Good day and welcome to the Applied Optoelectronics' Third Quarter 2024 Financial Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Cassidy Patterson, Investor Relations for AOI. Mrs. Patterson, you may begin.

Thank you. I'm Cassidy Patterson, Investor Relations for Applied Optoelectronics. I am pleased to welcome you to AOI's third quarter 2024 financial results conference call. After the market closed today, AOI issued a press release announcing its third quarter 2024 financial results and provided its outlook for the fourth 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 Q2 results, and Stefan will provide financial details and the outlook for the fourth quarter of 2024. A question-and-answer session will follow our prepared remarks. Before we begin, I'd 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, suggests, intends, predicts, expects, plans, may, should, could, would, will, potentially or thinks 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 only…

Thank you, Cassidy. And thank you for joining our call today. We had a solid third quarter performance as we ran up production capacity to meet our customer go-out schedules. We recorded strong double-digit sequential growth in our data center business, driven by new wins for our 400G products. While our CATV business more than tripled from the second quarter as our customers actively transitioned to new architectures, during the third quarter, we delivered revenue of $65.2 million, which was a high end of our guidance range of $60 million to $66 million. We recorded non-GAAP gross margin of 25%, which was in line with our guidance range of 24% to 26%. Our non-GAAP loss per share of $0.21 was larger than expected and above our guidance range of a loss of $0.14 to $0.20 per share due primarily to accelerated R&D spending due to greater-than-anticipated new customer requests, especially in our data center business where we saw notable increase in our 1.6 terabit transceivers. Total revenue for our data center products of $40.9 million was down 16% year-over-year, but up 90% sequentially. Revenue for our 100G product decreased 24% year-over-year, while revenue for our 400G products increased 140% in the same period. We are pleased to report that we have begun to receive initial orders for 400G products from another large hyperscale customer and we are very excited about this new customer interaction. We've already begun shipment on this relative small initial orders. We expect additional orders from this customer in this quarter and into 2025 for both 400G and 800G products. Total revenue in our CATV segment was $20.9 million, which was up 104% year-over-year and rose 260% sequentially, largely driven by shipment of our 1.8 GHz amplifiers for our major MSO customers. As we have discussed on our prior earning calls, our MSO customers are in the process of transition from DOCSIS 3.1 to DOCSIS 4.0. This initial ramp in CATV sales in Q3 was in line with our expectations, and we continue to expect additional growth as MSO upgrades increase in intensity next year. With that, I will turn the call over to Stefan to review the details of our Q3 performance and outlook for Q4. Stefan?

Thank you, Thompson. As Thompson mentioned, our revenue and non-GAAP gross margin for the third quarter were in line with our expectations. Our non-GAAP loss per share was unfavorable compared to our expectations due to higher-than-expected operating expenses as we accelerated R&D spending due to greater than anticipated new customer requests, especially in our data center business, where we saw notable interest in our 1.6 terabit transceivers after our strong showing at the European Conference on Communications in Frankfurt in September. During the third quarter, we continued to execute on many of the initiatives that we laid out earlier this year. We discussed on our Q2 call how we have begun to receive orders for the 400G products from another large hyperscale customer. This quarter, we continued to receive new orders from this customer, and we remain very excited about this opportunity. We have already begun shipments on these relatively small initial orders, and we expect additional orders from this customer in the fourth quarter and into 2025 for both 400G and 800G products. We also discussed on our Q2 call how we have begun to receive forecasted orders for the VCSEL-based 400G active optical cables for which Microsoft provided development funding last year. We have continued to see additional orders and shipments for our AOC products and new forecasts that indicate stronger growth in 2025. Lastly, in our CATV business, in line with our expectations, we saw a vast improvement in our CATV results in Q3. Our MSO customers need to place these orders in order to stock their distribution pipelines ahead of their more aggressive upgrade plans in 2025. Turning to our third quarter results, our total revenue was $65.2 million, which was up 4% year-over-year and up 51% sequentially, and was at the high end of our…

[Operator Instructions]. Our first question comes from Michael Genovese from Rosenblatt.

Congratulations on the revenues and the outlook. I guess my first question is, is this on 400G, right? It seems like maybe you've seen this coming for a little while, that there's higher 400G demand now from multiple customers. Just what do you think is driving that? And do you think that that's sustainable? Will it start to roll off when we move at a higher speed?

No. It's being driven by demand from our data center customers for interconnections, primarily for their AI networks. And I would not anticipate that that demand is going to decrease in the near term or even medium term. 400G is what they're using for their next generation architectures for these applications and we expect the demand to continue and perhaps even grow from here. As I mentioned, we have at least one new customer that's only beginning to purchase 400G from us, and I think there's significant room to ramp up that customer as well as potentially an overall growth in the market as more AI gets deployed.

I guess on 800G, can you comment what kind of transceivers you expect to be selling within this discussion of VCSELs, EMLs, and silicon photonics? Will you participate in all three or one or two more than the other?

Our primary focus has been historical for us, mainly on the edge emitting technology. That would be the electro-absorption modulated lasers and also on the silicon photonics based solutions. Both of those are the ones that we're pursuing most aggressively. We do have some interest in VCSEL-based solutions and we do have our own capability for manufacturing VCSELs. So there will probably be some sales, but we're expecting the bulk of the demand that we're going to satisfy to be on the longer distance transmitters.

Based on all your comments, it seems like – I guess maybe if we include Oracle as number five, but if we're really talking about the four kind of household names on hyperscalers, it sounds like three are customers now and the other one you're talking to. Is that fair?

Again, without talking about different names, I think we do think we have three out of the top five data from our customers, yes.

Just finally for me, just kind of help us understand – the cable's good and I guess that will get bigger and then it's 800G and then 1.6, does that drive higher margins? What's the outlook for margins over time? Any detail you give there would be helpful.

Cable TV margins right now are higher than data center margins. We do expect cable TV margins to improve. As we noted in our prepared remarks earlier, there's economies of scale, efficiencies, and things that we need to wring out of the manufacturing process there, and we expect that to happen over the next couple of quarters. So there's some room for improvement on the cable TV margins. With respect to data center, yes, the transition to 800G and 1.6 terabit should be accretive to gross margin as well. As we said in our prepared remarks, we think a 40% margin is a good long-term target for us to have and growth in both 800G, 1.6 terabits and cable is really what it's going to take to get there.

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

I just want to talk about the guidance here. You're obviously looking for a pretty sharp uptick here in the Q4. I think on the last call, you said you expected cable to be a primary driver in Q3, which it looks like it was, and maybe shifting back over to data center in Q4 as the primary growth driver. So the question is, does that remain the case? Maybe try and comment on some details on what's driving that. Sounds like AOCs at Microsoft should be ramping up. Also your new 400G transceiver customer. You mentioned you also expect some 800G revenue, if you look at that, I don't know if it's $30 million or so sequential increase in data center. Can you give a sense of what are the different factors and/or customers driving that?

Overall, our expectations regarding Q4 are pretty much what we communicated last time. We do see continued growth in cable, but we also see strong growth in the data center, largely driven by 400G at this point, as has been the case for a while for us. We do actually see some continuing strength in 100G as well interestingly enough. And then, the 800G will be a factor for us a little bit in Q4, but it won't be – won't likely be material in Q4, but it should start to ramp in Q1. So that's kind of how things break down. And then, of course, the cable again – as I said earlier, the margins on cable should start to improve in Q4 and Q1 as well.

I just want to make sure I understand your customer commentary. I don't know if you've snuck a new hyperscaler in there in the comments. So you've had another 10% customer outside of Microsoft these last couple of quarters that I think you've described as a hyperscaler in the past. I gather, given your commentary about fairly early days and your new 400G customer that you haven't seen those sorts of volumes yet, I guess, would you expect to in Q4 and might that customer rise to the 10% level? And outside of those three, are we missing anybody else in terms of advanced engagements from a hyperscale perspective?

The 10% customer that we have this quarter on the data center is the same 10% customer that we had last quarter, if that helps. And that would imply that this new hyperscale customer, which is really a re-engaging customer from – it's not a brand new customer to us, it's one that was formerly a pretty sizable customer for us, but we're sort of re-engaging with them. I think they'll likely grow in Q4. It's unclear that they're going to grow. I would not expect them to be a 10% customer in Q4, especially given the revenue growth that we're seeing that the bar to get to 10% certainly becomes higher. But we definitely think that they can ramp to be a 10% customer in the next few quarters.

Maybe last one for me, you've kind of estimated – well, let me go to another one. You mentioned elevated CapEx and capacity expansion. From a revenue capacity perspective, where are you in the US right now and where will these capacity investments take you over the next few quarters?

We haven't disclosed the specific revenue number coming out of the US. As you can imagine, our manufacturing operations are pretty integrated across multiple different locations. In other words, we're doing different operations in different places. But we do expect to continue to invest primarily in the US and Taiwan for manufacturing capacity over the next few quarters, as we noted in our prepared remarks. And that allow us to continue to execute on the revenue growth trajectory that we outline.

Well, congrats on the results and the outlook especially.

Our next question comes from Jeff Cook [ph] from Raymond James.

Jeff on for Simon. Maybe I misheard, but it sounded like maybe the Microsoft supply revenue this quarter was maybe slightly weaker than what we were thinking. It was up, certainly was up, but maybe it was only like less than $5 million still. Is that fair? And if that is the case, are you still confident in reaching – trying to reach like, I don't know, like low $20 million run rate next quarter for that business?

Yeah. It was below $5 million in this quarter. With respect to next quarter, it's hard to say. It's ramping a little slower than we expected. That is a fair statement. But we are still committed to reaching that $25 million per quarter level. It's just unclear which quarter that's going to occur in at this point. So it's more about timing. What we are seeing is a lot of increase in demand, as I mentioned earlier, for the 400G transceiver solutions. And again, surprisingly, some strength in 100G as well.

I was going to ask you about that too, especially the 400G. I guess the thinking is that everybody wants 800G for the backend. So, 400G, I'm surprised it's not more frontend. And then, strength in 100G sounds like maybe there's a catch up in, I guess, maybe the legacy data center investment. Are you guys seeing that at all?

Yeah, I think on both accounts, yes. It's easy for people to focus on one technology, I think, and say, okay, this is where the growth is going to be, but the reality is, many of our hyperscale customers are growing their infrastructure in multiple different ways, right? It's not just one thing that they're doing. They're growing their existing infrastructure and they're growing their new AI-focused infrastructure at the same time, so we're excited about all those opportunities. The reason why I highlighted the 100G is really that I want to draw people's attention to the fact that there's still some significant business opportunities and growth even outside the AI while we continue to focus our efforts and most of the industry on AI growth.

Maybe just a little bit of help on the gross margin versus next quarter. Like, you said that CATV is running above average at this point. As we go to next, should that be up again? Or where do you think the magnitude of the improvement – where's the biggest part?

Jeff, I'm sorry, you kind of broke up a little bit there. I understood you're asking about gross margins and what's driving the gross margin growth in Q4. I'll go ahead and answer that and then hope that was the question that you asked. CATV, as I mentioned earlier, we just started ramping this 1.8 gig product line. You could see going from almost zero to almost $21 million in the quarter for those products. That's a sizable ramp. And as you can imagine, in the initial phases of that ramp, not everything is – the efficiency in the manufacturing is not where we want it to be initially. And so, as we go forward in Q4 and in later quarters, we do expect there to be continued expansion in the gross margin in CATV. In addition, on the data center side, again, seeing more contribution from 400G and especially some initial contribution from 800G, which we expect to ramp next year, we'll improve gross margins in that segment as well.

At this time, we have no further questions, and I will turn the call over to Dr. Thompson Lin for closing remarks.

Again, 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 discussed today, we believe the long-term demand driver remains strong for both 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.