Good afternoon. I will be your conference operator. At this time, I would like to welcome everyone to Applied Optoelectronics Fourth Quarter and Full-Year 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. [Operator Instructions]. Please note that this call is being recorded. I will now turn the call over to Lindsay Savarese, Investor Relations for AOI. Ms. Savarese, you may begin.

Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics, and I'm pleased to welcome you to AOI's fourth quarter and full-year 2022 financial results conference call. After the market close today, AOI issued a press release announcing its fourth quarter and full-year 2022 financial results and provided its outlook for the first quarter of 2023. 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 one 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 Q4 results and Stefan will provide financial details and the outlook for the first quarter of 2023. 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 statements. 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 industries, 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 believes, forecasts, anticipates, estimates, intends, predict, expects, plan, may, should, could, would, will, potential or things, or by the negative of those trends or other similar expressions that convey uncertainty of future events or outcomes. The company updates these forward-looking statements on its current expectations, assumptions, estimate and projections. While the company believes these expectations, assumptions, estimates and projections are reasonable, such forward-looking…

Thank you, Lindsay. Thank you for joining our call today. We are pleased to report fourth quarter results, with revenue in line with our expectations, gross margin above our expectations and non-GAAP loss per share better than our expectations. We continue to see strong demand in the CATV market and generated the highest quarterly CATV revenue in the company history in Q4. During the fourth quarter, we delivered revenue of $61.6 million, in line with our guided range of $58 million to $64 million. We delivered non-GAAP gross margin of 21.4%, above our guided range of 17.5% to 19.5%, driven by our targeted cost reductions and favorable product mix. Our non-GAAP loss per share was $0.19, about our guided range of a loss of $0.28 to $0.34. Our revenue in our CATV segment was a company record of $38.2 million, up 53% year-over-year and 22% sequentially, off a strong Q3, as we continue to see robust demand in the CATV market. Total revenue for our data center products of $16.5 million decreased 35% year-over-year and 7% sequentially as customer continues to manage inventory level of all the products during the transition to 400G. This was partially offset by an increase in 400G revenue, which more than doubled sequentially. In Q4, we signed an agreement with a major hyperscale data center operator for development program to make next-generation lasers for their data center, both for 400G and beyond. While the development of this new product will take several quarters to be complete, we view this counter award as validation of the value of our core laser fabrication ability. With that, I'll turn the call over to Stefan to review the details of our Q4 performance and outlook for Q1. Stefan?

Thank you, Thompson. As Thompson mentioned, we are pleased to report our fourth quarter results, with revenue in line with our expectations, gross margin above our expectations and a non-GAAP loss per share of better than our expectations. We continue to see strong demand in the CATV market and generated the highest quarterly CATV revenue in the company's history from Q4. Before turning to the quarter, I wanted to provide an update on the transaction that we announced last September that we have entered into an agreement with Yuhan Optoelectronic Technology for the sale of our manufacturing facilities located in the People's Republic of China and certain assets related to our transceiver business and multi-channel optical sub-assembly products for the data center, telecom and FTTH markets for a purchase price of $150 million. As a reminder, we continue to anticipate that the transaction will be completed in 2023 and is subject to customary closing conditions and regulatory approvals, including CFIUS and ODI. We continue to advance work on these required regulatory approvals. As part of this process, Yuhan has disclosed additional details regarding their financials, including new details regarding the composition of their ownership group. And based on this new information, we continue to be optimistic that regulatory approval of this transaction both in the U.S. and China is achievable. Turning to the quarter. Our total revenue for the fourth quarter increased 13% year-over-year to $61.6 million, which was in line with our guidance range of $58 million to $64 million. As Thompson noted earlier, we made progress on our strategy to focus our efforts on our higher-margin laser business during Q4. We are pleased to announce that, during the fourth quarter, we signed an agreement with a major hyperscale data center operator for a development program to make next…

[Operator Instructions]. Our first question comes from Simon Leopold from Raymond James.

I appreciate the seasonal factors in terms of the Chinese New Year effect on the March quarter. And so, I guess what I'm struggling with is how to really think about maybe the normalized run rate, given that you didn't provide a full-year forecast. Can you give us some color or quantification about how you're thinking about the full year, particularly for the cable unit?

Well, as we noted in our prepared remarks, we had an all-time record in terms of cable TV production in Q4. I think part of that is probably some orders that were pulled into Q4 from Q1 just because they knew that there would be an impact from Lunar New Year and wanted to make sure that they had adequate inventory on hand. So, that number is probably a little bit high for an average run rate, but it's certainly what we were able to produce in Q4. So, consistent with demand. I'd say we'd probably come in at a number that's slightly less than that, perhaps, but not too far off after we finish off – after we get out of the Lunar New Year period. That being said, we're actually monitoring pretty carefully the activity around DOCSIS 4.0, or at least specifically the MSO plans to move to upgraded networks. It's something that we spent a lot of time developing products for, and we're excited about that transition. So we're waiting to see whether that occurs later this year or early in the next year, and how that'll impact volumes, both on the current generation of 1.2 gig products and the next generation 1.8 gig products.

And just to make sure I understand what you're alluding to there, if we were to make the assumption that DOCSIS 4.0 spending were to ramp in 2024, the activity in 2023 seems like maybe preparation for that, and therefore, 2024 should give you further growth if we think that's when DOCSIS 4.0 ramps. Is that the right interpretation?

Yeah, I think that's an accurate description. The DOCSIS 4.0 components, in addition to being just kind of more complicated in their own right because of the greater frequency response associated with DOCSIS 4.0, the products also – especially the amplifier products contain a great deal of intelligence in the products, which is something new that hasn't really been incorporated into those products. So, the bottom line is that the cost and price of those products is higher than the current generation DOCSIS 3.1 products. And so, independent of volume plans by the MSOs, just the cost increase alone would certainly tend to drive higher revenue numbers.

Can you give us the names of the customers that were over 10%, the cable TV vertical and the data center vertical?

Sure. ATX Networks and Microsoft.

Our next question comes from Tim Savageaux from Northland Capital Markets.

Congrats on the results, especially on the gross margin side. And I guess I'll start there. And I think your drivers for Q4 are pretty straightforward. In talking about mix, I guess that's more cable and less datacom. My first question, though, is on the Q1 gross margin guide, which is higher still, despite this seasonal pullback in revenue. I don't know if that's some of that NRE funding coming in or if you can talk about what the drivers might be there.

There's not much in the NRE funding in Q1 actually in terms of the forecast. I mentioned in our prepared remarks that we've actually been successful in pushing through some price increases, which is rather unusual for our industry. And so, we'll start to see the impact of some of those price increases during the quarter and then the continued cost reduction efforts. I've mentioned this pretty consistently over the last, I don't know, three or four quarters that because of the nature of the cost reduction, and specifically when you're talking about product redesigns or substituting components that maybe have lower costs, that takes some time to play out because you have inventory that you have to – older inventory at a higher cost you have to use up before the new inventory at a lower cost comes in. And so, those cost improvements don't happen all at once. They tend to happen over a period of a couple of quarters. So there'll be some additional impact from those cost reductions in Q1 as well.

So it sounds like if you're in a situation where revenue comes back post your seasonal quarter, it doesn't seem like there's a lot of one-time stuff in that Q1 – gross margin guide seems like you could possibly build on that with higher volumes.

Yeah, I think that's right. We've certainly been talking about returning to certainly upper 20s, mid to upper 20 range gross margins. And I think we can definitely see – especially over the last couple quarters, we can certainly see a pathway to that later this year.

Tim, this is Thompson. I certainly believe Q4 this year gross margin should be 30% for us. And next year with DOCSIS 4.0, I think the unit price should be much higher. For us, it's a very new product. And I think that AOI has – we believe we have very strong advantage in technology and performance. And the cost might be better. So, the next year, costs might be even better. This is how we see right now. And we see very strong demand from the key customers.

And I want to kind of follow – that was - my next question actually, is we seem to be talking about cable TV infrastructure demand in two different ways, which is, one, your current demand profile, which seems pretty strong and maybe some of that got pulled into Q4, but you grew 25% or so in cable TV in calendar 2022 and obviously, much faster than that in Q4. But does that represent a normalized growth rate? Can you maintain double digits there regardless of the timing of 4.0? It sounds like what you were trying to say is to the extent we see when some of this 4.0 activities start to really happen in the second half of 2023 versus 2024, that could be a swing factor for your cable TV growth. I'm just trying to set a baseline for how you see the current demand picture and what might be incremental to that.

So at the moment, I mean, we're sort of capacity limited in terms of production. And so, until we get a more clear line of sight on exactly how fast the adoption of 4.0 is going to go, I'm not anticipating that we're going to add a lot of production capacity for the 4.0 products. And so, for the next several quarters, I would say we're likely to be capacity constrained. Now, I mentioned earlier that Q4 was a little bit higher than I think we would do on an average basis. We sort of – as I said, the customer pulled in some revenue and we did some things to try to ship out as much product as we could. So, I wouldn't necessarily predict that number exactly in Q4 as a fourth quarter run rate. But going back a quarter or so probably is a reasonable estimate of what we would be able to do quarter-on-quarter this year, absent any change in the demand picture due to 4.0.

There are no more questions in the queue. And this concludes our question-and-answer session. I would like to turn the conference back over to Dr. Thompson Lin for any closing remarks.

Okay, thank you for joining us today. As always, we want to extend a thank you to our investors, customers and employees for your continuous support. We look forward to seeing many of you at IC and updating on you on our next earning call.

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