AAOI earnings call analysis

NASDAQ:AAOI Q4 2025 Earnings Call Transcript Generated on 6/8/2026 Conference Operator | Operator: Good afternoon. I will be your conference operator on today's call. At this time, I would like to welcome everyone to Applied Opto-Electronics' fourth quarter and full year 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question, you may press star, then one on your telephone keypad. And to withdraw a question, please press star, then two. Please also note that this call is being recorded today. I'll now turn the call over to Lindsay Savarese, Investor Relations for AOI. Ms. Savarese, you may begin. Lindsay Savarese | Investor Relations, Applied Optoelectronics: Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics. I'm pleased to welcome you to AOI's fourth quarter and full year 2025 Financial Results Conference Call. After the market closed today, AOI issued a press release. announcing its fourth quarter and full year 2025 financial results and provided its outlook for the first quarter of 2026. The release is also available on the company's website at ao-inc.com. This call is being recorded and webcast live. A link to the recording can be found on the investor relations section of the AOI website and will be archived for one year. Joining us on today's call is Dr. Thompson Lin, AOI's founder, chairman, and CEO. and Dr. Stephan Murray, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q4 results, and Stephan will provide financial details and the outlook for the first quarter of 2026. A question and answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AOI's Safe Harbor Statement. On today's call, management will make forward-looking statements. These forward-looking statements involve risks and uncertainties as well as assumptions and current expectations, which could cause the company's actual results, levels of activity, performance or achievements of the company or its industry to differ materially from those expressed or implied in such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as believes, forecasts, anticipates, estimates, suggests, intends, predicts, expects, plans, may, should, could, would, will, potential, or thinks, or by the negative of those terms or other similar expressions, that convey uncertainty of future events or outcomes. The company has based these forward-looking statements on its current expectations, assumptions, estimates and projections. While the company believes these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond the company's control. Forward-looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of its products into new markets and customer responses to its innovations, as well as statements regarding the company's outlook for the first quarter of 2026 and for the full year of 2026. Except as required by law, AOI assumes no obligation to update these forward-looking statements for any reason after the date of this earnings call. inform these statements to actual results or to changes in the company's expectations. More information about other risks that may impact the company's business are set forth in the risk factors section of AOI's reports on file with the SEC, including the company's annual report on Form 10-K and quarterly reports on Form 10-Q. Also, all financial results and other financial measures discussed today are on a non-GAAP basis unless specifically noted otherwise. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation between our GAAP and non-GAAP measures, as well as a discussion of why we present non-GAAP financial measures, are included in the company's earnings press release that is available on AOI's website. Before moving to the financial results, I'd like to note that AOI management is attending the Susquehanna Annual Technology Conference virtually tomorrow, as well as the Raymond James Annual Institutional Investors Conference on March 3rd. Additionally, management will host an investor session at OSC on Tuesday, March 17th in Los Angeles. This discussion will be webcast live, and a link to the webcast is available on the Investor Relations section of the AOI website. Lastly, I'd like to note that the date of AOI's first quarter 2026 earnings call is currently scheduled for May 7, 2026. Now, I would like to turn the call over to Dr. Thompson Lin, AOI's founder, chairman, and CEO. Thompson? Dr. Thompson Lin | Founder, Chairman & Chief Executive Officer, Applied Optoelectronics: Thank you, Lindsay. Thank you for joining our call today. We are pleased to deliver regular fourth quarter results that were in line with or better than our expectations and which came out the strongest year in our company's history. Our results were driven by robust demand in both our CATV and data center business. In 2025, total revenue increased 83% compared to 2024 to a record $456 million. Data center revenue of $196 million increased 32% compared to 2024. While our CATV revenue nearly tripled to $245 million in the same period, we entered 2026 with strong momentum, and due to the softball investment we have made, we have materially expanded our manufacturing capacity. We bear this position as well to meet increasing customer demand and we are lead to accelerating growth this year. During the quarter, we announced that we'd received our fourth Air Energy Valiant Order from one of our major hyperscale customers to support its AI data center growth. This was an important milestone in our next-generation data center roadmap and followed the successful qualification of our Air Energy products by the customer. It also reflects both the strengths of our product portfolio and the deepened relationship we have with this hyperscale customer. We continue to work with this customer to finalize the firmware used in this module to ensure interoperability across their network, which we believe will be completed in March. We have begun ramping up production of this 800G module in anticipation of a strong volume ramp starting in Q2. Focused demand for 800G modules are projected to exceed our production capacity through mid-2027, and we are working to add additional capacity to meet this demand. During the quarter, we saw particular strengths for our 400G products with this customer, which more than offset our 800G revenue. which came in below our expectation of $4 million to $8 million. Due to the ongoing firmware optimizations I mentioned above, looking ahead, we expect continued strength in our 400G business. Also, 800G is expected to dominate our revenue beginning in Q2. As a reminder, our Taiwan facility was already qualified for production of several 800G product types from this hyperscale customer during 2025. Our Texas facility was also qualified for production of some of our 800G products. During the quarter, we made an investment with qualifying additional products from our Texas facility with this customer and expect full qualification by mid-year. We expect that we move throughout the year to ship an increasing amount of AIG products from our Texas facility as we expand our capacity. In addition to this fourth major AIG customer, we have had indications from another existing hyperscale customer that they intend to begin to order AIG from us soon. Finally, a new Hyperscale customer has begun discussion about qualifying our 800G and 1.6T products just within the last few weeks. So we feel increasingly confident about our trajectory in 800G and 1.6T receiver with multiple customers. During the first quarter, we delivered revenue of $134.3 million which was in line with our guidance range of $125 million to $140 million. We recorded non-GAAP gross margin of 31.4%, which was above the high end of our guidance range of 29% to 31%, and our non-GAAP loss per share of $0.01 was narrower than our garden range of a loss of 13 cents to a loss of 4 cents. Total revenue for our data center product of $74.9 million increased 69% year-over-year and 70% sequentially. Sales of our 1G product increased 54% year-over-years and sales for our 4G product increased 141% year-over-years. Total revenue in Q4 in our CATV segment was $54 million, which was up 3% year-over-years and in line with our expectations was down 24% sequentially from a record Q3s. Similar to the last couple of quarters, we ship a significant quantity of 1.8 GHz amplifiers to our largest DATB customers in Q4, and demand from them continues to be robust. In addition to these customers, we continue to see momentum from a new set of MSO customers. With that, I will turn the call over to Stephen to review the details of our Q4 performance and outlook for Q1. Stephen. Dr. Stephan Murray | Chief Financial Officer & Chief Strategy Officer, Applied Optoelectronics: Thank you, Thompson. As Thompson mentioned, we are pleased to deliver record fourth quarter results that were in line with or better than our expectations and which capped off the strongest year in our company's history. Our performance was driven by robust demand in both our CATV and data center businesses. We enter 2026 with strong momentum, and due to the thoughtful investments we have made, we have materially expanded our manufacturing capacity. We believe this positions us well to meet increasing customer demand and will lead to accelerating growth this year. Throughout 2025, our focus remained on a few key priorities. One, scaling our next generation data center products, including both our 400G and 800G solutions. Two, expanding our production capacity in a disciplined manner to support anticipated demand, particularly in our Texas factory. Three, diversifying our revenue base. And four, strengthening operational execution to improve our margins and long-term profitability. I'm pleased to report that we made significant progress on each of these fronts and these will continue to be key priorities in 2026. Importantly, we saw and continue to see strong customer engagement around 800G and 1.6 terabit products, particularly as AI-driven data center investments accelerate. In 2025, total revenue increased 83% compared to 2024 to a record $456 million. Data Center revenue of $196 million increased 32% compared to 2024, while our CATV revenue nearly tripled to $245 million in the same period. Additionally, we expanded our gross margins and made progress on our path to profitability. Turning to the quarter, in Q4, we delivered revenue of $134.3 million. which was in line with our guidance range of $125 million to $140 million. We recorded non-GAAP gross margin of 31.4%, which was above our guidance range of 29% to 31%. Our non-GAAP loss per share of 1 cent was narrower than our guidance range of a loss of 13 cents to a loss of 4 cents. During the quarter, we announced that we received our first 800G volume order from one of our major hyperscale customers to support its AI data center growth. This was an important milestone in our next generation data center roadmap and follows the successful qualification of our 800G products by this customer. It also reflects both the strength of our product portfolio and the deepening relationship we have with this hyperscale customer. We continue to work with this customer to finalize the firmware used in these modules to ensure interoperability across their network, which we believe will be completed in March. We have begun ramping our production of these 800G modules in anticipation of a strong volume ramp starting in Q2. Forecast demand for 800G modules are projected to exceed our production capacity through mid-2027, and we are working to add additional capacity to meet this demand. During the quarter, we saw particular strength for our 400G products with this customer, which more than offset our 800G revenue, which came in below our expectations of $4 million to $8 million, due to the ongoing firmware optimization I mentioned above. We expect continued strength in our 400G business, although 800G is expected to dominate our revenue beginning in Q2. As a reminder, our Taiwan facility was already qualified for production of several 800G product types from this Hyperscale customer during 2025. Our Texas facility was also qualified for production of some of our 800G products. During the quarter, we made advancements with qualifying additional products from our Texas facility with this customer and expect full qualification by mid-year. We expect, as we move throughout the year, to ship an increasing amount of 800G products from our Texas facility as we expand our capacity. Given the strong demand, we have continued to invest in our manufacturing capacity to support current and future demand. During the fourth quarter, we made solid progress on the production capacity ramp we outlined last year at OFC. Over the past several years, we have purposely developed and scaled automation across key elements of our production process, from laser fabrication to transceiver assembly and testing. This automation not only improves yield, but it also supports rapid scale-up with greater flexibility in terms of geographic location of production and lower geographically indexed labor costs relative to many of our competitors who rely on traditional, more labor-intensive manual operations. As we continue to bring new automated lines into production, we expect this differentiation to increasingly translate into execution strength and significant revenue expansion. As we discussed at length at OFC last year, our focus remains on scaling manufacturing capacity for our next generation transceivers, particularly 800G and 1.6 terabit products. And we remain on track with the milestones we previously discussed. As we exited the year, we neared our target of 100,000 units per month of 800G capacity, with approximately 90,000 units per month of 800G capacity at year end. with roughly 31% of that production based in the U.S. We made tangible progress during the quarter through facility expansion and equipment installation, both of which are critical steps as we prepare for higher volume production. Our production capacity in the U.S. is currently in our existing footprint in Texas. During the fourth quarter, we announced that we signed an agreement to lease an additional building in Sugar Land. We began construction on this new facility earlier this month and are working hard to scale our production towards the middle to end of this year to achieve our 2026 targets. Looking further ahead, we expect that by the end of this year, we will be capable of producing over 500,000 pieces of 800G and 1.6 terabit products per month, with about a quarter of that output coming from Texas as we expand into additional facility space and bring new production online. These investments reflect measured scaling of our footprint while aligning with strong and growing customer demand and qualification progress across both 800G and 1.6 terabit products. Further, we have recently had dialogue with another large hyperscale customer who has been a long-term customer of ours and who is eager to begin qualification efforts for our 1.6 terabit products. This customer has also indicated a desire to purchase potentially significant quantities of 800G products from us in 2026 and 2027. We continue to discuss capacity availability and expect orders for 800G from this customer soon. It's also important to note our 800G and 1.6 terabit products can be manufactured on the same production line with the same process. While our 1.6 terabit products will require a different final testing, our 800G automated manufacturing lines have been developed with an architecture that will allow us to support future higher speed products as customer demand materializes and evolves over time. While we are encouraged by the conversations we are having with our customers pertaining to our 1.6 terabit products, We continue to believe that our 800G products will drive the near-term data center ramp, and our 1.6 terabit products are on track to begin to contribute to our overall revenue later this year. Before moving on to our fourth quarter results, I'd also like to reemphasize our in-house laser capabilities, which we believe continue to be a strategic advantage for the company. As we have mentioned before, we've been manufacturing lasers internally for many years. Having these capabilities has allowed us to avoid some of the shortages that affect others in the industry. As we continue to expand our footprint in Texas, our in-house laser manufacturing positions us well to support both near-term customer needs and longer-term growth. We believe that in the future, CPO will continue to drive increased demand for high-power lasers and plan to continue to expand our laser manufacturing capacity in Texas in order to accommodate these future growth drivers. During the fourth quarter, direct tariffs had a $1.2 million impact on our income statement. As it relates to tariffs, as I previously mentioned, while we do utilize some imported components in our transceivers, many key components, like our laser chips, are already manufactured in the United States. Importantly, in our 800G and 1.6 terabit transceiver designs, less than 10% of the value of these components used is currently sourced from China, and we have a path to further reduce that exposure to near zero that we have discussed on our prior earnings calls. Given the recent court decision on IEPA tariffs, it's worth noting that AOI acted as the importer of record for many, if not most, of the tariff shipments we incurred in 2025. Turning to our fourth quarter results, our total revenue was a record $134.3 million, which increased 34% year-over-year and increased 13% sequentially off a strong Q3 and was in line with our guidance range of $125 million to $140 million. During the fourth quarter, 56% of revenue was from data center product, 40% was from CATV products, and the remaining 4% was from FTTH, telecom, and others. In our data center business, Q4 revenue came in at $74.9 million, which was up 69% year-over-year and 70% sequentially. Sales of our 100G products increased 54% year-over-year and sales of our 400G products increased 141% year-over-year. In the fourth quarter, 51% of data center revenue was from 100G products, 41% was from 200G and 400G transceiver products, and 8% was from 10G and 40G transceiver products. In our CATV business, CATV revenue was $54 million, which was up 3% year-over-year, but was down 24% sequentially from a record Q3 and was in line with our expectations of $50 million to $55 million. Similar to the last couple of quarters, we shipped a significant quantity of 1.8 GHz amplifiers to our largest CATV customer in Q4, and demand continues to be robust. In addition to this customer, we continued to see momentum with a newer set of MSO customers that we have talked about on our prior couple of earnings calls. Looking ahead to Q1, we expect our CATV revenue will be between $61 and $67 million. Looking further ahead, the broad-based appeal of our CATV amplifiers and software solutions has been evident in these customer engagements, and we see software as an increasingly important part of our CATV offerings. Our QuantumLink software suite is designed to provide operators with enhanced remote management, visibility, and control over HFC network elements, reducing operational costs, and improving service quality. If current momentum continues, and while it is still early in the year, we still believe that it's feasible that we could generate nearly $300 million annually. While the vast majority of our CATV revenue expectations for this year are related to our amplifiers, we do anticipate that we will generate some revenue from our software solutions this year, and we will share more on the amount and timing as we progress throughout the year. Now turning to our telecom segment. Fourth quarter revenue from our telecom products of $5.1 million was up 45% year-over-year and 37% sequentially. As we have said before, we expect telecom sales to fluctuate from quarter to quarter. For the fourth quarter, our top 10 customers represented 96% of revenue compared to 97% of revenue in Q4 of 2024. We had three greater than 10% customers, one in the CATV market, which contributed 39% of total revenue, and two in the data center market, which contributed 31% and 21% of total revenue, respectively. Of note, one of these data center customers became a 10% customer for the first time in a long time and is a US-based large hyperscale customer. In Q4, we generated non-GAAP gross margin of 31.4%, which was above the high end of our guidance range of 29% to 31% and was up from 31% in Q3 of 2025 and 28.9% in the prior year quarter. The year-over-year increase in our gross margin was driven primarily by our favorable product mix and our cost reduction efforts. Looking ahead, we expect continued gradual improvement in gross margins, although we continue to expect that the revenue mix in data center in the next few quarters will be a slight headwind. We remain committed to our long-term objective of returning non-GAAP gross margins to around 40%, and we believe that this goal is achievable as our mix shifts towards higher margin products and as we capture additional efficiencies across our operations. That margin expansion, combined with increased scale, positions us to move towards sustainable profitability, which we currently expect to achieve on a non-GAAP basis beginning in Q2 of this year. The revenue figures presented above are net of a contra revenue amount due to the accounting for warrants provided to customers. As a reminder, this amounts to approximately 2.5% of revenue derived from certain customers to whom AOI has provided warrants in exchange for future revenue. In Q4, the amount of this contra revenue was $0.73 million. Total non-GAAP operating expenses in the fourth quarter were $49.3 million, or 37% of revenue, which compared to $31.5 million, or 31% of revenue, in Q4 of the prior year, and we're in line with our expectations of $48 million to $50 million. Looking ahead, we expect non-GAAP operating expenses to be in the range of $50 million to $57 million per quarter. Non-GAAP operating loss in the fourth quarter was $7.1 million compared to an operating loss of $2.5 million in Q4 of the prior year. gap net loss for Q4 was $2 million, or a loss of $0.03 per basic share, compared with a gap net loss of $119.7 million, or a loss of $2.60 per basic share in Q4 of the prior year. On a non-gap basis, net loss for Q4 was $0.6 million, or $0.01 per share, which was narrower than our guidance range of a loss of $9 million to a loss of $2.8 million, or non-GAAP income per share in the range of a loss of 13 cents to a loss of 4 cents. This compares to a non-GAAP net loss of $1 million, or 2 cents per share, in Q4 of the prior year. The basic shares outstanding used for computing the earnings per share in Q4 were $70.3 million. Turning now to the balance sheet, We ended the fourth quarter with $216 million in total cash, cash equivalents, short-term investments, and restricted cash. This compares with $150.7 million at the end of the third quarter of 2025. We ended the fourth quarter with total debt, excluding convertible debt, of $67.3 million compared to $62 million at the end of last quarter. As of December 31, we had $183.1 million in inventory. which compared to $170.2 million at the end of Q3. The increase in inventory is primarily due to raw material purchases or increasing production. We made a total of $84 million in capital investments in the fourth quarter, which was mainly used for manufacturing capacity expansion for our 400G and 800G transceiver products. In 2025, we made a total of $209 million in capital investments, which was above the CapEx projections we gave on our Q4 call last year of $120 million to $150 million for the full year. This was primarily due to increased customer demand projections. In Q4, the direct tariff impact on capital equipment was $3.1 million. As we have mentioned before, while we would continue to do our best to minimize any impacts, Tariff rates and equipment import mix may cause future results to vary materially. Notably, we source equipment from all over the world, including from both domestic and international locations. Going forward, we believe we are well positioned for sustained growth across both our data center and CATV businesses, and the capital investments underway are expected to fundamentally strengthen the company as we execute on these opportunities. Given the recent surge in customer inquiries and apparent rising demand, we believe that by mid-2027, 100G and 400G revenue will be approximately $90 million, 800G revenue will be approximately $217 million, and 1.6 terabit revenue will be approximately $71 million monthly. Altogether, this represents $378 million in monthly revenue for transceiver products. However, we believe that the customer demand is even larger than this. In order to accommodate this expected surge in demand, we plan to more than triple our laser manufacturing in Texas. We are evaluating our CapEx projections for 2026, and we intend to share those at a later date. Moving now to our Q1 outlook. We expect Q1 revenue to be between $150 million and $165 million. accounting for a sequential increase in CATV revenue, as well as a sequential increase in our data center revenue. We expect non-GAAP gross margin to be in the range of 29% to 31%. Non-GAAP net income is expected to be in the range of a loss of $7 million to a loss of $0.3 million, and non-GAAP earnings per share between the loss of $0.09 per share and break-even, using a weighted average basic share count of approximately 76.4 million shares. Looking more broadly at 2026, while it's still early in the year, we expect to generate over $1 billion in revenue this year, with a non-GAAP operating profit of over $120 million. This revenue level is limited by our production capacity and supply chain, not market demand, which we believe is much larger. Based on our planned capacity additions, we expect to see continued strong sequential revenue growth in the first two quarters With an acceleration in the second half of the year, as new production capacity comes online and additional customer qualifications are completed and orders begin to ship, we believe that this is an ambitious yet achievable target based upon our customers' forecasts and what we know about the unprecedented investments that are being made in AI infrastructure. With that, I will turn it back over to the operator for the Q&A session. Operator? Conference Operator | Operator: We will now begin the question and answer session. Again, to ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, you may press star then two. At this time, we will take our first question, which will come from Simon Leopold with Raymond James. Please go ahead. Simon Leopold | Analyst, Raymond James: Thanks for taking the question. First, just a very quick clarification, if I might. I missed the value you mentioned on 800 gig revenue. I know you had a little bit of a software firmware glitch and said it was below the guided or the $4 million or so, but what was the value of 800 gig in the quarter? Dr. Stephan Murray | Chief Financial Officer & Chief Strategy Officer, Applied Optoelectronics: We didn't break out exactly, but it was below $4 million. Simon Leopold | Analyst, Raymond James: A lot below or a little below? Dr. Thompson Lin | Founder, Chairman & Chief Executive Officer, Applied Optoelectronics: A lot below is delayed to Q1, but we have emphasized the A&E revenue will be big in Q2 next year across the target. Our revenue in this year is $1 billion. Simon Leopold | Analyst, Raymond James: And I wanted to really focus on the trajectory for gross margin improvement And I wanna maybe first start with understanding how much of your laser production is in-house today versus external merchant lasers. And I guess, I appreciate that Typically, as you ramp production, there's sort of a learning curve of improving yields and things like that. So I'd like to make sure we have a good understanding of really the timeline or trajectory to achieve that target you mentioned of 40%. So sort of where are we now and when do we, you know, what's the roadmap? Thank you. Dr. Thompson Lin | Founder, Chairman & Chief Executive Officer, Applied Optoelectronics: I think because, as I say, the gross margin for 1.6 is much, much higher than the other product. And I would say that, okay, As we say, I think by Q2, the monthly revenue, sometime in Q2, like June, July, or something like that, the revenue is like $378 million. So it depends on the portion of 1.6T transceiver. So at the time, I believe the gross margin should be 35% to 38% overall gross margin for all the transceiver revenues. So I believe we can achieve 40% growth margin by Q3 or Q4 next year. Dr. Stephan Murray | Chief Financial Officer & Chief Strategy Officer, Applied Optoelectronics: By the way, Simon, just to make sure you're on the same page, the revenue figures that Thompson mentioned were 2027 Q2, not this year. Dr. Thompson Lin | Founder, Chairman & Chief Executive Officer, Applied Optoelectronics: Yes, it's very important, okay? Don't be stupid. Simon Leopold | Analyst, Raymond James: Thank you for that, because I wrote down 26, so you anticipated my mistake. Dr. Thompson Lin | Founder, Chairman & Chief Executive Officer, Applied Optoelectronics: No one can do this kind of growth, okay? You know? It's impossible. Simon Leopold | Analyst, Raymond James: No, I appreciate that. No, thank you for that. And then before I pass, maybe just a quick check in on the cable TV side of the business in that it sounds like you remain very confident in the trajectory. However, the outlook offered by the big cable operators was not as inspiring. Can you sort of help folks triangulate between the CapEx forecast and your involvement in cable TV upgrades? Thank you. Dr. Stephan Murray | Chief Financial Officer & Chief Strategy Officer, Applied Optoelectronics: Sure, Simon. I mean, I think, as we've said consistently, where the money – I mean, the overall CapEx numbers are one thing, but where the money gets spent is another thing. And I think they're spending – this year and next year, a significant amount of their spend is going towards the amplifiers, the outside plant part of the network, and that's where we play. So – There are some other parts of the network in the nodes and other things that maybe are a little slower to ramp, although I think those are also ramping pretty significantly as well. So you have to look at it on a kind of granular basis. The other thing is we've got a lot of new customers that we alluded to in the call earlier, and we'll start to see some significant contribution from those newer customers as well. So it's not just the one or two or three top largest MSOs, but also a wider swath of smaller companies that are contributing to our revenue. Dr. Thompson Lin | Founder, Chairman & Chief Executive Officer, Applied Optoelectronics: And something that you know, by end of this year, I would say more than 95% of laser will be AOI laser. Because right now there's a huge issue of laser shortage. And actually even some supplier told us, we want to get laser from them, we need to wait at least one year or even longer. So that's why we announced we will invest $300 million in Texas. The purpose, as we said, we need to triple, even more than triple, our laser magnification capacity by Q2 next year. And that's to fulfill our transceiver demand. And let me emphasize, actually, our transceiver demand is much bigger than what we projected. Right now, the number we said, the $378 million of transceiver revenue in June, July next year, okay, not this year. is limited by our capacity and the supply chain. It's not limited by the customer demand. Simon Leopold | Analyst, Raymond James: Thank you for taking my questions. Conference Operator | Operator: Thank you. And our next question will come from Michael Genovese with Rosenblatt Securities. Please go ahead. Michael Genovese | Analyst, Rosenblatt Securities: Great. Thanks very much. So it sounds like instead of having a steady kind of ramp on this 800G, we're expecting to come in with really big numbers starting 2Q this year and then huge numbers next year, by 2Q next year. I guess for the ramp in 2Q this year, could you just go over some of the milestones, maybe talk about the issue on the sub, but also the ongoing qualification milestones that you have to hit to kind of have that ramp in 2Q? Dr. Stephan Murray | Chief Financial Officer & Chief Strategy Officer, Applied Optoelectronics: Right, so as you mentioned, In order for the ramp to start in earnest, our 800G products have to be interoperable with all the different platforms that are out there at this particular customer, and there's a lot of them. So the firmware has to be modified to work with all those different platforms. So hardware-wise, everything's fine. No problem with that. Firmware is good on most of the platforms. We just have to make some tweaks to get it to work across all of the different platforms that they have. The customer and us have agreed that that should be done in the middle of next month, so a couple of weeks, three weeks from now, something like that. And then that's basically the last hurdle to kind of unleash the ramp. As we talked about, we've already started manufacturing products for that ramp. So from a manufacturing standpoint, we're gearing up. Just to touch on the beginning part of that question, too, about the kind of non-linearity of the ramp, that's because what you're seeing is our production capacity coming online, right? it's not gated by demand, it's gated by our ability to produce, and that doesn't come on in a linear fashion, right? You build a production line and you get a step function, not a smooth ramp. Dr. Thompson Lin | Founder, Chairman & Chief Executive Officer, Applied Optoelectronics: Yes. So let me emphasize, because every customer has so many different switches, so many different kinds of ASICs, and when a customer adds more switches, They always change the firmware. We are supposed to get a green light to ship out already in December last year. The delay is not our problem or whatever. It's because, you know, how come, build AI, you know, the whole system is much more complicated than before. That's why it takes much longer. And right now, I think we feel very comfortable. And right now, I never said, okay, we have got, Almost two years of loading forecast from more than one customer, let me say that, for 800G. And right now, let me say that, more than one customer, at least two or even three, they would like to buy all the transceivers we can make for 800G 1.60 because AOI laser. And right now, it's limited by our capacity and the main power and the supply chain. So that's why we are trying everything to wrap up, but it takes time. It takes time. That's why I say, right now, this year, we say $1 billion. And let me say that demand is much, much bigger than $1 billion. But that's a number we feel comfortable. At least we feel a minimum 99% competent. We can deliver. Otherwise, the rate of risk is much bigger than that. Let me say that. Same thing for the 1.6T transceiver for June, July next year. It's still limited by supply chain. So that's a lot of issues we need to solve. And the other thing I'm going to tell you, in the short term, we should receive more than $100 million of air energy transceivers within a few months, maybe one month, two months, for sure less than three months. We should receive more than $200 million of 1.6T transceivers. All right. Dr. Stephan Murray | Chief Financial Officer & Chief Strategy Officer, Applied Optoelectronics: Transceiver orders. We're not buying the transceivers or receiving the orders. Dr. Thompson Lin | Founder, Chairman & Chief Executive Officer, Applied Optoelectronics: We don't buy transceivers. We make the transceivers. So for sure, okay, that's how great is the market. But, you know, so many things just stop, okay? It's very complicated. The whole team is walking crazy, you know. It's a good problem. But we are working so hard. Let me say that, all right? I got it. Sounds great. Michael Genovese | Analyst, Rosenblatt Securities: All right. I guess, is it fair to say that it sounds, when you say demand on the 800G side is already very high, does that mean orders? I mean, do you have that level of orders already in for 800G? Dr. Thompson Lin | Founder, Chairman & Chief Executive Officer, Applied Optoelectronics: Coming soon, at least from two customers, because they want to make sure we commit to our promise, you know. You're right on the problem, yes. They already give us the loading forecast, but to make sure we guarantee what we promise, There's some time we need to allow agreement and at the same time, for sure they'll give us order, okay? At least by end of this year or something like that. Michael Genovese | Analyst, Rosenblatt Securities: Okay, perfect. And last question for me. On the 500,000 units, I think you said by second quarter next year, and I think that's 800G at one point. End of this year, okay. Just the mix between Taiwan and the U.S. I mean, it sounds like you're expanding capacity in both places. Is it, I guess, harder and more expensive to do it here, which is why only a quarter of the capacity will be here? Would you prefer to have more here if it was easier? What's the decision-making on that, where to put it? Dr. Thompson Lin | Founder, Chairman & Chief Executive Officer, Applied Optoelectronics: We don't have much longer time to spend in the U.S. I think Texas is great. I would say the best in the U.S., let me say that. But let me say that by the end of next year, I would say more than 55% would be manufactured in the U.S., or even 60% or 65% for A&G 1.60. Because that's why we're just groundbreaking. A few weeks ago, it takes time. We need more creative, more space. It's quite expensive. And it takes time to build equipment. Then we can have equipment. Then we do qualification and training. It takes time, but it's catching up. All right? So the number will change a lot. But let me say that more than 85% of investment will be in Texas. Michael Genovese | Analyst, Rosenblatt Securities: Okay. Perfect. Thanks so much. Really exciting. Looking forward to following this more and to seeing you guys at OFC. Thank you. spk00: Thanks. Conference Operator | Operator: And our next question will come from George Nodder with Wolf Research. Please go ahead. George Nodder | Analyst, Wolf Research: Hi, guys. Thanks very much. Yeah, really impressive conversation here in terms of the demand profile. I guess I'm just curious about what you're seeing on tariffs. Obviously, we've had some moves on tariffs recently, 15% across the board tariff. I'm not sure if Dr. Stephan Murray | Chief Financial Officer & Chief Strategy Officer, Applied Optoelectronics: transceivers are going to be exempt or what the situation is but can you just talk about kind of the tariff situation maybe the perception your customers have on tariffs and how that may or may not be translating into orders thanks yeah i guess there's two ways to say that first of all i mean i think anybody that's telling you they confidently know exactly what the tariff situation is going to be throughout the year is probably not being truthful i certainly don't um We have a viewpoint on the current tariffs. It's pretty much in line with where we've been in terms of tariffs. If things stay the same as they are now, I don't expect it to dramatically change the tariff picture that we outlined on the call earlier. That being said, we are looking at the options in terms of the IEPA tariffs. Those have been outlawed, so at least there's some pathway where we might be able to recoup some of those. The other thing that I've said pretty consistently, and I think it ties in with Thompson's earlier comments, while it takes a while to build capacity in the United States, the one thing I can say is the one place where I'm pretty confident in saying it's not going to be tariffed is product that's made in the U.S., and that's what we're scaling up to do. So the more, as time goes on, the more we can manufacture in the U.S. and the more that we can attract other supply chain partners, which we are doing to move their production to the U.S. as well, that will help us, you know, in the long term, that's going to be the solution for really minimizing the tariff impacts. George Nodder | Analyst, Wolf Research: And then the comment about recouping tariffs, I think you said you were the shipper of the record. How much could that be? What is the potential upside you guys could get if indeed you can recoup those? Dr. Stephan Murray | Chief Financial Officer & Chief Strategy Officer, Applied Optoelectronics: Thanks. I mean, sure, if we could recoup all of it. We had about $4.6 million, I believe, just last quarter in tariffs. We probably paid last year – $7 or $8 million in tariffs overall. You know, again, we're still analyzing exactly how many of those are IEPA-related. Not all tariffs are that way. So there's a lot of nuance there. But, I mean, you know, it's not going to dramatically change our picture, but it certainly would be a welcome cash flow development for sure. Great. Thanks, guys. Conference Operator | Operator: Yep. Again, if you have a question, you may press star then 1 to join the queue. Our next question will come from Ryan Koontz with Needham & Company. Please go ahead. Ryan Koontz | Analyst, Needham & Company: Great, thanks. Just maybe stepping back a little bit, as you think about the ramp in 400G with your large customer and 800G, which is pending, maybe can you compare kind of the production and demand view, compare and contrast between those two that gives you confidence in executing your own capacity and visibility from your customer for those two different product lines. Great, thank you. Dr. Stephan Murray | Chief Financial Officer & Chief Strategy Officer, Applied Optoelectronics: Sure, I mean, the 400G products, as we said, are going to continue, I think there's going to be a continued strength in the sales of those products, driven by a couple of large customers, pretty much the same ones that we've already been shipping to, although we're seeing increased demand from at least one of those customers. But as we said in our prepared remarks earlier, 800G is expected to dominate those sales starting in Q2 of this year. So, you know, we'll see more revenue in 800G in Q2 than we did in 400G. And then moving through the year and into next year, I think we're going to continue to see very strong ramp in 800G because that's most closely associated with AI, right? That's the closest to the AI compute clusters, at least until we get to 1.6 terabit later this year. Ryan Koontz | Analyst, Needham & Company: That's helpful. And then, you know, on your laser supply, indium phosphide, you know, we were down to your facility in the fall. Where are you in terms of, you know, the equipment you need and kind of lead times with regards to expanding indium phosphide production and any color you can give us there in terms of building out your new facilities and acquiring the necessary equipment? Thank you. Dr. Stephan Murray | Chief Financial Officer & Chief Strategy Officer, Applied Optoelectronics: As Thompson mentioned, we're planning to triple our production of indium-phosphide-related devices here, laser devices made on indium-phosphide materials, by the middle part of next year. We have line of sight into all that equipment. It would be a very long conversation to go through every piece of equipment and what the schedule is, but the bottom line is when we talk about tripling our capacity, that includes the equipment that you either have on order or have line of sight into order that will be delivered in time to accommodate that RAM. Ryan Koontz | Analyst, Needham & Company: Great. Maybe just one last second. In terms of cable TV, you mentioned another customer. I assume that's a large U.S. customer. It's moving forward with 1.8 gigahertz here in terms of 4.0 ESD. Dr. Stephan Murray | Chief Financial Officer & Chief Strategy Officer, Applied Optoelectronics: Yeah, it is. We have a number of customers. a number of customers. I would, again, I want to caution, none of those customers are as large as our largest customer, okay? But in aggregate, I think they can be a significant contributor to the revenue, which is what I was trying to outline earlier in my response to Simon's question. Great. Ryan Koontz | Analyst, Needham & Company: Appreciate that. Dr. Stephan Murray | Chief Financial Officer & Chief Strategy Officer, Applied Optoelectronics: Thanks. Conference Operator | Operator: Yep. And our next question will come from Tim Savageau with Northland Capital Markets. Please go ahead. Tim Savageau | Analyst, Northland Capital Markets: Hi, good afternoon. A couple questions I wanted to follow up on. Looks like given the increase in cable in Q1, you expect data center revenues up about $10 million. I guess what's driving that if you don't expect 800 gig to ramp until Q2? Dr. Stephan Murray | Chief Financial Officer & Chief Strategy Officer, Applied Optoelectronics: Well, I think we're going to see two things. We'll see a growth in 400 gig. continued growth in 400 gig. And then we also do expect some revenue in 800 gig, just not, you know, the dramatic ramp that we expect to see starting in Q2. Tim Savageau | Analyst, Northland Capital Markets: Okay, great. So principally 400 gig. And you mentioned some, I guess, near-term gross margin headwinds driven by mix, I think you said, but you do have cable TV coverage. up in Q1, so I want to get a little more color on what's happening gross margin-wise there in Q1. Dr. Stephan Murray | Chief Financial Officer & Chief Strategy Officer, Applied Optoelectronics: Yeah, as we said, at the end of the day, if you look at our guidance, it's kind of a wash in terms of gross margin. We're seeing a little bit of headwind coming from the product mix, especially 400G, as I mentioned earlier, is going to continue to grow in Q1. until later when 800G starts to take over. Meanwhile, in cable, gross margins there are better, and they're actually expanding. So that's kind of the put and take on that. That's why it ended up being kind of a wash. Dr. Thompson Lin | Founder, Chairman & Chief Executive Officer, Applied Optoelectronics: As we said, without the real knob, 800G, we need time to fine-tune the production in the year. That's why this is early stage of volume at future 800G. That's what I say. By Q2 next year, we believe the overall gross margin will be 35% to 38% just for transceiver. By end of next year, we believe we can achieve more than 40% gross margin for all the transceiver by Q4 2027. Tim Savageau | Analyst, Northland Capital Markets: Okay. Maybe just one and a half more here. You mentioned expectations for 800 gig to, I guess, dominate revenue. Trying to get a sense of what that means in Q2. You should have about, you know, in the $40 million range for 100 gig, probably will be in the $40 million a quarter range for 400 gig. Would you expect 800 gig to be larger than both of those combined in Q2, or how might you frame that? Dr. Stephan Murray | Chief Financial Officer & Chief Strategy Officer, Applied Optoelectronics: What we're saying is it'll be our largest segment within the data center. It'll be the largest contributor to revenue of those three, 800 gig, 100 gig, and 400 gig. Dr. Thompson Lin | Founder, Chairman & Chief Executive Officer, Applied Optoelectronics: I think it'll be more than $25 million or $30 million. As I said, the issue is the demand. The Q1, the Q4 delays due to the firmware optimization. But the Q2, Q3 is limited by our capacity. It's not a demand issue. Let me say that. As we said, we've got demand from two customers. Even, I would say we got the order from them pretty soon, within a few weeks. Then the next issue is the supply chain and our manufacturing capacity. I would say I'm very comfortable with $25 million. But customer demand could be 35 to 40 billion. So that's what we see right now. All the numbers we see here is not customer demand issue. It's AOI, manufacturer, and supply chain issue. Let me say that. Tim Savageau | Analyst, Northland Capital Markets: Okay, great. And I guess last question for me. You talked about the potential for a billion dollars in revenue. in calendar 26, I think, or in total. Yes. You know, I wonder, from a customer standpoint, would you, I guess, how would you expect customer concentration to look in that scenario? I know you've got a big guy on the cable side, I'm principally talking about data center. Do you think a primary customer will be half of that, or what have you? Dr. Stephan Murray | Chief Financial Officer & Chief Strategy Officer, Applied Optoelectronics: So if you break down the revenue, right, if you just take a round number of a billion, right, subtract the 300-ish that we have in cable TV, that gives you 700 million-ish left over. Right now, I would expect that's going to be dominated by most of that is going to be two large hyperscale customers. And they'll probably be roughly equivalent. you know, exiting the year. We'll see how that plays out. It's pretty early to say exactly how the timing on that's going to go. But I would expect at least two to be sort of comparable in size, let's put it that way. And then obviously a third one that would be, you know, smaller in scale but still significant. Dr. Thompson Lin | Founder, Chairman & Chief Executive Officer, Applied Optoelectronics: So I would say we will have three hyperscale DSNA customers be more than 10% or much more than 10% for the whole years. Tim Savageau | Analyst, Northland Capital Markets: Got it. Appreciate that, Collin. Thanks very much. Conference Operator | Operator: Yep. All right. Thank you. And at this time, we have no further questions. I'll turn the call now over to Dr. Thompson-Lund for any closing remarks. Dr. Thompson Lin | Founder, Chairman & Chief Executive Officer, Applied Optoelectronics: Again, thank you for joining our call today. As always, we want to extend a thank you to our investors, customers, and employees. for your continued support. We continue to believe the fundamental driver of long-term demand for our business remains robust, and we are in a unique position to deliver, to drive value from those opportunities. We look forward to seeing many of you at upcoming investor conferences as well as OFC. Thank you. Conference Operator | Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. jsPDF 3.0.3 D:20260608224527-00'00'

NASDAQ:AAOI Q3 2025 Earnings Call Transcript Generated on 6/8/2026 Conference Operator: Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to Applied Optoelectronics Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note this call is being recorded. I will now turn the call over to Lindsay Savarese, Investor Relations for Applied Optoelectronics. Ms. Savarese, you may begin. Lindsay Savarese | Investor Relations, Applied Optoelectronics: Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics. I'm pleased to welcome you to AOI's third quarter 2025 financial results conference call. After the market closed today, AOI issued a press release announcing its third quarter 2025 financial results and provided its outlook for the fourth quarter of 2025. The release is also available on the company's website at ao-inc.com. This call is being recorded and webcast live. A link to the recording can be found on the investor relations section of the AOI website and will be archived for one year. Joining us on today's call is Dr. Thompson Lin, AOI's founder, chairman, and CEO. and Dr. Stephan Murray, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q3 results, and Stephan will provide financial details and the outlook for the fourth quarter of 2025. A question and answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AOI's Safe Harbor Statement. On today's call, management will make forward-looking statements. These forward-looking statements involve risks and uncertainties, as well as assumptions and current expectations, which could cause the company's actual results, levels of activity, performance, or achievements of the company or its industry to differ materially from those expressed or implied in such forward-looking statements. In some cases, you can identify forward-looking statements by terminology, such as believe, forecast, anticipate, estimate, suggests, intends, predicts, expects, plans, may, should, could, would, will, potential, or thinks, or by the negative of those terms or other similar expressions that convey uncertainty of future events or outcomes. The company has based these forward-looking statements on its current expectations, assumptions, estimates, and projections. While the company believes these expectations, assumptions, estimates, and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond the company's control. Forward-looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of its products into new markets and customer responses to its innovations. as well as statements regarding the company's outlook for the fourth quarter of 2025. Except as required by law, AOI assumes no obligation to update these forward-looking statements for any reason after the date of this earnings call to conform these statements to actual results or to changes in the company's expectations. More information about other risks that may impact the company's business are set forth in the risk factors section of AOI's reports on file with the SEC, including the company's annual report on Form 10-K and quarterly reports on Form 10-Q. Also, all financial results and other financial measures discussed today are on a non-GAAP basis unless specifically noted otherwise. Non-GAAP financial measures are not intended to be considered in isolation. or as a substitute for results prepared in accordance with GAAP. A reconciliation between our GAAP and non-GAAP measures, as well as a discussion of why we present non-GAAP financial measures, are included in the company's earnings press release that is available on AOI's website. Before moving to the financial results, I'd like to note that the date of AOI's fourth quarter and full year 2025 earnings call is currently scheduled for February 26th, 2026. Now, I would like to turn the call over to Dr. Thompson Lin, AOI's founder, chairman, and CEO. Thompson? Dr. Thompson Lin | Founder, Chairman, and CEO, Applied Optoelectronics: Thank you, Lindsay, and thank you for joining our call today. We successfully deliver revenue, gross margin, and elongate loss per share in line with our expectations. In fact, we recorded the highest quoted revenue in our history, driven by strong demand in the CATV market, which also achieved regular revenue in the third quarter. The strengths we saw in our CATV business more than offset our best-earned revenue, which came in a touch below expectations, largely due to the timing of sudden shipment at quarter end. In per period, we have approximately $6.6 million in shipment of 400G transceiver to a large, high-scale customer, which was not able to return into revenue during the quarter due to various shipping and receiving delays, and which we have booked in Q4. Despite this delay, our financial withdrawal clearly highlights the advantage of having Diversified revenue stream as a result, our total revenue on a combined basis increased 15% sequentially and 82% year-over-year. Number three, we continue to make progress on customer qualification on our 800G product. As we mentioned last quarter, we believe we are near the final stage of qualification with several customers. We expect qualifications in the near term based on conversation that we are having with our customers, and we continue to believe that we will produce meaningful treatment of ARG products in the fourth quarter. During the third quarter, we did a revenue of $118.6 million, which was in line with our guidance range of $115 million to $127 million. We recorded non-GAAP gross margin of 31%, which was in line with our guidance range of 29.5% to 31%. And our non-GAAP loss per share of 9 cents was also in line with our guidance range of a loss of 10 cents to a loss of 3 cents. Total revenue for our data center product of $43.9 million increased 7% year-over-year, but was down 2% sequentially. Revenue for our energy product increased 32% year-over-year, while revenue for our foreign energy product was down 65% year-over-year, or $7.1 million. Primarily due to the timing of certain shipment, a quarter And that I just mentioned. Total revenue in Q3 in our CATV segment was a record $70.6 million, which more than tripled year-over-year and was up 26% sequentially from a strong Q2. This increase is due to the continued rent in orders for our 1.8 GHz amplified products for both existing as well as new customers. With that, I will turn the call over to Stephen to review the details of our Q3 performance and our Q4, Stephen. Thank you, Thompson. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer, Applied Optoelectronics: As Thompson mentioned, we successfully delivered revenue gross margin, and a non-GAAP loss per share in line with our expectations. In fact, we recorded the highest quarterly revenue in our history, driven by strong demand in the CATV market, which also achieved record revenue in the third quarter. The strength that we saw in our CATV business more than offset our data center revenue, which came in a touch below our expectations, largely due to the timing of certain shipments at quarter end. In particular, we had approximately $6.6 million in shipments of 400G transceivers to a large, hyperscale customer, which was not able to be turned into revenue during the quarter due to various shipping and receiving delays, and which we have booked in Q4. Despite this delay, our financial results clearly highlight the advantage of having diversified revenue streams. As a result, our total revenue on a combined basis increased 15% sequentially and 82% year-over-year. In Q3, we delivered revenue of $118.6 million, which was in line with our guidance range of $115 million to $127 million. We recorded non-GAAP gross margin of 31%, which was in line with our guidance range of 29.5%, to 31%. Our non-GAAP loss per share of 9 cents was also in line with our guidance range of a loss of 10 cents to a loss of 3 cents. We continued to make progress on customer qualifications on our 800G products. As we mentioned last quarter, we believe we are near the final stages of qualification with several customers. We expect qualification in the near term based on conversations that we are having with our customers and we continue to believe that we will produce meaningful shipments of 800G products in the fourth quarter. For the third quarter in a row, we did record immaterial revenue for our 800G products related to deliveries for customer qualification activity. As we have mentioned before, our schedule on ramping up our production is largely constrained by our ability to build and qualify production capacity. On that front, we are pleased to report that we made good progress on getting our production ready during the third quarter and remain nearly on track to achieve the targets that we laid out at OFC. As a reminder, we expect this will culminate later this year with what we believe will be the largest domestic production capacity for 800G or 1.6 terabit transceivers, approximately 35,000 transceivers per month. or roughly 35% of our overall capacity for these advanced optical transceivers. Notably, we will be able to accommodate this expansion in our current Texas facility footprint. Further, by mid-2026, we continue to expect to be able to produce over 200,000 pieces per month, with the majority produced in Texas. As I just mentioned, we made solid headway towards these targets for next year. As you may have seen, we announced last week that we signed an agreement to lease an additional building in Sugar Land, Texas. We will begin construction on this new facility later this year and are confident in our ability to scale our production towards the middle to end of next year to achieve our 2026 targets. It's also important to note that AOI has had an in-house laser manufacturing capability for many years. and we have been expanding and improving this capability recently. While we have heard talks about laser shortages, having a laser production capability in-house gives us an advantage, and to date, we have not experienced a shortage of lasers that has affected our ability to deliver products according to our customers' requests. We've spent years developing our automated manufacturing capabilities, which gives us an advantage in the ability to do manufacturing virtually anywhere in the world that we would like to, and makes building out another facility in a cost-effective way in Texas possible. The message from our customers is consistent. Many of them have a strong preference for production in North America, and so that's what we have been and are currently focused on. When we talk about adding capacity, The lead time for us to add new equipment and add machinery to our production process is typically less than the lead time it would take to hire and train the types of skilled operators that are needed to do the manual processes that are used by most of our competitors. Just to reiterate, we currently have three manufacturing sites, one here in Sugar Land, Texas, where our headquarters is and which will soon involve two facilities, one in Ningbo, China, and two in Taipei, Taiwan, with an additional one under construction. As you may have heard me say at OFC, we expect to increase the total production of 800G at 1.6 terabit products by 8.5 times by the end of the year, and we are on track and dedicated to achieving this goal. During the third quarter, direct tariffs had a $1.1 million impact on our income statement. As it relates to tariffs, also, as I mentioned on our prior couple of earnings calls, While we do utilize some imported components in our transceivers, many key components, like our laser chips, are already manufactured in the U.S. Importantly, in our 800G and 1.6 terabit transceiver designs, less than 10% of the value of the components used is currently sourced from China, and we have a pathway as we scale production to further reducing this China content, ultimately to near zero. We are also in discussion with several key suppliers about onshoring their production to the U.S. to support a robust domestic supply chain. Turning to our third quarter results, our total revenue was $118.6 million, which increased 82% year-over-year and increased 15% sequentially off a strong Q2 and was in line with our guidance range of $115 million to $127 million. During the third quarter, 60% of revenue was from CATV products, 37% was from data center products, with the remaining 3% from FTTH, telecom, and other. In our data center business, Q3 revenue came in at $43.9 million, which was up 7% year-over-year and was down 2% sequentially. Sales of our 100G products increased 32% year-over-year, while sales for our 400G products decreased 65% year-over-year, or $7.1 million, which was primarily driven by the timing of certain shipments at quarter end that I previously discussed. In the third quarter, 83% of data center revenue was from 100G products, 9% was from 200G and 400G transceiver products, and 7% was from 10G and 40G transceiver products. Looking ahead to Q4, we expect a substantial sequential increase in our data center revenue, driven by growth in 400G revenue, as well as layering in some increased 800G revenue. In our CATV business, we saw exceptionally strong demand in Q3. CATV revenue in the third quarter was a record $70.6 million, which more than tripled year over year, and was up 26% sequentially from a strong Q2 revenue. This increase is due to the continued ramp in orders for our 1.8 GHz amplifier products. Similar to last quarter, we shipped a significant quantity of 1.8 GHz amplifiers to Charter in the quarter, and demand continues to be robust. On our last earnings call, we had discussed how in addition to Charter, we had six other MSO customers who had already begun to order and deploy our 1.8 GHz products or are in various stages of qualification of these products. We were pleased to see continued momentum with these new customers and are excited to see the broad-based appeal of our amplifiers and QuantumLink software. During the quarter, we announced the addition of four new software modules to our QuantumLink HFC remote management solution, which offers our customers actionable intelligence to optimize network performance, reduce operational costs, and improve the broadband experience. The new suite of software modules are add-ons to our existing QuantumLink Central, providing telemetry, adding unified visibility, predictive diagnostics, and automated controls to our remote amplifier management platform. Most software features will be available this quarter. The feedback we are hearing from our customers is very positive. In September, We attended the Society of Cable Telecommunications Engineering Expo. We had great interactions with customers and potential customers during the expo. And as I just mentioned, feedback from our customers continues to be very positive, with many noting that our amplifiers are groundbreaking in terms of performance, ease of setup, and control and monitoring capabilities. As cable operators prepare for substantial upgrades to their infrastructure to meet increased spectrum and bandwidth demands, it's clear that the deployment of next-generation amplifiers and related equipment has become essential. Looking ahead to Q4, we expect strength in our CATV business to continue, although we expect revenue in this business to moderate to between $50 million and $55 million next quarter, following this quarter's exceptionally strong results. Now turning to our telecom segment. Revenue from our telecom products of $3.7 million was up 34% year-over-year and 93% sequentially. As we have said before, we expect telecom sales to fluctuate from quarter to quarter. For the third quarter, our top 10 customers represented 97% of revenue, up from 96% in Q3 of last year. We had two greater than 10% customers, one in the CATV market, which contributed 66% of total revenue, and one in the data center market, which contributed 24% of total revenue. In Q3, we generated non-GAAP gross margin of 31%, which was in line with our guidance range of 29.5% to 31%, and was up from 25% in Q3 2024 and compared to 30.4% in Q2 2025. The year-over-year increase in our gross margin was driven primarily by our favorable product mix, Looking ahead, we expect continued gradual improvement in gross margins, although we expect that the revenue mix and data center in the next few quarters will be a slight headwind. We remain committed to our long-term goal of returning our non-GAAP gross margin to around 40%. The progress we have made so far demonstrates that we're on the right track, and we continue to believe that this goal is achievable. The revenue figures presented above are net of a contract revenue amount due to the accounting for warrants provided to customers. As a reminder, this amounts to approximately 2.5% of revenue derived from certain customers to whom AOI has provided warrants in exchange for future revenue. In Q3, the amount of this contract revenue was in material at about $50,000. Total non-GAAP operating expenses in the third quarter were $47.1 million, or 40% of revenue, which compared to $27.9 million, or 43% of revenue, in Q3 of the prior year. While operating expenses increased this quarter and were a bit higher than our forecast, this rise was largely driven by increased shipping costs related to increased business activity in our CATB business this quarter. Looking ahead, we expect non-GAAP operating expenses to be in the range of $48 million to $50 million per quarter. Non-GAAP operating loss in the third quarter was $10.3 million, compared to an operating loss of $11.7 million in Q3 of the prior year. GAAP net loss for Q3 was $17.9 million, or a loss of $0.28 per basic share, compared with a GAAP net loss of $17.8 million, or a loss of $0.42 per basic share in Q3 of 2024. On a non-GAAP basis, Net loss for Q3 was $5.4 million, or 9 cents per share, which was in line with our guidance range of a loss of $5.9 million to a loss of $2 million, or non-GAAP income per share in the range of a loss of 10 cents to a loss of 3 cents. This compares to a non-GAAP net loss of $8.8 million, or 21 cents per share, in Q3 of the prior year. The basic shares outstanding used for computing the earnings per share in Q3 were $63.3 million. Turning now to the balance sheet, we ended the third quarter with $150.7 million in total cash, cash equivalents, short-term investments, and restricted cash. This compares with $87.2 million at the end of the second quarter of 2025. We ended the third quarter with total debt excluding convertible debt of $62 million, compared to $54.3 million at the end of last quarter. As I mentioned on our prior earnings call, earlier this year we announced a revolving loan facility with BOK Financial of $35 million, which we intend to use to meet some of our working capital needs going forward. As of September 30, we had $170.2 million in inventory, which compared to $138.9 million at the end of Q2. This increase in inventory is almost entirely due to purchases of raw materials to be used in production of our products over the next several months. During the quarter, we initiated We completed this program during the quarter, raising $147 million net of commissions and fees, which we intend to use mainly for new equipment and machinery for production and research and development use, including the earlier mentioned production expansion in Texas. We made a total of $49.9 million in capital investments in the third quarter, which was mainly used for manufacturing capacity expansion for our 400G and 800G transceiver products. On our last few earnings calls, we have discussed our plans to make sizable CapEx investments over the next several quarters as we prepare for increased 400G, 800G, and 1.6 terabit data center production in 2025. To date this year, we have made a total of $124.9 million in capital investments, and we are tracking at or above our CapEx projections we gave earlier this year of $120 million to $150 million in total CapEx. We had noted on our prior couple of earnings calls that these costs could be impacted from tariffs, but that given the evolving nature, it is difficult to predict what type of impact or by how much. In Q3, the direct tariff impact on capital equipment was $1.9 million, or roughly 4%. But tariff rates and equipment import mix may cause future results to vary materially. We sourced equipment from all over the world, including both from domestic and international locations. We have and will continue to do our best to minimize any impacts. It's clear that U.S.-based production is a priority for our customers, and we remain fully committed to expanding our capacity to meet that demand. Moving now to our Q4 outlook. We expect Q4 revenue to be between $125 million and $140 million, accounting for a sequential decrease in CATV revenue, as well as a more substantial sequential increase in our data center revenue. We expect non-GAAP gross margin to be in the range of 29% to 31%. Non-GAAP net income is expected to be in the range of a loss of $9 million to a loss of $2.8 million, and non-GAAP earnings per share between a loss of 13 cents per share and a loss of 4 cents per share, using a weighted average basic share count of approximately 70.3 million shares. With that, I will turn it back over to the operator for the Q&A session. spk03: Operator? Conference Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And our first question comes from Simon Leopold of Raymond James. Please go ahead. Simon Leopold | Analyst, Raymond James: Thanks for taking the question. I'm going to ask two and start with the cable TV side. So clearly a strong blowout number here this quarter, so the moderation makes sense. And I guess where I'd like to go is to understand how you're thinking about the broader outlook for CATV in that I recall last quarter we talked about the potential to do over $300 million in 2026. If we sort of run right out what you're doing, you're certainly on that trajectory. But I want to assess this given the lumpy nature of cable TV. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer, Applied Optoelectronics: Yeah, Simon, thanks for bringing that up. So, yeah, I mean, we do think $300 million-plus in cable TV revenue is still achievable next year. As you pointed out, you know, we're kind of approaching a run rate there in this quarter. What I think is significant to point out, though, and we pointed this out on the last earnings call as well, that a lot of that growth is going to come from new products that we've announced and we discussed in our prepared remarks a few minutes ago about the great success that we had at the Society of Cable Telecommunications Engineering Show, showcasing some of our new products, including the software products that we highlighted. Yes, I think that the $300 million-plus mark is achievable next year. However, it's not likely to come just from the amplifier products, although, again, we expect strong results in the amplifiers, but the additional revenue that we expect to see from those other products should get us up to that $300 million mark. Dr. Thompson Lin | Founder, Chairman, and CEO, Applied Optoelectronics: Well, Simon, this is Tom. As we say in the script, we expect the cable TV revenue in Q4 will reduce to maybe $50 million to $55 million. So that means the data center growth should be a lot, okay? Since the revenue increased by about 10% compared to Q3. So that means data center revenue will increase by $25 to $40 million in Q4. Because in the season... Yeah, sorry. Go ahead. Simon Leopold | Analyst, Raymond James: Yeah, no, so that's where I wanted to follow up. On the data center, particularly around your comment about 400 and 800 gig being up, given 800 gig is teeny right now, I'd like to unpack that a little bit because I don't think you've announced certifications, qualifications on 800 gig yet. It sounds like that's somewhat imminent, but I don't want to over-interpret. So maybe just drill down specifically to how you think about 800 gig in that 4Q and And then, of course, how should we think about the timing of when to start thinking about 1.6T? I understand that's not in 4Q, but should we be thinking about that for next year? Thank you. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer, Applied Optoelectronics: Yes. So 800 gig, we do expect meaningful shipments in the fourth quarter, as we said in our prepared remarks. Now, the growth in Q4 is largely going to come from 400 gig, but we do expect meaningful revenue from 800 gig. you know, in this quarter. And as you pointed out, that would require, you know, product qualification to be, you know, pretty imminent, which is what we believe. With respect to 1.6 terabits, yeah, we do think that we'll see revenue from 1.6 terabits later next year, but it's not going to be a factor in Q4, as you pointed out, and probably not in the first half of next year. Dr. Thompson Lin | Founder, Chairman, and CEO, Applied Optoelectronics: So the A&Z single mode, especially, as in most of them will be from the 2xFR4, So the total 800G single-mode transceiver in Q4 will not be allowed. It's maybe $4 to $8 million. So most of the cost is from 400G single-mode transceiver. The 1.6G single-mode transceiver, we have right now, I would say, around four customers. So we are working very hard. So I will deliver the sample either by end of this year or early next year. But the volume effect should be more like, I would say, June, July next year for 1.60. And we have several, I would say, four or five different products for 1.60 single motor and receiver. And we will announce pretty soon in the short term. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer, Applied Optoelectronics: Also, Simon, I just want to reiterate something that we've mentioned, you know, repeatedly and talked about a little bit on the call, but just for clarity. The factory that we're building, both here as well as the increased capacity that we've been adding in Taiwan, is capable of manufacturing both 800G and 1.6 terabit on the same production line. The only difference really is in the final testing in terms of the type of equipment that we need. Simon Leopold | Analyst, Raymond James: Great. spk02: Thank you. You're welcome. Conference Operator: The next question comes from George Nodder of Wolf Research. Please go ahead. George Nodder | Analyst, Wolf Research: Hi, guys. Thanks very much. Hey, I was just curious if you could tell us more about the shipping and receiving delay at the end of the quarter. I'm just wondering what that was. And can you confirm that it was a single customer or was it multiple customers? Any insights there would be great. And I've got a follow-up, too. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer, Applied Optoelectronics: Sure. It was a single customer, a single hyperscale customer, which is a relatively new customer addition for us. And as a result of that, you know, some of the shipments at the end of the quarter, you know, I can't go into too many details because of, you know, obviously non-disclosure agreements and such, but let's just say that not all the systems that were, all the inventory management systems and all that have been properly configured at that point to be able to receive those goods in time for us to book them as revenue in the third quarter. So we resolved that in the first few days of the fourth quarter and have booked that revenue since then. So it wasn't anything that we expect to recur or anything like that. It was just kind of unique to this, I would say, sort of startup business, if you will, with this particular large hyperscale customer. George Nodder | Analyst, Wolf Research: Got it. Okay. I'm sorry. So the products were delivered to the customer, but it sounds like ownership couldn't transition because it hadn't been through their inventory management system. Is that the right view? Yeah. Yeah. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer, Applied Optoelectronics: Yeah, basically. I mean, there's a system integrator that's involved, again, without going into too many details, but it essentially comes down to just a timing issue with the computer systems on all sides that needed to be synced up. George Nodder | Analyst, Wolf Research: Okay, got it. And then can you give us an update on the capital spend? I mean, you said you're tracking ahead of the 120 to 150 for the year. What does that look like now when you layer in Q4? And then how about 2026? Do you have an initial view on what CapEx would look like next year? Thanks. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer, Applied Optoelectronics: Yeah, so we don't have a lot of the Q4 guidance comes down to sort of timing on when we're going to receive a lot of this equipment, so we're still looking at that. It's probably going to be ahead of that $150 million top end that we said before, but it's unclear at this point exactly how much of that equipment will really be able to be delivered in this quarter, so we'll get back to you on that. Similarly for 2026, we're still working on the CapEx plans for 2026, so I would expect it to be above what we're seeing in 2025, but I don't have a precise number yet on that. We're still going through those plans. George Nodder | Analyst, Wolf Research: Okay, super. Thanks very much. Conference Operator: Once again, if you would like to ask a question, please press star, then 1. And our next question comes from Michael Genovese of Rosenblatt Securities. Please go ahead. Michael Genovese | Analyst, Rosenblatt Securities: Great, thanks. I guess for 400G, with that customer becoming a run rate business, and if I'm not mistaken, I was thinking about 100,000 units per month, so maybe you could update on that. But is that the right way to think about it? And is it getting there in the fourth quarter and then we should think about that customer being at the same level of 400G per quarter all year in 2026. Am I thinking about that the right way? Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer, Applied Optoelectronics: So it is approaching, I mean, it is on track to becoming sort of a run rate business, as you mentioned. That is, when I hear the term run rate business, what I'm assuming you mean is that it's sort of capacity limited, right? That is, you know, we'll be selling a relatively consistent amount every quarter based on our capacity. So it's on, you know, it is moving in that direction. We will not be, you know, fully at capacity in Q4, not to mention the fact that we're continuing to add some capacity, especially in Taiwan, like we talked about earlier. So we won't reach its maximum potential in Q4 by any means, but it will be a meaningful contributor to revenue. As Thompson mentioned earlier, if you think about the guidance that we gave. Cable TV has an implied decline of let's just say $15 million roughly, give or take, while the overall revenue is going to be up roughly $15 million again, give or take, within the ranges that we specified. And so the rest of that growth is going to come from data center. and most of that is going to come from 400g as we discussed earlier. Not a little bit of 800g, but you know, not a lot. Most of it's going to come from 400g. Dr. Thompson Lin | Founder, Chairman, and CEO, Applied Optoelectronics: So basically, it's limited by our capacity. So right now, for 400g single-mode transceiver in Q4, we can only make it maybe close to 60,000 per month. Then by Q2, as in our targets, go to $110,000 to $120,000 per month. So it depends on our capacity. That's why we spend our CapEx, to expand the clean room in Taiwan and the U.S. The other, for sure, is very important. It's the laser capacity. As I say, it's very important. As you know, it's a short of lasers. Good news, we have laser capacity. That's why AOI right now is doing 3-inch. We'll go to 4-inch next year. At the same time, our target is go to maybe Okay, not to mention the other laser, like, you know, 25G, 50G, just high-power CW laser for the signal photonics. We are talking about our target by December next year is at least more than 2 million per month. This is where we spend all the capex. You know, it's, you know, EB, stepper, all kinds of stuff. And for sure, we are working on a 60-inch wafer, but it will be more like a two-year project. But I think 4-inch, project is ongoing and it's pretty smooth. Michael Genovese | Analyst, Rosenblatt Securities: Okay, great. And then, I mean, it sounds like you've got pretty high confidence of an 800G qualification coming soon if you're putting some in the fourth quarter guidance. So I just, you know, I just want to double click on that confidence. But then also, if we just back up three months ago, is this process going, you know, the way you expected? You know, I know no matter of a couple of weeks on either side is no big deal, but Did you think you'd have it by now, or is this kind of going the way you thought it would go? Dr. Thompson Lin | Founder, Chairman, and CEO, Applied Optoelectronics: I think we should get an order pretty soon. We will send a separate page for qualification for DER8 and 2xFR4, so we should get some volume order in maybe, I would say, three, four weeks or even sooner. So we, okay, let me tell you, we have delivered thousands of samples, okay? It's just not, that's just full-spatial sample, okay, to several customers. So finally, they'll get into volume, but really not so big volume, because the big volume, so maybe I would say 150,000 per month, or even 250,000 per month, but right now we are only talking about maybe 10,000, 20,000, so, you know, it's not, it's volume, it's still far away from That's why I say, you know, by end of December, we should have $100,000 per month. By end of June, next year, we have $200,000 per month. We spend the money based on customer commitment, okay? It's not based on our wish list. Let me say that, okay? And don't forget, especially in the U.S., you know, the cleaning space, the capacity, the equipment, you know, it's quite a lot of money. So we spend that money based on customer commitment. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer, Applied Optoelectronics: very strong commitment the reorder the fourth the fourth volume order we should receive please within a few weeks let me say that and michael directly answer your question about you know relative expectations like i think we said that we expected the qualifications to be coming in you know in the late q3 or in early q4 and so we're still in that range that i would consider uh what we expected and and we're basically still on track for that schedule Michael Genovese | Analyst, Rosenblatt Securities: Okay, if I can ask another, what should 100G be doing in 26 versus 25? And just when you compare the ASP of 100G to 800G, are we at an eight times multiple or is it even higher than that for the ASP of 800 versus 100? Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer, Applied Optoelectronics: It's not an eight times multiple. It's less than that. With respect to what 100G will do next year, I think it's going to be pretty consistent. I don't see a big fall off for sure. It could even go up a little bit. There continue to be new deployments of 100G. But I think the best scenario that I would model in is sort of a flat 100G business next year. Michael Genovese | Analyst, Rosenblatt Securities: Okay. You know what, if I could just ask one more. How are you guys feeling about the, you know, with the CapEx plans and the expansion plans, you know, gone to the market a few times this year. Are you in a good place for your spending next year, or do you think you're going to have to do more fundraisers? Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer, Applied Optoelectronics: I think we're going to continue to raise the capital that we need to fund the CapEx. I mean, our plans continue to expand. What we're hearing from our customers is, you know, more and more bullish in terms of the volume that they need and particularly the volume that they'd like to have out of U.S.-based factories, which we don't have yet. I mean, we just announced the lease a week or two ago of the new facility, which still has yet to be built out. So that's basically a 2026 event. So, you know, we're going to continue to add capacity as we see that demand coming from our customers, and it's very strong right now. Dr. Thompson Lin | Founder, Chairman, and CEO, Applied Optoelectronics: But let me say three points. One, we have some discussion with one or two major customers. With respect for the U.S. capacity, I think maybe customers will, you know, invest ALI in maybe $200 million, $300 million, okay, under discussion. Number two, I think we are working very close with Texas State to some fundraising, some support, including the U.S. government for CHIP Act. So I think maybe we should get some good money from both Texas State and the U.S. government. Number three, don't forget next year we should be profitable quite a lot. I would say, you know, No surprise, our net profit should be more than $150 million next year or even higher. So some of the expansion can be paid by our profit. Michael Genovese | Analyst, Rosenblatt Securities: Perfect. Great. Sounds exciting for the future. Thanks for answering the questions. spk02: You're welcome. Conference Operator: The next question comes from Ryan Kuntz of Needham & Co. Please go ahead. Ryan Kuntz | Analyst, Needham & Co.: Great, thanks. Following up on the transceiver products here, it sounds like you guys are doing well in silica photonics. I wanted to ask your view on kind of the macro of SIFO versus EML versus VXLs and what you're hearing from your customers about their interests as the data rates move up here to 800 and 1.6. Thank you. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer, Applied Optoelectronics: Well, I would say... First of all, what we're hearing from our customers may just be a function of where they view us in terms of our technological capabilities and what they need. So that is to say, I'm not saying that, for example, when I tell you that our customers like SIFO, they like our SIFO solution for sure. That's not to imply that they're going to switch all of their products over to SIFO. They have other vendors that are working with EMLs, for example. But all that being said, I think broadly speaking, I think SIFO is seen as a technology that has more scalability in terms of its ability to go to higher data rates in the future. I think we're at the early stages of implementing silicon photonics, you know, in terms of volume manufacturing and all that. So it's going to take some time for them to become sort of comfortable and let that technology ramp up. But it certainly has more legs in terms of higher data rate than EMLC. Dr. Thompson Lin | Founder, Chairman, and CEO, Applied Optoelectronics: Especially, you need less laser for SIFO. And don't you know that's a very serious problem, shortage of lasers, especially for EML, okay? Not to mention 200G, even 100G EML. So, for example, the 800G DR8, if you use EML, you need, I would say, 8 EML. But if you're using system for only, you only need two high-power CW lasers. So, that's a very good reason. Because you can't get enough EML. So what you can do, you've got all the, you've got everything, but no laser. So you can make, no way you can make in the, you know, 800G 1.6T transceiver. Ryan Kuntz | Analyst, Needham & Co.: Great stuff. Maybe shifting gears to cable. You know, how are you feeling about, about share there at your larger customers? Do you feel like the uptick in demand here for cable? Is this share gain? Is this higher deployment rates? Any view on how you feel about share versus customer spend? spk03: I would say it's share gain primarily. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer, Applied Optoelectronics: The customer's plans continue to evolve, but as I mentioned, We've had some very, very successful interaction with our major customers, including the larger MSOs like we've talked about with Charter and others, but also with a number of smaller operators. The Society of Cable Telecommunications Engineers show that we were at was really very, very positive for us. So I think we're taking slots that could have potentially gone somewhere else and gaining that share. Dr. Thompson Lin | Founder, Chairman, and CEO, Applied Optoelectronics: So besides Charter, we have six other customers, and we only got two good-sized orders from two brands. So total, we have seven customers right now for cable TV, 1.8 gigahertz. Okay, now including 1.2 gigahertz. But next year, we're talking about another 10. So that means by next year, total, we should have 17 customers in cable TV in North America, Latin, Australia, even Asia. So not only one customer, okay? A new Ryan Kuntz | Analyst, Needham & Co.: Great stuff. And when you talked about the new products coming in cable, are you referring to nodes or the software products for the amps that you mentioned earlier? spk03: Both, both, yes. Ryan Kuntz | Analyst, Needham & Co.: Got it. Super, that's all I got. Appreciate it. Thank you. Dr. Thompson Lin | Founder, Chairman, and CEO, Applied Optoelectronics: And don't forget the software, the Cosmic is pretty good. That's very important. And Quantum Link and Quantum Bridge, customers really like it. They solve a lot of problems of the customer. They solve a lot of issues. They can save a lot of operating expense. And that's why they like it. That's why AI would become the number one supplier in cable TV. It's not only hardware, but integration of hardware and software and the management system. spk03: Appreciate that. spk02: Thank you. Conference Operator: Once again, if you would like to ask a question, please press star then one. Our next question will come from Tim Savigno of Northland Capital Markets. Please go ahead. Tim Savigno | Analyst, Northland Capital Markets: Hey, good afternoon. A couple questions, but I want to start with what we've been hearing pretty much all week here is about a pretty dramatic kind of step function increase and really across a lot of the different areas in AI optical, including inside the data center for modules. Maybe focused on 1.6 to some degree, but pretty broad-based seeming. My first question is, are you seeing that in terms of your conversations with customers about overall levels of transceiver demand? Just, you know, I don't know, in the last four to six weeks. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer, Applied Optoelectronics: Just look at our... I'm sorry, I cut you off there. I didn't hear the first part of your question. Tim Savigno | Analyst, Northland Capital Markets: No, all good. Go ahead. Sorry. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer, Applied Optoelectronics: Yeah. But yes, I mean, we're seeing very strong increase in demand. If you look at our guidance, again, you know, just kind of go back to the segment guidance that we gave it implies a dramatic ramp in data center revenue in the fourth quarter. And, you know, we didn't give annual guidance for next year, but we certainly believe, you know, that's the beginning of a sustained ramp. So I think we're exactly in sync with what you described. You know, we're seeing that ramp first at 800 gig, but as we talked about later next year, we expect 1.6 to be a strong contributor as well. Does that answer your question, Tim? Tim Savigno | Analyst, Northland Capital Markets: Yeah. And I wanted to follow up on your capacity targets exiting the year, I think at 100,000 units a month. And Thompson had mentioned before, you know, commitments from customers, I guess. And I want to kind of dig into that a little bit more, which is, would you be in a position to ship that full, given we're running out of year a little bit here, but would you be in a position to ship that full capacity in the first quarter? And do you have either orders on hand, commitments, however you want to describe it, to kind of cover those type of volumes starting in Q1 next year? Dr. Thompson Lin | Founder, Chairman, and CEO, Applied Optoelectronics: I would say more like Q2. Don't forget the Chinese New Year and the manufacture cycle time is one and a half months. So even if we got all the equipment ready, you know, we are doing a pilot round right now, both in Taiwan and U.S. And so even the customer give us orders because of the manufacture cycle. So I would say you're going to see maybe 90 to 100,000 This is per month of revenue. You always say it's more like Q2. And to answer your first question, right now, customers give us crazy numbers, okay? Just AY share, not their total demand. They're talking about, like, more than 300,000 of 800D plus 1.60 single motion achievers, just AY share. So for sure, we're going to spend the money until we've got a commitment. So, yeah, yes, it's true. Right now, all the hyperscale data centers, data center customers are really serious. So it's not a problem. Let me say that. It's not a problem. It's a real demand, okay? And for all of them. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer, Applied Optoelectronics: Tim, I just wanted to touch on one thing that your question asked earlier. I want to make sure we're on the same page. So you mentioned a capacity of 100,000 per month. That is our 800 gig or 1.6 terabit, but again... 800 gig primarily the shared capacity. In addition to that, we also have capacity for 400 gig. Those are not shared, right? So the 400 gig capacity, as Thompson mentioned, should be 120,000 pieces or more early next year. And we do have, you know, customer commitments that would cover that. spk02: Great. Thanks very much. Conference Operator: At this time, we have no further questions, and I will turn the call back over to Dr. Thompson Lin for closing remarks. Dr. Thompson Lin | Founder, Chairman, and CEO, Applied Optoelectronics: Again, thank you for joining us today. As always, we want to extend a thank you to our investors, customers, and employees. For your continued support, we continue to believe the fundamental driver of long-term demand for our business remains robust, and we are in a unique position to drive value from these opportunities. We look forward to welcoming some of you to our Texas Factory Tour next week and seeing many of you at the upcoming investor conference. Thank you. Conference Operator: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect. jsPDF 3.0.3 D:20260608224744-00'00'

NASDAQ:AAOI Q2 2025 Earnings Call Transcript Generated on 6/9/2026 Conference Operator | Operator: Good afternoon. I will be your conference operator. At this time, I would like to welcome everyone to Applied Optoelectronics Second Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. To request operator assistance during the call, please press star then zero. Please note that today's event is being recorded. I will now turn the call over to Lindsay Savarese, Investor Relations for Applied Optoelectronics. Ms. Savarese, you may begin. Lindsay Savarese | Investor Relations, Applied Optoelectronics: Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics. I'm pleased to welcome you to AOI's second quarter 2025 financial results conference call. After the market closed today, AOI issued a press release announcing its second quarter 2025 financial results and provided its outlook for the third quarter of 2025. The release is also available on the company's website at ao-inc.com. This call is being recorded and webcast live. A link to the recording can be found on the investor relations section of the AOI website and will be archived for one year. Joining us on today's call is Dr. Thompson Lin, AOI's founder, chairman, and CEO, and Dr. Stephan Murray, AOI's chief financial officer and chief strategy officer. Thompson will give an overview of AOI's Q2 results, and Stephan will provide financial details and the outlook for the third quarter of 2025. A question and answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AOI's safe harbor statement. On today's call, management will make forward-looking statements. These forward-looking statements involve risks and uncertainties, as well as assumptions and current expectations, which could cause the company's actual results, levels of activity, performance or achievements of the company or its industry, that differ materially from those expressed or implied in such forward-looking statements. In some cases, you can identify forward-looking statements by terminology, such as believes, forecasts, anticipates, estimates, suggests, intends, predicts, expects, plans, may, should, could, would, will, potential, or think, or by the negative of those terms or other similar expressions. that convey uncertainty of future events or outcomes. The company has based these forward-looking statements on its current expectations, assumptions, estimates and projections. While the company believes these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond the company's control. Forward-looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of its products into new markets and customer responses to its innovations, as well as statements regarding the company's outlook for the third quarter of 2025. Except as required by law, AOI assumes no obligation to update these forward-looking statements for any reason after the date of this earnings call. to conform these statements to actual results or to changes in the company's expectations. More information about other risks that may impact the company's business are set forth in the Risk Factors section of AOI Reports on File with SEC, including the company's annual report on Form 10-K and quarterly reports on Form 10-Q. Also, all financial results and other financial measures discussed today are on a non-GAAP basis unless specifically noted otherwise. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation between our GAAP and non-GAAP measures, as well as a discussion of why we present non-GAAP financial measures, are included in the company's earnings press release that is available on AOI's website. Before moving to the financial results, I'd like to note that the date of AOI's third quarter 2025 earnings call is currently scheduled for November 6th, 2025. Now, I would like to turn the call over to Dr. Thompson Lin, AOI founder, chairman, and CEO. Thompson? Dr. Thompson Lin | Founder, Chairman and Chief Executive Officer: Thank you, Lindsay, and thank you for joining our call today. While EPS came in below our expectations, primarily due to elevated operating expense, The inherent strength of our business fundamentals was apparent with strong year-over-year timeline growth and cost margin expansion. The rise in our operating expense is a direct result of strategy investment in R&D and SG&A expense, driven by increased business activity, including new customer qualification efforts for 800G and 1.6T As you can see from our results as well as some of our recent announcements, these expenditures are already translating into higher level of customer engagement, certifications, and ultimately revenue opportunities. During the quarter, we saw steady growth in our data center business. we complete our fourth volume shipment of high-speed single-mode 400G data center transceiver to recently engage major hyperscale customers. And we are seeing increased sequential demands for other hyperscalers for this product as well. We continue to make progress on customer qualification on our 800G product, and we continue to have confidence in the second half range in 800G sales. In our CATV business, we continue to see strong demand in this market, and we announced that we completed testing and certification with charters for plans to deploy our 1.8 GHz amplifiers and quantum NIMH remote management software. During the second quarter, we delivered revenue of $103 million which was in line with our guidance range of $100 million to $110 million. We recorded non-GAAP gross margin of 30.4%, which was in line with our guidance range of 29.5% to 31%. Our non-GAAP loss per share of 16 cents was below our guidance range of a loss of 9 cents to a loss of 3 cents. due to larger than anticipated operating expense, as I mentioned earlier. Total revenue for our data center product of $44.8 million increased 30% year-over-year and 40% sequentially, largely due to increased demand for our 100G and 400G products. Revenue for our 100G product increased 25% year-over-year while revenue for our 400G product increased 43% year-over-year. Total revenue in our CATV segment of $56 million increased more than 8 times year-over-year. In line with our expectations, our CATV revenue decreased 13% sequentially of a seasonally strong Q1. and as we do two-world production to our Motorola-style amplifier products. With that, I will turn it over to Stephen to review the details of our Q2 performance and our Q3 study. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer: Thank you, Thompson. As Thompson mentioned, while EPS came in below our expectations primarily due to elevated operating expenses, The inherent strength of our business fundamentals was apparent with strong year-over-year top-line growth and gross margin expansion. The rise in our operating expenses is a direct result of strategic investments in R&D and SG&A expenses driven by increased business activity, including new customer qualification efforts for 800G and 1.6 terabit transceivers. As you can see from our results, as well as some of our recent announcements, These expenditures are already translating into higher levels of customer engagement, satisfaction, and ultimately revenue opportunities. In Q2, we delivered revenue of $103 million, which was in line with our guidance range of $100 million to $110 million. We recorded non-GAAP gross margin of 30.4%, which was in line with our guidance range of 29.5% to 31%. Our non-GAAP loss per share of $0.16 was below our guidance range of a loss of $0.09 to a loss of $0.03. This bottom line miss was due to higher than expected operating expenses in the quarter, mainly stemming from additional R&D and SG&A expenses in support of new customer opportunities. R&D expenses were up $2.6 million compared to Q1. due mostly to increases in project expenses like prototypes and samples, which tend to be directly correlated with near-term revenue generation. As we've discussed in prior quarters, as customer demand for new products emerge or timelines get pulled in, R&D expenses necessarily increase to support the product customization and qualification efforts necessary to realize revenue from these new opportunities. In addition to R&D, SG&A costs also increased by $2.5 million compared to Q1, which is mostly due to increased shipping costs as we imported certain products ahead of tariff increases and supported shipping of samples and prototypes to customers, along with expenses from the OFC trade show in April. Notably, tariffs were not a material factor to our income statement in Q2. Overall OPEX was also unfavorably impacted by the rapid strengthening of the Taiwan dollar in the quarter. Slightly under 10% of the increase in OPEX was due to this currency fluctuation. Notably, we have recently seen some weakening of the NTD, so we believe the impact on Q3 will be muted. Our performance continues to be driven by strength in both our data center and CATV businesses, underscoring the strategic value of our diversified revenue streams. Our focused efforts on the key initiatives we set in motion over the past couple of years are translating into tangible business momentum and the long-term strength of our business. We've remained focused on enhancing the company's resilience, broadening our manufacturing capabilities, deepening customer engagement, strengthening supply chain diversity, and scaling our production capacity. During the quarter, we saw steady growth in our data center business. We completed our first volume shipment of high-speed, single-mode 400G data center transceivers to a recently re-engaged major hyperscale customer, marking the first significant shipments to this customer in several years. This milestone supports our expectations for increased transceiver sales in the second half of the year, driven by growing demand and ongoing U.S.-based capacity expansion. We also saw a notable increase in 400G demand from other customers as well. Also, as a reminder, the vast majority of our 400G business is for single-mode transceivers, which carry higher ASP and gross margin than is typical of short-reach transceivers based on multi-mode optics. We continued to make progress on customer qualifications on our 800G products. During the quarter, one of our major hyperscale customers completed an extensive audit of our factory in Taiwan and approved this factory for 800G production. This was a positive step forward, and we're approaching what we believe are the final stages for securing 800G product qualification. And we believe the factory qualification demonstrates their intent to move forward with our products. We continue to believe that we will produce meaningful shipments of 800G products sometime in the second half of 2025, likely in late Q3 or Q4. The schedule is constrained by our ability to build and qualify production capacity. We believe that the demand for 800G is strong, and we expect that when our production is ready, we will see a fairly quick ramp in revenue for 800G. While immaterial to our overall revenue, we did record some revenue for the second quarter in a row for our 800G products related to deliveries for customer qualification activity. In our CATV business, we continued to see strong demand in Q2. On our past several earnings calls, we have discussed the continued shipments of our 1.8 GHz amplifiers for one of our major MSO customers. Our recent press release gives additional details on our 1.8 GHz amplifier deployments with Charter, who has been a valued, long-standing customer of ours. Early in the quarter, we completed testing and certification with Charter for our 1.8 GHz amplifiers and QuantumLink remote management software. We also recently announced plans for deployment of these products in Charter's network. Our products are designed to help them continue to deliver the capacity and speeds that their customers need and expect. We shipped a significant quantity of 1.8 GHz amplifiers to Charter in the quarter, and demand continues to be robust. In addition to Charter, we have six other MSO customers who have already begun to order and deploy our 1.8 GHz products or are in various stages of qualification of these products. We are very excited to see the broad-based appeal of our amplifiers and QuantumLink software across our potential customer base. Feedback from customers has been that our amplifiers are game-changing in terms of performance, ease of setup, and control and monitoring capabilities. And we feel very good about our prospects with these six customers, in addition to our very strong position with Taro. During the second quarter, tariffs had less than a $1 million impact on our income statement. While tariff developments continue to evolve, one thing remains certain. Products manufactured in the U.S. are not subject to tariffs. This makes having a cost-effective domestic production a strategic advantage. As it relates to tariffs, also as I mentioned on our Q1 earnings call, while we do utilize some imported components in our transceivers, Many key components, like our laser chips, are already manufactured in the U.S. Importantly, in our 800G and 1.6 terabit transceiver designs, less than 10% of the value of the components used is currently sourced from China, and we have a pathway as we scale production to further reducing this China content, ultimately to near zero. We also are in discussion with several key suppliers about onshoring their production to the U.S. to support a robust domestic supply chain. As part of our strategic efforts during the second quarter, we made good progress on adding production capacity for 800G and higher transceivers at our existing facility in Texas. This initiative was part of the strategic plan we outlined earlier this year at OFC for adding production capacity for 800G and higher transceivers in both our US and Taiwan factories. We remain on track to achieve the targets that we laid out. As a reminder, we expect this will culminate later this year with what we believe will be the largest domestic production capacity, expected to be approximately 40,000 transceivers per month, or roughly 40% of our overall capacity for these advanced 800G optical transceivers. It's important to note that we will be able to accommodate this expansion in our current Texas facility footprint. This initial US based production is currently on track for beginning production later this summer. Equipment has begun to arrive for this expansion and bring up is ongoing. Further, by mid 2026, we continue to expect to be able to produce over 200,000 pieces per month, with the majority produced in Texas. Just to reiterate, We currently have three manufacturing sites, one here in Sugar Land, Texas, where our headquarters is, one in Ningbo, China, and one in Taipei, Taiwan. As you may have heard me say at OFC, we expect to increase total production of 800G and 1.6 terabit products by eight and a half times by the end of the year, and we are dedicated to achieving this goal. During the quarter, We are pleased to have received a 10-year, $2 million incentive from the City of Sugar Land, Texas Office of Economic Development for the onshoring of our manufacturing as we look to expand our manufacturing footprint in the area. Having achieved this economic incentive package, this opens the door for us to finalize these negotiations and begin construction. We also made continued progress in outfitting our Taiwan facility for increased production, as I mentioned earlier. One of our potentially largest customers recently qualified this facility for production of 800G after having previously qualified it for 400G production. With the factory qualified for both 400G and 800G, we currently expect that this customer could become a greater than 10% customer in Q3. As I mentioned on our last earnings call, we signed an agreement to lease an additional building in Taiwan late last year, which we began outfitting in Q1, and which we continued to outfit further in Q2 in order to increase production of our 100G, 400G, and 800G data center transceivers and CATV products there. Turning to our second quarter results, our total revenue was $103 million, which more than doubled year over year and increased 3% sequentially off a strong Q1, and was in line with our guidance range of $100 million to $110 million. During the second quarter, 54% of revenue was from CATV products, 44% was from data center products, with the remaining 2% from FTTH, telecom, and other. In our data center business, Q2 revenue came in at $44.8 million, which was up 30% year-over-year and 40% sequentially. Sales of our 100G products increased 25% year-over-year while sales for our 400G products increased 43% year-over-year. In the second quarter, 70% of data center revenue was from 100G products, 20% was from 200G and 400G transceiver products, and 9% was from 10G and 40G transceiver products. Looking ahead to Q3, we expect a sequential increase in our data center revenue driven by continued growth in our 100G and 400G products with the possibility of layering some additional increased 800G revenue late in the quarter. In our CATV business, CATV revenue in the second quarter was $56 million, which was up more than eight times year-over-year and, in line with our expectations, was down 13% sequentially from a record Q1. This significant year-over-year increase is due to the continued ramp in orders for our 1.8 GHz amplifier products. As we explained on our last earnings call, we expected a modest pullback sequentially in CATV revenue as we retooled production to our Motorola-style amplifier products. As I mentioned earlier, we are pleased to have completed testing and received certification for both our Motorola and GameMaker-style amplifiers from Charter Communications and announced their plans to deploy our 1.8 GHz amplifiers and QuantumLink remote management software. As a reminder, Digicom International continues to play an important role in supporting the end-to-end experience for ongoing installations as we utilize their logistics services to continue to support our products. Looking ahead to Q3, we expect record or near-record revenue in our CATV business. Now turning to our telecom segment. Revenue from our telecom products of $1.9 million was down 34% year-over-year and 18% sequentially. As we have said before, we expect telecom sales to fluctuate from quarter to quarter. For the second quarter, our top 10 customers represented 98% of revenue, up from 94% in Q2 of last year. We had two greater than 10% customers, one in the CATV market, which contributed 54% of total revenue, and one in the data center market, which contributed 34% of total revenue. In Q2, we generated non-GAAP gross margin of 30.4%, which was in line with our guidance range of 29.5% to 31%, and was up from 22.5% in Q2 2024, and compared to 30.7% in Q1 2025. The year-over-year increase in our gross margin was driven primarily by our favorable product mix, including growth in our CATV revenue, as well as growth of our newer generation data center products. Looking ahead, we continue to expect that our gross margin will improve as we see the impact of manufacturing efficiencies in our CATV production and improving product mix. We remain committed to our long-term goal of returning our non-GAAP gross margin to around 40% and continue to believe that this goal is achievable. Total non-GAAP operating expenses in the second quarter were $42.1 million, or 41% of revenues. which compared to $26 million, or 60% of revenue, in Q2 of the prior year. While operating expenses increased this quarter, as I discussed at length earlier, the rise is a direct result of strategic investments in R&D and G&A expenses driven by increased business activity. Looking ahead, we expect non-GAAP operating expenses to be in the range of $41 million to $44 million per quarter. Non-GAAP operating loss in the second quarter was $10.8 million, compared to an operating loss of $16.2 million in Q2 of the prior year. GAAP net loss for Q2 was $9.1 million, or a loss of 16 cents per basic share, compared with the GAAP net loss of $26.1 million, or a loss of 66 cents per basic share, in Q2 of 2024. On a non-GAAP basis, net loss for Q2 was $8.8 million, or 16 cents per share, which compared to our guidance range of a loss of $4.8 million to a loss of $1.7 million, or non-GAAP income per share in the range of a loss of 9 cents to a loss of 3 cents. This compares to a non-GAAP net loss of $10.9 million, or 28 cents per basic share in Q2 of the prior year. The basic shares outstanding used for computing the earnings per share in Q2 were $56.8 million. For the full year, we continue to expect achieving positive non-GAAP net income is possible. Turning now to the balance sheet, we ended the second quarter with $87.2 million in total cash, cash equivalents, short-term investments, and restricted cash. This compares with $66.8 million at the end of the first quarter of 2025. We ended the quarter with total debt, excluding convertible debt, of $54.3 million, compared to $46.1 million at the end of last quarter. Post-quarter, we announced a new revolving loan facility with BOK Financial of $35 million, which we intend to use to meet some of our working capital needs going forward. As of June 30, we had $138.9 million in inventory, which compared to $102.3 million at the end of Q1. The increase in inventory is almost entirely due to purchases of raw materials to be used in production of our products over the next several months. During the quarter, we completed our ATM program, which raised $98 million net of commissions and fees. As we have discussed previously, We intend to use these proceeds to continue to make investments in the business, including new equipment and machinery for production and research and development use, including the earlier mentioned production expansion in Texas. We made a total of $38.8 million in capital investments in the second quarter, which was mainly used for manufacturing capacity expansion for our 400G and 800G transceiver products. On our last couple of earnings calls, we have discussed our plans to make sizable CapEx investments over the next several quarters as we prepare for increased 400G, 800G, and 1.6 terabit data center production in 2025. For the year, we continue to expect between $120 million and $150 million in total capex. While these costs could be impacted from the tariffs, given the evolving nature, it is difficult to predict what type of impact or by how much. Notably, we source equipment from all over the world, including both from domestic and international locations. We will continue to do our best to minimize any impacts. It remains evident that U.S.-based production is a priority for our customers, and we are fully committed to building out this capacity. Moving now to our Q3 outlook. We expect Q3 revenue to be between $115 million and $127 million. accounting for a modest sequential increase in CATB revenue as well as a sequential increase in data center revenue. We expect non-GAAP gross margin to be in the range of 29.5% to 31%. Non-GAAP net income is expected to be in the range of a loss of $5.9 million to a loss of $2 million and non-GAAP earnings per share between the loss of 10 cents per share and a loss of three cents per share using a weighted average basic share count of approximately 62.3 million shares. With that, I will turn it back over to the operator for the Q&A session. Conference Operator | Operator: Operator? Conference Operator | Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble the roster. Conference Operator | Operator: And our first question will come from Ryan Koontz of Needham. Conference Operator | Operator: Please go ahead. Ryan Koontz | Analyst, Needham & Company: Great. Thanks for having me on, and congrats on a nice quarter. Can we start with cable TV? How are you feeling about customer inventories? For a while there, you were capacity constrained. Are you still looking to expand that in your conversion over to the Motorola housings? And lastly, do you still have plans to enter the node market? Any rough timing on when that might happen? Thank you. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer: Yeah, great questions, Ryan. Thanks for asking. So relative to, let's see, the first question is relative to our capacity. We're not exactly switching to the Motorola. That's a little bit of a misstatement there. We're producing both Motorola and GameMaker. In the quarter, though, we'd already produced a significant quantity of GameMaker, so we needed to produce enough inventory of Motorola. to have both products available as our customers' needs evolve. So we've pretty much completed the inventory build-out on those two, and now we're going to be sort of managing both of those platforms going forward. So we will continue to have production of both Motorola and GameMaker moving forward. As we mentioned in our prepared remarks a minute ago, we do expect to see some modest sequential increase in the cable TV business. So we continue to ship those amplifier products, both platforms, as well as the QuantumLink software and some of the accessories that go with it, as we mentioned in our prepared remarks. With respect to the Node, yeah, we do expect to have the Node product launching in Q4. And, you know, it will take some time, as with the amplifiers, to go through the qualification process. But I do expect that to be generating revenue, if not in Q4, certainly by Q1. I think I answered all your questions if I didn't. Ryan Koontz | Analyst, Needham & Company: That's great. Then quickly, flipping to data center, on the 800-plus transceivers, how many engagements do you have there with Tier 1s on the 800-plus? Dr. Thompson Lin | Founder, Chairman and Chief Executive Officer: I would say right now we have a minimum of three, the Tier 1 potential pickups. And right now the good news is I think we'll start volume manufacturing either in this quarter or next quarter. But more importantly, it's 1.6T. I think we expect to start volume manufacturing maybe around June, July next year. I think that's really good news for us because we've been working with several customers for 1.6T. So right now, I think we've got two, three series of engagements. Not only for sampling, but we are talking about some kind of volume manufacture in Q2, Q3. That's why we really need to increase the capacity in Taiwan, especially in the United States. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer: And, Ryan, just to emphasize what we said before, just to be clear, the production capacity that we're building for 800 gig will also work for 1.6. It's a combination of both. So, you know, all the production expansion activity that we're undergoing now can be used for either of those platforms. Dr. Thompson Lin | Founder, Chairman and Chief Executive Officer: Yeah, the only difference is just the equipment. So it's 1.6T to 1G per laptop. But 400G and 800G can be shared, too, because they are all 100G per lambda. So right now, the information equipment for assembly can be shared. 400G, 800G, or 1 by 60. The only difference is testing between 100G to 200G per reference. That's it. Ryan Koontz | Analyst, Needham & Company: Gotcha. Helpful. Thanks so much, Thompson. Thanks, guys. Appreciate it. Conference Operator | Operator: Thank you. Conference Operator | Operator: The next question comes from Simon Leopold of Raymond James. Please go ahead. Simon Leopold | Analyst, Raymond James: Great. Thank you for taking the question. The first thing I wanted to ask you about was the level of vertical integration you've achieved within the data center business. And where this is going is I think at one point you were sourcing, buying EML lasers from others and had been ramping your own production or plans to ramp. Just want to get a better understanding of, one, are you doing EMLs or silicon photonics? And, two, are you insourced or outsourced, and what's the trajectory of insourcing? Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer: Sure. So the answer to that first question, you know, are we doing EMLs or silicon photonics, is we're doing both platforms. We do have our own production capacity for EMLs. but we also do buy e-mails externally. We've talked about this in the past as well, but just to reiterate, most of our customers require us to have multiple sources. Even if one of those sources is internal, we're usually required to have a second source as well, which you can imagine is prudent for risk management purposes. So not everything is insourced, but we're insourcing what we can based on our customer commitments. And again, the silicon photonics, the lasers that are used there are CW lasers. We also produce those in-house as well. And I think I answered your question there. Did you have another one, Simon? Dr. Thompson Lin | Founder, Chairman and Chief Executive Officer: I forgot the second one. Let me add a few more points. One, I think we are increasing all the high-power CW lasers for silicon photonics to maybe 2.5 million lasers per month by sometime next year. So right now, we're in-house capacity is 100G EML. We should have 200G EML sometime soon in next year. For sure, the high-power laser for signal photonics and VEXO. The other new project is a 200G photo detector. So this is all manufactured, 1% in Houston. Now, VEXO will be manufactured by our partner in Taiwan. The other is we have one new project is to develop special signal photonics with our big hospital. For sure, we don't do signal photonics, but we involve the design, the testing, the assembly. Yeah. Simon Leopold | Analyst, Raymond James: Where I was trying to go with the question was to try to get a better sense of one of the elements to help the gross margin move towards that long term of 40. So, What I was trying to tease out in this question was the degree that you're outsourcing today versus a change towards more vertical integration in the future as a lever for gross margin improvement. So maybe the question's off base, and maybe I'm going down the wrong path. More bluntly, what will help the gross margin improve? Dr. Thompson Lin | Founder, Chairman and Chief Executive Officer: Yeah, I think the key is this way. Right now we're doing two-inch waivers. But we go to 3-inch wafer, the cost will reduce by, I don't know, 50%, 60%. Then we go to 4-inch wafer by end of next year. This is a major, much bigger cost saving than what you are talking about. I think right now, yes, we are only maybe using 30% to 40% of our lasers. But we are using, I would say, two-thirds of our laser, okay? It's... But it will depend on customer by customer. Some customers prefer older AR lasers. Some customers prefer 50-50. So that's why it's different. But more important is the cost sound of AR laser change from 2-inch to 3-inch to 4-inch. Simon Leopold | Analyst, Raymond James: That's really, really helpful. And then I want to follow up on the cable TV side. You've talked to us about production capacity on data center. and I'm just wondering whether or not we need a better understanding of your production capacity, if there are constraints on cable TV. And the other aspect is just understanding whether – I assume you've got visibility into channel inventory, because I think when customers deploy your amplifiers, you would know when they're turned up. I believe that's the case. I'm just trying to get a sense of how much of your – revenue is perhaps not deployed yet and somewhere in the channel just to assess the risk of slowing from a channel buildup. Thank you. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer: Right. So let me touch on one thing real quick, kind of the tail end of your last question regarding gross margin expansion, and it relates to the cable TV business as well. There is still significant cost savings that we expect to achieve over the next few quarters in the cable TV business. That business is not yet hitting its gross margin targets, but we have a pathway to get there. The other thing that will help on the cable TV side relative to gross margin is a greater impact on software. As part of our revenue mix software will come in with a significantly higher. You know gross margin Level so a couple other things to add on the gross margin line even though that's sort of a follow on to your previous question Regarding the manufacturing capacity for cable TV. We're pretty much I've said this before I mean we're pretty much at the level that we expect to be at our goal is with cable TV production is really to kind of match what we see all of our customers' aggregate demand being, and we're more or less there. We had a little bit of a pullback last quarter. As we retooled, we're expecting a sequential increase this quarter, and that's about the same level that we were at the prior quarter. So we're kind of at that level right now. Regarding channel inventory, you know, yes, we do have a pretty clear line of sight into what the customer is using. You know, we're very comfortable with the level of inventory that we have. And as we discussed in our prepared remarks, it's not just one customer that we have. We have multiple customers now that are buying these products. And, you know, we have a number of other customers in the pipeline. As we talked about, we have six different customers that are either buying or you know, in various stages of qualification of the products right now. So, you know, we're pretty comfortable with the inventory that we have in the channel. It is substantial, but it's in line with our customer's demand in aggregate. Dr. Thompson Lin | Founder, Chairman and Chief Executive Officer: And, Simon, let me add a few more points. So, going now, next year we are very comfortable. We should have more than 10 customers next year. And going now, based on the feedback from this customer, I think the real demand from this customer next year is, I would say minimum $300 million to $350 million. And because the shipping is by ship, so usually it takes more than six, seven weeks. That's why we need inventory in the U.S. because the customer demand is like three to five days. So we can say we got an order that we manufacture in Taiwan, and then shift here, it will easily take two, three months. It doesn't work for this cable TV industry, okay? So that's the purpose to meet the customer demand. But really, the demand is pretty big, all right? Just next year, that's the number we see right now, $300 to $350 million, real demand, all right, for this customer in, I would say, U.S., Canada, all right? Conference Operator | Operator: Great. Really appreciate you taking all the questions. Conference Operator | Operator: The next question comes from Michael Genovese of Rosenblatt. Please go ahead. Michael Genovese | Analyst, Rosenblatt Securities: Thanks very much. So on the prepared remarks, there was a lot of talk about qualification activity, 400 and 800G. It sounds like with this customer who should become a 10% customer in the third quarter and beyond, I guess I just wanted to ask, and then somebody else asked about sort of engagement with other Tier 1s. But I just wanted to ask sort of very specifically if there's qualification activity going on at 400G and above with other customers besides that one that I think you spoke a lot about on the call. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer: Absolutely. 100% yes. All three of those that Thompson mentioned earlier are in qualification at various stages. Michael Genovese | Analyst, Rosenblatt Securities: And are those all existing customers or anybody brand new to the company? Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer: Those are all existing customers. I want to be sure that we're not mischaracterizing this. We also have a number of engagement with smaller Tier 2 operators as well. So it's not just like those are the only customers that we have, but all three of those customers are existing customers. Yeah, it's not really Tier 2. Dr. Thompson Lin | Founder, Chairman and Chief Executive Officer: It could be Tier 1. Depending on where you draw the line. I know, because based on the investment they announced, the next year it could become Tier 1, Tier 2. Michael Genovese | Analyst, Rosenblatt Securities: Okay, great. And then I'm on the guide for the cable TV to be sort of near an all time high in in three queue is does that is that more than one customer? Or is that, you know, still to the the primary customer only? Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer: More than one customer? Michael Genovese | Analyst, Rosenblatt Securities: Yeah, great. And I just want you know, I think my question might have been answered on the last question, but I just want to verify that I heard it correctly. Was that $300 to $350 million that Thompson was talking about, that's a cable TV revenue target for 2026? Is that correct? Yes. Dr. Thompson Lin | Founder, Chairman and Chief Executive Officer: But this is only Charter. The Charter plus more than 10 are the customers. Michael Genovese | Analyst, Rosenblatt Securities: Right. And any sense of how much of that is, you know, I imagine the large majority of that's amplifiers, but is there any significant amount of nodes in there? Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer: There should be some no business as well, but we haven't broken that out for you. Michael Genovese | Analyst, Rosenblatt Securities: And then I thought Simon's questions about the gross margins were super helpful. But I guess now I'm just wondering about the timing maybe of, you know, not all the way to 40%, but maybe like mid-30s. Is there any kind of timing expectation you'd want to set there, or is it like a one quarter at a time wait and see? Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer: No, I mean, I think, you know, our guide right now, as you can see, is kind of consistent around 30%. It's going to take us a couple quarters to see a bigger impact from 800G business and the impact of some of the cost reduction efforts and increased software revenue that we talked about on the cable TV side. So a few quarters to get, you know, kind of the next uptick in gross margin. Dr. Thompson Lin | Founder, Chairman and Chief Executive Officer: Yeah, I would say maybe Q2 or Q3, especially Q. As you see, the bond is picking up very strongly in the next quarter, every quarter. Then 1.60, I said we'll start valuing in, I would say, June, July next year. And KWTP growth rate will improve too. So I would say, yeah, Q2, Q3 next year. But our target is 40%. So we hope we could be there by next year or early 2027. That's our target. Michael Genovese | Analyst, Rosenblatt Securities: Okay, perfect. I'll pass it on. Thanks again. Thank you. Conference Operator | Operator: Once again, if you would like to ask a question, please press star, then one. And our next question will come from Dave Kang of B. Riley FBR. Please go ahead. Dave Kang | Analyst, B. Riley FBR: Yes, thank you. Good afternoon. First question is regarding receivables. So they went up, what, like $50 million, over $50 million last quarter, first quarter, and now it's another approximately $40 million. Can you go over the dynamics, why receivables are going up? I'm assuming that's related to cable TV customers? Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer: I mean, a lot of it is. Receivables are going up because business is going up, right? We more than doubled our revenue over last year, so naturally receivables are going to go up as well. We talked about the dynamic as well, but because we wanted to get some of the cable TV products in particular into the country and ready to be staged, ready for customer acceptance, we have offered some extended payment terms to certain customers in that channel chain to be able to accommodate that additional amount of revenue so that it's here when the customers need it. So, I mean, that's the story. Increased revenue, slightly larger payment terms equals increased receivables. Dave Kang | Analyst, B. Riley FBR: Got it. And then just a question on gross margin. Can you talk about the difference between transceiver versus a cable TV? Right now you're at 30%. Maybe what the difference is, and then your long-term 40%, what the margins will be for cable TV and transceivers? Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer: Yeah, so cable TV right now is kind of in the low to mid 30% range. And obviously the transceivers are below, you know, 30% at this point, so that they average out to be around 30%. I think we can get, I mean, we've been pretty consistent that our expectation for gross margin in cable is to get above 40%. And we think we can achieve that. So that's where that is heading. With respect to the transceivers, again, mid to upper 30% is, I think, where it can be, such that we can blend out to around 40%. Dr. Thompson Lin | Founder, Chairman and Chief Executive Officer: Especially the 1.6T, the cost of margin should be more than 40%. The A under G should be close to 40%. That's why we say the cost margin should be 35% to 40% by the end of next year. Dave Kang | Analyst, B. Riley FBR: Got it. And my last question is regarding that major customer qualifying your facility. So what's left for, I guess, when companies say our 400 gig, 800 gig products are qualified, what else is left, I guess? And how long does it typically take between facility qualification versus product qualification? Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer: Right. So 400G is already qualified. We talked about the first volume shipments occurring this quarter. I mean, last quarter, the quarter that we're reporting on Q2. So that's already happened. 800G, there's really not much that has to happen. But as we discussed in our prepared remarks, we have to have production capacity available for 800G, meaningful production capacity available for 800G. before, you know, there's any need for them to give us the green light to go ahead and produce. We're pretty close to that right now. You know, we outlined our targets at OFC, and we're sticking to that. We're tracking pretty well to those targets. So really what has to happen is we've got to have enough production capacity to be able to accept meaningful orders for them to finish the qualification. Dr. Thompson Lin | Founder, Chairman and Chief Executive Officer: So basically, and so I think this quarter, this customer may maybe become 10% customer. And by Q4, I would say 400G may become our biggest revenue creator for data center, bigger than 100G in Q4. So you can see how fast the 400G revenue is coming up in these years. But for sure, the 800G will become the biggest contribution to by, I would say, Q2 next year, for sure Q3. So you can see overall how fast the revenue, and revenue is not going down, okay? Don't take me wrong. I'm saying 100G will stay the same amount, but 400G will be so strong in Q3, Q4, and Q4, 400G will become the biggest, even bigger than 100G. But at the same time, by Q2, Q3 next year, AIG will be even bigger than 400G, okay? That's my point. Conference Operator | Operator: Got it. Thank you. Conference Operator | Operator: At this time, we have no further questions, and I will turn the call over to Dr. Thompson Lin for closing remarks. Dr. Thompson Lin | Founder, Chairman and Chief Executive Officer: Again, thank you for joining us today. As always, we want to extend a thank you to our investors, customers, and employees for your continued support. As we discussed today, we believe the fundamental driver of long-term demand of our business remains robust, and we are in a unique position to contribute. drive value from this opportunity. We look forward to seeing many of you at upcoming investor conference. Thank you. Conference Operator | Operator: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect. jsPDF 3.0.3 D:20260609232231-00'00'