AM
Here is another useful assessment from jy263 at the end of an SA article:
I'm trying to understand reconcile the statements AAOI made in August with what they said this week in an attempt to understand potential Q4 guidance. Maybe I'm missing something, but I can't quite understand how all the facts fit together. In August, the stated problem was that AMZN switched over from 40G to 100G sooner than expected. That forced AAOI to retool their production lines from 40G to 100G in order to meet that new demand. That was expected to take 6 weeks. AAOI said they didn't know about this problem until after pre-release (mid-July). So if they started retooling in mid-July, it should have been complete by end of August. In any case, AAOI's low Q3 guidance only $107M to $115M) seemed to account for that.
This week, AAOI said that on-going transition resulted in AMZN-related revenue to be just 10% of total quarterly revenue. (Note: I'm understanding the CFO's use of "transition" to refer to AMZN's 40G to 100G transition.) Given that Q3 revenue was approximately $89M, the breakdown of AMZN/non-AMZN revenue was $9M/$80M. Revenue from AMZN was probably all from 100G parts. All AMZN revenue was probably in September only (after they finished retooling their some production lines to 100G). They also said that AMZN was a 47% customer in Q2 ($117.4*47%=$55.2M). Therefore, based on the above, it appears that AAOI was expecting AMZN revenue to be at least $27M ($107M - $80M). (Obviously, if non-AMZN guidance was lower than $80M, e.g., $70M, then the expected AMZN revenue would have been more than $27M, e.g., $37M. Likewise, if actual revenue exceeded its guidance, e.g., $120M, then AMZN guidance would probably have been higher than $27M.) (If AAOI was expecting AMZN revenue to be lower than $27M, then non-AMZN revenue--while it grew--did not grow nearly as much as forecast.)
So what I am trying to reconcile is why AMZN revenue was only $9M, which was way below the the $27M, which already accounted for the transition (and was previously $55M). I didn't hear anything on the call that accounted for this. But I feel like understanding the discrepancy between $9M actual and $27M expected is the key for Q4 guidance. Some possibilities:
(1) Unexpectedly lower demand possibility #1: AAOI management overestimated how much AMZN wanted to buy / AMZN has paused or decreased buying while doing their 40G to 100G transition (as it ultimately doesn't know how much it will need overall, and from AAOI-specifically). The CFO's statements that the problem was not specific to AAOI and that it's due to an on-going transition support this possibility. Juniper's soft guidance also could support this possibility. If this continues into Q4, revenue will grow only as fast as non-AMZN grows. But if AMZN comes back fully in Q4, it could be a $150M quarter.
(2) Unexpectedly lower demand possibility #2: AMZN decided mid-Q3 to buy less than $27M from AAOI and instead more from competitors (FN, INTC, etc.). The CFO's not-specific-to-AAOI does not completely contradict this possibility as AMZN may still be buying from AAOI, but not just not nearly as much. So rather than $55M in revenue per full quarter that AAOI might get, AAOI may only get, e.g., $20M. But the CFO's on-going-transition statement appears to undermine this possibility. If this continues into Q4, revenue will grow only as fast as non-AMZN grows.
(3) Unexpectedly lower supply possibility: AMZN wanted to buy more, but AAOI didn't have enough 100G parts to sell them because retooling took longer than expected. The CFO's not-specific-to-AAOI and on-going-transition statements appear to undermine this possibility. If this continues into Q4, revenue will grow only as fast as AAOI can make parts.
(4) Timing/low inventory possibility: AMZN delayed deciding when to buy AAOI parts until very late in the quarter. At that time, AAOI only had enough time left in the quarter/inventory available to sell $9M to AMZN. The CFO's not-specific-AAOI and on-going-transition statements may support this possibility. Juniper's soft guidance also may support this possibility. If this continues into Q4, revenue will grow only as fast as AAOI can make parts.
(5) Some combination of the above possibilities There could be other possibilities that I haven't thought of. But the discrepancy between $9M and $27M really concerns me. Some random thoughts:
(1) P/E still attractive
(2) I didn't hear on the call that AAOI was selling everything they are making. CEO/CFO were not asked, but they also didn't volunteer. I will be listening for this point in upcoming earnings conference call.
(3) That said, AAOI seems to be heavily investing in new manufacturing capability. So they seem to believe their future revenues are significantly limited by existing manufacturing capability.
(4) While it may be difficult to make accurate forecasts when AAOI has a VOI arrangement for AMZN, management either has a poor grasp on expected AMZN-related business, AMZN is being particularly opaque with AAOI, or perhaps both.
(5) Non-AMZN revenue is up significantly (on a percentage basis) QoQ over the last couple quarters. It will be interesting to see what kind of on-going non-AMZN demand there is.