Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to Applied Optoelectronics' First Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions]. Please note this event 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. I am pleased to welcome you to AOI's first quarter 2025 financial results conference call. After the market closed today, AOI issued a press release announcing its first quarter 2025 financial results and provided its outlook for the second quarter of 2025. 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 2025. 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, forecasts, anticipates, estimates, suggests, intends, predicts, expects, plans, may, should, could, would, will, potential, 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…

Thank you, Lindsay, and thank you for joining our call today. We are pleased to deliver first quarter results that were in line or better than our expectations. We continue to see strong demand in the CATV market and achieve the highest quarterly CATV revenue in AOI's history. During the first quarter, we continue to make progress on our data center business with three new design wins and exceeding hyperscale data center customers during the quarter. During the first quarter, we delivered a revenue of $99.9 million, which was in line with our current range of $94 million to $104 million. We recorded non-GAAP gross margin of 30.7%, which was above the top end of our guidance range of 29% to 30.5%. All non-GAAP loss per share of $0.02 was in line with our guidance range of a loss of $0.07 to break even. Total revenue for our data center products of $32 million increased 11% year-over-year, but was down 28% sequentially due to inventory digestion on one product by one of our customers. During the quarter, we began several new qualification efforts to support existing qualifications on energy products with several large hyperscale customers. Total revenue in our CATV segment was $64 million, which increased more than 6 times year-over-year and increased 24% sequentially, largely driven by continued shipment of our 1.8 gigahertz amplifiers for one of our major MSO customers. As we have discussed on our prior earning calls, our MSO customers are in the process of upgrading their outside plan networks so that they can support higher bandwidth in the return path direction and eventually enable DOCSIS 4.0. With that, I will turn the call over to Stefan to review the details of our Q1 performance and our overview. Stefan.

Thank you, Thompson. We are pleased to deliver results that were in line or better than our expectations in the first quarter. We started the year with a considerable momentum. Compared to Q1 of last year, our revenue more than doubled, and we expanded our gross margin by over 1,000 basis points. We also generated positive non-GAAP EBITDA in the quarter. We continued to see strong demand in the CATV market and achieved the highest quarterly CATV revenue in AOI's history during the first quarter. Further, we continued to make progress on our data center business with three new design wins with an existing hyperscale data center customer during the quarter. Looking ahead, we continue to believe that these positive long-term growth trends in both our CATV and data center markets will benefit our business. While we continue to closely monitor news of tariffs, in Q1, tariffs had no material impact on our financials. We do not expect a significant impact in Q2 based on what we know at this point. We are maintaining a posture of flexibility and vigilance. We are continuously assessing our supply chain and manufacturing operations with an eye towards minimizing tariff impacts. At OFC, we unveiled our near-term targets for adding production capacity for 800G and higher transceivers at our existing plant in Texas. I am pleased to report that we remain on track for these targets, which will culminate later this year with what we believe will be the largest domestic production capacity, expected to be approximately 40,000 transceivers per month or roughly 40% of our overall capacity for these advanced 800G optical transceivers. By mid-2026, we expect to be able to produce over 200,000 pieces per month, with the majority produced in Texas. Currently, we have already begun to order the equipment necessary…

We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Simon Leopold of Raymond James. Please go ahead.

Thanks for taking my questions. I first wanted to ask about your understanding of the channel inventory for your cable TV products. In other words, do you have some telemetry features that allow you to know when products are deployed versus sitting in a warehouse? I'm just trying to understand what's the risk or the knowledge of the status of the gear you've shipped. And then I've got a follow-up.

Yeah, we do have telemetry features that in principle could allow us to have access to that, but we have a more direct way of knowing. We get reports from the MSO involved and from our channel partner that account for that inventory. So, we have pretty good knowledge of where that inventory is. It's a higher level than we would normally expect. Clearly, given the evolving tariff situation, it's beneficial for us to have as much inventory as we can stateside in anticipation of the revenue ramp that we're seeing. So, it's an intentional inventory build-up there, but we definitely have insight into what level that is and what the future holds for that.

And so, let me just make sure this is clear. You're saying that there is a bit of an inventory build because of the tariff situation, but you're comfortable with your knowledge of that inventory level?

Yes, exactly. We know what the inventory level is. We know how much is coming out, how much is going in, where the demand is going. We even know where within the MSO's network, those products are being deployed.

And then, on the 800-gig trajectory, sorry, go ahead.

So, we already -- as we said, we have received the volume order from MSO, and a lot of them have been consumed. So, all of the remaining inventory we have now should be completely consumed by, I would say, sometime in Q3, so maybe like August. So, it's not a lot of inventory, okay? The inventory view is based on the customer demand, one of the biggest MSO's in the U.S.

And then on the progress with 800-gig, it sounds like you're still in kind of the qualification, modest, modest revenue in the first half of the year with a ramp in the second half. Could you help us think about how to quantify or model what that second half 800-gig contribution should be?

Well, as we noted earlier, by the end of the year, we expect to have capacity about 100,000 pieces a month of, either 800-gig or 1.6 terabits. The majority of that, the vast majority of that for us is likely to be 800-gig. So, you'll see a ramp from near zero now to something like that level by the end of the year.

But I guess rough math, Yeah, $0.75 a gig, that would be well over $100 million in a quarter, $100 million in a quarter. Am I doing something wrong in that thinking?

Yeah. So, that'll be about production capacity. That'll lag. Obviously, the deliveries will lag maybe a quarter or something like that on that, because we have some cycle time for actual deliveries. But you'll see a ramp, again, in the second half of the year up to that level.

Thank you, very much. And then maybe one last one, if I may. Are you manufacturing anything in China that gets shipped to the U.S. today? Any color on that? Thanks.

So, we're not manufacturing any products that have a country of origin China for tariff purposes. We do certain manufacturing operations there, but the ultimate country of origin is not China.

[Operator Instructions]. And our next question comes from Michael Genovese of Rosenblatt Securities. Please go ahead.

Thank you, very much. I guess my question on cable TV will be, can you flesh out retooling to Motorola-style amplifiers, so we can understand that a little bit better?

I'm sorry. I didn't quite understand your question. You said, can we flesh out the tooling? I'm not sure I understand what you're asking.

Yeah. I mean, I think you're saying that cable TV will be down sequentially because you're retooling to another style of product. And I just was wondering what that meant.

Yeah, sure. So, it just means that -- so, we've produced a significant amount of product for the gain maker platform. As Thompson mentioned, that will be consumed pretty quickly. But we have sufficient inventory of that right now for the near future. So, during this quarter, during Q2, we're shifting our production to primarily the Motorola style, which, as I noted in our prepared remarks earlier, we're expecting the final field trial qualification really imminently in the next few weeks. So, then we'll ship that product out. So, that way, we'll have a significant inventory of both products stateside by the end of June.

And then for those that would kind of push back and say, by the time you have volume of 800G in the second half of the year, others in the industry will be moving on to focusing on 1.6 and sort of why or why not that you're intersecting the market in a good place where it's going to grow for some time rather than coming in too late. Can we get your view and the data that you're looking at on the kind of long-term 800G market from the time you enter for several years forward, what you think the market's going to look like?

Yeah. I mean, look, the market is enormous for 800G. And it's going to continue to grow based on what we're hearing from our customers. 1.6 terabits is a product that is starting to come out now and will ramp as well. But that doesn't take away from the growth prospects that we're seeing and hearing from our customers for 800G.

Well, let me emphasize. Remember, we just signed the deal with Amazon. And as we say, it's about maybe, I would believe, much more than $4 billion in the next 10 years. The main focus, 800G for sure, we'll submit $4 billion, too, from Q3, the environment picture, and then go to 1.6T. For 1.6T, right now, the only big volume we believe is only for NVIDIA, maybe later on from Google. That's it. But not for customer. We have the customer we have right now, they are not really buying 1.6T transceiver.

Finally, for me, thanks for that. Finally, for me is just, are there any other ways of approaching the CapEx needs of the company outside of the ATM? Or is that really going to be the key mechanism to raise the funds?

Well, we announced just a moment ago that we substantially completed the ATM, $98 million net of fees, so that's basically the $100 million gross. We haven't announced plans for any other future fundraising.

So, don't forget very aggressive working with customers and potential customers for potential strategy investment. We are still looking for some other solution for any. [Indiscernible] But as we said, we believe, we still believe we'll be profitable this year and, in the season, we have delivered positive EBITDA. So, operation cash flow should be positive. So obviously, you need to raise money just for the CapEx because we need to increase the capacity very fast, especially for 800G, 1.6T, for the strong demand from the customers, especially like Amazon. And we still believe we become their major supplier. I would say maybe, I would say one year, 400 years and higher, and that's why a lot of things going on. But quality is still the key issues. So that's why, with AI demand, we need to go through step by step. But right now, I think so far, so far, we have accommodated.

The next question comes from Tim Savageaux of Northland Capital Markets. Please go ahead.

Good afternoon. Looking at what you discussed at OFC in terms of capacity additions, looks like you've got some additions planned. You talked about 400 gig earlier in the year, but 800 gig in Taiwan here in May and June. Would you expect to be able to deliver material 800 gig revenue in Q3? And I guess by material, I mean, say tens of millions?

Well, I mean, I won't comment on the exact magnitude, but it's certainly material revenue from 800 gig in Q3, yes.

And obviously, relative to what you announced in the warrant agreement, I mean, that capacity that you're ramping to would seem to be 100% occupied by Amazon. And of course, you look to be going beyond that. But I wonder if I could ask you about your opportunities with other major cloud provider customers, and specifically, whether the design wins you mentioned in the quarter, should we assume that that's with Amazon or with other potential customers?

Those design wins, none of them were with Amazon in this quarter. They were with other hyperscale customers. And I mean, to kind of get at your question more directly. What I think you're asking is, do we think we have significant opportunities with other hyperscale customers? The answer is absolutely yes. I mean, we've had very productive discussions with other customers, other data center customers, hyperscale customers besides Amazon. We think that the uncertainty around tariffs gives the U.S.-based production that we're adding an advantage. I mean, I think all of the hyperscalers that we've talked to have been very excited about the prospect of being able to purchase at least a portion of their supply from a domestic supplier, just for continuity's sake, for security of supply chain. We already make the lasers here. They like the idea that we can assemble transceivers here as well.

And now, not the only invoice size is the PAA. That is a requirement. If you are doing business with U.S. government, you cannot manufacture in Thailand, Malaysia, China. So, we PAA right now is one of very few transceiver suppliers are meeting PAA requirement. We manufacture either in Taiwan or in Houston. And that's another key, especially for high-end transceiver products, for a space for AI.

And going back to the design wins, I think you'd mentioned there were three with one existing hyperscale customer. Can you say whether those are 800 gig design wins?

None of them were 800 gig.

We assembled -- there were other qualifications. We assembled hyperscale data center. Let me say that. Going now, when we say design win, we need to go through three phases. So, right now, for some products, some customers, we are doing in the final phase, that means you need to deliver something like a few thousand or 10,000. And you need to put it in data center for final qualification for one month and make sure quality is okay. Then you start looking into volume delivery. But for the lab qualification, we have tests already. So, for a few simple customers, simple product, we are in the final qualification phase. Or you can say it's the final phase, okay?

Which is why we talked about having some revenue, not big material revenue, but some revenue for 800 gig in the quarter.

No, but you're not so bad, okay? Still like maybe 5,000 piece or 10,000 piece, okay? So, it's not like 100 or 200 piece, okay?

And Stefan, you kind of alluded to it, but my last question was going to be, I guess, around what sort of share you think that agreement at Amazon gives you relative to their total consumption?

Well, I think, as Thomson mentioned a few moments ago, our belief, our expectation, is that we can grow to be, the largest supplier of 800G and faster, higher data rate optics for Amazon. Now, that's not guaranteed by any means, but I don't see any reason why we couldn't be there. And that would imply a market share; typically, they're going to have two or three suppliers, so that would be, maybe 30, maybe even up to 40%.

What's fair right now is tariffs, and as I said, TAA, T is very important. As I said, especially for high-end AI transceiver, and that's why I say we are much more competent. I cannot say 100%, but personally, I believe more than 90% or 95% of AI will become the major supplier for Amazon, including other hyperscale data centers, which I would say by sometime next year, Q2, Q3, I would say more than 40% might be shared.

Great. Thanks very much.

The next question comes from Dave Kang of B. Riley FBR. Please go ahead.

Thank you. Good afternoon. First question is regarding the inventory digestion situation. Just wondering if that was 400 gig, and do you expect that to recover in the second quarter, or how long will that go on?

Yes, it was 400 gig, and yes, we expect it to largely resolve in the second quarter.

Got it. And then just on the margin situation, what's the margin differential between cable TV and data center transceivers, and is there any difference between 400 gig and maybe 800 gig when you start to ship next quarter?

I'm sorry. Your first question was about the margin difference between...

Yes, cable TV and transceivers.

Yes. So, I mean, the margin on cable is somewhat higher. It varies a little bit, based on product mix within the data center market. I mean, the cable market, relatively speaking, has a lot less product diversity in there. There's just a few products versus data center, which has a lot more. So, the mix affects the data center overall margin a little bit more. But it's anywhere from, I would say, I don't know, 300 basis points, 400 basis points to maybe 600 basis points higher for cable right now. And we expect the cable will expand as we continue to wring efficiencies out of our manufacturing process. Data center will expand. The margin there will expand based on somewhat on economies of scale, but more likely on the transition to 800 gig and eventually 1.6 terabit.

And then just regarding your 800 gig qualification status, can you just remind us how many you got going? And it sounds like they've been going on for a while, right? I mean, at least the last summer, so maybe, I don't know, eight, nine months. Is that kind of a typical process? And in your prepared remarks, you talk about you got some new qualifications. So, should we expect similar eight to nine months or any thoughts on that?

I think the number of qualifications, I don't have the exact number in hand, but it's more than five, less than 10, I would say, somewhere in that range. I'd have to get the exact number for you. As Thompson mentioned, it's a multi-stage process. We're pretty strict about when we qualify a design win or when we report a design win, and it requires full qualification, an order from the customer, and a forecast that continued orders will be ongoing, right? And so, we're somewhere in that process between finishing up the qualification, as Thompson mentioned, as multi-stage qualification, and actually logging the design win. So, we'll have more to report back once we have those design wins in place, but let's just say we're feeling very, very good about the progress that we're making with the customers on 800 gig. It's going quite well.

Usually, there are three phases. The first one is called third party, all right? We test them, and then the customer, we have some kind of much bigger volume of in-house interoperability qualification. We test some of them already. As I said, [Indiscernible], the last one is usually you need 5,000 or even 10,000, 20,000 transceiver to do the final phase of qualification in a data center for at least one month. That makes you almost no failure, okay? Because as I said, right now with AI, the requirement for quality is really, really high, much higher than that two, three goal for the transceiver.

And my last question is, you talked about Texas versus Taiwan. Transceivers coming out of Texas versus those from Taiwan. What do you think the margin differential will be?

I mean, I think there's a good chance the margins in Texas will be higher, actually. I think the profit will be higher, okay? Because customers are willing to pay, I would say, 10% higher, or even 15%. Same with tariff, I think, it'd be much cheaper than tariff. So, based on current, it could be the lowest cost in manufacturing in Houston. You don't forget the key is automation, all right? And we are almost fully automated for energy. So, it'd be the demo qualified in Linpo and in Taiwan in this quarter. U.S. was sometime in Q3.

Got it. Thank you.

At this time, we have no further questions, and I will turn the call 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. As we discussed today, we believe the fundamental driver of long-term demand for our business remains robust, and we are in a unique position to drive value from this opportunity. We look forward to seeing many of you at upcoming investor conference. Thank you.

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