Applied Optoelectronics, Inc.AAOINASDAQ
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Operator: Good afternoon. I will be your conference operator on today's call. At this time, I would like to welcome everyone to Applied Optoelectronics, Inc.'s fourth quarter and full year 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. To withdraw a question, please press star, then 2. Please also note that this call is being recorded today. I will now turn the call over to Lindsay Savarese, Investor Relations for Applied Optoelectronics, Inc. Ms. Savarese, you may begin.
Lindsay Savarese: Thank you. I am Lindsay Savarese, Investor Relations for Applied Optoelectronics, Inc. I am pleased to welcome you to Applied Optoelectronics, Inc.'s fourth quarter and full year 2025 financial results conference call. After the market closed today, Applied Optoelectronics, Inc. issued a press release announcing its fourth quarter and full year 2025 financial results and provided its outlook for 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 Applied Optoelectronics, Inc. website and will be archived for one year. Joining us on today's call is Dr. Thompson Lin, Applied Optoelectronics, Inc.'s Founder, Chairman, and CEO, and Dr. Stefan Murry, Applied Optoelectronics, Inc.'s Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of Applied Optoelectronics, Inc.'s Q4 results, and Stefan will provide financial details and the outlook for 2026. A question-and-answer session will follow our prepared remarks. Before we begin, I would like to remind you to review Applied Optoelectronics, Inc.'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, we 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 response to its innovations, as well as statements regarding the company's outlook for 2026 and for the full year of 2026. Except as required by law, Applied Optoelectronics, Inc. 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 Applied Optoelectronics, Inc.'s reports on file with the SEC, including the company's annual reports 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 Applied Optoelectronics, Inc.'s website. Before moving to the financial results, I would like to note that Applied Optoelectronics, Inc. management is attending the Susquehanna Annual Technology Conference tomorrow, as well as the Raymond James Annual Institutional Investors Conference on March 3. Additionally, management will host an investor session at OFC on Tuesday, March 17 in Los Angeles. This discussion will be webcast live, and a link to the webcast is available on the Investor Relations section of the Applied Optoelectronics, Inc. website. Lastly, I would like to note that the date of Applied Optoelectronics, Inc.'s first quarter 2026 earnings call is currently scheduled for 05/07/2026. Now I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics, Inc.'s Founder, Chairman, and CEO. Thompson?
Thompson Lin: Thank you, Lindsay. Thank you for joining our call today. We are pleased to deliver record fourth quarter results that were in line with or better than our expectations, and which came off the strongest year in our company 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 $456,000,000. Data center revenue of $196,000,000 increased 32% compared to 2024, while our CATV revenue nearly tripled to $245,000,000 in the same period. We enter 2026 with strong momentum, and due to the thoughtful investment 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. During the quarter, we announced that we received our fourth 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 the customer. It also reflects both the strength 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 our production of this 800G module in anticipation of a strong volume ramp starting in Q2. Forecast demand for 800G modules are projected to exceed our production capacities to 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 expectation of $4,000,000 to $10,000,000 due to the ongoing firmware optimizations I mentioned above. Looking ahead, 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 product 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 product from our Texas facility as we expand our capacity. In addition to this fourth major 800G customer, we have had indications from another existing hyperscale customer that they intend to begin to order 800G from us soon. Finally, a new hyperscale customer has begun discussion about qualifying our 800G and 1.6T product just within the last few weeks. So we feel increasing confidence about our trajectory in 800G and 1.6T receiver with multiple customers. During the fourth quarter, we delivered revenue of $134,300,000, which was in line with our guidance range of $125,000,000 to $140,000,000. 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 current range of our loss of $0.13 to a loss of $0.04. Total revenue for our data center products of $74,900,000 increased 69% year over year and 70% sequentially. Sales of our 100G products increased 54% year over year, and sales for our 400G products increased 141% year over year. Total revenue in Q4 in our CATV segment was $54,000,000, which was up 3% year over year and in line with our expectations, but was down 24% sequentially from a record Q3. Similar to the last couple of quarters, we achieved a significant quantity of 1.8 GHz amplifiers to our largest CATV customer in Q4, and demand from this CATV customer continued to be robust. In addition to this customer, we continue to see momentum from a new set of MSO customers. With that, I will turn the call over to Stefan to review the details of our Q4 performance and outlook for Q1 2026.
Stefan Murry: 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, 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 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 am 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 $456,000,000. Data center revenue of $190,000,000 increased 32% compared to 2024, while our CATV revenue nearly tripled to $245,000,000 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 $134,300,000, which was in line with our guidance range of $125,000,000 to $140,000,000. 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 $0.01 was narrower than our guidance range of a loss of $0.13 to a loss of $0.04. 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 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 $4,000,000 to $8,000,000 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 cost 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 is 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 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 would 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 have 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 we 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 $1,200,000 impact on our income statement. As it relates to tariffs, as I have 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 IEEPA tariffs, it is worth noting that Applied Optoelectronics, Inc. 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 $134,300,000, which increased 34% year over year and increased 13% sequentially off a strong Q3, and was in line with our guidance range of $125,000,000 to $140,000,000. During the fourth quarter, 56% of revenue was from data center products, 40% was from CATV products, and the remaining 4% was from FTTH, telecom, and other. In our data center business, Q4 revenue came in at $74,900,000, 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 $54,000,000, which was up 3% year over year but was down 24% sequentially from a record Q3, and was in line with our expectations of $50,000,000 to $55,000,000. 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 $61,000,000 and $67,000,000. 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 offering. Our Quantum Link 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 is feasible that we could generate nearly $300,000,000 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 $5,100,000 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 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 U.S.-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 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 toward higher-margin products and as we capture additional efficiencies across our operations. That margin expansion, combined with increased scale, positions us to move toward 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 Applied Optoelectronics, Inc. has provided warrants in exchange for future revenue. In Q4, the amount of this contra revenue was $730,000. Total non-GAAP operating expenses in the fourth quarter were $49,300,000, or 37% of revenue, which compared to $31,500,000, or 31% of revenue, in Q4 of the prior year, and were in line with our expectations of $48,000,000 to $50,000,000. Non-GAAP operating loss in the fourth quarter was $7,100,000 compared to an operating loss of $2,500,000 in Q4 of the prior year. GAAP net loss for Q4 was $2,000,000, or a loss of $0.03 per basic share, compared with a GAAP net loss of $119,700,000, or a loss of $2.60 per basic share, in Q4 of the prior year. On a non-GAAP basis, net loss for Q4 was $600,000, or $0.01 per share, which was narrower than our guidance range of a loss of $9,000,000 to a loss of $2,800,000, or non-GAAP income per share in the range of a loss of $0.13 to a loss of $0.04. This compares to a non-GAAP net loss of $1,000,000, or $0.02 per share, in Q4 of the prior year. The basic shares outstanding used for computing the earnings per share in Q4 were 70,300,000. Turning now to the balance sheet, we ended the fourth quarter with $216,000,000 in total cash, cash equivalents, short-term investments, and restricted cash. This compares with $150,700,000 at the end of Q3 2025. We ended the fourth quarter with total debt, excluding convertible debt, of $67,300,000, compared to $62,000,000 at the end of last quarter. As of December 31, we had $183,100,000 in inventory, which compared to $170,200,000 at the end of Q3. The increase in inventory is primarily due to raw material purchases for increasing production. We made a total of $84,000,000 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 $209,000,000 in capital investments, which was above the CapEx projections we gave on our Q4 call last year of $120,000,000 to $150,000,000 for the full year. This was primarily due to increased customer demand projections. In Q4, the direct tariff impact on capital equipment was $3,100,000. As we have mentioned before, while we will 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 $90,000,000 monthly, 800G revenue will be approximately $217,000,000 monthly, and 1.6 terabit revenue will be approximately $71,000,000 monthly. Altogether, this represents $378,000,000 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 $150,000,000 and $165,000,000, 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 $7,000,000 to a loss of $300,000 and non-GAAP earnings per share between a loss of $0.09 per share and breakeven, using a weighted average basic share count of approximately 76,400,000 shares. Looking more broadly at 2026, while it is still early in the year, we expect to generate over $1,000,000,000 in revenue this year, with a non-GAAP operating profit of over $120,000,000. 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?
Operator: We will now begin the question-and-answer session. Again, 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 a question, you may press star, then 2. At this time, we will take our first question, which will come from Simon Matthew Leopold with Raymond James. Please go ahead.
Simon Matthew Leopold: First, just a very quick clarification, if I might. I missed the value you mentioned on 800G revenue. I know you had a little bit of a software firmware glitch and said it was below the guided or the $4,000,000 or so. But what was the value of 800G in the quarter? A lot below or a little below?
Stefan Murry: We did not break out exactly, but it was a bit below $4,000,000.
Thompson Lin: A lot below is delayed to Q1, but we have emphasized the end of the day may be big in Q2 next year. Plus the target—our revenue in this year is $1,000,000,000.
Simon Matthew Leopold: And I wanted to really focus on the trajectory for gross margin improvement. I want to 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 is sort of a learning curve of improving yields and things like that. So I would 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 what is the roadmap? Thank you.
Thompson Lin: I see no end because, as I say, the gross margin for 1.6 is much, much higher than the other product. And I would say that, okay, on the monthly revenue, as we say, I think by Q2, sometime in Q2, like June, July, or something like that, the revenue, like $378,000,000. So it depends on the portion of 1.6T transceiver. So at that time, I believe the gross margin should be 35% to 38% overall gross margin for all the transceiver revenue. So we believe we can achieve 40% gross margin by, like, Q3 or Q4 next year.
Stefan Murry: By the way, Simon, just to make sure you are on the same page, the revenue figures that Thompson mentioned were 2027 Q2, not this year.
Thompson Lin: Yes. It is very important. Okay. No mistake.
Simon Matthew Leopold: Thank you for that because I wrote down 2026. So you anticipated my mistake. No one can do this on the road. Okay.
Thompson Lin: No. It is impossible. No. I appreciate that. No. Thank you for that. And then
Simon Matthew Leopold: 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.
Stefan Murry: Sure, Simon. I mean, I think as we have said consistently, the overall CapEx numbers are one thing, but where the money gets spent is another thing. And I think they are 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 is where we play. So are some other parts of the network, in the nodes and other things, that maybe are slower to ramp, although I think those are also ramping, you know, pretty significantly as well. So it really—you have to look at it on a kind of granular basis. The other thing is we have got a lot of new customers that we alluded to in the call earlier. We will start to see some significant contribution from those newer customers as well. So it is not just the, you know, one or two or three top largest MSOs, but also a wider swath of smaller companies that are contributing to our revenue.
Thompson Lin: And, Simon, let you know by end of this year, I would say more than 95% of laser will be AI laser. Because right now, there is a huge issue of laser shortage. And, actually, even some supplier to us want to get this from them. We—we had at least one year, even longer. So that is why we announced we will invest $300,000,000 in Texas—triple, even more than triple. The purpose, as we said, we need to increase our laser capacity by Q2 next year, and that is to fulfill our transceiver demand. And let me emphasize: the transceiver demand is much bigger than what we projected. Right now, the number we say, the $378,000,000 of transceiver revenue, in June, July next year—okay, not this year—it is limited by our capacity and the supply chain. It is not limited by the customer demand.
Simon Matthew Leopold: Thank you for taking my questions.
Operator: And our next question will come from Michael Edward Genovese with Rosenblatt Securities. Please go ahead.
Michael Edward Genovese: Great. Thanks very much. So it sounds like instead of having a steady kind of ramp, this 800G we are expecting to come in with really big numbers starting 2Q this year and then, you know, 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 firmware, but also the ongoing qualification milestones that you have to hit to kind of have that ramp in 2Q?
Stefan Murry: 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. There is a lot of them. So the firmware has to be modified to work with all those different platforms. Hardware-wise, everything is 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. And that is really—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 is basically the last hurdle to kind of unleash the ramp. As we talked about, we have already started manufacturing products for that ramp. So from a manufacturing standpoint, we are gearing up. Just to touch on the beginning part of that question, too, about kind of nonlinearity of the ramp, that is because what you are seeing is our production capacity coming online. Right? It is not gated by demand, it is gated by our ability to produce, and that does not come on in a linear fashion. Right? You build a production line and you get a step function, not a smooth ramp.
Thompson Lin: Yes. Let me emphasize. Because every customer has so many different switch, transceiver supplier, so many different kind of ASIC. And, you know, when a customer adds more switch, this will change the firmware. We were supposed to get a green light to ship out already in December. The delay is not our problem or whatever. It is because, you know, how come build AI—you know, the whole system is much more complicated than before. That is why it takes much longer. And right now, I think we feel very comfortable. And right now, let me say, we have got almost two years of loading forecast from more than one customer. Let me say that, okay? 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 transceiver we can make for 800G and 1.6. Because Applied Optoelectronics, Inc. laser. And right now, it is limited by our capacity and the manpower and the supply chain. So that is why we are trying everything to ramp up. It takes time. It takes time. That is why I say going on this year, we say $1,000,000,000. And let me say that dimension is much, much bigger than $1,000,000,000. But that is a number we feel comfortable. At least we feel minimum 99% confident we can deliver. Otherwise, the revenue will be much bigger than that. Let me say that. Same thing for the 1.6T transceiver for the, you know, dual—right next year is still limited by supply chain. So there is a lot of issues we need to solve. And the other thing I am going to tell you, in the short term, we should receive more than $100,000,000 of 800G transceiver orders within a few months—maybe, I do not know, one month, two months—for sure less than three months. We should receive more than $200,000,000 of 1.6T transceiver orders. Alright? Transceiver orders. We are not buying the transceivers or receiving the orders—zero. We do not buy transceiver. We make transceiver. So for sure, okay, that is how great the market is. But, you know, so many things—this is okay? It is very complex. The whole team is working crazy. You know? This is a good problem. Yep. We are—we are going to talk to—let me say that. Alright?
Michael Edward Genovese: I got it. Sounds great. I guess, is it fair to say that it sounds as though when you say demand on the 800G side is already very high, does that mean orders? Like, I mean, do you have that level of orders already in for 800G?
Thompson Lin: Coming soon. At least from two customers. Because they want to make sure we commit to our promise. You know? You have the problem—yes, we will give us the loading forecast. But to make sure we guarantee what we promise, then sometime we need to allow agreement and sign down. For sure they give us order, okay? This is at least by this year, or something like that.
Michael Edward Genovese: Perfect. And last question for me. On the 500,000 units, I think you said by end of this year, and I think that is 800G and 1.6. Just the mix between Taiwan and the U.S.—I mean, it sounds like you are 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 is the goal—what is the decision making on where to put it?
Thompson Lin: It takes longer time to expand in the U.S. I think the investment is great. I think it is the, I would say, the best in the U.S., let me say that. But let me say that by end of next year, I would say more than 55% would be manufactured in the U.S., or even 60% or 65% for 1.6T. Because that is why we just—we just got—you know, we just did groundbreaking a few weeks ago. It takes time. We need more cleanroom, more space. It is quite expensive. And it takes time to do the cleanroom. Then we can have equipment, then we do a qualification and training. It takes time, but catching up. Alright? So the number will change a lot, but let me say that more than 80% to 85% of investment will be in Texas.
Michael Edward Genovese: Okay. Perfect. Thanks so much. Really exciting. Looking forward to following this more and to seeing you guys at OFC. Thank you.
Operator: Thanks. And our next question will come from George Notter with Wolfe Research. Please go ahead.
George Notter: Hi, guys. Thanks very much. Really impressive conversation here in terms of the demand profile. I guess I am just curious about what you are seeing on tariffs. Obviously, we have had some moves on tariffs recently. 15% across-the-board tariff. I am not sure if 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.
Stefan Murry: Yeah. I guess there are two ways to say that. First of all, I mean, I think anybody that is telling you they confidently know exactly what the tariff situation is going to be throughout the year is probably not being truthful. I certainly do not. You know, we have a viewpoint on, you know, obviously, on the current tariffs. It is pretty much in line with where we have been in terms of tariffs. I mean, I do not expect—if things stay the same as they are now, I do not expect it to dramatically change, you know, kind of the tariff picture that we outlined on the call earlier. That being said, you know, we are looking at the options in terms of the IEEPA tariffs. Those have been outlawed. At least there is some pathway where we might be able to recoup some of those. The other thing that I have 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 place where I am pretty confident in saying it is not going to be tariffed is product that is made in the U.S. And that is what we are scaling up to do. So the more—as time goes on—the more we can do 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 is going to be the solution for really minimizing the tariff impact.
George Notter: Got it. And then the comment about recouping tariffs—I think you said you were the shipper of record. Is there—how much could that be? What is the potential, you know, upside you guys could get if indeed you can recoup those? Thanks.
Stefan Murry: I mean, sure. If we could recoup all of it, you know, we had about $4,600,000, I believe, just last quarter in tariffs. We probably paid last year $7,000,000 or $8,000,000 in tariffs overall. Again, we are still analyzing exactly how many of those are IEEPA-related; not all tariffs are that way. So there is a lot of nuance there. But, I mean, you know, it is not going to dramatically change our picture, but it certainly would be a welcome cash flow development for sure.
George Notter: Great. Thanks, guys.
Thompson Lin: Yep.
Operator: Again, if you have a question, you may press star then 1 to join the queue. Our next question will come from Ryan Boyer Koontz with Needham & Company. Please go ahead.
Ryan Boyer Koontz: 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 you can compare 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.
Stefan Murry: Great. Thank you. Sure. I mean, the 400G products, as we said, are going to continue—I think there is going to be continued strength in the sales of those products, driven by a couple of large customers, much the same ones that we have already been shipping to, although we are seeing increased demand from at least one of those customers. 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 will 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 are going to continue to see very strong ramp in 800G, because that is most closely associated with AI. Right? That is the closest to the AI compute clusters, at least until we get to 1.6 terabit later this year.
Ryan Boyer Koontz: That is helpful. And then, you know, on your laser supply, indium phosphide—you know, we were down into 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 could give us there in terms of building out your new facilities and acquiring the necessary equipment? Thank you.
Stefan Murry: Yeah. I mean, as Thompson mentioned, we are 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, and we have line of sight into all that equipment. Some of it has already been— I mean, it would be a 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 we either have on order or have line of sight into order that will be delivered in time to accommodate that ramp.
Ryan Boyer Koontz: Great. And just maybe one last I can squeeze in. In terms of cable TV, you mentioned another customer. I assume that is a large U.S. customer that is moving forward at 1.8 GHz here in terms of DOCSIS 4.0 ESD.
Stefan Murry: Yeah. It is. We have 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 could be a significant contributor to the revenue, which is what I was trying to outline earlier in response to Simon's question.
Ryan Boyer Koontz: Great. Appreciate that. Thanks.
Stefan Murry: Yep.
Operator: And our next question will come from Tim Savageaux with Northland Capital Markets. Please go ahead.
Tim Savageaux: Hi, good afternoon. A couple of questions I wanted to follow up on. Looks like, given the increase in cable in Q1, you expect data center revenues up about $10,000,000. I guess, what is driving that if you do not expect 800G to ramp until Q2?
Stefan Murry: Well, I think we are going to see two things. We will see a growth in 400G, continued growth in 400G, and then we also do expect to see some in 800G, just not, you know, the dramatic ramp that we expect to see starting in Q2.
Tim Savageaux: Okay. Great. So principally 400G. And you mentioned some, I guess, near-term gross margin headwinds driven by mix, I think you said, but you do have cable TV up in Q1. So I want to get a little more color on what is happening gross margin-wise there.
Stefan Murry: In Q1—yeah, as we said, I mean, at the end of the day, you look at our guidance, it is kind of a wash in terms of gross margin. We are seeing, you know, a little bit of headwind coming from the product mix, especially—you know, 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 are actually expanding. So that is kind of the put and take on that. That is why it ended up being kind of a wash.
Thompson Lin: As we said, with the brain now—800G—we need time to fine tune the production in the year. That is why this is early stage of volume—make 800G. That is why we—that is why I say by Q2 next year, 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% goal gross margin for all the transceiver by Q4 2027.
Tim Savageaux: Okay. Let me just—one and a half more here. You mentioned expectations for 800G to, I guess, dominate revenue. Trying to get a sense of what that means in Q2. You should have about, you know, in the $40,000,000 range for 100G, probably will be in the $40,000,000 a quarter range for 400G. Would you expect 800G to be larger than both of those combined in Q2? Or how might you frame that?
Stefan Murry: What we are saying is it will be our largest segment within the data center. You know, it will be the largest—it will be the largest revenue of those three: 800G, 100G, 400G. I think it will be more than $25,000,000.
Thompson Lin: Or $30,000,000, I know, something like that. As I said, the issue right now is not the demand, okay? The Q1—the Q4 delay—due to the firmware optimization. But Q2, Q3 is limited by our capacity. Alright. It is not a demand issue. Let me say that. Because as we say, we received demand from the customer—from two customers. Even—I 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. So I would say I am very confident to $25,000,000, but customer demand could be $35,000,000 to $40,000,000. So we will just see how—we feel comfortable right now. The numbers we say here are not a customer demand issue. It is Applied Optoelectronics, Inc. manufacturing and supply chain issue. Let me say that.
Tim Savageaux: Okay. Great. And then I guess last question for me. You talked about the potential for $1,000,000,000 in revenue in calendar 2026, I think, or in total. I wonder, from a customer standpoint, how would you expect customer concentration to look in that scenario? And I know you have a big guy on the cable side. I am principally talking about data center. Do you think—if you break down the revenue, right, if you just take a round number of a billion, would you—if you break down—would one customer be at half of that, or what have you?
Stefan Murry: So if you break down the revenue, right, if you just take a round number of a billion, subtract the $300,000,000-ish that we have in cable TV, that gives you $700,000,000-ish left over. Right now, I would expect that is going to be dominated by—most of that is going to be two large hyperscale customers, and they will probably be roughly equivalent, you know, exiting the year. We will see how that plays out. It is pretty early to say exactly how the timing on that is going to go. But I would expect at least two to be sort of comparable in size—let us put it that way—and then, obviously, a third one that would be, you know, smaller in scale but still significant.
Thompson Lin: So I would say we would have three hyperscale customers to be more than 10%, or much more than 10%, for the whole year.
Tim Savageaux: Got it. Appreciate that color. Thanks very much.
Thompson Lin: Yep. Alright. Thank you.
Operator: At this time, we have no further questions. I will turn the call now over to Dr. Thompson Lin for any closing remarks.
Thompson Lin: Okay. And thank you for joining this 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 drivers of long-term demand for our business remain robust, and we are uniquely positioned to deliver and to drive value from those opportunities. We look forward to seeing many of you at upcoming investor conferences as well as OFC. Thank you.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.