Good day and welcome everyone to Applied Optoelectronics' First Quarter 2024 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to Lindsay Savarese, Investor Relations for AOI [ph]. Please go ahead.

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 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 Q1 results, and Stefan 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 believes, forecast, anticipates, estimates, projects, intends, predicts, expects, plans, may, should, could, would, will, potential or things 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…

Thank you, Lindsay. Thank you for joining our call today. Our revenue and gross margins for the first quarter came in below expectations. And 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 interaction, we remain very positive on improvements in the second half of the year. In the first quarter, we delivered revenue of $40.7 million, which was just below our guidance range of $41 million to $46 million. We delivered non-GAAP gross margin of 18.9% which was below our guidance range of 21% to 23%, mainly driven by difference in quarter mix. Our non-GAAP loss per share was $0.31 per share, which was less of guidance range of a loss of $0.28 to a loss of $0.33. Total revenue for our data-center products of $29 million was up 42% year-over-year, and was down 35% sequentially. Revenue for our 100G product increased 33% year-over-year, and revenue for our 400G product more than doubled in the same period. Total revenue in our CATV segment was $8.7 million, which was down 59% year-over-year, and down 30% sequentially, largely driven by continued generally slow sales of DOCSIS 3.1 equipment as the industry prepares to transition to DOCSIS 4.0. With that, I will turn the call over to Stephen to review the details of our Q1 performance and outlook for Q2. Stefan?

Thank you, Thompson. 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 forecasts 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 optimistic outlook, despite the slow start to the year. The first is that we have begun to receive forecasted orders for the pixel [ph] 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 forecast 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…

[Operator Instructions] And the first question will come from Simon Leopold with Raymond James. Please go ahead.

Thanks for taking the question. A couple of quick ones, maybe. I think on the prior conference call, you had given us some indication that you’ve got the full year revenue, it 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?

Well, what we've said is that we think we can be profitable for the year. So, if you can run the numbers on that we don't give guidance, you know -- guidance really, so -- I wouldn’t have pulled back anything but I think it was a little more challenging considering where we started the year but I think it's still very achievable.

Okay. And then, you did give us some indication of the operating expense expectations for the year at that $24 million to $26 million per quarter. And I think we were anticipating more of a $22 million 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?

As we noted in our prepared remarks, we've increased our R&D spend a little bit because we're getting -- like we talked about, we're getting customers that are pulling in the request for product development much ahead of schedule. 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; perhaps not so much increase in sales and marketing.

And then, I remember at our meeting at RFC [ph], you had talked about sort of a product roadmap going from the vexcel [ph] based solutions to vexcels EMLs [ph] and ramping up to higher per channel speed. Could you give us an overview of the roadmap you expect in terms of launches over the next year or plus?

Right. So the vexcel [ph] based products are already in production, and will likely add higher speed to main vexcels [ph] to that portfolio next year. With respect to the EML based products, we have some products in production now with higher speed, data center products with EMLs will go into production in Q3 or Q4.

And your -- what was your 400 gig in the quarter? I missed that.

17% of the data center; so $29 million -- 17% of that.

Okay. And that was just 400 gig, not about…

400 doubling [ph].

Let's say that again.

That's a little over doubling compared to that -- almost -- well, we’re slightly over doubling from the same period last year.

Great. Thank you very much for taking the questions. Appreciate it.

The next question will come from Michael Genovese with Rosenblatt Securities. Please go ahead.

To start with, I wanted to ask a question 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? Like we 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 you're coming from the overall presence of $300 million plus has maybe gotten a little bit more bullish but that -- maybe that's because you've added 800G to it. So, if you could help us understand that as well? Thank you

I'm sorry, what?

I was just raised reminding the first one was, why the delay [ph].

Yes. I wouldn’t really say it’s an overall delay. 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 is nothing in particular that I can point to you with respect to that. It is positive that we're getting new updated forecast 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 too 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 earlier thinking. That small delay in business from Microsoft is being more than compensated by the other data center customers, so it’s not anything that I am trying to point to, it’s just that one particular product that had something to do. Your second question had to do with $300 million target and whether that represents a change. No, fundamentally, other than that we mentioned that we're having to pull an 800 gig in 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. What was it?

My next and last question, so -- but it was about the orders. If for instance, we think that there's a reason to think as you're seeing these forecasts that -- for instance, June would be up from, which is up from April; if you're seeing that kind of trend at this customer. But I wanted to just ask, I mean, you said -- you know, once your 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.

I want to be clear. Well, first of all, maybe I misspoke earlier, Q1 and Q2 data center numbers are about what we expected them to be. Cable TV in 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 -- actually its 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 went fine. And that's slightly -- and that one product is more than compensated for in Q2 by growth in other customers. So, with respect to…

So, maybe at times we said that, its [indiscernible]. I have been -- we feel more positive right now compared to a few months ago. The main reason is [indiscernible]. Right now I think the inlays [ph], we can see several big customer, especially to [indiscernible] for energy. Our Cable TV -- you know, Cable TV is quite a sloppy because all parts are working for 1.0 edgy [ph] products. So, usually the delay in Cable TV is not surprisingly; I think you can see from other companies.

Michael, I just want to touch on your last question there. I’ll try to answer it directly. Are we seeing a trend of more orders kind of month by month? And the answer is, yes. As I mentioned earlier, that one program, for example, for Microsoft, is somewhat delayed, we do expect it to pick up towards the end of this quarter, so that in June month would be busier than May and that would certainly begin in 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 of the data center business, outside some of these new programs, and especially the 800 gig products later in the year, it’s -- you know, it’s relatively consistent business at this point.

Okay, great. I may come back later or take my questions for offline. Thank you.

The next question will come from Tim Savageaux with Northland Capital Markets. Please go ahead. Tim, your line maybe muted.

Yes, sorry about that. I'm here. Can you hear me?

Yes, we can hear you.

All right. Great. I'd say with the new OpEx forecast, it seems like maybe something reasonably over $300 million, that’s what you would need to get you there and so that's a pretty significant ramp in the second half, almost 3X over the first, although we've seen that recently, at couple of different places; most recently at coherent [ph]. So, I guess as you look at that ramp -- and the 800 gig opportunities in particular, I am hoping you might be able to size those for us in a fashion maybe similar or analogous to how you've been talking about the Microsoft 400 gig opportunity? 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, 1.60 [ph] also applies to Microsoft or is it more focused on the new players?

No. I mean, we specifically -- maybe I wasn’t totally clear from the prepared remarks but 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 would be included in the category of existing customers. And as far as the size of the market, what we're seeing right now is that 800 gig is several times as large as the 400 gig opportunity. So it represents 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 larger.

Great. So as you look at that data center ramp 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 that ramp?

Yes. I think that’s the key point. Really, is the Cable TV has been -- you know, kind of -- to the extent that there has been a disappointment in Q2 is mainly that Cable TV is ramping slower than we expected, and that's just -- at times we mentioned, some of that’s part for the course. I mean, we are optimistic that the MSOs would move a little faster in the 1.8 [ph] but it's taken a little longer to get through the qualification, the necessary training and what hadn't done. But we do expect them to ramp in the second half of the year, and that'll contribute meaningfully towards the revenue ramp, but it would also help us improve the gross margin which is significantly higher in the Cable TV segment than it was in data center.

And I can add. For the 800 gig business, we can see what we are discussing with -- at least current 3 to 4 customers, which are including Microsoft and others [ph] -- who are worth more than $500 million, $600 million next year for AOI for 800 gig.

All right. Is that in the aggregate or what kind of time period or maybe we can -- Stef, can we put some more brackets around that $500 million, $600 million [ph] or I think I’ve heard you said?

I think we are doing quite okay. I think -- I can you wish [ph] you get the body in order of by Q3. So, if not, the next year; Q1 to Q4 next year I would say [indiscernible] more than $500 million or even $600 million for AOI based on this time [ph].

That was going to be my last question actually. In terms of your -- 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 putting -- guiding me as in crossing the TSM contracts? A little more color there.

Well, I am not sure to what extent the contracts really come into play there. What we're talking about now is planning around deployment scenarios, when they're going to be products, how much product we are going to need, pricing; that sort of thing. [Indiscernible] from the customers is, how fast can you deliver this amount of products for us, right. It's about how fast can we be ready to deploy or to manufacture the products that they need to deploy.

And they very important key as I say is, AOI has been in best $200 million in the cash for more than 10 year for automation, including a lot of our own equipment for automations. So, I've been going to -- we are doing a Phase 2 [ph], maybe I will say we would do Phase 2 live -- Phase 3 live by end of this year and we will do a Phase 3 we are measuring in Q1, Q2 next year. So we can do manufacturing in Houston with our [indiscernible] or with higher cost than in Taiwan and China. I think [indiscernible] to the customer including the customer we used to bet. Some of they had gone, and then they are coming back. Number two; the key -- so you know, the rate is the key component -- key terminology [ph]. The 100G, 200G, the Vexcel [ph], the EML; and I think they are to make all in Houston. This also is very -- I think a key factor for the customer. I think for sure it is -- now, even called the key [indiscernible].

Great. Thanks very much.

[Operator Instructions] Our next question will come from Dave Kang with B. Riley FBR. Please go ahead.

Thank you. Good afternoon. So regarding that 800 gig, first question is, do you have 200 gig per lane Vexcels [ph] and EML? So what's the status of that?

We would have -- the one I addressed would be more than Q1 next year. [Indiscernible] either go through AOI, and it’s special because customer is very concerned about the quality. But with 1.6 to 800G [indiscernible]. And I'm talking about is -- at the end of the year I am talking about our next year it will be $500 million to $600 million higher, getting more -- or that is like two kilometer higher, it is not as our reach, it is not [indiscernible]; so it’s a pretty ASP, high gross margin product. The 1.6T, I don’t know if next year it’s more like -- it will be the multi more [indiscernible] for shorter distance, maybe 500 meter and below; but we have all that producing [ph].

Got it. And then, sticking with 800 gig, I think you need stuff like -- maybe, two customers that will ramp third quarter. Just wondering, if you've been qualified or is that peels [ph] already?

The royalty model in Q3 or Q4. We are doing on quite occasions. So it’s a 2 kilometer and higher, including the [indiscernible]. So, I would say more than 200. On a hyperscale, I would say maybe 3 customers including -- there are some other smaller customers. The one -- for sure we don’t want to push in Q3, so we are trying to outpace so pick up the volume. Now with Q4 or Q3, we can’t say -- it is a bit higher, maybe September.

Got it. And then, you -- regarding your press release, at the beginning of AOC -- about that 800 gig AOC, that you jointly developed with Creta [ph]. 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?

So to create a mix with DSP [ph] we make an active optical cables around it [ph]. And we haven't commented on our new production schedules so far.

Okay. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Dr. Thomas Lin. Please go ahead, sir.

Okay. Thank you for joining us today. As always, we want to extend a thank you to our investors, customers and employees for your continued support. As we discuss today, we believe the long-term demand driver we met strong to perform our data center and CATV business. And we believe we are well positioned to capitalize on this opportunity. Thank you.

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