Applied Optoelectronics NASDAQ: AAOI expects a sharp second-half ramp in its data center optics business as demand for higher-speed transceivers continues to outstrip the company’s manufacturing capacity, Chief Strategy Officer and Chief Financial Officer Dr. Stefan Murry said at Needham’s 21st Annual Technology, Media and Consumer Conference.
In a discussion with Needham analyst Ryan Koontz, Murry said Applied Optoelectronics’ first quarter was largely in line with the company’s expectations. He highlighted the company’s first shipments of 800G products during the quarter as a “significant milestone” and said the data center business surpassed the cable TV segment for the first time in a while.
“We expect that trend to continue,” Murry said, citing expected growth in data center revenue. He added that the cable TV segment may also grow, but not at the same rate as the data center business.
Demand Exceeds Capacity, Murry Says
Asked about the company’s outlook after Koontz referenced a raised full-year guide to $1.1 billion, Murry said the second quarter is a “very busy transition quarter” focused on expanding manufacturing infrastructure. He said the company guided to quarterly revenue “a little shy of $200 million,” or roughly $190 million, and feels “really good” about that number.
Murry said demand is not currently the company’s constraint. “We have plenty of demand, more demand than we can supply,” he said, adding that Applied Optoelectronics expects demand to exceed capacity “at least until middle of 2027, maybe beyond.”
The company has completed qualification of 800G products with one customer and another customer, Murry said, and expects shipments to the second customer to begin “very, very soon.” He said that same second customer has also placed orders for 1.6 terabit products, with initial deliveries expected in late third quarter and a ramp into the end of the year and early next year.
800G Seen as a Data Center Workhorse
Murry said customers expect 800G to remain important in cloud data centers for an extended period, even as 1.6T products begin to emerge. “800G’s gonna be the workhorse for a while,” he said.
He said Applied Optoelectronics designed its 800G and 1.6T products to be manufactured on largely the same production lines, with the main difference coming in final testing. That similarity, he said, gives both the company and its customers more confidence in the 1.6T transition.
On customer sourcing, Murry said Applied Optoelectronics’ customers value supply chain diversity, particularly after pandemic-related disruptions. He said the company’s automated manufacturing process helps make U.S. production more feasible, adding that the company is effectively replicating processes already in place in Taiwan at facilities in Texas.
Texas Expansion and Laser Capacity
Murry said Applied Optoelectronics is adding capacity in Taiwan and Texas. He said a 211,000-square-foot leased facility across the street from the company’s existing Sugar Land, Texas, site is expected to start coming online in August or September, contributing revenue in the fourth quarter. The company also recently purchased two additional Houston-area buildings totaling 388,000 square feet, where interior build-outs such as clean rooms and manufacturing infrastructure are expected to begin shortly.
Murry also discussed the company’s in-house laser manufacturing, noting that Applied Optoelectronics began nearly 30 years ago as a laser company and still manufactures the lasers used in its transceivers internally. He said the company’s indium phosphide fab has existed since 2000 and is being scaled rather than built from scratch.
On indium phosphide substrates, Murry said the company has “a pretty good line of sight” on availability based on inventory and supplier agreements, and is “basically covered for the next year or so.” He characterized broader substrate concerns as tied in part to political issues between China and the U.S., while also suggesting the industry may move to increase Western supply.
Capital Spending and Margin Targets
Murry said it costs Applied Optoelectronics about $120 million to build 100,000 transceivers per month of capacity for 800G or 1.6T products. He said the company expects to exit next year with capacity approaching 1 million transceivers per month, implying more than $1 billion of investment, “much of which has already been made.”
He said the company expects to generate cash from operations as revenue scales, while also retaining the ability to use debt or equity financing. Murry said investments in additional capacity offer a quick return if demand visibility remains strong.
Gross margin improvement, Murry said, will largely depend on product mix within the data center business. He said 400G products carry the lowest gross margin among the company’s data center products, while 800G should be meaningfully higher and 1.6T higher still. Murry said the company is targeting gross margin in the mid-30% range by the end of this year and 40% by the end of next year.
Cable TV Business Remains a Contributor
Murry also highlighted Applied Optoelectronics’ cable TV business, particularly its smart amplifier product line. The amplifiers are used in cable networks to amplify coaxial signals, and Murry said the company’s products add microprocessor-based control and telemetry to equipment that historically provided limited visibility to operators.
He said the company’s QuantumLink software uses telemetry data from the amplifiers to support predictive maintenance and improve network reliability. Applied Optoelectronics has been deploying the technology with Charter for about a year and a half, Murry said, and has also announced adoption by smaller cable operators.
Murry said the products help field technicians install and troubleshoot equipment more efficiently, while giving cable operators better insight into potential network failures before customers are affected.
About Applied Optoelectronics NASDAQ: AAOI
Applied Optoelectronics, Inc develops and manufactures high-speed fiber-optic networking products designed to support the growing bandwidth demands of data centers, telecommunications carriers and internet content providers. The company's core offerings include pluggable optical transceiver modules, transponders and optical components that enable data transmission at rates ranging from 1G to 400G. These products are used to facilitate long-haul, metro and intra-data center connectivity, addressing the need for scalable, low-latency and energy-efficient solutions in modern network infrastructures.
The company's product portfolio spans small-form factor pluggable modules such as SFP+, QSFP+ and QSFP28 units, as well as more advanced form factors like CFP2 and OSFP for ultra-high-speed applications.
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