Applied Optoelectronics Inc (NASDAQ:AAOI) announced financial results for its second quarter ended June 30, 2017.

“AOI achieved another record performance driven by strong demand for our market-leading datacenter products and continued improvement in our manufacturing costs and capacity expansion,” said Dr. Thompson Lin, Applied Optoelectronics, Inc. founder, president and CEO. “Our record gross margin and earnings demonstrate the strength of our business model and deep manufacturing know-how. We believe our ability to leverage our vertical integration and proprietary manufacturing processes to drive greater efficiencies and shorten our production cycle times sets AOI apart from others in the industry.”

Lin continued, “We are pleased with our team’s continued solid execution in the quarter, which marked our ninth consecutive quarter of generating record datacenter revenue. However, as we look into the third quarter, we see softer than expected demand for our 40G solutions with one of our large customers that will offset the sequential growth and increased demand we expect in 100G. We believe AOI has a leading position in the advanced optics market and we continue to expand within our existing customer base as well as engage with new customers for 100G technologies and beyond.”

Second Quarter 2017 Financial Summary

  • Total revenue increased to $117.4 million, up 112% compared with $55.3 million in the second quarter 2016 and up 22% compared with $96.2 million in the first quarter of 2017.
  • GAAP gross margin increased to 45.4%, up from 31.3% in the second quarter 2016 and 43.1% in the first quarter of 2017. Non-GAAP gross margin increased to 45.5%, up from 31.4% in the second quarter 2016 and 43.2% in the first quarter of 2017.
  • GAAP net income increased to $29.1 million, or $1.43 per diluted share, compared with net income of $0.6 million, or $0.03 per diluted share in the second quarter 2016, and net income of $19.8 million, or $1.00 per diluted share in the first quarter of 2017. The effective GAAP income tax rate for the quarter was 15%.
  • Non-GAAP net income increased to $31.3 million, or $1.54 per diluted share, compared with non-GAAP net income of $2.8 million, or $0.16 per diluted share in the second quarter 2016, and non-GAAP net income of $21.8 million, or $1.10 per diluted share in the first quarter of 2017.

A reconciliation between all GAAP and non-GAAP information referenced above is contained in the tables below. Please also refer to “Non-GAAP Financial Measures” below for a description of these non-GAAP financial measures.

Third Quarter 2017 Business Outlook

For the third quarter of 2017, the company currently expects:

  • Revenue in the range of $107 million to $115 million.
  • Non-GAAP gross margin in the range of 43.0% to 44.5%.
  • Non-GAAP net income in the range of $26.6 million to $29.4 million, and non-GAAP fully diluted earnings per share in the range of $1.30 to $1.43 using approximately 20.5 million shares.

In the wake of the earnings announcement, shares of Applied Optoelectronics are falling nearly 30% to $68.15. AAOI has a 1-year high of $103.41 and a 1-year low of $12.28. The stock’s 50-day moving average is $75.77 and its 200-day moving average is $56.19.

On the ratings front, AAOI has been the subject of a number of recent research reports. In a report released yesterday, Cowen analyst Paul Silverstein reiterated a Buy rating on AAOI. Separately, on July 24, Needham’s Alex Henderson reiterated a Buy rating on the stock and has a price target of $115.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Paul Silverstein and Alex Henderson have a yearly average return of 44.9% and 13.8% respectively. Silverstein has a success rate of 65% and is ranked #37 out of 4625 analysts, while Henderson has a success rate of 54% and is ranked #240.

Overall, one research analyst has rated the stock with a Sell rating, one research analyst has assigned a Hold rating and 7 research analysts have given a Buy rating to the stock. When considering if perhaps the stock is under or overvalued, the average price target is $85 which is -11.0% under where the stock opened today.

Applied Optoelectronics, Inc. designs, develops and manufactures optical devices, packaged optical components, optical subsystems, laser transmitters, and fiber optic transceivers. It manufactures optical devices, including laser diodes, photodiodes, related modules and circuitry and equipment for applications in fiber-to-the-home, cable television, point to point communications and wireless. The company provides its products for three networking end-markets: internet data center, cable television and fiber-to-the-home.