Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Applied Optoelectronics Q1 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to our host, Ms. Maria Riley, with Investor Relations. Please go ahead.

Thank you. I'm Maria Riley, Applied Optoelectronics' Investor Relations, and I'm pleased to welcome you to AOI’s First Quarter 2014 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its Q1 2014 financial results. The release is also available on the company’s website at ao-inc.com. This call is being recorded and webcast live. A link to that recording can be found on the Investor Relations page of the AOI website and will be archived for 90 days. Joining us on today’s call is Dr. Thompson Lin, AOI’s Founder, Chairman and CEO; James Dunn, AOI's Chief Financial Officer; and Dr. Stefan Murry, AOI’s Chief Strategy Officer and Senior VP of Marketing and Sales. We will begin the call with Thompson and Stefan providing comments on AOI's strategy and market, then James will provide details on AOI's first quarter of 2014 and expectations for Q2 2014. 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 to differ materially from those anticipated in such forward-looking statements. You can identify forward-looking statements by terminologies such as may, expect, plan or believe, and by similar expressions. 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 Factors section of the company’s prospectus and report on file with the SEC, including its 10-K for the year ended December 31, 2013. Also, with the exception of revenue, all financial measures -- numbers 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 GAAP and our 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. Now I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics' President, Founder and CEO. Thompson?

Thank you, Maria. Thank you for joining us today. We believe 2014 is off to a fantastic start, and we are excited to share with you our first quarter accomplishments. We delivered a very strong first quarter and achieved our fourth consecutive quarter of record revenue. Revenue grew 74% year-over-year, and 5% sequentially, to reach $24.9 million. Notably, data center revenue grew 220% year-over-year and 96% from Q4 2013. And fiber-to-the-home revenue grew 104% year-over-year and 38% from Q4 2013, and we significantly improved our gross margin to 34.9%. As Stefan and James will discuss with you in more detail, throughout the quarter, we continued to make steady progress toward executing our growth plan and achieving our operational goals in order to capitalize our growth market opportunities. We are quickly increasing our production capacity in order to keep pace with the strong customer demand for our data center and fiber-to-the-home products. Market trends are building strong demand for optical technologies in the EBITDA margin, and customer demand for our product, continued to grow strong. Internet service providers and data center operators need to upgrade their optical-enabled infrastructure in order to accommodate growing Internet traffic. Consumers' increasing demand for greater bandwidth is growing [ph] 1 gigabit per second fiber deployment to the home. We believe that Google's 1-gigabit-per-second fiber-to-the-home initiative with 34 cities will pressure the traditional service provider to respond with major upgrades to their network. We are already seeing what others have called the Google effect. In late April, AT&T announced that Siemens deployed 1-gigabit-per-second service to 21 major areas. We think that other broadband service providers will have a similar response to the change in the competitive landscape. And we believe that this competitive pedal provides additional growth opportunities within both our fiber-to-the-home and cable TV markets. As a result of this market trend, we are working to further expand our production capacity in order to keep pace with growing customer demand. As we say on our last call, we are expanding our investment in R&D, expanding our laser fabrication capacity and production capacity for both fiber-to-the-home and data center products. To support the growth, in March, we completed a very successful follow-on offering, raising $45.7 million in capital, excluding underwriting discounts and expenses. We are already deploying the capital to grow our business and meet customer demand. We are on track with our capital expansion and growth plans, which we believe will provide long-term revenue growth as our markets continue their record expansion. With that as an introduction, I will turn the call over to Stefan to talk further about market dynamics in Q1. Stefan?

Thank you, Thompson. Looking at our Q1 results, cable TV broadband revenue was slightly above our internal expectation, growing 18% year-over-year. While we continue to see good growth in the Asia-Pacific region, we still see moderate spending in North America, as MSOs are in various stages of planning to upgrade their networks and consolidation continues among the MSOs. Overall, we believe that we have outperformed the market and continue to increase our share and expand our leadership in the CATV component and equipment market. As Thompson mentioned, we believe that MSOs are planning major upgrades to their networks in order to compete with new entrants in the market, as well as meet the new DOCSIS 3.1 standard. However, based upon public MSO comments and CapEx projection, we believe the MSOs will focus on upgrading CPE in 2014, with major upgrades to access networks beginning in 2015. In the meantime, we are developing and expanding our leading product portfolio with DOCSIS 3.1 capability. New laser transmitter and photodiode receiver technology is critical to enabling DOCSIS 3.1, which puts AOI in a very strong position to benefit from the DOCSIS 3.1 upgrade cycle. In January, we announced a new line of high-frequency laser components that are targeted for DOCSIS 3.1 downstream transmission equipment, and we have additional R&D projects underway to further enhance the performance of these devices and also to address upstream transmitters and receivers at both the node and heading. We are already seeing RF use from key customers and expect qualification to begin in Q2 and continue into 2015. Turning now to the data center market. On a sequential basis, revenue nearly doubled for the second consecutive quarter. We are really excited by our success, which continues to exceed our internal expectation. In Q1, we continue to see strong…

Thank you, Stefan. Looking specifically at the top line, the first quarter was a very strong start to 2014. We delivered our fourth consecutive quarter of record revenue, driven by increasing demand for our data center and fiber-to-the-home products. Please notice that this strong demand wholly offsets what would have normally been a sequentially down quarter due to historical seasonality from the cable TV market. While CATV revenue decreased 31% sequentially, as expected, total first quarter revenue grew 5% sequentially to reach a record of $24.9 million. Looking at revenue by customer, the first quarter, we derived 81% of our revenue from our top 10 customers compared with 79% in the prior quarter. This increase reflects the strong growth in data center revenue and seasonally lower CATV revenue as a percentage of total revenue. However, from a market perspective, we expect our revenue mix to continue to diversify throughout the year, with growth in the CATV, data center and fiber-to-the-home revenues. Looking at growth trends within these markets, revenue from CATV products in the first quarter was slightly above our expectations at $9.7 million, an increase of 18% from the $8.3 million reported in the same period last year. The sequential decrease was expected and was due to normal seasonality in the CATV market from the lack of cold weather deployment and the impact of Chinese New Year on our Asian operation. For the CATV market overall, we continue to expect CATV revenue to provide single-digit growth for 2014. Revenue from the Internet data center was very strong and again exceeded our own expectation. Data center revenue was $11.6 million, more than triple the revenue earned over the same period last year and nearly double the revenue in the prior quarter. We continue to invest in capacity expansion to meet…

[Operator Instructions] And our first question comes from the line of Simon Leopold with Raymond James.

Just a couple of questions here. One just pretty simple one. You had very good sales and a lot of upside to gross margin, but the R&D, in particular, was higher than I was expecting, and I guess that sapped some of the upside to the earnings. And I guess, what it begs the question of whether or not there was maybe some re-categorization of some expenses shifting from what might have been COGS historically going into R&D. Is there any kind of change relative to the prior quarters in terms of categories?

No. Simon, this is James. No, there was no re-categorization. It was just a straight R&D expense. The increase came from increasing our investment in R&D projects. The cost of goods was a product mix benefit and had really nothing to do with the change in categorization at all. And so we continue, as we said, to invest in R&D. It's a growth driver for the company, and there's lots of opportunity that we're trying to capitalize on. So a little larger R&D investment, but it's akin to a sales and marketing expense for many companies in that it drives immediate opportunity in top line growth. So our gross margin was normal.

Okay. And then staying on this gross margin theme, it does seem that the improvement in gross margin is not simply the reporting segment mix, but maybe mix within the mix, meaning that maybe within data center, there's improvement because even among data center products, relative to the prior quarter, there was a higher gross margin mix. If you could help us understand some of the levers of mix within the mix?

And so as we've kind of said before, we don't provide margin by market. But what we have said is that we do see data center and fiber-to-the-home providing lift to our overall margin. And of course, 40G products tend to have a higher margin than 10G, and so the mix there, as we continue to drive more of our mix within data center to 40G, we should get positive movement in margin. But most of it, in this case, was due to the larger weight of data center in relative comparison to cable TV and fiber-to-the-home. And to overcome normal seasonality was exciting. And so we continue to see good strong growth in data center, and we've got really all 3 cylinders firing now. So we look for a continued positive result.

And when you talk about your forecast for the June quarter, you suggested that data center would show particularly strong growth. And so I'm wondering about the gross margin you've guided to for the June quarter not being better if data center is the fastest-growing category.

Yes. So we want to be conservative. We've got cable TV’s becoming a larger weight. We've got more shipments into some emerging markets that continue to have a little less margin than other parts in the CATV space. So we just want to be appropriate in our guidance and try to be in line and ahead when we actually report. So it's not that there's anything happening in data center that would cause the margin to retreat or anything like that. But we just think it's appropriate to look at the product mix among the 3 markets and try to provide the best view we can of a likely margin.

Okay. And 2 more quick ones. One is regarding the timing of the FTTH project. I think you said this in your prepared remarks, but I think it's worth repeating, because I've read some press reports suggesting these projects may be later than what's expected. You indicated you expect your ramp in the third quarter to begin for the customer prem [ph] element. Has there been any change in your view versus what you talked about in the last quarter?

No, not really. It's pretty much the same viewpoint that we had with respect to the FTTH timing.

Okay, great. And then last one is, just any 10% customer color we could get?

We didn't have any new 10% customers but, of course, with the larger percentage of data center, we had a more meaningful input from data center customers as compared to prior quarters. But otherwise, not any new 10% customers to talk about. But data center was a larger share, as you would expect, on a percent of the overall revenue.

But did you have 2 10% customers, 1 in CATV and 1 in data center?

Yes, we did.

And our next question comes from the line of Krishna Shankar with Roth Capital.

As you're looking at your guidance for Q2, do you anticipate good sequential revenue growth in each of the 3 business segments? Or will CATV grow faster coming off its seasonal low in Q1?

Sequentially, we would expect normal conditions from cable TV, right? It's seasonally down, and it tends to recover in Q2 and Q3. So we expect just normal trends in terms of CATV. But we've handled some ups and downs historically in data center revenue, but we look for continued growth there in data center and fiber-to-the-home. So CATV will be regular in terms of its seasonality, but lots of excitement in terms of the other markets.

And then for the data center market, can you characterize where we are in terms of this upgrade cycle? Are we very early in terms of the 10-gig and the 40-gig upgrade cycle? Can you sort of give us a sense for the market growth potential for data centers over the next 12 to 18 months?

Sure. So I continue to think that we're still relatively early in the 10-gig upgrade cycle. And I think we are, for instance, in our remarks, the Infonetics study, which I think bears that out, admirably, they're calling for more than doubling of the unit sales between now and 2017. So I think we're not the only ones who say this is early stage. In addition, you mentioned the 10-gig versus 40-gig mix. We continue to see the market being dominated by 10-gig, although, as we mentioned, the 40-gig is starting to come on. It's worth mentioning -- I mean, really, those products just started shipping a couple of quarters ago for us, so it takes some time for that to ramp up, and it has done that. And we expect it to continue to stay a meaningful part, but a small percentage compared to the 10-gig.

And our next question comes from the line of Troy Jensen with Piper.

So James, I'd like just to follow up on one of Simon's questions. 40G gross margin, do they have higher than 10 even at low volumes? Or do you need scale to get above 10G margin?

They do. They have a higher margin because of higher ASP and cost efficiency, so it's really not a volume play at all. We have -- remember, it's part of the AOI story. We make our own lasers. We do our own component assembly and so we have immediate margin available to us even at low volumes, and we look to exploit that as we roll out 40G products.

And then maybe a follow-up on some of the gross margin questions. I think what you and Stefan talked about that incentive [ph] on the data center side. So just more color on that, and is that maybe one of the reasons they are also impacting gross margins a little bit?

So, no, the sales incentive will be a sales and marketing expense to make sure it's both highlighted and discreet in terms of timing. So it's a short-term incentive that we've identified that we think can contribute to continued growth, both in existing customers and potential new customers. So we think it's very appropriate. We have the opportunity to take advantage of it, and we're going to. But it really has no -- it's not any kind of rebate or anything else that would affect -- or discount that would affect cost of goods. It will be highlighted in the sales and marketing line.

Okay. And how about maybe switching gears here. Stefan, you mentioned a little bit about consolidation. Can you touch on Comcast, Time Warner, just kind of your exposure there, and any confidence in CATV front of that?

Yes. So we have roughly comparable exposure to both Comcast and Time Warner in the sense that we're not heavily overweighted in either one. What I think we’re seeing in the marketplace right now really is a lot of things are just kind of waiting for that consolidation to take place because, obviously, the shape of the future networks are going to be decided, in part, by how that all plays out. So the North American market, I think, is really still kind of waiting for 2 things: DOCSIS 3.1 product and then the results of that consolidation. So we do continue to hear -- I mean, the commentary that we're getting from our customers continues to be very strong and very bullish on the DOCSIS 3.1 opportunity. And I think some of the remarks that have been made recently about the need for gigabit speeds and the competition has been very positive in terms of our future opportunities there. And indeed, with respect to DOCSIS 3.1 in particular, we're seeing a lot of RFQ activity coming in. We're quoting a lot of new products, starting to develop a lot of products for our customers. So all of it’s lining up to be very good for us in DOCSIS 3.1.

[Operator Instructions] And our next question comes from the line of Richard Shannon with Craig-Hallum.

I guess a few questions from me on the data center side. In terms of the customer profile, you've had 2 big customers for the last few quarters. Have you added any new ones that are material? Can you discuss kind of the diversification efforts there?

Well, we talked about adding a few new customers last year. Those customers continue to grow in terms of volume. But we haven't added any additional new material customers beyond those 4 that we've talked about.

And just another reason, the sales incentive that we talked about a little bit, that's really part of the reason there is to spur opportunities that we do see with some other customers as well.

Okay, fair enough. And I need to follow up a couple of other questions. I don't know if you're able to kind of offer a number or characterize this, but how much of your data center revenues are in 40-gig today?

We -- if you look at the Infonetics study, we don't want to provide exact numbers in terms of shipments or percent of revenue, but we're consistent with kind of the market right now and the Infonetics study that put overall 40G product somewhere in the 5% to 10% of ports shipped. And so we're in line with that now. I think as time trends, we'll see more and more 40G, especially among certain of our customers, so it’s just right now, we're kind of in line with the market.

Yes, I think, moving forward, as James said, I think we're -- our customers tend to be the early adopters of new technology, so I think, right now, we're kind of in line with where Infonetics was projecting. I suspect that in future quarters, we'll probably be a little more heavily weighted towards 40-gig just because of our -- the nature of our customers versus the average, if you will, of all enterprise data center customers.

Okay, fair enough. And one last question from me, I guess maybe a 2-parter also in data center here. I think last quarter, you commented on your visibility and that part, would love to get an update on that. And I think, specifically, with this great revenue growth you had quarter-on-quarter, wondering if there's any lumpiness, and should we be worried about any sorts of pauses that may happen as your customers kind of absorb inventory and builds here?

So I'll take the second question first. I mean, in terms of lumpiness, I think we continue to see just strong indications of growth. Our customers are continuing to upgrade their existing infrastructure and building new infrastructure. And I don't want to oversell it by saying it's endless, but at least, at the moment, we're not seeing any indications from them that they have any desire to slow down any time soon. With respect to visibility, I think our visibility remains pretty good. It's actually probably somewhat improved from what we had last quarter around this time. Again, continuing to plug away, pulling all the parts that we can for them and delivering as quickly as we can for these new opportunities that we see.

[Operator Instructions] Our next question comes from the line of Edison Chu [ph] with G2 Investment Partners.

It's Josh Goldberg for Edison. I have just a couple of things. One is, originally, your March guidance on the gross margin was 31% to 32%, you ended up doing close to 35%. Obviously, your margin expectation this quarter is similar, low-30s. Do you think that there's potential for some upside if things kind of come through as expected? And then I have a follow-up.

Yes. So we try to provide as much visibility as we can into what we see across the lines that we forecast, but obviously, product mix within any given period can vary that margin. But we think we're in good shape in terms of our margin profile. We think we're on track in terms of our overall target market -- target model, rather, so we think the guidance we gave is appropriate.

Okay. And then as we go into the second half of the year, your comments about building these lines for the fiber-to-the-home opportunity, is it as easy as just saying, hey, if you had 1 line, you're doing roughly $2 million, if you have 4 lines, you could be even closer to $8 million to $10 million a quarter? Or should we not extrapolate the lines in terms of what your back-half growth could be, because it does sound pretty exciting in terms of what the growth could be in the second half.

I think in the short term, the lines that we're building are all nominally similar in terms of their capacity, but it's worth mentioning that at the state that we're at right now, we're ramping up things, and new lines may take more or less time to get to their full capacity and things like that. So I wouldn't directly extrapolate, but the lines that we're building are basically similar in terms of their ultimate capacity. It's just the timing of when that happens and how that ramps and things like that could be -- it could complicate an extrapolation in the shorter term.

Are you expecting typical strength in both cable TV and data center in the second half of the year as well, as well as what you might see on the fiber-to-the-home?

Yes. So cable TV is typically seasonal in the first quarter, as we mentioned. It tends to get better in the second and third quarters, and our outlook on that hasn't changed. And the data center business doesn't -- so far as we can tell, it doesn't seem to have seasonality associated with it. And as we said, we continue to see strong indications of customer demand in that one.

Thank you. That does conclude our Q&A session at this time. I'd like to turn the conference over to Dr. Thompson Lin for closing remarks.

Okay. Thank you for all joining us today. We are very pleased with the progress we have made, and we are on track with our key growth plans in the data center and fiber-to-the-home markets. We believe we have the tools and market conditions that provide us help to continue to succeed in goals. Okay, and we thank you for your support.

Ladies and gentlemen, that does conclude our conference for today. You may now disconnect.