What Applied Optoelectronics (AAOI) Said on Its Q3 Earnings Call

Key Points

• Record growth and a return to GAAP profitability: Q3 revenue rose 127.5% year over year to $269.9 million, with net income of $6.3 million. Data center and CATV revenue both surged, though gross margin came in below guidance.
• Major hyperscale deal offers significant potential, but remains conditional: An existing customer agreed to buy at least 10% of its 1.6-terabit transceiver needs from AAOI from June 2026 through May 2029, potentially generating $1 billion to $1.5 billion. A separate, potentially larger customer agreement was still under negotiation.
• Capacity and supply constraints temper the growth outlook: Delays at the Texas facility and shortages of materials, including digital signal processors, are limiting near-term production; the company also lowered its expected year-end 2026 capacity target. For Q4, it forecast revenue of $385 million to $420 million and non-GAAP earnings of $0.48 to $0.63 per share.

Applied Optoelectronics NASDAQ: AAOI reported its sixth consecutive quarter of record revenue as demand for data center and cable television products more than doubled sales from a year earlier. The company also said a new hyperscale customer agreement could generate $1 billion to $1.5 billion in revenue over three years, although a manufacturing expansion faces delays.

Third-quarter revenue rose 127.5% to $269.9 million and increased 40.6% from the preceding quarter. The company returned to profitability under generally accepted accounting principles, reporting net income of $6.3 million, or $0.07 per diluted share, compared with a loss of $17.9 million a year earlier.

Non-GAAP earnings were $0.17 per diluted share, within the company’s guidance range. Non-GAAP gross margin of 28.7% fell short of its 29% to 30.5% forecast, which Chief Financial Officer and Chief Strategy Officer Stefan Murry attributed to a higher proportion of lower-margin 400G products.

Hyperscale agreement and customer demand

In October, Applied Optoelectronics signed a multiyear agreement with an existing tier-one hyperscale customer covering 1.6 terabit transceivers. Subject to conditions including the company’s ability to supply the products, the customer agreed to purchase at least 10% of its required 1.6 terabit transceivers from Applied Optoelectronics over the three-year period from June 2026 through May 2029, Murry said.

The estimated $1 billion to $1.5 billion in revenue could vary significantly depending on the customer’s actual demand, he said. Applied Optoelectronics committed to supply the volume at agreed prices, including some reductions over the term. The customer did not commit capital as part of the agreement.

Murry said the agreement gives the company greater confidence to invest in manufacturing capacity, but the locked-in pricing could limit potential gains if market prices rise significantly.

Founder, Chairman and CEO Thompson Lin also said a second agreement with another customer was in the final stages and could be signed within weeks. He said it could be five times larger than the first agreement or more and would include 800G products, lasers and other items. The company did not announce a completed second agreement on the call.

Capacity delays and supply constraints

Applied Optoelectronics expects the first phase of its new manufacturing facility in Sugar Land, Texas, to begin operations in December. The second phase, however, is expected to be delayed by several months because of longer-than-expected timelines for obtaining electrical power and other construction issues, Lin said.

The company now expects to reach its goal of a $471 million monthly revenue run rate toward the end of 2027. Murry said capacity should be added throughout the year rather than arriving all at once.

Manufacturing capacity is approaching 330,000 units per month, up from about 200,000 at the end of the second quarter. The company expects capacity for more than 500,000 800G and 1.6 terabit units per month by the end of 2026, down from its prior expectation of 650,000. By the end of 2027, it expects capacity for more than 1 million units per month, up from a prior estimate of 930,000. Murry cautioned that actual output will depend on qualifications, staffing, materials and other factors.

The shift by the long-term agreement customer from 800G to 1.6 terabit products has happened faster than expected, leaving the company short of materials needed to meet fourth-quarter demand, Murry said. He identified digital signal processors as a significant near-term constraint and said he expects the situation to improve substantially in the first quarter of 2027.

Lin estimated that the company had roughly $400 million to $450 million in 1.6 terabit orders but might deliver $50 million to $70 million in related revenue in the fourth quarter, depending on material availability.

Fourth-quarter outlook

For the fourth quarter, Applied Optoelectronics forecast revenue of $385 million to $420 million and non-GAAP earnings of $0.48 to $0.63 per diluted share. It projected non-GAAP gross margin of 29.5% to 31%.

The company expects data center revenue of $270 million to $300 million and cable television, or CATV, revenue of $105 million to $115 million. Murry said 800G products should account for most of the data center growth, with 1.6 terabit products also contributing and 400G sales increasing incrementally.

In the third quarter, data center revenue rose 254% year over year to $155.6 million. Within that business, 800G revenue nearly quadrupled sequentially to $47.5 million, while 400G revenue nearly doubled to $93.4 million. CATV revenue rose 57% year over year to a record $110.9 million.

Customer concentration remained high: the company’s top 10 customers accounted for 99% of third-quarter revenue. Three customers each represented more than 10% of sales, with one CATV customer contributing 41% and two data center customers accounting for 28% and 23%, respectively.

Investment and financing

The company made $501 million in capital investments during the third quarter, including $142.8 million in equipment prepayments. It ended the quarter with $621.5 million in cash, cash equivalents, short-term investments and restricted cash. In early October, it completed a previously disclosed $600 million at-the-market equity offering program.

During prepared remarks, Murry said capital expenditures would increase in the fourth quarter and rise further in 2027. In response to an analyst’s question, Lin later said next year’s spending would depend on customer demand and could be lower, partly because construction delays would also delay payments.

Murry said the company is leaning more on debt than equity financing and will continue to assess the mix. Lin said Applied Optoelectronics had recently signed a $200 million bank loan and could increase U.S. bank borrowing if necessary.

About Applied Optoelectronics (NASDAQ:AAOI)

Applied Optoelectronics, Inc NASDAQ: AAOI develops and manufactures fiber-optic networking products and solutions. Its offerings include optical transceivers, transmitters, receivers, lasers, and related components used to transmit data across fiber-optic networks.

The company serves several communications markets, including data centers, broadband access networks, cable television, and telecommunications. Its products are designed for applications such as high-speed data transmission, fiber-to-the-home and other broadband deployments, network connectivity, and communications infrastructure.

Founded in 1997 and headquartered in Sugar Land, Texas, Applied Optoelectronics supports customers in multiple regions, including North America, Asia, and other international markets.

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