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spk14: Good day and welcome to the Applied Opto-Electronics First Quarter 2024 Financial Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Lindsay Savarese, Investor Relations for AIO. Please go ahead.
spk12: Thank you. I'm Lindsay Savarese, Investor Relations for Applied Opto-Electronics. I am pleased to welcome you to AOI's First Quarter 2024 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its first quarter, 2024 Financial Results, and provided its outlook for the second quarter of 2024. The release is also available on the company's website at -inc.com. This call is being recorded and webcast live. A link to the recording can be found on the Investor Relations section of the AOI website and will be archived for one year. Joining us on today's call is Dr. Thompson Lins, AOI's founder, chairman, and CEO, and Dr. Stephen Murray, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q1 results, and Stephen will provide financial details and the outlook for the second quarter of 2024. A question and answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AOI's Safe Harbor Statement. On today's call, management will make forward-looking statements. These forward-looking statements involve risks and uncertainties, as well as assumptions and current expectations, which could cause the company's actual results, levels of activity, performance or achievements of the company, or its industry to differ materially from those expressed or implied in such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as, believe, forecast, anticipate, estimate, suggest, 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 our products into new markets and customer responses to our innovations, as well as statements regarding the company's outlooks for the second quarter of 2024. Except as required by law, we assume no obligation to update 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 factor section of the company's reports on file with the SEC, including the company's annual report on Form 10-K and the company's quarterly reports on Form 10-Q. Also, all financial results and other financial measures discussed today are on a non-GAP basis unless specifically noted otherwise. Non-GAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAP. A reconciliation between our GAP and non-GAP measures, as well as a discussion of why we present non-GAP financial measures, are included in our earnings press release that is available on our website. Before moving to the financial results, I'd like to announce that AOI Management will virtually participate at the Needham Technology Media and Consumer Conference on May 16th. And I'd like to note that the date of our second quarter 2024 earnings call is currently scheduled for August 8th, 2024. Now I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics Founder, Chairman, and CEO. Thompson?
spk18: Thank you, Lindsay. Thank you for joining our call today. Our revenue and non-GAP cost margin for the first quarter came below our expectations, and our non-GAP EPS was in line with our expectations despite the slow start to the year. Based on our current forecast and very constructive customer interactions, we remain very positive on improvement in the second half of the year. During the first quarter, we delivered revenue of $40.7 million, which was just below our guidance range of $41 to $46 million. We delivered non-GAP cost margin of $18.9 percent, which was below our guidance range of 21 to 23 percent, mainly driven by difference in product mix. Our non-GAP loss per share was $31 per share, which was within our guidance range of a loss of $28 to a loss of $33 per share. Total revenue for our data center product of $29 million was our 42 percent -over-year and was down 35 percent sequentially. Revenue for our one-year product increased 33 percent -over-year, and revenue for our four-year product more than doubled in the same period. Total revenue in our CATV segment was $8.7 million, which was down 69 percent -over-year and down 30 percent sequentially, largely driven by continued generally slow sales of DOCSIS 3.1 equipment. As the industry prepares to transition to DOCSIS 4.0, we set our internal call over to Stephen to review the details of our Q1 performance and auto-procurement. Stephen? Thank you, Thompson.
spk03: As Thompson mentioned, our first quarter revenue and non-GAP gross margin came in below our expectations, while our non-GAP EPS was in line with our expectations. Based on our current forecast and very constructive customer interactions, we remain very positive on improvements in the second half of the year. We believe that the long-term demand drivers remain strong for both our data center and CATV businesses, and we believe we are well positioned to capitalize on these opportunities. Looking to the back half of the year, there are a few key items to note that give us a basis for our optimistic outlook despite the slow start to the year. The first is that we have begun to receive forecasted orders for the VIXL-based 400G active optical cables for which Microsoft provided development funding last year. While the pace of product adoption has been somewhat slower than we anticipated, we believe that the fact that we are now receiving forecasts for these products for delivery in Q3 is a significant step in seeing meaningful business improvement. The second is that follow-on projects to our 400G AOC program, specifically for our 800G and 1.6 terabit products, have been fast-tracked with our customers as they address an acceleration in demand for infrastructure around AI. We are being asked to compress the time from development to scale production as much as possible in order to meet this accelerated demand. The third is that we have continued to experience significant traction and continue to have meaningful discussions with multiple large data center customers, some of which are new customers to AOI or customers that we have not worked with in many years, specifically for our 400G, 800G and 1.6 terabit products. We expect one or more of these customers will begin to contribute meaningfully to revenue starting in Q3. And lastly, we believe that the transition to DOCSIS 4.0 will begin to take place in Q3 and that our products are aptly designed for the deployment of amplifiers and other network elements required for DOCSIS 4.0. We shipped our first fully production-ready DOCSIS 4.0 amplifier sample to a major customer last week and the feedback while early has been exceedingly positive. With the improvement we expect in the second half, we continue to believe that 2024 can be our first full year of non-GAAP profitability since 2018. Turning to the quarter, our total revenue for the first quarter was $40.7 million, which was down 23% -over-year and 33% sequentially and which was just below our guidance range of $41 million to $46 million. As we had discussed on our prior earnings call, the softness in Q1 was largely due to the combined effects of the Lunar New Year holiday and our Asian factories along with some price reductions which took effect in the quarter. During the first quarter, 71% of our revenue was from our data center products, 22% was from our CATB products, with the remaining 7% from FTTH, Telecom and other. Turning to our data center business, our Q1 data center revenue came in at $29 million, which increased 42% -over-year and was down 35% sequentially. In the first quarter, 73% of our data center revenue was from our 100G products, 17% was from our 200G and 400G transceiver products, and 3% was from our 40G transceiver products. As we have discussed on several prior earnings calls, we signed two agreements with Microsoft in 2023 for the development of 400G products and beyond. This included a development program to make next-generation lasers for its data center and for the development of its 400G and next-generation active optical cables. While not guaranteed, we continue to believe that the revenue opportunity for our 400G and 800G products could be greater and a longer duration than the revenue contribution we saw from this customer during the peak of the 40G product cycle, which suggests that revenue from these products may exceed $300 million over the several years of these build-ups. We began shipments late last year and have begun to receive new forecasted orders, which we expect to contribute to revenue later in Q2 and we believe will continue to ramp strongly in Q3 and Q4. Also as a reminder, in 2023 we shipped samples of our 800G products to three different data center customers and had received initial positive feedback. As we discussed above, we are in detailed discussions with several hyperscale data center operators about ramping production for our 800G and 1.6 terabit products starting in Q3 for 800G and early Q1 of 2025 for the 1.6 terabit products. These dates are several months earlier than we had previously been requested to deliver and we believe the acceleration in the schedule is being driven by faster deployment of technology needed by AI workflows. Turning to our CATB business, CATB revenue in the first quarter was $8.7 million, which was down 69% -to-year and down 30% sequentially, largely driven by generally slow sales of DOCSIS 3.1 equipment as the industry prepares to transition to DOCSIS 4.0. Looking forward, we continue to expect that our near-term CATB business will be down compared to the historic highs we saw in 2021 and 2022 as the MSO's transition to next-generation architecture. We anticipate this transition to DOCSIS 4.0 will begin to take place in Q3 and we are optimistic about the second half of the year and 2025. As a reminder, we shipped initial test samples of our 1.8 GHz amplifier products to two major MSO's in Q4 of last year and we received encouraging feedback on their performance and pricing. We are pleased to report that we shipped final qualification units of various amplifiers last week and we would expect revenue to begin as early as the end of Q2 with significant ramp in the second half as we increase manufacturing capacity for these new products. As Thompson mentioned, we will continue to carefully monitor MSO plans to upgrade to DOCSIS 4.0 networks and we continue to believe AOI is a leader in technologies that will enable DOCSIS 4.0 and that we have the right portfolio in place to address our customers' needs. Now turning to our telecom segment, revenue from our telecom products of $2.3 million was down 39% -over-year and down 19% sequentially, largely driven by ongoing softness and 5G demand, particularly in China. Looking ahead, we continue to expect telecom sales to fluctuate from quarter to quarter. For the first quarter, our top 10 customers represented 92% of revenue, down from $1.5 million, one in the data center market and one in the CATB market, which contributed 62% and 21% of our total revenue respectively. In Q1, we generated non-GAAP gross margin of 18.9%, which was below our guidance range of 21% to 23% and was down from .4% in Q4 of 2023 and down from .2% in Q1 of 2023. The decrease in gross margin was driven mainly by product mix and some price reductions which took effect during the quarter. Looking ahead, we expect improving gross margins throughout the year as product mix improves in our data center business and CATB revenue begins to ramp. We remain committed to the long-term goal of returning gross margin to around 40% and believe that this goal is achievable. Total non-GAAP operating expenses in the first quarter were $24.8 million or 61% of revenue, which compared to $19.6 million or .9% of revenue in Q1 of the prior year due to higher R&D spend. Looking ahead, we continue to expect non-GAAP operating expenses to range from $24 million to $26 million per quarter to account for the acceleration of R&D expenses to improve time to market for our 800G and 1.6 terabit data center products. Non-GAAP operating loss in the first quarter was $17.1 million compared to an operating loss of $7.2 million in Q1 in the prior year. GAAP net loss for Q1 was $23.2 million or a loss of $0.60 per basic share compared with the GAAP net loss of $16.3 million or a loss of $0.56 per basic share in Q1 of 2023. On a non-GAAP basis, net loss for Q1 was $12 million or $0.31 per share which was within our guidance range of a loss of $10.9 million to a loss of $12.6 million and in line with our guidance range of a loss per share in the range of $0.28 to a loss of $0.33 per basic share. This compares to a net loss of $7.1 million or a loss of $0.25 per basic share in Q1 of the prior year. The fully diluted shares outstanding used for computing the earnings per share in Q1 were $38.4 million. Turning now to the balance sheet, we ended the first quarter with $17.4 million in total cash, cash equivalents, short-term investments and restricted cash. This compares with $55.1 million at the end of the fourth quarter. This cash balance reflects a few slow-paying AR receipts totaling about $11 million which were subsequently received in the first two weeks of Q2. Also note that we used almost $4 million in cash to reduce debt during the quarter. We ended the quarter with total debt excluding convertible debt of $34.8 million compared to $38.7 million at the end of last quarter. As of March 31, we had $54.3 million in inventory compared to $63.9 million at the end of Q4. We made a total of $7.8 million in capital investments in the first quarter which was mainly used for production and R&D equipment. Moving now to our Q2 outlook, we expect Q2 revenue to be between $41.5 million and $46.5 million and non-GAAP gross margin to be in the range of .5% to 27.5%. Non-GAAP net loss is expected to be in the range of $11.6 million to $13.5 million and non-GAAP loss per share between 29 cents per basic share and 34 cents per basic share using
spk17: weighted
spk03: average basic share count of approximately 39.2 million shares. Looking ahead, as the widespread adoption of generative AI continues to place increased demands on our customer data centers, we believe that these customers will ultimately need to deploy more infrastructure to meet these needs which will provide a long tailwind of demand for the optical industry. Our U.S.-based production ability combined with our automated manufacturing capabilities and experience puts us in a unique competitive position to address these needs. Further, as our CATB customers transition to next generation architecture and implement new technologies like DOCSIS 4.0, we believe that we have positioned ourselves as a leader in technologies that will enable DOCSIS 4.0 and we are confident that we have the right product portfolio, team and strategy in place to capitalize on this upcoming transition. We have spent several years developing these products and we expect that they will go to market in the next few months. In sum, we believe that the long-term demand drivers remain strong for both our data center and CATB businesses and we believe we are well positioned to benefit from these growing long-term trends. With that, I will turn it back over to the operator for a Q&A session. Operator?
spk14: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause
spk05: momentarily to assemble our roster. Any first question will come from Simon Leopold with
spk14: Raymond James. Please go ahead.
spk08: Thanks for taking the question. A couple quick ones maybe. I think on the prior conference call, you had given us some indication that you thought the full year revenue could exceed $300 million. Given the slower start to the year, it does sound like you still expect a much stronger second half, but how do you feel about that full year $300 million target?
spk05: Well, what we have said is
spk03: that we think we can be profitable for the year. So if you can run the numbers on that. We don't give annual guidance really, so I wouldn't say we are pulling back on anything. It is obviously going to be a little more challenging considering where we started the year, but I think it is still very achievable, let's say that.
spk08: Okay. And then you did give us some indication of the operating expense expectations for the year at that $24 to $26 million per quarter. And I think we were anticipating more of a $22 to $24 million per quarter, and that may simply be just extrapolating too much from the first quarter forecast. Did something change in terms of your expectation of what you need to spend on sales marketing and R&D?
spk05: As we noted in our prepared remarks, we have increased our R
spk03: &D spend a little bit because we are getting, as I talked about, we are getting customers that are pulling in their request for product development months ahead of schedule. And so we need to spend additional R&D. I wouldn't say additional overall, but we are spending it quicker than we otherwise would. So it does represent a slight increase to our R&D. Sales and marketing, not too much increase in sales and marketing.
spk08: Thanks. And then I remember at our meeting at OSC, you had talked about sort of a product roadmap going from the VIXL-based solutions to VIXLs and EMLs and ramping up to higher per channel speeds. Could you give us an overview of the roadmap you expect in terms of launches over the next year plus?
spk05: Right. So the VIXL-based products are already
spk03: in production. And we'll likely add higher speed lane VIXLs to that portfolio next year. With respect to the EML-based products, we have some products in production now. The higher speed data center products with EMLs will go into production in late Q3 or late Q4.
spk08: And what was your 400 gig in the quarter? I missed that.
spk05: 400 gig in the quarter, let me get you that number here.
spk06: Well,
spk03: it was 17% of the data center revenue. So $29 million, 17% of that.
spk08: Okay. And that was just 400 gig, not 400 gig. Over doubling last year.
spk05: Correct.
spk08: Can I say that again? That's
spk03: a little over doubling compared to that. That almost, well, it was slightly over doubling from same period last year.
spk08: Great. Thank you very much for taking the questions. Appreciate it.
spk14: The next question will come from Michael Genovice with Rosenblatt Securities. Please go ahead.
spk09: Oh, great. Thanks. I guess to start with, I wanted to ask some questions about Microsoft. Like, if you had any more color on why you think that it's going slower than initially expected. But then secondly, how do you expect orders to trend in the second quarter? Do you see orders in the month of June being above the month of May? Is there any visibility to that? And then finally, it sounds like your comments on the overall side of this, of 300 million plus, have maybe gotten a little bit more bullish. But maybe that's because you've added 800G to it. So if you could help us understand that as well. Thank you.
spk05: Sure. First of all, I'm sorry. What?
spk04: I'm sorry. I was just reminding you the first one was why the delay.
spk05: Yeah, I wouldn't really say it's an overall delay.
spk03: If my prepared remarks sounded that way, that's not what I was trying to say. There was a slight delay in one particular program, which really just reflects the fact that it's a new product. And sometimes new product launches just take a little longer than expected. There's nothing particular that I can point to with respect to that. It is positive that we're getting new updated forecasts now that we didn't expect to see. We're not going to be able to communicate shipments beginning later in Q2 and then ramping quickly in Q3 and Q4. So that's all positive. I wouldn't read much into the delay itself. Overall, the revenue in our data center business is about where we expected it to be in Q2. So there's not really a significant change from our earlier thinking. That small delay in the business for Microsoft is being more than compensated by other data center customers. So it's not anything overall that I'm trying to point to there. Just that one particular product that's got some of the delay. Your second question had to do with the $300 million target and whether that represents a change. No, fundamentally, other than that, you know, we mentioned that we're having to pull in 800 gig and 1.6 terabits faster. Now, 1.6 terabits won't be a factor this year, but it will be early next year. But the acceleration in 800 gig is certainly helpful to try to meet that goal. And then I'm sorry, I forgot your third question there. What was it?
spk09: Well, I'll tie that in with my next and last question. But it was about the orders. If for instance, you think that if there's a reason to think as you're seeing these forecasts that for instance, June would be up from May, which is up from April, if you're seeing that kind of trend at this customer. But I might as well just ask. I mean, you said one Q data center revenues were about where you expected them to be. How do you see them trending in 2Q and 3Q, if you could address that? And then that would be it.
spk15: I want to be clear.
spk03: Yeah, well, first of all, maybe I misspoke earlier. Q1 and Q2 data center numbers are about what we expected them to be. Cable TV and Q2 is coming in a little lighter than what we had expected. And that explains to the extent that we didn't give guidance until now in Q2, but to the extent that there was some change in our thinking. It had to do with cable TV, not data center. Data center overall is doing almost, you know, actually slightly ahead of plan compared to where we thought it was going to be. I mentioned earlier Microsoft had a delay in one product, but the rest of them are going to find. And that slight delay in that one product was more than compensated for in Q2 by growth and other customers. So with respect to.
spk18: So this is Thompson. Let me say that. I think overall for data center, I think we feel more positive right now compared to a few months ago. The main reason is -hundred-G. Right now, I think at least we can see several big customers, especially two hyper-scale data customers, are pulling in the schedule for -hundred-G. But cable TV, you know, cable TV is quite slow because all the customers are waiting for one point -hundred-G product. So, you know, usually the delay in cable TV is not surprising, as you can see from other companies.
spk03: Michael, I just want to touch on your last question there. I'll try to answer it directly. Yeah. You know, are we seeing a trend of more orders kind of month by month? And the answer is yes. As I mentioned earlier, you know, that one program, for example, for Microsoft, it's somewhat delayed. We do expect it to pick up towards the end of this quarter. So that would
spk16: mean
spk03: June months would be bigger than May. And that was certainly bigger than April. So we are seeing that trend with that product. But overall, we expect to see that trend somewhat throughout the quarter. Although, again, I would say for the most part, the data center business outside some of these new programs, and especially the -hundred-G products later in the year, is, you know, it's a relatively consistent business at this point.
spk09: Okay, great. I'll pass it over now. I might come back later or say my questions for offline. Thank you.
spk14: Okay, sounds great.
spk02: Thanks.
spk14: The next question will come from Tim Savajow with Northland
spk05: Capital Markets. Please go ahead.
spk13: Tim, your line may be muted.
spk05: Yeah, sorry about that.
spk08: I'm here. Can you hear me? Yep, we can hear you. All
spk03: right, great.
spk08: Hello. Yeah, I'd say with the new OPEX forecast, it seems like
spk03: maybe something reasonably over $300 million is what you would need to get you there. And so that's a pretty significant ramp in the second half, you know, almost 3X over the first. Although, we've seen that recently, a couple different places,
spk10: most recently at Coherent.
spk03: So I guess as you look at that ramp and the -hundred-G opportunities in particular, I'm hoping you might be able to size those for us in a fashion maybe
spk10: similar or analogous to how you've been talking about the Microsoft 400-gig opportunity.
spk03: That's one question. And you've talked about new data center customers or some old data center customers coming back. Should we assume this discussion around 800-gig and 1.60 also applies to Microsoft or is it more focused on the new players? No, I mean, we specifically, maybe it wasn't totally clear from the prepared remarks, but it's our existing customers that we have now, plus the new customers for those 800-gig and 1.60 terabit products. So Microsoft clearly would be included in the category of existing customers. And as far as the size of the market, you know, what we're seeing right now is that 800-gig is several times as large as the 400-gig opportunity. So it represents, you know, a dramatic expansion. And that's within the same customer. If you add on the new customers that we're referring to, the market size there gets commensurately
spk05: larger. Great. So as you look at that data center ramp
spk03: into the second half, would you imagine between your current 400-gig, would you imagine that to be, I don't know, half 800-gig or how are you looking at it now? And to what extent are you looking at a material cable TV networking contribution in the second half as part of that ramp? Yeah, I think that's the key point really is the cable TV has been, you know, kind of to the extent that there's been a disappointment in Q2, it's mainly that cable TV is ramping slower than we expected. And that's just, as Thompson mentioned, you know, somewhat that's par for the course. I mean, we were optimistic that the MSOs would move a little faster into 1.8, but, you know, it's taken a little longer to get through the qualification, get all the necessary training and what have you done. But we do expect another ramp in the second half of the year. That will contribute meaningfully towards the revenue ramp, but it will also help us improve the gross margin, which is, you know, significantly higher in the cable TV segment than it is in data center.
spk18: And I can add something. So for the 800-g business, we can see, I think we have discussion with at least 3, 4 customers, for sure including Microsoft, I think it's, I would say, more than $500, $600 million next year for AOI.
spk05: Just 800-g. Sorry. Thompson,
spk10: is that in the aggregate or what kind of time period or maybe we can, or can we put
spk03: some more brackets around that? $500, $600, I think I heard you say.
spk18: I think we are doing qualification. I think we should get somebody in order by next Q3. So it's about next year, Q1 to Q4 next year, I would say. Just 800-g only is more than $500 million or even $600 million for AOI
spk03: based
spk18: on this. And
spk03: that was going to be my last question actually in terms of the nature of these detailed discussions and kind of, is that around qualification or where do we stand on that front? Or are we talking about, you know, putting the, you know, dotting the I's and crossing the T's on contracts? A little more color there. Well, I'm not sure, you know, to what extent the contracts really come into play there. What we're talking about now is detailed planning around deployment scenarios, when they're going to need products, how much product they're going to need, pricing, that sort of thing.
spk05: Okay, thanks. The commentary
spk03: from the customers is how fast can you deliver a certain amount of product for us, right? It's about how fast can we be ready to deploy or to manufacture the products that they need to deploy.
spk05: And
spk18: the
spk05: very
spk18: important key, as I say, is AOI has been in base a few hundred million dollars in the past as a modern technology of automation, including we develop a lot of our own equipment for automations. So I think right now we're doing a phase two, maybe I would say we will do phase three live, I think this year, and do a phase three fully automation Q1, Q2 next year. So we can do energy manufacturing in Houston with, I would say, similar or a bit higher cost than in Taiwan and China. I think that's very attractive to the customer, including the big customers we used to have several years ago. I think they're coming back. Number two, the key, so you know the laser is a key component, key technology. The 190G, 200G, the VEXO, the EML, and I think we can make all our laser in Houston. That's also very, I think, the key factor for the customer. I think for sure it's not only the cost, the key is the risk measurement.
spk05: Great. Thanks very much. Again, if you
spk14: have a question, please press star, then one. Our next question will come from Dave Kang with B. Riley FBR. Please go ahead.
spk07: Thank you. Good afternoon. So regarding that 800G, first question is, do you have 200G per lane, VEXOs, and EML? So what's the status on that?
spk18: We will have the volume effects will be more like Q1 next year. Right now it's, you know, you need to go through the whole R&D special. I think customers are very concerned about the quality. But that's for 1.6T, all right, not for 800G. So 800G is still a plan. And I'm talking about the opportunity for ALR next year, 500 to 600 million higher. There are single modes, okay. It's like two kilometers higher. It's not a show-reach. It's not ALC. So it's a pretty high ASP, high cost margin product. Okay, 1.6T, as you know, we next year's more like will be the multi-mode and single mode together for shorter distance, maybe, you know, 500 meters and below. But we will have all of them pretty soon.
spk07: Got it. And then sticking with 800G, I think I used something like maybe two customers that will ramp third quarter. Just wondering if you've been qualified or if you've got some POs already?
spk18: The range will be more like Q3 or Q4. If you know, we are doing a qualification. So it's a single mode, two kilometers higher, including DRA and 2xFR4. So I would say more than two customers. The hyperscale, I would say maybe three customers, including some other smaller customers. The body manufacturer, for sure they are pushing Q3, so we are trying our best to catch up the body. But I would say Q4 for sure. Q3 schedule is a big time, maybe September.
spk07: Got it. And then regarding your press release at the beginning of OFC about that 800G AOC that you jointly developed with CRETA, can you just give more color exactly what they provide and what you guys provide? And where are we as far as sampling or even going to production?
spk05: So CRETA makes a DSP and we make
spk03: an active optical cable around it. And we haven't commented on any production schedules for it.
spk17: Okay, thank you.
spk14: This concludes our question and answer session. I would like to turn the conference back over to Dr. Thomas Lin.
spk05: Please go ahead, sir.
spk18: Again, thank you for joining us today. As always, we want to extend a thank you to our investors, customers, and employees. We will continue to follow as we discussed today. We believe the long-term demand driver will remain strong for both our data center and CATB business. And we believe we are well positioned to capitalize on these opportunities. Thank you.
spk14: The conference is now concluded. Thank you for attending today's
spk05: presentation. You may now disconnect.
spk00: Thank you. Thank you. Thank you.
spk01: Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
spk14: Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Good day and welcome to the Applied OptoElectronics First Quarter 2024 Financial Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Lindsay Savarese, Investor Relations for AIO. Please go ahead.
spk12: Thank you. I'm Lindsay Savarese, Investor Relations for Applied OptoElectronics. I am pleased to welcome you to AOI's First Quarter 2024 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its first quarter, 2024 Financial Results, and provided its outlook for the second quarter of 2024. The release is also available on the company's website at -inc.com. This call is being recorded and webcast live. A link to the recording can be found on the Investor Relations section of the AOI website and will be archived for one year. Joining us on today's call is Dr. Thompson-Linds, AOI's Founder, Chairman, and CEO, and Dr. Stephen Murray, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q&A results, and Stephen will provide financial details and the outlook for the second quarter of 2024. A question and answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AOI's Safe Harbor Statement. On today's call, management will make forward-looking statements. These forward-looking statements involve risks and uncertainties, as well as assumptions and current expectations, which could cause the company's actual results, levels of activity, performance or achievements of the company, or its industry to differ materially from those expressed or implied in such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as believe, forecast, anticipate, estimate, suggest, 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 our products into new markets and customer responses to our innovations, as well as statements regarding the company's outlook for the second quarter of 2024. Except as required by law, we assume no obligation to update 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 factor section of the company's reports on file with the SEC, including the company's annual report on Form 10-K and the company's 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 our earnings press release that is available on our website. Before moving to the financial results, I'd like to announce that AOI Management will virtually participate at the Needham Technology Media and Consumer Conference on May 16th. And I'd like to note that the date of our second quarter 2024 earnings call is currently scheduled for August 8th, 2024. Now I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics Founder, Chairman, and CEO. Thompson?
spk18: Thank you, Lindsay. Thank you for joining our call today. Today, our revenue and non-GAAP cost margin for the first quarter came in below our expectations, and our non-GAAP EPS was in line with our expectations. Despite the slow start to the year, based on our current forecast and very constructive customer interactions, we remain very positive on improvement in the second half of the year. During the first quarter, we delivered a revenue of $40.7 million, which was just below our guidance range of $41 to $46 million. We delivered a non-GAAP cost margin of 18.9%, which was below our guidance range of 21 to 23%. Many driven by difference in product mix. Our non-GAAP loss per share was 31 cents per share, which was within our guidance range of a loss of 28 cents to a loss of 33 cents per share. Total revenue for our data center product of $29 million was at 42% -over-year and was down 35% sequentially. Revenue for our one-year product increased 33% -over-year, and revenue for our four-year product more than doubled in the same period. Total revenue in our CATV segment was $8.7 million, which was down 69% -over-year and down 30% sequentially. Large driven by continuous, generally slow sales of DOCSIS 3.1 equipment. As the industry prepares to transition to DOCSIS 4.0, we sent our internal call over to Stephen to review the details of our Q1 performance and our opportunity. Thank you, Thompson.
spk03: As Thompson mentioned, our first quarter revenue and non-GAAP gross margin came in below our expectations, while our non-GAAP EPS was in line with our expectations. Based on our current forecast and very constructive customer interactions, we remain very positive on improvements in the second half of the year. We believe that the long-term demand drivers remain strong for both our data center and CATV businesses, and we believe we are well positioned to capitalize on these opportunities. Looking to the back half of the year, there are a few key items to note that give us a basis for our optimistic outlook despite the slow start to the year. The first is that we have begun to receive forecasted orders for the VIXL-based 400G active optical cables for which Microsoft provided development funding last year. While the pace of product adoption has been somewhat slower than we anticipated, we believe that the fact that we are now receiving forecasts for these products for delivery in Q3 is a significant step in seeing meaningful business improvement. The second is that follow-on projects to our 400G AOC program, specifically for our 800G and 1.6 terabit products, have been fast-tracked with our customers as they address an acceleration in demand for infrastructure around AI. We are being asked to compress the time from development to scale production as much as possible in order to meet this accelerated demand. The third is that we have continued to experience significant traction and continue to have meaningful discussions with multiple large data center customers, some of which are new customers to AOI or customers that we have not worked with in many years, specifically for our 400G, 800G, and 1.6 terabit products. We expect one or more of these customers will begin to contribute meaningfully to revenue starting in Q3. And lastly, we believe that the transition to DOCSIS 4.0 will begin to take place in Q3 and that our products are aptly designed for the deployment of amplifiers and other network elements required for DOCSIS 4.0. We shipped our first fully production-ready DOCSIS 4.0 amplifier samples to a major customer last week, and the feedback while early has been exceedingly positive. With the improvement we expect in the second half, we continue to believe that 2024 can be our first full year of non-GAAP profitability since 2018. Turning to the quarter, our total revenue for the first quarter was $40.7 million, which was down 23% -over-year and 33% sequentially, and which was just below our guidance range of $41 million to $46 million. As we had discussed on our prior earnings call, the softness in Q1 was largely due to the combined effects of the Lunar New Year holiday and our Asian factories, along with some price reductions which took effect in the quarter. During the first quarter, 71% of our revenue was from our data center products, 22% was from our CATB products, with the remaining 7% from FTTH, Telecom, and other. Turning to our data center business, our Q1 data center revenue came in at $29 million, which increased 42% -over-year and was down 35% sequentially. In the first quarter, 73% of our data center revenue was from our 100G products, 17% was from our 200G and 400G transceiver products, and 3% was from our 40G transceiver products. As we have discussed on several prior earnings calls, we signed two agreements with Microsoft in 2023 for the development of 400G products and beyond. This included a development program to make next-generation lasers for its data center and for the development of its 400G and next-generation active optical cables. While not guaranteed, we continue to believe that the revenue opportunity for our 400G and 800G products could be greater and a longer duration than the revenue contribution we saw from this customer during the peak of the 40G product cycle, which suggests that revenue from these products may exceed $300 million over the several years of these build-ups. We began shipments late last year and have begun to receive new forecasted orders, which we expect to contribute to revenue later in Q2 and we believe will continue to ramp strongly in Q3 and Q4. Also as a reminder, in 2023 we shipped samples of our 800G products to three different data center customers and had received initial positive feedback. As we discussed above, we are in detailed discussions with several hyperscale data center operators about ramping production for our 800G and 1.6 terabit products starting in Q3 for 800G and early Q1 of 2025 for the 1.6 terabit products. These dates are several months earlier than we had previously been requested to deliver and we believe the acceleration in the schedule is being driven by faster deployment of technology needed by AI workflows. Turning to our CATB business, CATB revenue in the first quarter was $8.7 million, which was down 69% -over-year and down 30% sequentially, largely driven by generally slow sales of DOCSIS 3.1 equipment as the industry prepares to transition to DOCSIS 4.0. Looking forward, we continue to expect that our near-term CATB business will be down compared to the historic highs we saw in 2021 and 2022 as the MSO's transition to next generation architecture. We anticipate this transition to DOCSIS 4.0 will begin to take place in Q3 and we are optimistic about the second half of the year and 2025. As a reminder, we shipped initial test samples of our 1.8 GHz amplifier products to two major MSO's in Q4 of last year and we received encouraging feedback on their performance and pricing. We are pleased to report that we shipped final qualification units of various amplifiers last week and we would expect revenue to begin as early as the end of Q2 with significant ramp in the second half as we increase manufacturing capacity for these new products. As Thompson mentioned, we will continue to carefully monitor MSO plans to upgrade to DOCSIS 4.0 networks and we continue to believe AOI is a leader in technologies that will enable DOCSIS 4.0 and that we have the right portfolio in place to address our customers' needs. Now turning to our telecom segment, revenue from our telecom products of $2.3 million was down 39% -over-year and down 19% sequentially, largely driven by ongoing softness and 5G demand, particularly in China. Looking ahead, we continue to expect telecom sales to fluctuate from quarter to quarter. For the first quarter, our top 10 customers represented 92% of revenue, down from 93% in Q1 of last year. We had two greater than 10% customers, one in the data center market and one in the CATB market, which contributed 62% and 21% of our total revenue respectively. In Q1, we generated non-GAAP gross margin of 18.9%, which was below our guidance range of 21% to 23% and was down from .4% in Q4 of 2023 and down from .2% in Q1 of 2023. The decrease in gross margin was driven mainly by product mix and some price reductions which took effect during the quarter. Looking ahead, we expect improving gross margins throughout the year as product mix improves in our data center business and CATB revenue begins to ramp. We remain committed to the long-term goal of returning gross margin to around 40% and believe that this goal is achievable. Total non-GAAP operating expenses in the first quarter were $24.8 million or 61% of revenue, which compared to $19.6 million or .9% of revenue in Q1 of the prior year due to higher R&D spend. Looking ahead, we continue to expect non-GAAP operating expenses to range from $24 million to $26 million per quarter to account for the acceleration of R&D expenses to improve time to market for our 800G and 1.6 terabit data center products. Non-GAAP operating loss in the first quarter was $17.1 million compared to an operating loss of $7.2 million in Q1 in the prior year. Gap net loss for Q1 was $23.2 million or a loss of $0.60 per basic share compared with a gap net loss of $16.3 million or a loss of $0.56 per basic share in Q1 of 2023. On a non-GAAP basis, net loss for Q1 was $12 million or 31 cents per share, which was within our guidance range of a loss of $10.9 million to a loss of $12.6 million and in line with our guidance range of a loss per share in the range of $0.28 to a loss of $0.33 per basic share. This compares to a net loss of $7.1 million or a loss of $0.25 per basic share in Q1 of the prior year. The fully diluted shares outstanding used for computing the earnings per share in Q1 were $38.4 million. Turning now to the balance sheet. We ended the first quarter with $17.4 million in total cash, cash equivalents, short-term investments and restricted cash. This compares with $55.1 million at the end of the fourth quarter. This cash balance reflects a few slow-paying AR receipts totaling about $11 million, which were subsequently received in the first two weeks of Q2. Also note that we used almost $4 million in cash to reduce debt during the quarter. We ended the quarter with total debt excluding convertible debt of $34.8 million compared to $38.7 million at the end of last quarter. As of March 31, we had $54.3 million in inventory compared to $63.9 million at the end of Q4. We made a total of $7.8 million in capital investments in the first quarter, which was mainly used for production and R&D equipment. Moving now to our Q2 outlook. We expect Q2 revenue to be between $41.5 million and $46.5 million and non-GAAP gross margin to be in the range of .5% to 27.5%. Non-GAAP net loss is expected to be in the range of $11.6 million to $13.5 million and non-GAAP loss per share between 29 cents per basic share and 34 cents per basic share
spk17: using
spk03: weighted average basic share count of approximately 39.2 million shares. Looking ahead, as the widespread adoption of generative AI continues to place increased demands on our customer data centers, we believe that these customers will ultimately need to deploy more infrastructure to meet these needs, which will provide a long tailwind of demand for the optical industry. Our US-based production ability, combined with our automated manufacturing capabilities and experience, puts us in a unique competitive position to address these needs. Further, as our CATB customers transition to next-generation architecture and implement new technologies like DOCSIS 4.0, we believe that we have positioned ourselves as a leader in technologies that will enable DOCSIS 4.0, and we are confident that we have the right product portfolio, team, and strategy in place to capitalize on this upcoming transition. We have spent several years developing these products, and we expect that they will go to market in the next few months. In sum, we believe that the long-term demand drivers remain strong for both our data center and CATB businesses, and we believe we are well positioned to benefit from these growing long-term trends. With that, I will turn it back over to the operator for a Q&A session. Operator?
spk14: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
spk05: And
spk14: at this time,
spk05: we'll pause momentarily to assemble our roster. Any first question will come from Simon Leopold with
spk14: Raymond James. Please go ahead.
spk08: Thanks for taking the question. A couple quick ones maybe. I think on the prior conference call, you had given us some indication that you thought the full year revenue could exceed $300 million. Given the slower start to the year, it does sound like you still expect a much stronger second half, but how do you feel about that full year $300 million target?
spk05: Well, what we've said is that we think we
spk03: can be profitable for the year. So if you can run the numbers on that. We don't give annual guidance really, so I wouldn't say we're pulling back on anything. It's obviously going to be a little more challenging considering where we started the year, but I think it's still very achievable to say that.
spk08: Okay. And then you did give us some indication of the operating expense expectations for the year at that $24 to $26 million per quarter. And I think we were anticipating more of a $22 to $24 million per quarter, and that may simply be just extrapolating too much from the first quarter forecast. Did something change in terms of your expectation of what you need to spend on sales, marketing, and R&D?
spk05: As we noted in our prepared remarks, we've increased
spk03: our R&D spend a little bit because we're getting, as I talked about, we're getting customers that are pulling in their request for product development months ahead of schedule. And so we need to spend additional R&D. I wouldn't say additional overall, but we're spending it quicker than we otherwise would. So it does represent a slight increase to our R&D. Sales and marketing, not too much increase in sales and marketing.
spk08: Thanks. And then I remember at our meeting at OSC, you had talked about sort of a product roadmap going from the VIXL-based solutions to VIXLs and EMLs and ramping up to higher per channel speeds. Could you give us an overview of the roadmap you expect in terms of launches over the next year plus?
spk05: Right. So the VIXL-based products are already in production.
spk03: And we'll likely add higher speed lane VIXLs to that portfolio next year. With respect to the EML-based products, we have some products in production now. So the higher speed data center products with EMLs will go into production in late Q3 or late Q4.
spk08: And what was your 400 gig in the
spk05: quarter? I missed that.
spk06: 400
spk03: gig in the quarter, let me get
spk06: you that number here. Well, it
spk03: was 17% of the data center revenue. So $29 million, 17% of that.
spk08: Okay. And that was just 400 gig, not 400 gig. Over doubling
spk03: last
spk08: year. Can I say that again?
spk03: That's a little over doubling compared to that. That almost, well, it was slightly over doubling from same period last year.
spk08: Great. Thank you very much for taking the questions. Appreciate it.
spk14: The next question will come from Michael Genovice with Rosenblatt Securities. Please go ahead.
spk09: Oh, great. Thanks. I guess to start with, I wanted to ask some questions about Microsoft. Like, if you had any more color on why you think that it's going slower than initially expected. But then secondly, how do you expect orders to trend in the second quarter? Do you see orders in the month of June being above the month of May? Is there any visibility to that? And then finally, it sounds like your comments on the overall size of this, 300 million plus, have maybe gotten a little bit more bullish, but maybe that's because you've added 800G to it. So if you could help us understand that as well. Thank you.
spk05: Sure. First of all, I'm sorry.
spk04: I'm just reminding you the first one was why the delay.
spk05: Yeah, I wouldn't really say it's an overall delay.
spk03: If my prepared remarks sounded that way, that's not what I was trying to say. There was a slight delay in one particular program, which really just reflects the fact that it's a new product. And sometimes new product launches just take a little longer than expected. There's nothing particular that I can point to with respect to that. It is positive that we're getting new updated forecasts now that would indicate shipments beginning later in Q2 and then ramping quickly in Q3 and Q4. So that's all positive. I wouldn't read much into the delay itself. Overall, the revenue in our data center business is about where we expected it to be in Q2. So there's not really a significant change from our earlier thinking. That small delay in the business for Microsoft is being more than compensated by other data center customers. So it's not anything overall that I'm trying to point to there. Just that one particular product that's got some of the delay. Your second question had to do with the 300 million dollar target and whether that represents a change. No, fundamentally, other than that, you know, we mentioned that we're having to pull in 800 gig and 1.6 terabits faster. Now, 1.6 terabits won't be a factor this year, but it will be early next year. But the acceleration in 800 gig is certainly helpful to try to meet that goal. And then I'm sorry, I forgot your third question there. What was it?
spk09: Well, I'll tie that in with my next and last question. So but it was about the orders. If, for instance, you think that, you know, if there's a reason to think as you're seeing these forecasts that, for instance, June would be up from, you know, up from May, which is up from April, if you're seeing that kind of trend at this customer. But I might as well just ask, I mean, you said you said, you know, one Q data center revenues were about where you expected them to be. How do you see them trending in two Q and three Q, if you could if you could address that and then that would be it. I
spk15: want to be
spk03: clear. Yeah, well, first of all, maybe maybe I misspoke earlier. Q1 and Q2 data center numbers are about what we expected them to be. Cable TV and Q2 is coming in a little lighter than what we had expected. And that explains, you know, to the extent that we didn't give guidance until now in Q2, but to the extent that, you know, there was some change in our thinking, it had to do with cable TV, not data center. Data center overall is doing almost, you know, actually, it's slightly ahead of plan compared to we thought where we thought it was going to be. I mentioned earlier, Microsoft had a delay in one product, but the rest of them are going to find. And that slight delay in that one product was more than compensated for in Q2 by by growth and other customers. So with respect to.
spk18: So let me say that overall for data center, I think we feel more positive right now compared to a few months ago. The main reason is -hundred-G. Right now, I think at least we can see several big customers, especially two hyperscale data customers are pulling in the schedule for -hundred-G. But cable TV, you know, cable TV is quite slow because all customers are working for one point or the products. So, you know, usually the delay in cable TV is not surprising, as you can see from other cost from other other companies.
spk03: Michael, I just want to touch on your last question there. I try to answer it directly. Yeah, you know, are we seeing a trend of more orders kind of month by month? And the answer is yes, as I mentioned earlier, you know, that one program, for example, from Microsoft, it's somewhat delayed. We do expect it to pick up towards the end of this quarter. So that would
spk16: mean
spk03: June months would be bigger than May. And that was certainly bigger than April. So we are seeing that trend with that product. But overall, we expect to see that trend somewhat throughout the quarter. Although, again, I would say for the most part, the data center business outside some of these new programs and especially the -hundred-G products later in the year is, you know, it's a relatively consistent business at this
spk09: point. OK, great. I'll pass it on now. I might come back later or say my questions for offline. Thank you.
spk14: OK, sounds
spk02: great.
spk14: Thanks. The next question will come from Tim Savageau with
spk05: Northland Capital Markets. Please go ahead.
spk13: Tim, your line may be muted.
spk05: Yeah, sorry about that. I'm here.
spk08: Can you hear me?
spk03: Yep,
spk04: we can
spk08: hear you.
spk03: Hello. All right, great.
spk08: Hello. Yeah, I'd say with the with the new OPEX forecast,
spk03: it seems
spk08: like
spk03: maybe something reasonably over 300 million is what you would need to get you there. And so that's a pretty significant ramp in the second half, you know, almost 3x over the first. Although we've seen that recently a couple of different places,
spk10: most recently at Coherent. So
spk03: I guess as you as you look at that ramp and the 800 gig opportunities in particular, I'm hoping you might be able to size those for us in a fashion maybe similar
spk10: or analogous to how you've been talking about
spk03: the
spk10: Microsoft 400 gig opportunity.
spk03: That's one question. And you've talked about new data center customers or some old data center customers coming back. Should we assume this discussion around 800 gig at 1.60 also applies to Microsoft or is it more focused on the new players? No, I mean, we specifically maybe maybe it wasn't totally clear from the prepared remarks, but it's it's you know, our existing customers that we have now, plus the new customers for those 800 gig and 1.6 terabit products. So Microsoft clearly is would be included in the category of existing customers. And as far as the size of the market, you know, what we're seeing right now is that 800 gig is is the size of the market. And that is several times as large as the 400 gig opportunity. So it represents, you know, a dramatic expansion. And that's that's, you know, within the same customer. If you add on, you know, the new customers that we're referring to, the market size there gets, you know,
spk05: commensurately larger. Great. So as you look at that data center ramp
spk03: into the second half, I mean, would you imagine between your current 400 gig, would you imagine that to be, I don't know, half 800 gig or how are you looking at it now? And to what extent are you looking at a material cable TV networking contribution in the second half as part of the data center ramp? Yeah, I think that's the key point really is the cable TV has been, you know, kind of to the extent that there's been a disappointment in key two. It's mainly the cable TV is ramping slower than we expected. And that's just as Tom mentioned, you know, somewhat that's par for the course. I mean, we were optimistic that the MSOs would move a little faster into one point eight. But, you know, it's taken a little longer to get through the qualification, get all the necessary training and what have you done. But we do expect them to ramp in the second half of the year. And that will contribute meaningfully towards the revenue ramp. But it will also help us improve the gross margin, which is, you know, significantly higher in the cable TV segment than it is in data center.
spk18: And I can add something. So for the 800G business, we can see, I think we are discussing with at least three, four customers, for sure, including Microsoft. I think this is more than 500, 600 million dollars next year for AOR.
spk05: Just 800G. Sorry.
spk10: Tom, is that in the aggregate or what kind of time period or maybe we can or can we put some more brackets around that?
spk03: 500, 600, I think I heard you say.
spk18: I think we are doing qualification. I think we should get somebody in order. So, Q3, so it's about next year, Q1 to Q4 next year, I would say. Just A and G only is more than 500 million or even 600 million dollars for AOR based on this. And that was going
spk03: to be my last question actually in terms of the nature of these detailed discussions and kind of does that around qualification? Or where do we stand on that front? Or are we talking about putting the dotting the I's and crossing the T's on contracts, a little more color there. Well, I'm not sure to what extent the contracts really come into play there. What we're talking about now is retail planning around employment scenarios, when they're going to need products, how much product they're going to need, pricing, that sort of thing.
spk05: Okay, thanks.
spk03: Commentary from the customers is how fast can you deliver a product for us, right? It's about how fast can we be ready to deploy or to manufacture the products that they need to deploy.
spk05: And the very
spk18: important key, as I say, is AOR has been invest a few hundred million dollars in the past as a more than 10 years of automation, including we develop a lot of our own equipment for automation. So I think right now we're doing a phase two. Maybe I would say we will do phase three live, ION this year, and do a phase three fully automation in Q1, Q2 next year. So we can do energy manufacturing in Houston with, I would say, similar or a bit higher cost than in Taiwan and China. I think that's very attractive to the customer, including the big customers we used to have several years ago. I think they're coming back. Number two, the key, so you know the laser is a key component, key technology. The 190G, 200G, the VEXO, the EML, and I think we can make all the lasers in Houston. That's also very, I think, the key factor for the customer. I think for sure is not only the cost, the key is
spk05: the risk measurement. Great. Thanks very much. Again, if
spk14: you have a question, please press star, then one. Our next question will come from Dave Kang with B. Riley FBR. Please go ahead.
spk07: Thank you. Good afternoon. So regarding that 800G, first question is, do you have 200G per lane, VEXOs, and EML? So what's the status on that?
spk18: We will have the volume effects will be more like Q1 next year. Right now it's, you know, you need to go through the whole R&D special. I think customers are very concerned about the quality. But that's for 1.6T, all right, not for 800G. 800G is still the per lane. And I'm talking about, the 800G, I'm talking about the opportunity for EML. Next year it's 500 to 600 million higher. There are single modes, okay. It's like 2 kilometers higher. It's not a short-reach, it's not an ALC. So it's a pretty high ASP, high cost margin product. The 1.6T, I think, next year is more like the, will be the multi-mode and single mode together. But for shorter distance, maybe, you know, 500 meters and below. But we will have all of them pretty soon.
spk07: Got it. And then sticking with 800G, I think I used, it sounds like maybe two customers that will ramp third quarter. Just wondering if you've been qualified or if you've got -the-peel already?
spk18: The range will be more like Q3 or Q4. If you know, we are doing a qualification. So it's a single mode, 2 kilometers higher, including DRA and 2xFR4. So I would say more than two customers. The hyperscale, I would say maybe three customers, including just some other smaller customers. The body manufacturer, for sure they're not pushing Q3, so we are trying our best to catch up the body. I would say Q4 for sure. Q3 schedule is a bit tight, maybe September.
spk07: Got it. And then regarding your press release at the beginning of OFC about that 800G AOC that you jointly developed with Credo, can you just give more color exactly what they provide and what you guys provide? And where are we as far as sampling or even going to production?
spk05: So
spk03: Credo makes a DSP and we make active optical cable around it. And we haven't commented on any production schedules for it.
spk17: Okay. Thank you.
spk14: This concludes our question and answer session. I would like to turn the conference back over to Dr.
spk05: Thomas Lin. Please go ahead, sir.
spk18: Again, thank you for joining us today. As always, we want to extend a thank you to our investors, customers, and employees. We will continue to follow as we discussed today. We believe the long-term demand driver will remain strong for both our data center and CATB business. And we believe we are well positioned to capitalize on these opportunities. Thank you.
spk14: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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