AAOI earnings call analysis

NASDAQ:AAOI Q1 2026 Earnings Call Transcript Generated on 6/6/2026 Conference Operator | Conference Operator: Good afternoon. I will be your conference operator. At this time, I would like to welcome everyone to Applied Optoelectronics first quarter 2026 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. Please note that this call is being recorded. I will now turn the call over to Lindsay Savarese, Investor Relations for AOI. Ms. Savarese, you may begin.

Lindsay Savarese | Investor Relations for Applied Optoelectronics

Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics. I am pleased to welcome you to AOI's first quarter 2026 financial results conference call. After the market closed today, AOI issued a press release announcing its first quarter of 2026 financial results and provided its outlook for the second 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 Q1 results, and Stephan will provide financial details and the outlook for the second 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 second 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 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 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 21st Annual Needham Technology, Media, and Consumer Conference on Wednesday, May 13th. This discussion will be webcast live, and a link to the webcast will be available on the Investor Relations section of the AOI website. Lastly, I'd like to note that the date of AOI's second quarter 2026 earnings call is currently scheduled for August 6, 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

Thank you, Lindsay, and thank you for joining our call today. We are pleased to deliver a solid first quarter result, zero in line with our expectations, driven by robust demand in both our data center and CATV business. We generated our fourth consecutive quarter of regular revenue as we executed well to expand our manufacturing capacity. We continue to see accelerating customer demands needed to support the next wave of AI infrastructure deployment. And we anticipate starting sequential revenue growth throughout these years, with a significantly larger range expected starting in Q3 as additional capacity comes online. During the first quarter, we delivered revenue of $151.1 million non-GAAP gross margin of 29.2% and non-gate loss per share of $0.07, all in line with our expected guidance range. Importantly, during the quarter, we saw and continue to see strong customer engagement around our 800G and 1.6G products, particularly as AI-driven data center investment is led. We completed our fourth volume shipment of our 800G single-mode transceiver to one of our large hyperscale customers in Q1. And we continue to anticipate a strong volume range of our 800G product starting in Q2. During the fourth quarter, we announced that we'd received our fourth volume order for our 1.6T transceiver from another long-term major hyperscale customer along with two new volume orders from this customer for our 800Z single-mode transceivers. Looking ahead, forecast demand continues to outpace our production capacity throughout mid-2027. We are working hard to add additional capacity to meet this demand. Based on new demand and our anticipated capacity range, we now believe our 2026 revenue will exceed $1.1 billion, and we now expect it to generate more than $140 million in long-term operating income in these years. With that, I will turn the call over to Stephen to review the details of our Q1 performance and our look for Q2. Stephen. Thank you, Thompson.

Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer

As Thompson mentioned, we are pleased to deliver solid first quarter results that were in line with our expectations, driven by robust demand in both our data center and CATV businesses. We generated our fourth consecutive quarter of record revenue as we executed well to expand our manufacturing capacity. We continue to see accelerating customer demand needed to support the next wave of AI infrastructure deployment. and we anticipate solid sequential revenue growth throughout this year, with a significantly larger ramp expected starting in Q3 as additional capacity comes online. In Q1, we delivered revenue of $151.1 million, which was in line with our guidance range of $150 million to $165 million. We recorded non-GAAP gross margin of 29.2%, which was in line with our guidance range of 29% to 31%. Our non-GAAP loss per share of $0.07 was in line with our guidance range of a loss of $0.09 to break even. Notably, we continued to make progress on our key priorities in the first quarter, which included, 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 facilities. Three, diversifying our revenue base, and four, strengthening operational execution to improve our margins and long-term profitability. Importantly, during the quarter, we saw and continue to see strong customer engagement around our 800G and 1.6 terabit products, particularly as AI-driven data center investments accelerate. We completed our first volume shipment of our 800G single mode transceivers to one of our large hyperscale customers. Notably, 800G revenue in the first quarter was $4.6 million, or 5.6% of our total data center revenue. Looking ahead, we continue to anticipate a strong volume ramp of our 800G products starting in Q2. During the quarter, in line with our expectations, along with the increasing demand for our 800G products, We also saw particular strength for our 400G products. Looking ahead, we expect continued strength in our 400G business, and we expect to ship nearly four times the quantity of 800G compared to our Q1 shipments. In Q1, we announced that we received our first volume order for our 1.6 terabit transceivers from another one of our long-term major hyperscale customers. We also announced that we had received two new volume orders from this customer for our 800G single-mode transceivers. Following product qualification, we expect to begin delivering these 800G orders in Q2, the 1.6 terabit order as early as Q3, and to complete all of the deliveries by the end of this year. This hyperscale customer has been a key and valued customer of ours for many years, and we are excited by the increased engagement and meaningful discussions we have had as this customer boosts its network bandwidth for AI workloads. We expect these orders to return this customer as a 10% plus customer for us. Looking ahead, forecast demand for 800G and 1.6 terabit modules are projected to continue to exceed our production capacity through mid-2027. we are working to add additional capacity to meet this demand. At OFC in March, we provided more color on our ambitious plans to increase our manufacturing capacity. During the first quarter, we made solid progress on this production capacity ramp, particularly for our 800G and 1.6 terabit products. As a reminder, our US manufacturing footprint is anchored in Sugar Land, just outside Houston. Through a combination of real estate acquisition and leases, we have expanded our Texas manufacturing footprint to about 900,000 square feet. This includes 135,000 square feet of existing capacity at our headquarters, two new buildings of 388,000 square feet in Pearland, Texas, a 210,000 square foot facility which is under development, and a 154,000 square foot building in Houston, Texas. For those of you who are not familiar with the Houston area, all of these facilities are located within a 15-mile radius of our current headquarters facility in Shogunate. During the quarter, we made progress building out our recently leased 210,000 square foot facility. We expect to begin initial production in this facility in the third quarter. Notably, this facility is located just a few hundred yards from our headquarters, and it will be entirely dedicated to manufacturing of 800G and 1.6 terabit transceivers. While this will not directly increase our indium phosphide wafer capacity, we plan to move the existing transceiver production from our current headquarters facility to this new building, which will allow expansion of our indium phosphide capacity. The facilities in Pearland and Houston will be built out to expand our production capacity for 800G and 1.6 terabit transceivers. We expect these facilities to come online in early 2027. As a reminder, internationally, We have 795,000 square feet across three facilities in Taiwan focused on optical transceivers, as well as a larger 1.2 million square foot facility in Ningbo, China, primarily dedicated to transceiver and cable TV manufacturing. Exiting Q1, our total manufacturing capacity approached 100,000 units per month of 800G and 1.6 terabit capacity. Looking ahead, we expect to continue to rapidly expand our production capacity to approach 150,000 per month of 800G and 1.6 terabit this quarter. As a reminder, we expect by the end of this year that we will be capable of producing over 650,000 pieces of 800G and 1.6 terabit products per month, with about 30% of that output coming from Texas as we expand into additional facility space and bring new production online. By the end of next year, 2027, we expect to grow our production capacity to be able to produce over 930,000 pieces of 800G and 1.6 terabit products per month, with over half of that output coming from Texas. These investments reflect measured scaling of our footprint while aligning with our strong and growing customer demand and qualification progress across both 800G and 1.6 terabit products. As a reminder, 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 high-speed products as customer demand materializes and evolves over time. While we continue to be 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. Our 1.6 terabit products are on track to begin to contribute to our overall revenue later this year, with the bigger ramp beginning in 2027. At OFC, we also discussed our plans to increase our manufacturing capacity for our external light source, or ELSFP, that's for co-packaged optics, or CPO. This utilizes the ultra-narrow line with high-power laser that we announced late last year. We have very limited production of these modules now, but we anticipate ramping production later this year and into 2027, ultimately culminating in about 400,000 pieces per month by the end of 2027. As a reminder, we will be making the high-power lasers for these modules for the in-house production of the ELSFP. We believe our in-house laser capabilities continue to be a strategic advantage for the company. As we have mentioned before, we've been manufacturing lasers internally for many years. This has allowed us to avoid some of the shortages that affected 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 we plan to continue to expand our laser manufacturing capacity in Texas in order to accommodate these future growth drivers. We expect to further expand our laser fabrication capacity by around 350% by the end of 2027. A central element of our strategy is a hiring process for transceivers. which allows us to deploy production capacity where it makes the most sense economically and geopolitically while scaling output quickly, reliably, and efficiently. As I mentioned, this automation platform is also highly flexible, enabling us to produce across multiple generations, from 400G to 800G to 1.6 terabit, using many of the same techniques and equipment. In a fast-moving AI environment, that flexibility is critical. as it allows us to rapidly ramp specific products and shift production in response to changing customer demand. This capability is the result of over a decade of investment in proprietary, in-house designed equipment and tightly integrated product and process engineering. The plans that we have unveiled have been evolving for some time, so while some of the required equipment does have long lead times, we've already ordered many of the key pieces of equipment and are working closely with our vendors to ensure on-time delivery. Notably, equipment availability has not been a problem for us to date, which we believe is largely due to the fact that most of this equipment is developed in-house, which means that we're not generally in direct competition with other similar companies for supply of the necessary machinery and equipment to build our factories. There are exceptions to this, of course, but overall we feel that our in-house developed technologies give us an edge in ensuring reliable supply of production equipment. During the first quarter, Direct tariffs had a $1.4 million impact on our income statement. With the overturn of the IEPA tariffs, we have applied for a refund which we currently anticipate will be at least $5.7 million. Our application for the refund has been approved, but as the process is still very new, we currently cannot estimate the timeframe for recovery of these tariffs. Turning to our first quarter results, our total revenue was a record $151.1 million. which increased 51% year-over-year and increased 13% sequentially off a strong Q4 and was in line with our guidance range of $150 million to $165 million. During the first quarter, 54% of revenue was from our data center product, 44% was from cable TV products, and the remaining 2% was from FTTH, telecom, and others. In our data center business, Q1 revenue came in at $81.4 million, which was up 154% year over year and 9% sequentially. Sales of our 100G products increased 36% year over year, while sales for our 400G products increased tenfold year over year. In the first quarter, 41.9% of data center revenue was from 100G products, 46.7% was from 200G and 400G products, 5.6% was from 800G transceiver product, and 5.6% was from 10G and 40G transceiver product. In our CATV business, CATV revenue was $66.8 million, which was up 4% year-over-year and 24% sequentially, and was at the high end of our expectations of $61 million and $67 million. Similar to the last couple of quarters, we shipped a significant quantity of 1.8 GHz amplifiers to our largest CATV customer in Q1, and based on recent conversations with customers, we believe demand will be somewhat higher than our initial projections for 2026. We continued to see momentum with a newer set of MSO customers that we have talked about on our prior few earnings calls. Looking ahead to Q2, We expect our CATV revenue will be between $75 and $80 million. Looking further ahead, we now currently expect to generate over $325 million annually in CATV. 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. Now turning to our telecom segments. First quarter revenue from our telecom products of $2.6 million was down 13% year over year and 50% sequentially. As we have said before, we expect telecom sales to fluctuate from quarter to quarter. For the first quarter, our top 10 customers represented 98% of revenue compared to 97% of revenue in Q1 of last year. We had three greater than 10% customers, one in the CATV market, which contributed 44% of total revenue. and two in the data center market, which contributed 26% and 25% of total revenue, respectively. In Q1, we generated non-GAAP gross margin of 29.2%, which was in line with our guidance range of 29% to 31%, and compared to 31.4% in Q4 2025 and 30.7% in Q1 2025. As we discussed on our last quarterly earnings call, while we do expect continued gradual improvement in gross margins, we continue to expect that the revenue mix in data center in the short term will be a slight headwind. We remain committed to our long-term objective of returning non-GAAP gross margins to around 40% and 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 continue to expect to approach on a non-GAAP basis beginning this quarter. 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 Q1, the amount of this contract revenue was $1 million. Total non-GAAP operating expenses in the first quarter were $51.4 million, or 34% of revenue, which compared to $35.5 million, or 36% of revenue in Q1 of the prior year, and were in line with our expectations of $50 million to $57 million. Looking ahead, we expect non-GAAP operating expenses to be in the range of $50 million to $58 million per quarter. Non-GAAP operating loss in the first quarter was $7.3 million, compared to an operating loss of $4.8 million in Q1 of the prior year. GAAP net loss for Q1 was $14.3 million, or a loss of $0.19 per basic share, compared with a GAAP net loss of $9.2 million, or a loss of $0.18 per basic share in Q1 of the prior year. On a non-GAAP basis, net loss for Q1 was $4.9 million, or $0.07 per share, which was in line with our guidance range of a loss of $7 million to a loss of $0.3 million and non-GAAP income per share in the range of a loss of $0.09 to break even. This compares to a non-GAAP net loss of $0.9 million or $0.02 per share in Q1 of the prior year. The basic shares outstanding used for computing the earnings per share in Q1 were $76 million. Turning now to the balance sheet. We ended the first quarter with $449.4 million in total cash, cash equivalents, short-term investments, and restricted cash. This compares with $216 million at the end of the fourth quarter of 2025. We ended the first quarter with total debt, excluding convertible debt, of $77 million, which compared to $67.3 million at the end of last quarter. As of March 31, we had $206.2 million in inventory, which compared to $183.1 million at the end of Q4. The increase in inventory is primarily due to raw material and work in progress needed for production, partially offset by a decrease in finished goods inventory as purchase orders to customers were fulfilled in the quarter. We made a total of $68.7 million in capital investments in the first quarter, which was mainly used for manufacturing capacity expansion for our 400G, 800G, and 1.6 terabit transceiver products. We expect to continue to make sizable CapEx investments this year as we prepare for increased 400G, 800G, and 1.6 terabit data center production. On a quarterly basis, we expect our capital expenditures to be above the total that we spent in Q1. We expect to finance these investments through a combination of cash on hand, cash generated from operations, and some equity sales along with additional debt. Notably, in Q1, we increased availability under existing and new loan agreements by $13.4 million and added another $14.5 million in April. Going forward, We believe we are well positioned for sustained growth across both our data center and CATB businesses, and the capital investments underway are expected to fundamentally strengthen the company as we execute on these opportunities. Given the rising demand, we now 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 $164 million monthly. In total, this is about $471 million per month of data center transceiver revenue, with about 40% of this capacity in the U.S. Moving now to our Q2 outlook. We expect Q2 revenue to be between $180 million and $198 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 30%. Non-GAAP net income is expected to be in the range of a loss of $2.5 million to income of $2.8 million, and non-GAAP earnings per share between the loss of 3 cents per share and earnings of 3 cents per share, using a weighted average basic share count of approximately 80.7 million shares. Looking more broadly at 2026, We now expect to generate over $1.1 billion in revenue this year, with a non-GAAP operating profit of over $140 million. As we have discussed previously, 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 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 | Conference Operator

We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw the question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Simon Leopold with Raymond James.

Please go ahead. Simon Leopold | Analyst, Raymond James

Thank you very much for taking the question. I wanted to dig in a little bit to understand the risk profile for ramping the capacity. I appreciate the nuance that you do a lot of your own tooling and machinery, and so that should put it in your control. I wonder if you could reflect on sort of the prior capacity expansions, what led to any kind of timing or disruption, and help us understand sort of how to prioritize the risk for meeting your schedule. And then I've got a quick follow-up.

Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer

Sure, Simon. I think it's important to understand that the expansion that we're undergoing is while it's large in scope, it's not something that's brand new to us, right? We've built significant capacity, especially in our Asian factories over the last couple years, and now we're basically adding additional increments to that capacity, the same type of equipment, the same manufacturing process, mainly here in the U.S., here in Texas, as we talked about during the call. So from a risk standpoint, the risk of doing something that you've already done is a lot lower than doing something that's brand new, right? As we mentioned on the call, on the prepared remarks, a lot of this equipment is developed in-house, so the risk of supply chain disruptions for the equipment, I mean, it's not eliminated, right, of course, but it's a lot lower than if we were relying on the same equipment that was being bid up by, you know, other suppliers and it had limited supply to begin with, right? So, I think those two risks are minimized because of the nature of the manufacturing process that we have. It's worth noting, too, that because the process for us is very highly automated, we're not hiring a lot of people. So the labor, the risk associated with quality control issues or being able to scale labor doesn't really exist to any great extent for us as well. So it's really just a matter of can we get the equipment in and can we put it into production on time. And so far, we're executing very well to that, which isn't surprising because we've done a good job of it over the last couple of years already.

Simon Leopold | Analyst, Raymond James

And maybe just a quick... Yeah, just a quick follow-up. I want to make sure I understand and clarify the metric you shared with us towards the end of the call, the $471 million monthly of production by the middle of 27. I want to make sure I understand, is that a... capacity number or is that a number that assumes a certain percent utilization of the total capacity available? How should we take that $471 million value? Is that a revenue forecast or is that a capacity capability and we should assume some haircut to that for lower utilization?

Thank you. Dr. Thompson Lin | Founder, Chairman, and CEO

Simon, this is Thompson. Let's base on revenue. Actually, the actual capacity is higher. But you need to understand, when you've got the equipment, you need several months to hire people for qualification. So that means based on the order in hand or minimum commitment from the customer, plus the equipment has been fully qualified. So that means June, July, that's when we believe we can deliver. For sure, not only I think Another risk is the material. So this is why we are working with all the material suppliers to secure the material supply. That's the number we feel comfortable to commit at this moment. But if you say the actual demand could be even higher than this number, but that's the best we can do. Let me say this. The actual number for our customers is bigger. And actually, what they expect is April, not June, July. So we are still trying everything to pull it in.

Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer

And, Simon, just to make it really clear, if you go back to our remarks in the last earnings call, that number was $378 million monthly. So that $471 is directly comparable to that, and it represents almost $100 million a month of additional revenue starting in the middle part of next year.

spk09

Appreciate it.

Thank you. You're welcome. Conference Operator | Conference Operator

Up next, we have George Nodder with Wolf Research. Please go ahead. on for George Miller\ Hey, guys. It's Terran Kata on for George Miller. On the ELSP business, can you talk a little bit more about the customer engagements you're seeing there? Who are you working with or how many customers are you working with? Any details would be appreciated.

Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer

Yeah, we have a couple of large customers that we're working with.

Dr. Thompson Lin | Founder, Chairman, and CEO

We haven't said who they are. Let me say that right now, We are working on a three-year long-term agreement with several customers, RSS3, including laser, including the ESIP. So that's the number we are talking about. That's why now in the transceiver, we are expanding very fast about our laser capacity. And right now, we have been doing a four-inch growth process. All targets go to 6-inch by end of next year. So yes, I think we need to do more investment to meet the demand for CPO market. As you know, the CPO laser is about 300 to 400 milliwatt compared to 70 milliwatt for 800G transceiver and 100 milliwatt for 1.6 terabit transceiver. the size is much bigger. Minimum maybe five times or six times bigger. That's why we need to go to maybe, that's why we already go from like two inch to three inch to four inch in the past 18 months. But we still plan to go to six inch by end of next year, including the, they will increase our capacity a lot. But at the same time, we are adding a lot of capacity, like more CBD, e-bean, stable, colder, everything.

Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer

We see a shortage of indium phosphide laser manufacturing capacity across the industry right now, and we think that's going to persist and even get more acute with the advent of ELSFP, as Thompson mentioned. That's why we see this need to really expand our indium phosphide fabrication capability pretty dramatically over the next 12 to 18 months. on for George Miller\ Great. And then just to follow up on that, how do you see the ability to secure the substrate capacity for the indium phosphide Dr.

Thompson Lin | Founder, Chairman, and CEO

Right now, we already got four to five suppliers. We have some kind of discussion. Sorry, not much we can say. But four of them are outside of China. So I would say right now, we should have enough inventory, minimum for almost one year. But since the volume will increase so fast, we are making calls with all the suppliers.

Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer

I would say we've got a good line of sight into how we think we can, you know, not see a shortage there. But we can't say too much about it specifically at this point because a lot of it's under discussion still. on for George Miller\ Got it.

Thank you. Conference Operator | Conference Operator

You're welcome. Again, if you have a question, please press star then 1. Our next question comes from Michael Genovese with Rosenblatt Securities.

Please go ahead. Michael Genovese | Analyst, Rosenblatt Securities

Thank you. Can you give us more granularity on when you expect qualification for 800G with this hyperscaler that sounds like will be your third hyperscale 10% customer? But when in the quarter, you know, exactly do you think you'll have this qualification? And then does your guidance de-risk it, meaning that if you got it sooner or if things went to plan, would there be upside in the quarter?

Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer

Well, as we mentioned in our prepared remarks, we've already started shipping, so I'm not sure what the qualification question really is referring to.

Dr. Thompson Lin | Founder, Chairman, and CEO

We have two big customers. One is qualified. Another one is almost qualified. The one gave us a rush order for, I don't remember, $140 million. I think they are negotiating with AOL with some kind of three-year long-term agreement with a very big volume. uh the qualification is pretty smooth i think we started shipping some volume in next month another customer we've been working for a long time has qualified we increase the capacity in this month on this quarter too so uh so we started shipping volume to two big customers not including a small one got it okay um and then Michael Genovese | Analyst, Rosenblatt Securities: You know, your guidance for the year, you're doing about a third of the revenue for the year in the first half, and then obviously expect big sequential growth in the third quarter. Then we have more big sequential growth in the fourth quarter, or is 3Q and 4Q more linear? Like, how should we think about the shape of the second half?

Not linear. Dr. Thompson Lin | Founder, Chairman, and CEO

That is a very great question. Do I now, as I said, because, okay, let me explain to you. From the day when you order equipment and qualification, installation, everything, and some kind of reliability, even in Asia, it easily takes five to seven months. In the US, it takes another two months because of shipping. So that's why the ramping from the Q3, not Q2. Even if we've got some equipment in already, but still need to go through a lot of process, it will still take several months. So right now in Q3, we can see compared to Q2, 60% to 80% increase. Q4 should be similar. And you can figure out the number. And let me say that the actual demand is not $1.1 billion. The actual demand is $1.4 billion, $1.5 billion. So right now, our target still go to $1.2 or $1.2 billion. But we still need to work very hard, like the supply chain, 18 manpower, everything. But right now, 1.1 billion is the number we feel very competent. And it's increased from 1 billion we commit in the last quarter. But our internal number is high.

Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer

Mike, just to summarize what Thompson said, the limiting factor for deliveries is our ability, the manufacturing capacity that we have available. So Once that capacity that we've been building, we talked in detail about the real estate that we have and the number of square feet that we've added and the equipment. Simon asked some very detailed questions about our equipment capacity and how confident we are in that. Once that starts to come online, it's not going to be a linear type of thing. It's going to be another large increment and then another large increment in Q4, as Thompson outlined. But that's why. It's not... You can't extrapolate from the first half and go, well, you know, there's only a certain growth rate. No, when you have new factories coming online, that adds capacity very quickly.

Dr. Thompson Lin | Founder, Chairman, and CEO

And as I said, even you've got equipment, okay, it still takes easily, including my fixed cycle time, it takes at least more than three months or even longer to deliver revenue, okay, because sometimes customers need to do another on-site auditing, some kind of qualification. So we've got a lot of equipment in, But to count the real revenue, it's more like Q3. So that's what I told you. Yes, I think Q2, we have maybe 30% growth. That's limited by our capacity. But Q3, Q4, we're talking about 60, 70, or even 80% of growth in every quarter. Or actually, even Q1 next year, too. In the next few quarters, our growth will be very fast because this trend, We can't stop the feed either to the customer.

Perfect. Michael Genovese | Analyst, Rosenblatt Securities

Great. Thank you so much.

spk09

Appreciate the call.

Conference Operator | Conference Operator

Our next question comes from Ryan Koontz with Needham.

Please go ahead. Ryan Koontz | Analyst, Needham & Company

Great. Thanks. Just want to ask about, get back to the Indian classified topic here and where you are in terms of that capacity relative to your demand and, you know, the different fab equipment you need to support that growth. Can you maybe kind of walk us through some of the major milestones we should think about for the laser supply internal here, you know, over the next couple of quarters?

Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer

Right. Great question. So, you know, as I said earlier, I think indium phosphide capacity is critical right now. You know, the fact that we have our own in-house laser manufacturing capability is one of our key advantages. When you talk to customers, that's one of the big things that they like about it, especially now that we're seeing shortages across the industry. Our fab expansion is well underway. As Thompson mentioned, we've got a number of critical pieces of equipment, MOCVDs, coating machines, and others that are in various stages of either being delivered or being qualified. It does take a fairly extended period of time to qualify a new piece of laser manufacturing equipment, as you can imagine today. You don't want to take a risk of having an unknown quality issue there. So a lot of that is already here and already undergoing qualification or it's very close to being here. And that's why we can be pretty confident that our capacity is going to be where we need it to be. It's just a matter of going through that qualification process internally, which is, by the way, different from the transceiver qualification. Here I'm talking about our internal qualification of new equipment as it comes in.

Dr. Thompson Lin | Founder, Chairman, and CEO

Let me say that. It's very different from transceiver. For laser, from the day you place the order to all the equipment suppliers, it takes minimum 18 months or even longer. Even right now, I think with the equipment delivery scale, it could take 21 to 24 months for you to start to deliver laser to the customer. Because sometimes the customer requires 3,000 hours or even 5,000 hours of reliability data. So we place a lot of orders to more than 50 suppliers. Let me say that. We got a commitment from the supplier, and we're getting some equipment in-house already, I think, every month. And let me say that by end of next year, we should be, I would say, minimum top three less suppliers worldwide. OK? I can't tell you how many equipment we have. It's confidential. That's why we are working with several customers, not only for transceivers, including laser, and for EOS-AP. As I said, EOS-AP is very challenging. It's very high spec and very high power, especially with wavelength control. I would say the challenge is more than 10 times. of like 70 or 80, 100 milliwatt laser for transceivers. It's totally different ballgames. That is our focus. And you know AOI has been doing the lasers since day one, including my PhD thesis, has been doing a laser since 1990. So we know how to do a good job.

Ryan Koontz | Analyst, Needham & Company

Yeah, Professor Thompson. Yeah, thank you. If I could have a quick follow-up there in terms of your margins and how we should think about that and the mix. As your production mix of 800 moves up here, should we think about that as the tailwind for margins? Maybe can you unpack that for us just a little bit, how to think about the mix?

Thank you. Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer

Yeah, the margins get a lot better as we expand the capacity. Right now what's going on is we're in this shifting mix between 400 and 800 and between predominantly cable TV and predominantly data center, right? So as we see that continue to shift and as 800 takes precedence, you'll start to see growth in gross margin primarily in the second half of the year.

Dr. Thompson Lin | Founder, Chairman, and CEO

So I would say we'll go to 35% gross margin by the end of this year. And at the same time, in Q1, Q2, since we started ramping up ARNG 1.60, we need time to fine-tune the process. So the efficiency is not as good as what we expect, but I think within two, three months, I think with a fully automatic manufacturing line, we can tune out the efficiency and eat it very fast. That's the major advantage of automation. By Q3, for sure by Q4, the cost margin, the whole company should be, I would say, more than 40%, especially with the laser beams that will kick in in Q3, Q4 next year.

spk09

That's helpful. Thank you both.

All right. Yep. Conference Operator | Conference Operator

Again, if you have a question, please press star then one. Our next question comes from Tim Savageau with Northland Capital Markets. Please go ahead.

spk09

Pardon me.

Tim Savageau | Analyst, Northland Capital Markets

Hey, good afternoon. First question is trying to understand where you are capacity-wise versus what you're forecasting. So I think in the release you talked about 100,000 units a month exiting Q1 in 800 gig. And that puts your capacity revenue-wise well over $100 million, right, a quarter. We've got orders in hand for $124 million of 800 gig. The capacity, theoretically, to ship those orders And yet you're guiding to, what, $18 million, $20 million in 800 gig revenue. What I'm trying to understand is that delta and what's driving that apparent disconnect. I have a follow-up.

Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer

It's just timing on how long it takes to do the manufacturing process, really. Not all that $100,000 was online in the middle of the quarter, and then you add the cycle time to it. It puts the real production output for that closer to middle to even two-thirds of the way through the quarter. It's just the timing of the manufacturing lead time.

Dr. Thompson Lin | Founder, Chairman, and CEO

So that's what I said when Simon asked why we're talking about $471 million for June, July next year. That's what I said. That is the revenue, not the capacity. The capacity is much higher because, as I said, when you have capacity, you need to add in more than one month on the official cycle time of six weeks. Plus, maybe customers need to do on-site auditing, qualification, there's all kinds of requirements. So the day you have installed, you have done all the pilot work, everything, it still would easily take another two, three, or four months to realize the revenue. Or even some of the customers even have to light some kind of light bulb, all kinds of different processes. This is why I made clear, when we're talking about $471 million in revenue, not capacity, and we're talking about equal to about $780,000 of transceivers per month by mid or next year. But actually, capacity could be high. Actually, it's high.

spk09

Okay. Okay, got it. Yeah, I mean...

Tim Savageau | Analyst, Northland Capital Markets

Incidentally, that would make you about the same size as Coherent after, you know, kind of a multi-year run over there. So the numbers kind of match up coincidentally.

Dr. Thompson Lin | Founder, Chairman, and CEO

Another question.

Tim Savageau | Analyst, Northland Capital Markets

Yeah, go ahead. Speaking of competition, earlier this week, we had a prominent contract manufacturer in the space announce two deals whereby they would be making transceivers for hyperscale customers directly. How would you assess the competitive and margin impact of that development on AOI?

Dr. Thompson Lin | Founder, Chairman, and CEO

We don't really know, but anyway, right now I think the demand is more than what we get delivered. Let me say that. Here, we are negotiating with these three customers. The three-year number is crazy high. So it depends. Let me say that for multi-mode, it's easier. Maybe you can use Fibernet or whatever. Or even for DRA, it's easier to manufacture. But it would be very tough. for like 800G, 1.6T, 2xFR4, because you need 4 lasers. But the key is still the same thing. Can you get lasers or not? Even there are many laser transceiver suppliers. But where is the laser from? Right now, Lumentum, Coedan are completely booked, even ProCam, even Sumitomo. So without lasers, how can you make transceivers?

Tim Savageau | Analyst, Northland Capital Markets

Got it. And last one for me. This goes back to the 1.6T comments where, Stefan, I think you talked about some revenue contribution later in the year in a bigger ramp in 27. And yet, I think it was my understanding that the big order that you announced, was that to be shipped completed in 26? Has there been some change there?

Or what's the Dr. Stephan Murray | Chief Financial Officer and Chief Strategy Officer

No, it means that order is just a small order compared to what we're going to see in 2027.

Dr. Thompson Lin | Founder, Chairman, and CEO

Oh, the 2027 is much, much bigger. I think the volume is light.

All right. Tim Savageau | Analyst, Northland Capital Markets

So we've got to define our terms. $200 million is not a big ramp. Okay. I got it.

Exactly. Dr. Thompson Lin | Founder, Chairman, and CEO

Next year, we are talking about more than $2 billion, $1.6 billion. Much more than $1.6 billion. We need to deliver in next year.

spk09

Thanks very much.

Conference Operator | Conference Operator

This concludes our question and answer session. I would like to turn the conference back over to Dr. Thompson Lin, founder, president, and CEO, for any closing remarks.

Dr. Thompson Lin | Founder, Chairman, and CEO

Again, thank you for joining us today. As always, we want to extend a thank you to our investors, customers, and employees who For your continued support, this is an exciting time for our industry and for AOI. 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 this opportunity. We look ahead to seeing many of you at upcoming investor conferences.

Thank you. Conference Operator | Conference Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. jsPDF 3.0.3 D:20260606091731-00'00'

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'