Applied Optoelectronics Stock

Applied Optoelectronics, Inc. is a leading, vertically integrated provider of fiber-optic networking products, primarily for four networking end-markets: cable television, (CATV), internet data center, telecommunications (telecom), and fiber-to-the-home (FTTH). The company designs and manufactures a range of optical communications products at varying levels of integration, from components, subassemblies and modules to complete turn-key equipment.

In designing products for its customers, the company begins with the fundamental building blocks of lasers and laser components. From these foundational products, the company designs and manufactures a wide range of products to meet its customers’ needs and specifications, and such products differ from each other by their end market, intended use and level of integration. The company primarily focuses on the higher-performance segments within all four of its target markets, which increasingly demand faster connectivity and innovation.

The four end markets the company targets are all driven by significant bandwidth demand fueled by the growth of network-connected devices, video traffic, cloud computing and online social networking.

The CATV market is the company’s largest and the most established market, for which it supplies a broad array of products, including lasers, transmitters and transceivers, and turn-key equipment. Sales of headend, node and distribution equipment have contributed significantly to the company’s revenue in recent years as a result of its ability to meet the needs of CATV equipment vendors who have continued to outsource both the design and manufacturing of this equipment.

The internet data center market is the company’s second largest market. The company’s customers in this market are generally large internet-based (Web 2.0) data center operators, to whom it supplies optical transceivers that plug into switches and servers within the data center and allow these network devices to send and receive data over fiber-optic cables.

In the telecom market the company supplies lasers and laser subassemblies, as well as transceivers. The company’s customers in this segment consist mostly of network equipment manufacturers (NEMs) and other manufacturers of optical transceivers. The company’s NEM customers manufacture equipment used in telecommunications networks and its transceiver manufacturer customers use its lasers and subassemblies in the manufacture of their optical transceivers. Most of its products in this segment are purchased for use in advanced 5G mobile network deployments.

The company’s vertically integrated manufacturing model provides it several advantages, including rapid product development, fast response times to customer requests and greater control over product quality and manufacturing costs. The company designs, manufactures and integrates its own analog and digital lasers using proprietary Molecular Beam Epitaxy, or MBE, and Metal Organic Chemical Vapor Deposition (MOCVD) fabrication process, which is unique in its industry. The company manufactures the majority of the laser chips and optical components that are used in its products. The lasers the company manufactures are tested extensively to enable reliable operation over time and its devices are often highly tolerant of changes in temperature and humidity, making them well-suited to the CATV, FTTH and 5G markets where networking equipment is often installed outdoors.

In 2022, the company’s key customers in the CATV market included ATX Networks Corp., Cisco Systems, Inc., and CommScope. In 2022, ATX accounted for 47.3% of the company’s revenue, Cisco accounted for 1.9% of its revenue, and CommScope accounted for 1.7% of its revenue. In 2022, the company’s key customers in the data center market included Microsoft Corp, a U.S. based large datacenter operator, and a U.S. based NEM. In 2022, Microsoft accounted for 18.4% of the company’s revenue, the U.S. based large datacenter operator accounted for 5.9% of its revenue, the U.S. based NEM accounted for 3.6% of its revenue, respectively.

Solutions

The company leverages its extensive expertise in high-speed optical, mixed-signal semiconductor and mechanical engineering, and MOCVD and its proprietary MBE laser fabrication process to deliver technologically advanced products to its customers.

The company designs and sells products at the level of integration desired by a customer, from components to turn-key equipment, providing its customers a dependable, cost-effective and simplified supply chain.

As a vertically integrated supplier, the company is able to monitor and maintain quality control throughout the production process, using its internally produced components, where possible, for its final products.

The company’s in-house expertise in both analog and digital optical engineering enables it to design comprehensive solutions that meet many of the different network architectures and protocols used by its customers.

Strategy

The company seeks to be the leading global provider of optical components, modules and equipment for each of its four target markets: CATV, internet data centers, telecom and FTTH. The key elements of the company’s strategy are to extend its leadership in CATV networking; continue to penetrate the internet data center market; continue to invest in its capabilities and infrastructure; selectively pursue other opportunities that leverage its existing expertise; and pursue complementary acquisition and strategic alliance opportunities.

Products

The company’s products include an array of optical communications solutions at varying levels of integration. The company begins from the fundamental building blocks of lasers and laser components. From these foundational products, the company designs and manufactures a wide range of products from optical modules to complete turn-key equipment. The company designs its products to target customers in its identified markets to meet their needs and specifications.

The company’s components often incorporate one or more of its optical laser chips inside a precision housing that provides mechanical protection, as well as standardized electrical contacts. More complex optical components may also include optical filters (for example, for use in WDM) or other optical elements by which optical signals are routed internally within the component. These more advanced components may also include coolers, heaters and sensors that allow the temperature of the laser chip to be measured and controlled. The company manufactures the majority of the laser chips and optical components that are used in its own products.

At the next level of integration, the company’s module or sub-assembly products typically contain one or more of its optical components and some additional control circuitry. Examples of modules include the company’s transceiver line primarily used in internet data center markets, telecom markets, and FTTH markets.

At the highest level of integration and complexity, the company’s equipment products typically contain one or more optical components, modules and additional electronic control circuitry required to enable these subsystems to operate independently. For example, the company’s CATV transmitter equipment requires utilization of its optical components and assembly onto a circuit board and to an external housing. Examples of equipment include the company’s CATV transmitter and CATV nodes.

Patents

As of December 31, 2022, the company owned a total of 165 U.S. issued patents and 130 patents issued in China and Taiwan, plus a number of pending U.S. and foreign/international patent applications. The company’s issued U.S. and foreign patents will expire between 2023 and 2042.

The company’s portfolio of patents and patent applications covers several different technology families including laser structure and design; optical signal conditioning and laser control; laser fabrication; photodiode and optical receiver design and fabrication; optical device and module designs; optical device packaging equipment and techniques; and optical network enhancements.

Trademarks

The company has registered the trademarks APPLIED OPTOELECTRONICS, INC., AOI and its logo with the U.S. Patent and Trademark Office on the Principal Register.

Operations

The company sells its products to customers worldwide, and in addition to external customer sales many of its products are used internally in the production of transceivers and equipment that it manufactures. With a vertically integrated manufacturing process, the company produces many of its own laser chips and other parts required to manufacture its optical components. The company incorporates its own components into its transceivers, subsystems and equipment products wherever possible.

Customers

The company’s customers are primarily CATV, internet data center operators, telecom equipment manufacturers, and internet service providers. The company generally employs a direct sales model in North America and in the rest of the world it uses both direct and indirect sales channels. In 2022, the company obtained 99.6% of its revenue, through its direct sales efforts and the remainder of its revenue through its indirect sales channels. The company’s sales channel partners provide logistical services and day-to-day customer support. Where the comopany sells through an indirect sales channel, it works with the end customer to establish technological specifications for its products. The company’s equipment customers typically offer its equipment under their brand-name and its equipment is often customized with unique design or performance criteria by each of these customers.

In 2022, the company’s three large CATV original equipment manufacturers, or OEMs, consisted of ATX, Cisco and CommScope. The three customers who contributed most to the company’s data center revenue were Microsoft, a U.S. based large datacenter operator and a U.S. based NEM. In 2022, revenue from the CATV market, internet data center market, telecom market, FTTH market and other markets provided 53.0% of its revenue.

In its telecom market, the company manufactures and sells optical products which include transceivers designed to transmit signals used in 5th Generation (5G) mobile networks, and various products targeted at the metro-scale telecom networking market. The company has various other products designed for diverse applications, both inside and outside of communications technology, which generally are derivatives of products developed for its four target markets.

The company supports its sales efforts by attendance at industry trade shows (virtually and in person), technical conferences and other promotional efforts.

Seasonality

The company is uncertain whether the demand for its CATV, internet data center, telecom and FTTH products is seasonal, as its sales data does not indicate a significant trend with respect to these products. The company began to manufacture a meaningful quantity of CATV and internet data center products in its Ningbo, China factory in 2017 and 2020, respectively. The company’s gross margin varies quarter to quarter and varies primarily due to the product mix in a particular quarter (year ended December 31, 2022), as well as from the level of manufacturing efficiencies, production yields (particularly in the laser chip fabrication process) and overall supply costs.

Competition

The company’s major competitors in one or more of its markets include EMCORE Corporation, Finisar Corporation who was acquired by II-VI Incorporated, Foxconn Interconnect Technology Ltd., InnoLight Technology (Suzhou) Ltd., Intel Corporation, Lumentum Holdings, Inc., Mitsubishi, Molex, LLC, Source Photonics, Inc. and Sumitomo Electric Industries, Ltd.

Regulations

The company is subject to rules promulgated by the SEC pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding the use of conflict minerals.

History

Applied Optoelectronics, Inc. was founded in 1997. The company was incorporated in the state of Texas in 1997. The company was converted into a Delaware corporation in 2013.