Good afternoon. I will be your conference operator. At this time, I would like to welcome everyone to Applied Optoelectronics' Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the call over to Monica Gould, Investor Relations of AOI. Ms. Gould, you may begin.

Thank you. I'm Monica Gould, Investor Relations for Applied Optoelectronics and I'm pleased to welcome you to AOI's Third Quarter 2020 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its third quarter 2020 financial results and provided its outlook for the fourth quarter of 2020. 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 the recording can be found on the Investor Relations section of the AOI website and will be archived for 1 year. Joining us on today's call is Dr. Thompson Lin, AOI's Founder, Chairman and CEO; and Dr. Stefan Murry, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q3 results and Stefan will provide financial details and the outlook for the fourth quarter of 2020. 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. In some cases, you can identify forward-looking statements by terminology such as believes, anticipates, estimates, intends, predicts, expects, plans, may, should, could, would, will or thinks and by other similar expressions that convey uncertainty of future events or outcomes. 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 fourth quarter of 2020. Except as required by law, we assume no obligation to update…

Thank you, Monica, and thank you, everybody, for joining us today. Our third quarter results were driven by good growth in each of our 3 major business segments. We achieved Q3 revenue of $76.6 million, which was within our guidance of $76 million to $83 million. Q2 revenue grew 66% compared to the third quarter last year and 70% sequentially, but was at the low end of our guidance range as we began to see some slowing in orders from certain of our data center customers in the later part of the third quarter. We believe that this slowdown in orders is related to inventory normalization following the surge in demand that was driven by the shift to working from home earlier in the year. Non-GAAP gross margin of 27.4% was above our guidance range of 25% to 26.5% due to favorable product mix coupled with benefit from our cost reduction action. Non-GAAP net loss of $0.06 per share was in line with our expectations of a loss of $0.20 to a loss of $0.03. Similar to Q2, we saw good demand in the data center market during most of the third quarter. Toward the end of Q3, we started to see some softness from certain payers and customers due to what we believe was digestion of previous orders. And based on what we see today, we expect headwinds in Q4 as our hyperscale customers adjust their inventory levels downward in response to supply chain disruption that currently appear to be less severe than seen earlier in the year. Our customer relationship and market share position remains strong and we believe the continued need of higher bandwidth within the data center would drive long-term growth. Additionally, we expect continuing favorable product mix and our cost reduction efforts to further improve…

Thank you, Thompson. As Thompson mentioned, our Q3 results were broadly in line with our expectations and reflect continued progress on our revenue and customer diversification efforts and improvement in our gross margin. We saw good growth across each of our 3 major business segments. Similar to Q2, we saw good demand in the data center market during the third quarter. Notably, our 100G revenue increased nearly 350% from Q3 last year and 13% sequentially. However, later in the quarter, we started to see some softness in deliveries as our customers began to catch up with the surge in demand in the first half of the year and focused on digesting previous orders. Based on what we see today, we expect headwinds in Q4 as certain of our hyperscale customers adjust their inventory to more normal levels. We anticipate that revenue will be down sequentially in Q4. However, we believe that in the next few quarters, as inventory at our customers returns to normal level, we will resume revenue growth in this segment. We continue to have good relationships with our data center customers. We believe the fundamental needs for higher bandwidth within hyperscale data center will drive long-term growth, particularly during this time as our customers remain focused on improving network performance in light of the increased traffic related to the shift towards working from home. And we expect our gross margins to further benefit in Q4 from continued favorable product mix and our cost reduction efforts. Turning to our quarterly performance. Total revenue for the third quarter of $76.6 million was in line with our guidance range. Revenue increased 66% year-over-year and 17% sequentially, driven by growth in all of our business segments. Our data center revenue rose 5% sequentially and 63% year-over-year to $55.3 million and accounted…

[Operator Instructions] Our first question comes from Dave Kang with B. Riley.

I just have a quick one on the 400G and 100G products. I was wondering if you guys could give a little color around the pricing environment. Do you guys see any weakness in pricing there? Also, how is the demand looking? Can you guys give any color around that? Like what are customers' demands looking like going forward? And how do you guys view strength in that product?

Sure. So regarding your first question on the pricing environment. It's been pretty stable. I mean within our expectations. No big change in that. Regarding your question on demand, as we talked about in our prepared remarks, I think there's some near-term headwinds in -- from some of the hyperscale customers. We've seen -- basically, I think what's going on here is that several of them kind of anticipated more supply chain disruption during COVID than actually occurred. So they prepared extra inventory in anticipation that there would be some problems. Those problems maybe didn't materialize as much as they thought they might and so they're going to adjust their inventories back to more normal levels. Now that's what's going on. And that will take the next couple of quarters to normalize itself, we think.

Okay. Great. And on the 200- and 400-gig products, how was progress looking? How are qualifications coming along? And how does the demand and pricing environment look for that going forward?

Sure. So I mean, 200-gig products are -- they're not probably the next mainstream product, as we've talked about in our previous earnings calls and other investor communications. We think 400-gig is really where the next-generation is going to land pretty squarely. We do have some 200-gig sales but it's relatively minor. As far as 400 gigs, the qualifications that are ongoing there, well we had some good progress on that this quarter. We did finish a -- successfully completed a qualification effort from one of our data center operators this quarter for 400G. That's our second qualification. The other one was announced I believe in Q2 -- I'm sorry, it was announced in our -- in Q2 for our Q1 call. So that's our second 400-gig qualification. And we think that speaks pretty highly of our technology and our ability to gain traction in that market. We do see the 400-gig market beginning to pick up in earnest probably the middle part of next year. We're still working with our customers to ascertain the exact time frame there. But it's starting to feel more solid that we'll start to see some orders in the middle part of next year.

Okay. Sorry, go ahead.

No, no. That's it. I think I answered the question.

Our next question comes from Paul Silverstein with Cowen.

Stefan, Thompson, how does demand for 5G look outside of China?

Right now, I mean, the demand that we're seeing is primarily in China. There's probably demand outside of that but it's not something that we have much exposure to at this point.

So it's more -- Stefan, if I hear you correctly, you just don't have much exposure outside of China that's why your revenue is highly leveraged in 5G China, not so much or very little to 5G outside of China.

Yes. But my suspicion is that there's not -- I mean there's obviously 5G activity going on in China, but I want to be really clear that when we talk about 5G, what we're really talking about is ultra-wideband 5G. There's clearly 5G deployments going on in areas outside of China, but for the most part, the front-haul and mid-haul links in those applications are similar to 4G. So there's not a need for the kind of high-bandwidth optics that we're supplying. Those optics are needed in the ultra-wideband 5G which right now is primarily being deployed in China. So it's not that we necessarily don't have inroads or the capability to sell in other parts of the world, it's just that the ultra-wideband type of 5G deployments are not really that active outside of China.

[Operator Instructions] At this time, we have no further questions. I will now turn the call over to Dr. Thompson Lin for closing remarks.

Okay. Thank you for joining us today. As always, thank you to our investors, customers and employees for your continued support and we look forward to virtually seeing many of you at our upcoming investment conference.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.