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Applied Optoelectronics (AAOI) Q3 Earnings: What's in Store?

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Applied Optoelectronics, Inc. (AAOI - Free Report) is set to report third-quarter 2018 results on Nov 7.

The company’s earnings beat the Zack Consensus Estimate in three of the trailing four quarters, delivering an average positive surprise of 10.67%.

In second-quarter 2018, Applied Optoelectronics posted non-GAAP earnings of 64 cents per share, which beat the Zacks Consensus Estimate by 20 cents per share.

Revenues of $87.8 million beat the Zacks Consensus Estimate of $77 million. However, revenues decreased 25.2% from the year-ago quarter’s figure of $117.4 million.

The Zacks Consensus Estimate for third-quarter revenues is currently pegged at $56.77 million, while that for earnings stands at breakeven.

Let’s see how things are shaping up prior to the upcoming announcement.

Quality Issues & Production Constraints to Hurt TopLine

Ahead of third-quarter earnings release, Applied Optoelectronics drastically reduced its revenue guidance on the back of quality issues in 25G lasers. Notably, the company provided the new guidance in the range of $55 million to$58 million,down from the earlier guided figure of $82 million to $92 million.

The issue experienced with a specific customer environment resulted in temporary suspension of certain transceivers. We believe that the issue may also affect Applied Optoelectronics agreement with Facebook (FB - Free Report) , given their transceivers contract for calendar year 2018.

If Facebook chooses other peers over the ongoing quality issue, Applied Optoelectronics may lose market share due to the loss of a key customer. Notably, Facebook contributed about 29% to the company’s total revenues in fiscal 2017.

Moreover, due fewer customer requirements, the company had to incorporate additional testing procedures in the manufacturing process, which will lead to lower transceivers production in the soon-to-be reported quarter.

Applied Optoelectronics is also exposed to significant customer concentration risk. In fiscal 2017, Amazon (AMZN - Free Report) , Facebook and Microsoft (MSFT - Free Report) together contributed about 78% to total revenues.

Constrains in production coupled with quality issues may likely hurt the company’s competitive prowess.

Moreover, increased expenses along with the ongoing trade war between the Unites States and China is expected to hurt the company’s profitability in the near term.

Applied Optoelectronics, Inc. Price and EPS Surprise

Applied Optoelectronics, Inc. Price and EPS Surprise | Applied Optoelectronics, Inc. Quote

Demand for Datacenter Likely to Boost Investor Confidence

However, increased demand for its datacenter products continued to drive top-line growth in second-quarter 2018.

Management noted that, with strong growth for data traffic, datacenter operators are anticipated to expand their datacenters. This will eventually lead to increased datacenter product revenues for Applied Optoelectronics, thereby driving top-line. Notably, in the last reported quarter, datacenter revenues contributed about 79% to total revenues.

Additionally, the company secured seven design wins in the quarter including one 100G win from China. For the second half of the year management expects demand for 100G to more than double.

Applied Optoelectronics currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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