Applied Optoelectronics (NASDAQ: AAOI) reported second-quarter results that beat revenue expectations but raised concerns over shareholder dilution and margin pressure. The stock initially fell 7.5% in after-hours trading before recovering to a 1.3% gain, closing the regular session down 3.7% at $124.22.
Revenue for the quarter reached $191.9 million, an 86% increase year-over-year, surpassing the Zacks consensus of $191.13 million. Adjusted earnings per share came in at $0.06, double the expected $0.03. However, the diluted share count used in the adjusted EPS calculation jumped 42% to 88.2 million, causing revenue per diluted share to grow at a slower 31% rate to $2.18.
The company's GAAP gross margin contracted by 260 basis points to 27.7%, and its GAAP operating loss widened to $24.7 million from $16.0 million a year earlier. Adjusted EBITDA remained negative at $0.5 million, though improved from a $3.4 million loss. A $14.3 million tax-related gain boosted non-GAAP net income to $5.5 million.
For the third quarter, management guided revenue in the range of $255 million to $290 million, with a midpoint of $272.5 million, 3% above consensus and representing a 42% sequential increase. However, the non-GAAP EPS guidance of $0.11 to $0.26 fell short of the $0.28 consensus, with the high end 7% below expectations. The company expects diluted shares to rise further to approximately 92.8 million, a 5.3% sequential increase.
Data center sales soared 140% to $107.7 million, accounting for 56% of total revenue, while CATV sales grew 44% to $80.6 million. CEO Thompson Lin stated that demand will "continue to outpace our production capacity through mid-2027." CFO Stefan Murry said monthly capacity has neared 200,000 units and expects about 650,000 units by year-end.
The company's balance sheet shows significant investment: inventory up 52% from December, property and equipment up 85%, and cash at $508.8 million, more than double the previous amount.
In the broader market, a Reuters report of a potential U.S. ban on new Chinese optical transceivers initially boosted AAOI and peers Coherent (COHR) and Lumentum (LITE) on Tuesday, but the gains partially reversed on Thursday. Analysts view the ban as low probability, but it remains a risk factor.
Analyst targets vary widely, from $57.50 to $220, with three Buys and two Holds among recent ratings. The stock has risen 37.9% over five sessions, and upcoming analyst revisions will test both bullish and bearish outlooks.
Key risks include customer concentration, supply constraints, pricing pressure, and potential margin erosion if product mix shifts. The company must demonstrate that capacity expansion translates into per-share operating leverage.
