Applied Optoelectronics: Upgrading Rating to Hold Despite Weak Q2 Earnings

Applied Optoelectronics reported a weak Q2 but has a strong medium-term outlook. The company's revenue fell 24% YoY to $73.3mln, missing estimates. However, AOI has a strong backlog and a robust product portfolio, leading to a rating upgrade to Hold from Sell. The medium-term outlook remains positive, driven by growing demand for high-speed data transmission and 5G adoption.

Applied Optoelectronics (AAOI) reported its fiscal Q2 2025 results, showcasing a mixed performance with significant revenue growth in both the data center and CATV segments. However, the company's non-GAAP loss per share fell below guidance due to higher-than-expected operating expenses.

Revenue for Q2 2025 was $103 million, doubling year-over-year (YoY) and up 3% sequentially. Data center revenue rose by 30% YoY to $44.8 million, while CATV revenue surged eightfold YoY to $56 million. Despite these impressive top-line figures, the company's non-GAAP loss per share of $0.16 fell below the non-GAAP guidance range of $0.09 to $0.03, primarily due to higher-than-expected operating expenses.

Thompson Lin, the founder, chairman, and CEO of Applied Optoelectronics, highlighted the strong fundamentals of the business, noting that while the earnings per share (EPS) fell short of expectations, the company's top-line performance was robust. The company's data center segment saw a 25% YoY increase in 100G revenue and a 43% YoY increase in 400G revenue, driven by demand for higher-speed optical products. The CATV segment's revenue growth was particularly noteworthy, with a more than eightfold YoY increase, although it declined by 13% sequentially compared to Q1.

Stefan Murry, the Chief Financial Officer, attributed the elevated operating expenses to increased spending on research and development (R&D) and selling, general, and administrative (SG&A) expenses. These expenses were driven by new product development and customer initiatives. The strengthening Taiwan dollar accounted for less than 10% of the non-GAAP operating expense increase.

Looking ahead, Applied Optoelectronics expects Q3 revenue to range between $115 million and $127 million, with a stable non-GAAP gross margin forecast of 29.5% to 31%. The company anticipates a non-GAAP net loss of $5.9 million to $2 million for Q3, with a non-GAAP loss per share of $0.10 to $0.03 on 62.3 million weighted shares.

The company's capital expenditures (CapEx) for the full year are expected to range between $120 million and $150 million, with a focus on 400G, 800G, and 1.6T data center products. Applied Optoelectronics has also secured customer qualification for its 800G products and is on track to begin US-based production in the late summer of 2025.

In summary, Applied Optoelectronics delivered a strong Q2 performance with significant revenue growth in both the data center and CATV segments. However, the company's non-GAAP loss per share fell below guidance due to higher-than-expected operating expenses. The company's outlook for Q3 remains positive, with a stable gross margin forecast and a projected revenue range of $115 million to $127 million.

References:
[1] https://www.ainvest.com/news/applied-optoelectronics-q2-earnings-call-highlights-mixed-sentiment-strong-revenue-growth-increased-expenses-2508/
[2] https://finance.yahoo.com/news/outlook-therapeutics-reports-financial-results-120500610.html