Applied Optoelectronics Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2025

Key Takeaways

  • Neutral Sentiment: AOI delivered Q2 revenue of $103 M (in line with guidance) with non-GAAP gross margin of 30.4%, while non-GAAP EPS loss of $0.16 missed the guided loss of $0.09 to $0.03 due to higher operating expenses.
  • Positive Sentiment: Operating expenses rose on strategic R&D and SG&A investments supporting new 800 G and 1.6 T transceiver qualifications and CATV certifications, translating into increased customer engagements and future revenue opportunities.
  • Positive Sentiment: Data center revenue grew 30% YoY and 40% sequentially to $44.8 M, marked by first volume shipments of single-mode 400 G transceivers to a major hyperscaler, 800 G factory qualification progress, and US/Taiwan capacity expansions targeting 40 K transceivers/month by year-end and 200 K/month by mid-2026.
  • Positive Sentiment: CATV segment revenue jumped over eightfold YoY to $56 M on strong demand for 1.8 GHz amplifiers; completed certifications with Charter and six other MSOs and expects near-record CATV revenue in Q3, with node product launches slated for Q4.
  • Neutral Sentiment: AOI ended Q2 with $87.2 M in cash, netted $98 M from its ATM program, secured a $35 M revolving credit facility, and plans $120 M–$150 M in full-year CapEx to scale transceiver and CATV production.
AI Generated. May Contain Errors.
Earnings Conference Call
Applied Optoelectronics Q2 2025
00:00 / 00:00

Transcript Sections

Skip to Participants
Operator

Good afternoon. I will be your conference operator. At this time, I would like to welcome everyone to Applied Optoelectronics Second Quarter twenty twenty five 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 To ask a question, you may press star, then 1 on your telephone keypad.

Operator

To withdraw your question, please press star, 2. To request operator assistance during the call, please press star, then 0. Please note that today's event is being recorded. I will now turn the call over to Lindsey Savarice, Investor Relations for Applied Optoelectronics. Ms. Savarice, you may begin.

Lindsay Grant Savarese
Managing Director at The Blueshirt Group

Thank you. I'm Lindsay Savarice, Investor Relations for Applied Optoelectronics. I'm pleased to welcome you to AOI's second quarter twenty twenty five financial results conference call. After the market closed today, AOI issued a press release announcing its second quarter twenty twenty five financial results and provided its outlook for the 2025. The release is also available on the company's website at aoinc.com.

Lindsay Grant Savarese
Managing Director at The Blueshirt Group

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 Doctor. Thompson Lin, AOI's Founder, Chairman and CEO and Doctor. Stefan Murry, AOI's Chief Financial Officer and Chief Strategy Officer.

Lindsay Grant Savarese
Managing Director at The Blueshirt Group

Thompson will give an overview of AOI's Q2 results and Stefan will provide financial details and the outlook for the 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.

Lindsay Grant Savarese
Managing Director at The Blueshirt Group

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 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.

Lindsay Grant Savarese
Managing Director at The Blueshirt Group

More information about other risks that may impact the company's business are set forth in the Risk Factors section of AOI reports on file with the SEC, including the company's annual report on Form 10 ks and quarterly reports on Form 10 Q. Also, all financial results and other financial measures discussed today are on a non GAAP basis unless specifically noted otherwise. Non GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation between our GAAP and non GAAP measures as well as a discussion of why we present non GAAP financial measures are included in the company's earnings press release that is available on AOI's website. Before moving to the financial results, I'd like to note that the date of AOI's third quarter twenty twenty five earnings call is currently scheduled for 11/06/2025.

Lindsay Grant Savarese
Managing Director at The Blueshirt Group

Now I would like to turn the call over to Doctor. Thompson Lin, AOI's Founder, Chairman and CEO. Thompson?

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

Thank you, Lindsay, and thank you for joining our call today. While EPS came in below our expectations, primarily due to elevated operating expense, the inherent strength of our business fundamentals was apparent with strong year over year top line growth and gross margin expansion. The rise in our operating expense is a direct result of strategy investment in R and D and SG and A expense driven by increased business activity, including new customer qualification efforts for 800 gs and 1.6T transceivers. As you can see from our results as well as some of our recent announcement, these expenditures are already translated into higher level of customer engagements, certifications and ultimately revenue opportunities. During the quarter, we saw steady growth in our data center business. We complete our first volume shipment of high speed single mode 400 gs data center transceiver to a recently engaged major hyperscale customer and we are seeing increased sequential demands for other hyperscaler for this product as well. We continue to make progress on customer qualification on our 800E product and we continue to have confidence in the second half range in 800 gs sales. In our CATV business, we continue to see strong demand in this market and we announced that we completed testing and certification with charters for plan to deploy our 1.8 gigahertz enterprise and corner NIM remote management software.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

During the second quarter, we delivered revenue of $103,000,000 which was in line with our guidance range of $100,000,000 to $110,000,000 We recorded non GAAP gross margin of 30.4%, which was in line with of our guidance range of 29.5% to 31%. All non GAAP loss per share of $0.16 was below our guidance range of a loss of $0.09 to a loss of $03 due to larger than anticipated operating expense, as I mentioned earlier. Total revenue for our data center product of $44,800,000 increased 30% year over year and 40% sequentially, largely due to increased demand for our 100 gs and 400 gs products. Revenue for our 100 gs product increased 25% year over year, while revenue for our 400 gs product increased 43% year over year. Total revenue in our CATV segment of $56,000,000 increased more than eight times year over year, in line with our expectation.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

Our CRTB revenue decreased 13% sequentially over seasonally strong Q1 and as we retool production to our Motorola style amplifier products. With that, I will turn the call over to Stefan to review the details of our Q2 performance and outlook for Q3. Stefan?

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

Thank you, Thompson.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

As Thompson mentioned, while EPS came in below our expectations, primarily due to elevated operating expenses, the inherent strength of our business fundamentals was apparent with strong year over year top line growth and gross margin expansion. The rise in our operating expenses is a direct result of strategic investments in R and D and SG and A expenses driven by increased business activity, including new customer qualification efforts for 800 gs and 1.6 terabit transceivers. As you can see from our results as well as some of our recent announcements, these expenditures are already translating into higher levels of customer engagement, satisfaction and ultimately, revenue opportunities. In Q2, we delivered revenue of $103,000,000 which was in line with our guidance range of $100,000,000 to $110,000,000 We recorded non GAAP gross margin of 30.4%, which was in line with our guidance range of 29.5 to 31%. Our non GAAP loss per share of $0.16 was below our guidance range of a loss of $09 to a loss of $03 This bottom line miss was due to higher than expected operating expenses in the quarter, mainly stemming from additional R and D and SG and A expenses in support of new customer opportunities.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

R and D expenses were up $2,600,000 compared to Q1 due mostly to increases in project expenses like prototypes and samples, which tend to be directly correlated with near term revenue generation. As we've discussed in prior quarters, as customer demand for new products emerge or time lines get pulled in, R and D expenses necessarily increased to support the product customization and qualification efforts necessary to realize revenue from these new opportunities. In addition to R and D, SG and A costs also increased by $2,500,000 compared to Q1, which is mostly due to increased shipping costs as we imported certain products ahead of tariff increases and supported shipping of samples and prototypes to customers, along with expenses from the OFC trade show in April. Notably, tariffs were not a material factor to our income statement in Q2. Overall OpEx was also unfavorably impacted by the rapid strengthening of the Taiwan dollar in the quarter.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

Slightly under 10% of the increase in OpEx was due to this currency fluctuation. Notably, we have recently seen some weakening of the NTD, so we believe the impact on Q3 will be muted. Our performance continues to be driven by strength in both our data center and CATV businesses, underscoring the strategic value of our diversified revenue streams. Our focused efforts on the key initiatives we set in motion over the past couple of years are translating into tangible business momentum and the long term strength of our business. We've remained focused on enhancing resilience, broadening our manufacturing capabilities, deepening customer engagement, strengthening supply chain diversity and scaling our production capacity.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

During the quarter, we saw steady growth in our data center business. We completed our first volume shipment of high speed single mode 400 gs data center transceivers to a recently reengaged major hyperscale customer, marking the first significant shipments to this customer in several years. This milestone supports our expectations for increased transceiver sales in the second half of the year, driven by growing demand and ongoing U. S.-based capacity expansion. We also saw a notable increase in 400 gs demand from other customers as well.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

Also as a reminder, the vast majority of our 400 gs business is for single mode transceivers, which carry higher ASP and gross margin than is typical of short reach transceivers based on multimode optics. We continued to make progress on customer qualifications on our 800 gs products. During the quarter, one of our major hyperscale customers completed an extensive audit of our factory in Taiwan and approved this factory for 800 gs production. This was a positive step forward, and we're approaching what we believe are the final stages for securing 800 gs product qualification. And we believe the factory qualification demonstrates their intent to move forward with our products.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

We continue to believe that we will produce meaningful shipments of 800 gs products sometime in the 2025, likely in late Q3 or Q4. The schedule is constrained by our ability to build and qualify production capacity. We believe that the demand for 800 gs is strong, and we expect that when our production is ready, we will see a fairly quick ramp in revenue for 800 gs. While immaterial to our overall revenue, we did record some revenue for the second quarter in a row for our 800 gs products related to deliveries for customer qualification activity. In our CATV business, we continued to see strong demand in Q2.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

On our past several earnings calls, we have discussed the continued shipments of our 1.8 gigahertz amplifiers for one of our major MSO customers. Our recent press release gives additional details on our 1.8 gigahertz amplifier deployments with Charter, who has been a valued long standing customer of ours. Early in the quarter, we completed testing and certification with Charter for our 1.8 gigahertz amplifiers and Quantum Link remote management software. We also recently announced plans for deployment of these products in Charter's network. Our products are designed to help them continue to deliver the capacity and speeds that their customers need and expect.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

We shipped a significant quantity of 1.8 gigahertz amplifiers to Charter in the quarter, and demand continues to be robust. In addition to Charter, we have six other MSO customers who have already begun to order and deploy our 1.8 gigahertz products or are in various stages of qualification of these products. We are very excited to see the broad based appeal of our amplifiers and Quantum Link software across our potential customer base. Feedback from customers has been that our amplifiers are game changing in terms of performance, ease of setup and control and monitoring capabilities. And we feel very good about our prospects with these six customers in addition to our very strong position with Charter.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

During the second quarter, tariffs had less than a $1,000,000 impact on our income statement. While tariff developments continue to evolve, one thing remains certain, products manufactured in The U. S. Are not subject to tariffs. This makes having a cost effective domestic production a strategic advantage.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

As it relates to tariffs, also as I mentioned on our Q1 earnings call, while we do utilize some imported components in our transceivers, many key components like our laser chips are already manufactured in The U. S. Importantly, in our 800 gs and 1.6 terabit transceiver designs, less than 10% of the value of the components used is currently sourced from China. And we have a pathway as we scale production to further reducing this China content, ultimately to near zero. We also are in discussion with several key suppliers about onshoring their production to The U.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

S. To support a robust domestic supply chain. As part of our strategic efforts during the second quarter, we made good progress on adding production capacity for 800 gs and higher transceivers at our existing facility in Texas. This initiative was part of the strategic plan we outlined earlier this year at OFC for adding production capacity for 800 gs and higher transceivers in both our U. S.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

And Taiwan factories. We remain on track to achieve the targets that we laid out. As a reminder, we expect this will culminate later this year with what we believe will be the largest domestic production capacity, expected to be approximately 40,000 transceivers per month or roughly 40% of our overall capacity for these advanced 800 gs optical transceivers. It's important to note that we will be able to accommodate this expansion in our current Texas facility footprint. This initial U.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

S.-based production is currently on track for beginning production later this summer. Equipment has begun to arrive for this expansion and bring up is ongoing. Further, by mid-twenty twenty six, we continue to expect to be able to produce over 200,000 pieces per month with the majority produced in Texas. Just to reiterate, we currently have three manufacturing sites: one here in Sugar Land, Texas, where our headquarters is one in Mingbo, China and one in Taipei, Taiwan. As you may have heard me say at OFC, we expect to increase total production of 800 gs and 1.6 terabit products by 8.5x by the end of the year, and we are dedicated to achieving this goal.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

During the quarter, we are pleased to have received a ten year $2,000,000 incentive from the City of Sugar Land, Texas, Office of Economic Development for the onshoring of our manufacturing as we look to expand our manufacturing footprint in the area. Having achieved this economic incentive package, this opens the door for us to finalize lease negotiations and begin construction. We also made continued progress in outfitting our Taiwan facility for increased production, as I mentioned earlier. One of our potentially largest customers recently qualified this facility for production of 800 gs after having previously qualified it for 400 gs production. With the factory qualified for both 400 gs and 800 gs, we currently expect that this customer could become a greater than 10% customer in Q3.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

As I mentioned on our last earnings call, we signed an agreement to lease an additional building in Taiwan late last year, which we began outfitting in Q1 and which we continued to outfit further in Q2 in order to increase production of our 100 gs, 400 gs and 800 gs data center transceivers and CATV products there. Turning to our second quarter results. Our total revenue was $103,000,000 which more than doubled year over year and increased three percent sequentially off a strong Q1 and was in line with our guidance range of $100,000,000 to $110,000,000 dollars During the second quarter, 54% of revenue was from CATV products, 44% was from data center products, with the remaining 2% from FTTH, telecom and other. In our data center business, Q2 revenue came in at $44,800,000 which was up 30% year over year and 40% sequentially. Sales of our 100 gs products increased 25% year over year, while sales for our 400 gs products increased 43% year over year.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

In the second quarter, 70% of data center revenue was from 100 gs products, 20% was from 200 gs and 400 gs transceiver products, and 9% was from 10 gs and 40 gs transceiver products. Looking ahead to Q3, we expect a sequential increase in our data center revenue driven by continued growth in our 100 gs and 400 gs products, with the possibility of layering some additional increased 800 gs revenue late in the quarter. In our CATV business, CATV revenue in the second quarter was $56,000,000 which was up more than eight times year over year and in line with our expectations, was down 13% sequentially from a record Q1. This significant year over year increase is due to the continued ramp in orders for our 1.8 gigahertz amplifier products. As we explained on our last earnings call, we expected a modest pullback sequentially in CATV revenue as we retooled production to our Motorola style amplifier products.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

As I mentioned earlier, we are pleased to have completed testing and received certification for both our Motorola and GameMaker style amplifiers from Charter Communications and announced their plans to deploy our 1.8 gigahertz amplifiers and Quantum Link remote management software. As a reminder, Digicom International continues to play an important role in supporting the end to end experience for ongoing installations as we utilize their logistics services to continue to support our products. Looking ahead to Q3, we expect record or near record revenue in our CATV business. Now turning to our Telecom segment. Revenue from our Telecom products of $1,900,000 was down 34 year over year and 18% sequentially.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

As we have said before, we expect telecom sales to fluctuate from quarter to quarter. For the second quarter, our top 10 customers represented 98% of revenue, up from 94% in Q2 of last year. We had two greater than 10% customers: one in the CATV market, which contributed 54% of total revenue and one in the data center market, which contributed 34% of total revenue. In Q2, we generated non GAAP gross margin of 30.4%, which was in line with our guidance range of 29.5% to 31% and was up from 22.5% in Q2 twenty twenty four and compared to 30.7% in Q1 twenty twenty five. The year over year increase in our gross margin was driven primarily by our favorable product mix, including growth in our CATV revenue as well as growth of our newer generation data center products.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

Looking ahead, we continue to expect that our gross margin will improve as we see the impact of manufacturing efficiencies in our CATV production and improving product mix. We remain committed to our long term goal of returning our non GAAP gross margin to around 40% and continue to believe that this goal is achievable. Total non GAAP operating expenses in the second quarter were $42,100,000 or 41 percent of revenue, which compared to $26,000,000 or 60% of revenue in Q2 of the prior year. While operating expenses increased this quarter, as I discussed at length earlier, the rise is a direct result of strategic investments in R and D and G and A expenses, driven by increased business activity. Looking ahead, we expect non GAAP operating expenses to be in the range of $41,000,000 to $44,000,000 per quarter.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

Non GAAP operating loss in the second quarter was $10,800,000 compared to an operating loss of $16,200,000 in Q2 of the prior year. GAAP net loss for Q2 was $9,100,000 or a loss of $0.16 per basic share compared with the GAAP net loss of $26,100,000 or a loss of $0.66 per basic share in 2024. On a non GAAP basis, net loss for Q2 was $8,800,000 or $0.16 per share, which compared to our guidance range of a loss of $4,800,000 to a loss of $1,700,000 or non GAAP income per share in the range of a loss of $09 to a loss of $03 This compares to a non GAAP net loss of $10,900,000 or $0.28 per basic share in Q2 of the prior year. The basic shares outstanding used for computing the earnings per share in Q2 were $56,800,000 For the full year, we continue to expect achieving positive non GAAP net income is possible. Turning now to the balance sheet.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

We ended the second quarter with $87,200,000 in total cash, cash equivalents, short term investments and restricted cash. This compares with $66,800,000 at the end of the 2025. We ended the quarter with total debt, excluding convertible debt, of $54,300,000 compared to $46,100,000 at the end of last quarter. Post quarter, we announced a new revolving loan facility with BOK Financial of $35,000,000 which we intend to use to meet some of our working capital needs going forward. As of June 30, we had $138,900,000 in inventory, which compared to $102,300,000 at the end of Q1.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

The increase in inventory is almost entirely due to purchases of raw materials to be used in production of our products over the next several months. During the quarter, we completed our ATM program, which raised $98,000,000 net of commissions and fees. As we have discussed previously, we intend to use these proceeds to continue to make investments in the business, including new equipment and machinery for production and research and development use, including the earlier mentioned production expansion in Texas. We made a total of $38,800,000 in capital investments in the second quarter, which was mainly used for manufacturing capacity expansion for our 400 gs and 800 gs transceiver products. On our last couple of earnings calls, we have discussed our plans to make sizable CapEx investments over the next several quarters as we prepare for increased 400 gs, 800 gs and 1.6 terabit data center production in 2025.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

For the year, we continue to expect between $120,000,000 and $150,000,000 in total CapEx. While these costs could be impacted from the tariffs, given the evolving nature, it is difficult to predict what type of impact or by how much. Notably, we source equipment from all over the world, including both from domestic and international locations. We will continue to do our best to minimize any impacts. It remains evident that U.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

S.-based production is a priority for our customers, and we are fully committed to building out this capacity. Moving now to our Q3 outlook. We expect Q3 revenue to be between $115,000,000 and $127,000,000 accounting for a modest sequential increase in CATV revenue as well as a sequential increase in data center revenue. We expect non GAAP gross margin to be in the range of 29.5% to 31%. Non GAAP net income is expected to be in the range of a loss of $5,900,000 to a loss of 2,000,000 and non GAAP earnings per share between the loss of $0.10 per share and a loss of $03 per share using a weighted average basic share count of approximately 62,300,000.0 shares.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

With that, I will turn it back over to the operator for the Q and A session. Operator?

Operator

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. Our first question will come from Ryan Kuntz of Needham. Please go ahead.

Ryan Koontz
MD - Research Analyst at Needham & Company

Great. Thanks for having me on and, congrats on a nice quarter. Can we start with Cable TV? How are you feeling about customer inventories, your capacity for a while there, you were capacity constrained? Are you still looking to expand that in your conversion over to the Motorola housings?

Ryan Koontz
MD - Research Analyst at Needham & Company

And then lastly, do you still have plans to enter the node market and any rough timing on when that might happen? Thank you.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

Yeah, great questions, Ryan. Thanks for asking. So relative to let's see, the first question is relative to our capacity. We're not exactly switching to the Motorola. That's a little bit of a misstatement there.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

We're producing both Motorola and Gainmaker. In the quarter, though, we'd already produced a significant quantity of Gainmaker, so we needed to produce enough inventory of Motorola to have both products available as our customers' needs evolve. So we've pretty much completed the inventory build out on those two, and now we're going be sort of managing both of those platforms going forward. So we will continue to have production of both the Motorola and GameMaker moving forward. As we mentioned in our prepared remarks a minute ago, we do expect to see some modest sequential increase in the cable TV business.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

So we continue to ship those amplifier products, both platforms, as well as the Quantum Link software, some of the accessories that go with it, as we mentioned in our prepared remarks. With respect to the node, yeah, we do expect to have the node product launching in Q4. And it'll take some time, as with the amplifiers, to go through the qualification process. But I do expect that to be generating revenue. If not in Q4, certainly by Q1.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

I think I answered all your questions if I didn't Yeah, that's increase your great.

Ryan Koontz
MD - Research Analyst at Needham & Company

And then quickly flipping to data center, on the 800 plus transceivers, how many, engagements do you have there with with tier ones on the 800 plus?

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

I would say right now, we have many three, the tier one Yeah. Potential because and right now, the good news is I think we start body manufacture either in this quarter or next quarter. But more important, it's 1.6 t. I think the we expect to start volume manufacture maybe around June, July next year. That's I think that's a really good news for us because, you know, we've been working with several customer for 1.6 t.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

So right now, this week, got two, three series engagement, not only for sampling, but we are talking about some kind of the volume manufacturer, alright, in, I would say, Q2 for sure, Q3. So that's why we really need to increase the capacity Taiwan, especially United States.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

And Ryan, just to emphasize what we said before, just to be clear, the production capacity that we're building for 800 gig will also work for 1.6. It's a combination of both. All the production expansion activity that we're undergoing now can be used for either of those platforms.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

Yeah. The only difference is that the equipment is 1.6 piece, 200 per lambda. But 400 g energy can be shared too because they are all 100 per lambda. So this this is right now the aforementioned agreement for assembly can be shared.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

Okay? It's 300 g, 800 g, or one by 60. The only test difference is testing between 100 g to 200 g per reference. That's it.

Ryan Koontz
MD - Research Analyst at Needham & Company

Got you. Helpful. Thanks so much, Thompson. Thanks, guys. Appreciate it.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

Thank you.

Operator

The next question comes from Simon Leopold of Raymond James. Please go ahead.

Simon Leopold
Simon Leopold
Managing Director at Raymond James Financial

Great. Thank you for taking the question. The first thing I wanted to ask you about was, the level of vertical integration you've achieved within the data center business. And where this is going is, I think at one point you were sourcing buying EML lasers from others and had been ramping your own production or plans to ramp. Just want to get a better understanding of one, are you doing EMLs or silicon photonics?

Simon Leopold
Simon Leopold
Managing Director at Raymond James Financial

And two, are you insourced or outsourced? And what's the trajectory of insourcing?

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

Sure. So the answer to that first question, are we doing EMLs or silicon photonics is we're doing both platforms. We do have our own production capacity for EMLs, but we also do buy EMLs externally. We've talked about this in the past as well, but just to reiterate, most of our customers require us to have multiple sources. Even if one of those sources is internal, we're usually required to have a second source as well, which you can imagine is prudent for risk management purposes.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

So not everything is in sourced, but we're in sourcing what we can based on our customer commitment. And again, the silicon photonics, lasers that are used there, our CW lasers, we also produce those in house as well. I think I answered your question there. Did you have another one, Simon? I forgot the second one.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

Let me add two more points. One, I think we are increasing all the high power CW laser for silicon photonics to maybe the 2,500,000 laser per month by sometime next year. So right now, we're in house capacities, 100 EML, which we have 200 EML sometime soon in next year. For sure, the high power laser for signal photonics VCSEL. The other new projects are 200 g photo detector.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

Okay. So this is the all manufactured 1% in Houston. Next, all to be manufactured by our partner in Taiwan. The others, we had one new project is the very special signal photonics with our our the customer. For sure, we don't do signal photonics, but we involve the design, the testing, and the assembly. Yeah.

Simon Leopold
Simon Leopold
Managing Director at Raymond James Financial

And the Yeah. Where I was trying to go with the question was to try to get a better sense of, one of the elements to help the gross margin move towards that long term of 40. So what I was trying to tease out in this question was the degree that you're outsourcing today versus a change towards more vertical integration of future as a lever for gross margin improvement. So maybe the question is off base and maybe I'm going down the wrong path. More bluntly, what will help the gross margin improve?

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

Yes. I think the key this way, okay, right now we're doing two inches wafer, but we've got the switch wafer, the cost will reduce by, I don't know, 50%, 60%. Then we'll go to four inch wafer by end of next year. This is a major, much bigger cost saving than what you're talking about. As in right now, yes, we only maybe using 30 to 40% of our lasers, but we were using our, I would say, two thirds of laser.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

Okay? It's but it would depend on customer by customer. Some customer prefer all the laser. Some customers prefer fifty fifty. Okay?

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

So that's why it's different. But more important is the cost sound of AI laser change from two inch to three inch to four inch.

Simon Leopold
Simon Leopold
Managing Director at Raymond James Financial

That's really, really helpful. And then I wanna follow-up on the on the cable TV side. You've talked to us about production capacity on data center. And I'm just wondering whether or not we need a better understanding of your production capacity if there are constraints on cable TV. And the other aspect is just understanding whether I assume you've got visibility into channel inventory because I think when customers deploy your amplifiers, you would know when they're turned up.

Simon Leopold
Simon Leopold
Managing Director at Raymond James Financial

I believe that's the case. So I'm just trying to get a sense of how much of your revenue is perhaps not deployed yet and somewhere in the channel just to assess the risk of suing from a channel buildup? Thank you.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

Right. So let me touch on one thing real quick, kind of the tail end of your last question regarding gross margin expansion, and it relates to the cable TV business as well. There is still significant cost savings that we expect to achieve over the next few quarters in the cable TV business. That business is not yet hitting its gross margin targets, but we have a pathway to get there. The other thing that will help on the cable TV side relative to gross margin is a greater impact on software.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

As part of our revenue mix, software will come in with a significantly higher gross margin level. So a couple other things to add on the gross margin line, even though that's sort of the follow on to your previous question. Regarding the manufacturing capacity for cable TV, we're pretty much I've said this before, I mean, we're pretty much at the level that we expect to be at. Our goal with cable TV production is really to kind of match what we see all of our customers' aggregate demand being, and we're more or less there. We had a little bit of a pullback last quarter.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

As we retooled, we're expecting to see sequential increase this quarter. And that's about the same level that we were at the prior quarter. So we're kind of at that level right now. Regarding channel inventory, yes, we do have a pretty clear line of sight into what the customer is using. We're very comfortable with the level of inventory that we have.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

And as we discussed in our prepared remarks, it's not just one customer that we have. We have multiple customers now that are buying these products. And we have a number of other customers in the pipeline, as we talked about. We have six different customers that are either buying or in various stages of qualification of the products right now. So we're pretty comfortable with the inventory that we have in the channel.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

It substantial, but it's in line with our customers demand in aggregate.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

And Simon, let me add a few more points. So going now, next year, we are very comfortable with this chart that we should have more than 10 customers next year. And going now, based on the feedback from this customer, I think the real demand from this customer next year is, I would say, minimum 300,000,000 to $350,000,000 And because the shipping is by ship, so usually it take more than six, seven weeks. That's why we need inventory in US because the customer demand is like three to five days. Okay?

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

So we can say, we got an order that we manufacture in in Taiwan and then ship here. It will easily take two, three months. It don't work for this cable TV industry. Okay? So that's purpose to meet the customer demand, but really the demand is pretty big.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

Alright. Just next year, this number we see right now, 300 to $350,000,000 per year demand. Alright. For this customer in I would say, US, Canada. Alright?

Simon Leopold
Simon Leopold
Managing Director at Raymond James Financial

Great. Really appreciate you taking all the questions.

Operator

Next question comes from Michael Genovese of Rosenblatt. Please go ahead.

Mike Genovese
Senior Research Analyst at Rosenblatt Securities

Thanks very much. So, on the prepared remarks, there was a lot of talk about qualification activity, 400 gs and 800 gs. It sounds like with this customer who should become a 10% customer in the third quarter and beyond. I guess I just wanted to ask and somebody else asked about sort of engagement with other tier ones. But I just wanted to ask sort of very specifically if there's qualification activity going on at 400 gs and above with other customers besides that one that I think you spoke a lot about on the call.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

Absolutely. A 100% yes. All three of those that Thompson mentioned earlier are in qualification at various stages.

Mike Genovese
Senior Research Analyst at Rosenblatt Securities

Are those all existing customers or anybody brand new to the company?

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

Those are all existing customers. I mean, number of I want to be sure that we're not mischaracterizing We also have a number of engagement with smaller tier two operators as well. So it's not just like those are the only customers that we have, but all three of those customers are existing customers.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

Yeah. It's not really tier two. It could be tier one.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

Depending on where you draw the line.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

But I know because based on the investment they announced, the next few weeks could become tier one too.

Mike Genovese
Senior Research Analyst at Rosenblatt Securities

Yep. Okay, great. And then on the guide for the cable TV to be sort of near an all time high in 3Q, does that is that more than one customer? Or is that still to the primary customer only?

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

More than one customer.

Mike Genovese
Senior Research Analyst at Rosenblatt Securities

Yes. Great. And I just want you know, I think my question might have been answered on the last question, but I just want to verify that I heard it correctly. Was that 300,000,000 to $350,000,000 that Thompson was talking about, that's a cable TV revenue target for 2026. Is that correct?

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

Yes. But this is only Charter. This Charter plus more than 10 are the customer.

Mike Genovese
Senior Research Analyst at Rosenblatt Securities

Right. And any sense of how much of that is I imagine the large majority of that's amplifiers, but is there any significant amount of nodes in there?

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

There should be some node business as well, but we haven't broken that out for you.

Mike Genovese
Senior Research Analyst at Rosenblatt Securities

Yeah. And then I saw Simon's questions about the gross margins were were super helpful. But I guess now I'm just wondering about the timing maybe of, you know, not all the way to 40%, but maybe like mid-30s. Is there any kind of timing expectation you'd want to set there? Or is it like a one quarter at a time wait and see?

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

No, I mean, think our guide right now, as you could see, is kind of consistent at around 30%. It's going take us a couple of quarters to see a bigger impact from 800 gs business and the impact of some of the cost reduction efforts and increased software revenue that we talked about on the cable TV side. So a few quarters to get, you know, kind of the next uptick in in gross margin.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

Yeah. Would say maybe q two or q three, especially q they had to see the bottom picking up very strongly in the next quarter, every quarter. Then 1.6, I said we'll start borrowing in, I would say, June, July next years. And cable TV growth will improve too. So I would say, yeah, Q2, Q3 next years.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

But our target is So 40 we hope we could be there by end of next year, next year, early twenty twenty seven. That's our target.

Simon Leopold
Simon Leopold
Managing Director at Raymond James Financial

Okay, perfect. I'll pass it on. Thanks again.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

Thank you.

Operator

And our next question will come from Dave Kang of B. Riley FBR. Please go ahead.

Dave Kang
Senior Research Analyst at B Riley Financial

Yes. Thank you. Good afternoon. First question is regarding receivables. So they went up, what, like $50,000,000 over $50,000,000 last quarter, first quarter, and now it's another approximately $40,000,000 Just can you go over the dynamics why receivables are going up? I'm assuming that's related to cable TV customer?

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

I mean, a lot of it is. Receivables are going up because business is going up, right? We more than doubled our revenue over last year. So naturally, receivables are going to go up as well. Talked about the dynamic all of because we wanted to get some of the cable TV products in particular into the country and ready to be staged, ready for customer acceptance, we have offered some extended payment terms to certain customers in that channel chain to be able to accommodate that additional amount of revenue so that it's here when the customers need it.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

So I mean, that's the story. Increased revenue, slightly larger payment terms equals increased receivables.

Dave Kang
Senior Research Analyst at B Riley Financial

Got it. And then just a question on gross margin. Can you talk about the difference between transceiver versus a cable TV? Right now, you're at 30%, maybe what the difference is, and then you're at long term 40%, what the margins will be for cable TV and transceivers?

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

Yeah. So, I mean, cable TV right now is kind of in the low to mid 30% range. And obviously the transceivers are below 30% at this point. So they average out to be around 30%. Think we can get I mean, we've been pretty consistent that our expectation for gross margin in cable is to get above 40%.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

And so and we think we can achieve that. So that's where that is heading. With respect to the transceivers, again, you know, mid to upper 30% is I think where it can be such that we can blend out to, you know, around 40%.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

Especially the 1.6 T, the gross margin should be more than 40%. The 800 gs should be close to 40. That's why we said the gross margin should be 35% to 40% by end of next year.

Dave Kang
Senior Research Analyst at B Riley Financial

Got it. And my last question is regarding that major customer qualifying your facility. So what's left for, I guess, when companies say our 400 gig, 800 gig products are qualified, what else is left, guess? And how long does it typically take between facility qualification versus product qualification?

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

Right. So 400 gs is already qualified. We talked about the first volume shipments occurring this quarter. That means I mean, last quarter, the quarter that we're reporting on in Q2. So that's already happened.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

800 gig, there's really not much that has to happen. But as we discussed in our prepared remarks, we have to have production capacity available for 800 gs, meaningful production capacity available for 800 gs before there's any need for them to give us the green light to go ahead and produce. We're pretty close to that right now. We outlined our targets at OFC and we're sticking to that. We're tracking pretty well to those targets.

Stefan Murry
Stefan Murry
Chief Financial Officer and Chief Strategy Officer at Applied Optoelectronics

So really what has to is we've got to have enough production capacity to be able to accept meaningful orders for them to finish the qualification.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

So basically, and so I think this quarter, this customer may maybe become 10% customer. And by q four, I would say 400 g may may become our biggest revenue creator for data center, bigger than 100 g in q four. So you can see how how how fast the 400 gs room is coming up in this years. But for sure, the 800 gs will become the biggest contribution to buy, I would say, Q2 next year for sure Q3.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

So again, the overall how fast the revenue and one is doing is not going down. Okay. Don't take me wrong. I'm saying, one is you would say the similar before the peak is not so strong in Q3, Q4. And Q4, 400 gs become the biggest, even bigger than 100 gs.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

But at the same time, by Q2, Q3 next year, AIG will be even bigger than 400 gs. Okay? That's my point.

Dave Kang
Senior Research Analyst at B Riley Financial

Got it. Thank you.

Operator

At this time, we have no further questions. And I will turn the call over to Doctor. Thompson Lin for closing remarks.

Thompson Lin
Thompson Lin
Founder, President, CEO & Chairman at Applied Optoelectronics

Okay. Thank you for joining us today. As always, we want to extend a thank you to our investors, customers and employees for your continued support. As we discussed today, we believe the fundamental driver of long term demand of our business remain robust and we are in unique position to drive value from this opportunity. We look forward to see many of you at upcoming investor conference. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.

Executives
    • Thompson Lin
      Thompson Lin
      Founder, President, CEO & Chairman
    • Stefan Murry
      Stefan Murry
      Chief Financial Officer and Chief Strategy Officer
Analysts
Powered by Quartr