Applied Optoelectronics (AAOI 24.66, -3.70, -13.05%) traded sharply lower today after lowering Q3 guidance by a significant amount this morning. AAOI is a provider of fiber-optic access network products primarily for three networking end-markets: data center, cable television (CATV) and fiber-to-the-home (FTTH). It makes a range of optical communications products from components, subassemblies and modules to complete turn-key equipment.
AAOI is primarily focused on the higher-performance segments within all three of its target markets. Its data center business is benefitting as Internet content providers spend heavily to upgrade and expand their data center infrastructure. The transition to 100G has been accelerating.
Its CATV business is being driven by the DOCSIS 3.1 upgrade cycle, which AAOI has described previously as a "large scale rollout...spanning several years." As the market share leader in cable TV and given its history in working with the top cable equipment manufacturers, AAOI expects this large scale rollout will be a nice tailwind for AAOI for several years.
Turning to the guidance, AAOI lowered Q3 revenue guidance to $55-58 mln from $82-92 mln. EPS guidance was not provided. That is a big guide down, so what happened? During the quarter, AAOI identified an issue with a small percentage of 25G lasers within a specific customer environment. Consistent with its commitment to product quality and customer support, AAOI mutually agreed with the customer to temporarily suspend shipments of certain transceivers using these lasers while AAOI worked to gain a deeper understanding of the scope of the issue and implement a solution.
AAOI has since determined that less than 1% of these lasers were subject to this issue. AAOI has enacted a solution and, with the agreement of the customer, resumed shipments. While this was a bit of a speed bump, AAOI believes that its customers appreciate AAOI's willingness to thoroughly resolve any issues, even at the expense of a delay in revenue. Outside of the temporary delay in shipments that impacted Q3 revenue, overall sales and shipments as well as the pricing environment were consistent with prior expectations.
In sum, the stock sold off pretty aggressively today on this news as investors are disappointed that AAOI had this product quality issue with a customer. The good news is that it sounds like the issue has been resolved and shipments are flowing again. Also, it was good to hear that the overall sales/pricing environment was not the issue. Looking ahead, investors hope this was just a bump in the road and not an issue that is going to reappear.
While this does seem to be an AAOI-specific issue, possible sympathy plays on the weak AAOI guidance include: LITE, OCLR, FNSR, ACIA, NPTN, IIVI, VIAV, IPHI, FN, COHR, INFN, ADTN, CIEN.