Goody day, ladies and gentlemen and welcome to the Applied Optoelectronics Q2 Financial Results Conference Call. Today's conference is being recorded. (Operator instructions) I will now turn the conference over to Ms. Maria Riley. Please go ahead, Ms. Riley.

Thank you. I am Maria Riley of Applied Optoelectronics Investor Relations, and I am pleased to welcome you to AOI’s second quarter 2014 financial results conference call. After the market closed today, AOI issued a press release announcing its Q2 2014 financial results. The release is also available on the company’s Web site at ao-inc.com. This call is being recorded and has webcast slides. A link to that recording can be found on the Investor Relations page of the AOI Web site and will be archived for 90 days. Joining us on today’s call is Dr. Thompson Lin, AOI’s Founder, Chairman and CEO; and Dr. Stefan Murry, AOI’s Chief Strategy Officer and incoming CFO. Thompson will give an overview of AOI's Q2 results and Stefan will provide financial details and an update on AOI's strategy in market. 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, expects, plan or believe, and by similar expressions. Except as required by a 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 change 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 are, of course, on file with the SEC. Also with the exception of revenue, all financial 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 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 Web site. 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 delivered very strong second quarter results exceeding both current bottom line expectations. We achieved our fifth consecutive quarter of record revenue. Maintained gross margin of 34.4% and demonstrated solid earnings growth. More specifically, second quarter revenue grew 67% year-over-year and 31% sequentially to reach a record $32.7 million and we achieved record non-GAAP net income of $2.4 million, up 184% sequentially. Both our data center and fiber-to-the-home products saw a tremendous growth this quarter. Our data center revenue grew 170% year-over-year and 55% sequentially primarily a result of increased share within our existing customer base. Fiber-to-the-home revenue grew 339% year-over-year and 40% sequentially to reach a record $3.1 million. As we continue to increase shipments of our WDM-PON products for our foundational fiber-to-the-home customer. We continue to execute on our growth plan in order to capitalize on our growing market. In July we added a key member to our sales team in Taiwan to help broaden our data center customer base. We are quickly ramping our production capacity in order to keep pace with the strong customer demand for our industry building products and I am very pleased to announce that in July we shipped our 1 millionth laser so far this year surpassing this annual milestone mid-year. I am sure many of you have heard me say this before but it would be better if it was repeated because it sets AOI apart from the crowd and is helping drive our success. AOI is one of the few optical component suppliers focused on the optical access market. Our vertical integration from laser chip to equipment coupled with our design and manufacture capabilities are keys to a continuation of our strong growth. We are very excited by both our current…

Thank you. As Thompson indicated, we achieved our fifth consecutive quarter of record revenue with a very strong gross margin profile. Total second quarter revenue grew 31% sequentially to reach record revenue of $32.7 million. Looking at revenue by customer, 88% of our second quarter revenue was derived from our top 10 customers with data center revenue providing over half of that total. Looking at our growth by market, revenues from CATV products in the second quarter was within our expectations of $10.6 million, an increase of 1% from the $10.5 million reported in the same period last year and up 9% sequentially. We see two near-term catalysts that will drive revenue growth for our CATV broadband products in the back half of 2014 and into 2015. First, the impending DOCSIS 3.1 upgrade cycle, and second, the move to fiber deep architectures, both of these are driven by increasing consumer demand for more and faster bandwidth and by competitive pressures CATV providers are facing from new market entrants like, Google Fiber and other 1G fiber-to-the-home initiative. Looking into these growth drivers in more detail, recall that DOCSIS 3.1 is the new, high-speed data over cable is standard that will allow cable operators to deliver next-generation broadband services over their HFC networks. As part of the DOCSIS 3.1 upgrade, MSOs will need to deploy new equipment in the head end, or central office, the node and in the customer premise. As the largest CATV ODM equipment supplier, we are actively involved with many of our key CATV equipment customers in developing the head end and node products that will form the basis of their DOCSIS 3.1 network. In Q2, we were awarded four key development contracts by one of our key cable TV customers, specifically related to DOCSIS 3.1 node and…

(Operator Instructions) We will go first to Simon Leopold with Raymond James.

A couple of things I wanted to check on. You made a couple of comments that may be are a little bit conflicting. You've indicated you are making an assumption of a similar product mix but then as you spoke about the various line items, I had the feeling that cable TV would be up in the third quarter, data center relatively flat and the fiber-to-the-home up but on more sallow ramp then prior expectations. So if you could help me compared to similar mix to the commentary on each of the individual segments if I summarized this correctly.

Hey, Simon, this is Stefan. So what we see basically is data center being relatively flattish like we pointed out, so you are correct on that. Cable TV, we think will be up slightly, perhaps, but not, maybe not a whole lot. And then FTTH will be, again, relatively flat over the next two quarters as indicated. So you got that part pretty much correct. But what we are talking about, relatively consistent mix, I mean these are not big changes from the last quarter is what we are seeing.

Okay. And then you talked about a little bit of a push out on the fiber-to-the-home business. You mentioned one to two quarter. Do you have insight into the cause of that push out? Is it complications with permitting, delays in construction activity, other resources? Help us understand the why in terms of the push out.

Well, we have had a lot of customer conversations about that, obviously, but I can't really give you a whole lot of insight into the nature of the push out. What we know is that, what I can say for sure is it has nothing to do with AOI's product or the technology. They are moving ahead, pushing our product out as we mentioned, into field trials. We have had an internal speed trial, if you will, within our customer -- within their building. That was operating for the last couple of months. Absolutely rock solid. So we don't see any technological reason or availability of products or anything related to the products that we are manufacturing as the region for the push out. I think I will leave it to you guys to speculate on, on what might be causing the deployment push out but it's nothing related to our products.

Okay. And you mentioned a number in your discussion on the data center outlook for 2015. I believe you said, expectations of greater than 45% growth in '15. Did I get that number right?

That’s, right. 45% or greater year-over-year 2015 compared to 2014.

Okay. And then one last one. Somebody's got to ask about the departure of the CFO. So pretty surprising. Stock was trading somewhat weakly today. So if there is anything more you can help us understand, why this is occurring? It's a surprise generally to investors and analysts, bit of a yellow flag. So we would like some more color.

Sure. Well, as we indicated, James is leaving for personal reasons to pursue other opportunities. I can't obviously elaborate on what those opportunities might be, that’s for him to disclose when we feel appropriate. What I can say is that it doesn’t have anything to do with any disagreement about our financials or any strategic disagreement among the management team. Nothing onerous like that.

Troy Jensen with Piper Jaffray has the next question.

Congratulations on the nice results, gentlemen. I will step in, start with you on the DC side, data center side. Any new significant wins in the quarter, new customer wins?

We don't have any new wins in data center in the quarter. We do have a number of ongoing qualifications though, with new customers that we hope to talk a little bit more about on our next call.

Okay. And then just a follow-up on Simon's all or Simon's question. You say, predicting 45% growth next year, can you just help us with the visibility that you are getting from these data center customers. Most other optical companies don't have visibility behind kind of a quarter. So, just the confidence to say such a big growth rate.

Well, I think there is two things. Number one, as we have indicated previously, I think we do tend to have better visibility than most companies in this business because, again, we are dealing directly with the large data center operators that are our customers. So the other thing as a kind of indicated in the remarks, the technology transition that we are seeing from 10 gig to 40 gig and then 40 gig to 100 gig in the middle part of next year. That's significant because they need to give us a lot of visibility into those transitions so that we can make sure that we are supporting them as they make those transition. In other words, making sure that we have got the production capacity in place and what have you. So we have had quite a few detailed discussions with the customers about their plans for 2015 and that's why we feel fairly comfortable in talking about it. It's worth pointing out too that, you know I want to emphasize here that every time when we undergo a transition in data rates from a slower speed to a higher speed, that tends to have an impact on the ASP. In other words, we are getting a higher ASP for these newer generations of products. So again, we are not necessarily counting on a whole lot of port growth, although, again, we don't necessarily see any deceleration in it. But even if that were to occur, the increase in ASP will allow us to grow the revenue at a very quick rate even without, say a lot of growth in port count itself.

Great. Last question for me then. You talked about some cable TV design wins. Can you just kind of help us out with the timeline for when those start to monetize and maybe the magnitude of the opportunity here.

Well, as we indicated what we have are awards of, basically, development contracts, if you will. In other words, we have been given the green light to go ahead and develop these products for the customer. We expect to finish the development by the end of the year and then revenue should start to flow fairly quickly after that. Now not all for those would be exactly at the same time obviously. So there will be a -- some of them will be earlier in Q4 and some of them will be a little later in Q4. But we should start to see revenue flow fairly quickly after that.

Moving on to Paul Silverstein with Cowen. Paul Silverstein - Cowen & Company: Several questions if I may. So first off, any 10% customers?

Yes. We had one 10% customer in the quarter. Paul Silverstein - Cowen & Company: And your thoughts on how large a contribution that made?

It was substantial contribution. I think it was 47%. Paul Silverstein - Cowen & Company: 47%, okay. Would it be fair to assume that was in -- that had to be in data center, obviously (indiscernible)?

Correct. That’s right. Paul Silverstein - Cowen & Company: It seems that the four large data center customers, are they just large in terms of size of the customers not necessarily what they have been buying to date. Did all four contribute to revenues in the quarter?

Yes. All four contributed. Paul Silverstein - Cowen & Company: Did all four grow and more importantly when you look out to the future, are you expecting meaningful growth from all four as you go forward?

Let's see. They all grew I believe. At least the two, ones that contributed the most, grew. Obviously one grew quite a bit in dollar terms more than the others. We do moving forward continue to expect to see them all grow and, again, we do have some additional qualifications that are undergoing right now. Paul Silverstein - Cowen & Company: All right. And the 10% customer, was it the same one as the one from last quarter?

Yes. It was one of the two from... Paul Silverstein - Cowen & Company: All right. And Stefan, going through your comment about port speed versus more ports, assuming that you continue to penetrate and if we assume away any new wins and just focus and look for large data center customers that you have and one were to assume that you continue to gain footprint. Correct me if I'm wrong, but in two of the cases, the relatively new relationships and I assume that the port count that you currently have relatively small but growing in the third case while a little bit older vintage, there again it seems like you are still early in the ramp. So, I guess, where I am going with this, it seems to me you should be gaining a (indiscernible) number of ports over time over and above the ship to higher line rate. But I want to make sure I understand it correctly.

Yes. I think that's a fair assessment. What I was trying to get at with the line rates is that when we talk about 45% growth year-over-year, for example, that's not necessarily implying that there is exactly a 45% growth in port count or a higher growth in that if you count for maybe some price erosion or whatever. I just want to -- I don't want you to extrapolate the number of ports directly, that's all I'm saying. Paul Silverstein - Cowen & Company: Understood. But maybe I misunderstood your earlier comment because I thought your comment was that that was mostly just from an increase in the line that as opposed to much of any growth in port count. But maybe I misunderstood you.

No. Again, I'm not trying to draw any conclusion about whether our ports are actually growing or not. I mean in fact they have been. But what I'm trying to say, is that for 2015, going into 2015, we have two effects. We have whatever happens to the actual number of ports that we sell up, down or sideway. But keep in mind that we also have this transition from more and more 40 gig and then in the middle part of next year we expect to see 100 gig layering in. And those will have a significantly higher ASP. So that affect in and of itself can account for quite a bit of growth regardless of the number of ports. Does that make sense? Paul Silverstein - Cowen & Company: Understood. But just to be clear, Stefan, it sounds like there are two major drivers. There is ongoing growth in port count as you more deeply penetrate the customers you have and perhaps any additional customers and there is the increase in line rate.

Yes, that’s correct. That’s absolutely correct. Paul Silverstein - Cowen & Company: All right. And to, I think it was Troy's question, but to your statement that you have another customer in qualification. Were you referring to a new customer that you haven't yet announced or is it one of the existing customers that’s in qualification?

A new customer that we haven't announced. Paul Silverstein - Cowen & Company: So that would make your fifth major data center customer.

Correct. Paul Silverstein - Cowen & Company: All right. And on the gross margin front. The small gross margin performance, is that primarily or exclusively a function of the mix or is there something else going on?

No. I mean it's the same kind of things that have been driving our gross margin before. So the mix is the major factor there. Obviously, an overweight of data center revenue tends to be accretive to gross margin relative, for example, cable TV. Paul Silverstein - Cowen & Company: All right. And then one more if I may. On the visibility question, which has been asked by others, again, I apologize but I have got to come back to it. I understand you gave a forecast, I assume the rolling forecast for data center, from your data center customers, from your fiber-to-the-home customer. And I understand that gives you some visibility on one quarter. But given what just happened as an example of how things can change unexpected in a very sudden manner, where you think you have visibility but it's not visibility that you actually saw. And correct me if I am wrong, but on the fiber-to-the-home side, I thought historically you have cited that you are building the capacity against firm orders albeit perhaps new orders really firm and so you shifted. But the obvious question is, how often do you get these rolling forecasts? How confident can you truly be, whether it be data center or fiber-to-the-home in terms of the visibility and predictability of the business. To some extent perhaps it's a rhetorical question but if you look at this historically, what type of confidence level can you and we have?

Yes, it's a very fair question. I think it's worthwhile to start by touching a little bit on the differences between the fiber-to-the-home and the data center deployments, okay. Fiber-to-the-home as you know is a very new technology, its new deployments and frankly certain aspects of those deployments are not within the control of our customer. It's a lot more complicated in that sense. It's not -- it can't be completely forecast even by our customer no matter what they would like to do, right, in fiber-to-the-home. Because there is other extrinsic things that come into play there. And Simon mentioned some possibilities for those types of things in his question earlier. On the other hand, data center is very much in the control of the customer. They have data centers that they have built out, that there upgrading to higher data rates, for example. They have new data centers that they are building and building online and all those things are very predictable and very much under the control of the customer. So I think there is a -- I think we're getting very good visibility both in the fiber-to-the-home and data centers from our customers in the sense that they're telling us in a very open way, what they plan to do. Now, to your point, certainly those plans can change from time to time and in the fiber-to-the-home sense that perhaps is a little bit more likely because of the extrinsic factors that affect those types of deployment. But we feel very strongly that the data center business is more predictable and certainly our past history indicates that the forecast that we get from the customers tend to be very accurate, if anything, a little bit of an underestimate. And then the final thing on the data center market that I want to say is, for the growth rate that we are talking about, we are not only talking about the existing customers that we have but bringing new customers as well. And so we are not only relying on forecast from one customer or two customers but we are layering and diversifying our customer base and that also will contribute to growth and lessen our reliance on any one particular customer's forecast. Paul Silverstein - Cowen & Company: So, Stefan that said, in your 45% growth forecast for next year for data center. In that forecast are you assuming more than five customers i.e. new customers on top of the customer that’s coming on? Or is that just from the five customers that you have?

It's substantially from those five customers although we do expect that we will continue to undergo qualification activities with additional customers. And so there may be some upside to that.

We will now hear from Richard Shannon with Craig-Hallum.

This guys, [Jorge] (ph). Actually I'm here for Richard. So just a couple of questions for me. One, on the ONU product. It seems your FTTH customer has pushed out its plans for a couple of quarters. Do you have any update in which we can expect the initial shipments of the ONU units.

Not much update on, other than what we said in the remarks that we continue to make progress talking to them about qualification and things like that. So not much else I can say beyond that.

Okay. So I think initially we were expecting the ONUs to begin shipping this quarter. So that’s not the case anymore then?

Yes, that's correct.

Okay. And then last question on the data center. Based on your comments, that 40 gig would probably reach, will be close to 50% of the sales. That seems to imply that 10-gig shipments, unit shipments would be falling down in the second half. I just would like to get more color around that. Is this just based on your two customers that are probably shifting higher speeds a lot faster than the rest of the industry or is there probably qualifications?

Yes. I think that's pretty accurate. And in fact one of the customers is moving a little earlier than the other ones but that's exactly what's going on. It's a customer's specific kind of thing.

(Operator Instructions) And we will now hear from Krishna Shankar with Roth Capital.

Yes, when you look at the cable segment of your businesses, the growth in the second half of this year is going to be driven by mostly the U.S. DOCSIS 3.1 and deeper fiber deployment, or can you talk about the international cable markets and how they may contribute to growth?

Yes. So we do continue to expect that the growth for most of the second half is going to continue to come from sort of international markets. As we talked about our DOCSIS 3.1 products won't be really available until towards the end of the year. Some of them may contribute a little bit in Q4 but mostly not. So most of the growth is going to come from the traditional sources that we have talked about in the past and a lot of that is international, in South and Southeast Asia like we mentioned.

Okay. And then similar to data center where you would expect 45% revenue growth next year, can you give us some range for what you think the cable part of your business that could grow in 2015 given the likely scenario for DOCSIS 3.1 and continued international growth?

Yes. As we talked about in our remarks earlier, the cable TV business we expect to see revenue growth in excess of 20% next year, year-over-year.

Okay. And then, I guess it's still very early to talk about the fiber-to-the-home deployment but if your core customer starts to deploy next year and extends its traditional cities, what could be the range of revenue growth for FTTH next year, you think?

Yes. We are not really able to take you much this far in advance. I think as you can appreciate, it sensitively depends on when they get you started and how fast they continue to ramp. I would expect to see -- it's not going to be a step function, right? I mean they're not going to go from pre-deployment type quantities to instantly large quantities. So there will be a period of ramp and we think that that ramp, basically, or the start of that ramp if you will, is probably delayed by one to two quarters.

And this concludes our Q&A session for today. Dr. Lin, I will turn the conference back to you for closing or additional remarks.

Okay. Thank you for joining us today. We are very pleased with our Q2 results and we believe that we are on track our key growth initiatives. As one of the few optical providers focused on the access market, we believe that we are well positioned for continued growth in all three of our target markets. We look forward to continue to [fit] (ph) at both the top and bottom line. Again, we thank you for your support.

And again, ladies and gentlemen, that does concluded conference for today. We thank you all for your participation.