APPLIED OPTOELECTRONICS, INC. Q2 FY2025 earnings call

Key Points

• EPS was below expectations due to elevated operating expenses, but there was strong top-line growth and gross margin expansion.
• Strategic investments in R&D and SG&A driven by new customer qualification efforts for 800G and 1.6Tb transceivers.
• Datacenter business: Completed first volume shipment of 400G datacenter transceivers to a major hyperscale customer, made progress on 800G customer qualification, and expects 800G shipments in the second half of 2025.
• CATV business: Strong demand, completed testing and certification with Charter for 1.8 gigahertz amplifiers and QuantumLink remote management software, and 6 other MSO customers in various stages of qualification.
• Tariffs had less than $1 million impact, and U.S.-based production is a strategic advantage.
• Progress on expanding production capacity in Texas and Taiwan, with plans for 800G and higher transceiver production.

Total revenue for the second quarter was $103 million. 54% of revenue was from CATV products ($56 million), 44% from datacenter products ($44.8 million), and the remaining 2% from FTTH, telecom and other. Datacenter revenue in Q2 was $44.8 million, up 30% year-over-year and 40% sequentially. Sales for 100G products increased 25% year-over-year, and 400G products increased 43% year-over-year. CATV revenue in Q2 was $56 million, up more than 8x year-over-year but down 13% sequentially from Q1.

Guidance

• Q3 revenue expected to be between $115 million and $127 million.
• Non-GAAP gross margin expected to be in the range of 29.5% to 31%.
• Non-GAAP net income expected to be in the range of a loss of $5.9 million to a loss of $2 million.
• Non-GAAP earnings per share between a loss of $0.10 per share and a loss of $0.03 per share.
• Full-year expectation of positive non-GAAP net income if possible.

Risks

• Forward-looking statements involve risks and uncertainties, including those related to tariff developments, currency fluctuations, and dependence on key customers and the qualification process for new products.

Q: Congrats on a nice quarter. Can we start with cable TV? How are you feeling about customer inventories? For a while there, you were capacity constrained. Are you still looking to expand that in your conversion over to the Motorola housings? And then lastly, do you still have plans to enter the node market? And any rough timing on when that might happen?

A: Yes. Great questions, Ryan. Thanks for asking. So let's see. The first question is relative to our capacity. We're not exactly switching to the Motorola. That's a little bit of a misstatement there. We're producing both Motorola and GameMaker. In the quarter, though, we'd already produced a significant quantity of GameMaker, so we needed to produce enough inventory of Motorola to have both products available as our customers' needs evolve. So we've pretty much completed the inventory build-out on those two, and now we're going to be sort of managing both of those platforms going forward. So we will continue to have production of both the Motorola and GameMaker moving forward. As we mentioned in our prepared remarks a minute ago, we do expect to see some modest sequential increase in the cable TV business. So we continue to ship those amplifier products, both platforms as well as the QuantumLink software and some of the accessories that go with it, as we mentioned in our prepared remarks. With respect to the node, yes, we do expect to have the node product launching in Q4. And it will take some time, as with the amplifiers, to go through the qualification process, but I do expect that to be generating revenue, if not in Q4, certainly by Q1. I think I answered all your questions.

Q: The first thing I wanted to ask you about was the level of vertical integration you've achieved within the datacenter business. And where this is going is I think, at one point, you were sourcing, buying EML lasers from others and had been ramping your own production or plans to ramp. Just want to get a better understanding of, one, are you doing EMLs or silicon photonics? And two, are you in-sourced or outsourced? And what's the trajectory of in-sourcing?

A: Sure. So the answer to that first question, are we doing EMLs or silicon photonics, is we're doing both platforms. We do have our own production capacity for EMLs, but we also do buy EMLs externally. We've talked about this in the past as well, but just to reiterate, most of our customers require us to have multiple sources. Even if one of those sources is internal, we're usually required to have a second source as well, which you can imagine is prudent for risk management purposes. So not everything is in-sourced, but we're in-sourcing what we can based on our customer commitments. And again, the silicon photonics, the lasers that are used there are CW lasers. We also produce those in-house as well. And I think I answered your question there. Did you have another one, Simon? I forgot the second.