Applied Optoelectronics Inc (AAOI) Q4 2020 Earnings Call Transcript

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Applied Optoelectronics Inc (AAOI -1.75%)
Q4 2020 Earnings Call
Feb 25, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Applied Optoelectronics Fourth Quarter 2020 and Full Year Earnings Call. [Operator Instructions]

I would now like to turn the conference over to Lindsay Savarese. Please go ahead.

Lindsay Savarese -- Investor Relations

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 2020 financial results conference call. After the market closed today, AOI issued a press release announcing its fourth quarter and full year 2020 financial results, and provided its outlook for the first quarter of 2021. 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 detail and the outlook for the first quarter of 2021. 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 to differ materially from those anticipated in such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as believe, anticipate, estimate, intend, predict, expects, plans, may, should, could, would, will or thinks, and by other similar expressions that convey uncertainty of future events or outcomes.

Forward-looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of our products into new markets and customer responses to our innovation as well as statements regarding the company's outlook for the first quarter of 2021. Except as required by law, we assume no obligation to update forward-looking statements for any reason after the date of this earnings call to conform these statements to actual results or to changes in the company's expectation. More information about other risks that may impact the company's business are set forth in the Risk Factor section of the Company's reports on file with the SEC, including the Company's annual report on Form 10-K for the year ended December 31, 2019.

Also, with the exception of revenue, all financials discussed today are on a non-GAAP basis unless specifically noted otherwise. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation between our GAAP and non-GAAP measures as well as a discussion of why we present non-GAAP financial measures are included in our earnings press release that is available on our website.

Before moving to the financial results, I'd like to announce that AOI management will virtually participate at the Raymond James Institutional Investor Conference on March 3rd. The presentation at this conference will be webcast live and links to the webcast will be available on the Investor Relations section of the AOI website. We hope to have the opportunity to interact with many of you virtually. Additionally, I'd like to note that the date of our first quarter 2021 earnings call is currently scheduled for May 6, 2021.

Now, I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics' Founder, Chairman and CEO. Thompson?

Thompson Lin -- Founder, President, Chief Executive Officer, and Chairman of the Board

Thank you, everyone, for joining us today to compare our 2020. I'm proud of the entire AOI team and the progress that we have made this year, despite a slow start and end to the year with changing and evolving market dynamics. We are encouraged by the double-digit revenue growth we generated in 2020, which was driven by growth in each of our three major business segments. We secure 30 total design wins last year's on par with a record 31 in 2019. Given the difficulty around the pandemic last year, I'm very pleased with this design win we got. We have continued to expand the reach of our product to a diverse customer base evident by the decline in concentration, our revenue from our top 10 customers. And on this front, we are pleased to report a new greater than 10% customer during the fourth quarter in our CATV segments.

Turning to the fourth quarter. We delivered revenue in line with our expectation, gross margin below our expectation and non-GAAP EPS at a high-end of our guidance range. Total revenue for the fourth quarter of $52.8 million grew 8.5% compared to the fourth quarter in the prior year and as we expected was now 31.1% sequentially. As we mentioned on our Q3 call, we began to see some slowing in order from some of datacenter customers in the later part of the third quarter, which extended into the fourth quarter. This slowdown was related to inventory normalization following the surge in demand that was driven by the shift to working from homes early last year.

We continue to expect generally slow commission in Q1 in the Datacenter segment, followed by our increased activity in this segment in Q2 and beyond. Non-GAAP gross margin of 27.5% was below our guidance range of 28.5% to 29.5% due to many product mix and slightly higher production costs than anticipated.

As we develop our CATV production during the quarter, non-GAAP net loss was $0.20 per share. Similar to Q3, we continue to see broadband demand for our 100G product. Total revenue for 100G product increased 41% from Q4 of 2019. In our CATV segment, the overall demand environment continue to be strong as MSO, particular in North America continue to upgrade their networks. Total revenue for our CATV products more than doubled year-over-year and increased 37% sequentially to $15.9 million, which is the highest quarterly revenue for this segment in almost three years.

Revenue from our telecom products of $3.5 million was up 59% from Q4 of 2019, but was down 51% sequentially. As we mentioned on our Q3 earnings call, several of our channel telecom customer notify us that their 5G deployments has been posed by several large naval operators while they revisit their supply chain following the disruption caused by uncertainties surrounding Huawei's U.S. ban. We believe that this disruption will be short lived and expect to see a recovery in our Telecom segment in Q1. Looking forward, we are excited about the growth opportunity ahead, driven by the continued need for higher bandwidth and increase capacity within the CATV and datacenter markets and the increased demand for 5G products in our telecom market. We look forward to meeting again in person probably soon.

With that, I would call -- turn the call over to Stefan to review the detail of our Q4 performance and outlook for Q1. Stefan?

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Thank you, Thompson. As Thompson mentioned, we delivered revenue in line with our expectations, gross margins below our expectation, and non-GAAP EPS at the high end of our guidance range. While we saw strong demand in the CATV market, as we anticipated, our fourth quarter results were impacted by softness in the datacenter and telecom markets. Looking back on the year, despite challenging and evolving market dynamics throughout 2020, we are encouraged by the double-digit revenue growth we generated, which was driven by growth in each of our three major business segments and we are pleased with the progress we made in diversifying our revenue streams and customer base.

We secured 30 total design wins in 2020, similar to the record of 31 in 2019. Of the 30 design wins, 18 were in our datacenter market, five were in our CATV market, four were in our telecom market and three were in other markets. In total, for the fourth quarter we secured three new design wins among two customers, all in our CATV segment. Given the difficulties around the pandemic last year, I am very pleased with these design win results.

We have continued to expand the reach of our products to our diverse customer base, which is evident by the declining concentration of revenue from our top 10 customers from 2019 to 2020. And on that front, we are pleased to report that one of our CATV customers exceeded 10% of our revenue for the first time.

Turning to our quarterly performance. Total revenue for the fourth quarter of $52.8 million was in line with our guidance range of $50 million to $55 million. Revenue increased 8.5% year-over-year and decreased 31.1% sequentially.

As we mentioned on our Q3 call, we began to see some slowing in orders from some of our datacenter customers in the latter part of the third quarter and into the fourth quarter, related to inventory normalization following the surge in demand that was driven by the shift to working from home early last year. We expect the headwinds we are seeing in our datacenter market to persist through Q1 and then begin improving in Q2 and beyond.

We continue to see increased customer interest in our 400G product portfolio and expect to see revenue contribution from these products in the second half of the year. In the fourth quarter, 62% of our revenue was from our datacenter products, 30% was from CATV products, with the remaining 8% from FTTH, telecom and other.

Our datacenter revenue came in at $32.8 million compared with $39.3 million in Q4 of the prior year. In the fourth quarter, 22% of our datacenter revenue was from our 40G transceiver products and 71% was from our 100G products.

Turning to our CATV product segment. The overall demand environment remains strong as MSOs, particularly in North America continue to upgrade their networks. We generated revenue of $15.9 million, up 37% sequentially and up 136% from $6.8 million in Q4 of the prior year. Our CATV performance in the quarter is the highest that we have seen since the third quarter of 2017. We ended the quarter with a strong backlog of CATV products, which we expect to continue to drive growth in this segment going forward.

Revenue from our telecom products increased to $3.5 million, up 59% from $2.2 million in Q4 of the prior year, but was down 61% sequentially for reasons we discussed on our Q3 call. During the fourth quarter, 5G demand in China was impacted by a pause that several of our China telecom customers were seeing as several large network operators revisited their supply chains following the disruption caused by uncertainty surrounding Huawei's U.S. ban. We continue to believe that sequential growth will resume in our telecom segment in Q1.

We are pleased with our progress on our customer diversification efforts. Overall, for the fourth quarter, our top 10 customers represented 85.1% of revenue, down from 87.5% in Q4 of the prior year. The concentration of revenue among our top 10 customers decreased from 88.1% in 2019 to 81.8% in 2020. We had three 10% or greater customers in the fourth quarter, one of which was in the datacenter market and two of which were in the CATV market, including a new 10% or greater customer. These customers contributed 36%, 14% and 11% of total revenue, respectively. For the full year, we had two 10% or greater customers in the Datacenter segment that contributed 38% and 12% of total revenue, respectively.

In Q4, we generated non-GAAP gross margin of 27.5% compared to 27.6% in Q4 of the prior year. Gross margin was below our guidance range of 28.5% to 29.5% due mostly to unfavorable product mix and a slightly higher production cost than anticipated as we ramped our CATV production during the quarter.

Total non-GAAP operating expenses in the fourth quarter of $20.6 million or 39% of revenue compared with $19.4 million or 39.9% of revenue in Q4 of the prior year. Operating expenses as a percent of overall revenue decreased from the prior year and reflect our efficient expense management. Non-GAAP operating loss in the fourth quarter was $6.1 million compared to an operating loss of $6 million in Q4 of the prior year. GAAP net loss for Q4 was $13.4 million or loss of $0.57 per basic share compared with a GAAP net loss of $35.4 million or $1.76 per basic share in Q4 of 2019.

On a non-GAAP basis, net loss for Q4 was $4.8 million or a loss of $0.20 per basic share, which was at the high end of our guidance range of a loss of $4.5 million to $5.8 million or a loss of $0.19 to $0.25 per basic share, and compares to a net loss of $3.6 million or loss of $0.18 per basic share in Q4 of the prior year. The basic shares outstanding used for computing the net loss in Q4 were 23.6 million.

Turning now to the balance sheet. We ended the fourth quarter with $50.1 million in total cash, cash equivalents, short-term investments and restricted cash. This compares with $58.1 million at the end of the third quarter and reflects $14.1 million in cash used for operations. As of December 31, we had $110.4 million in inventory compared to $111.4 million in Q3. This inventory level was higher than normal due to continuing uncertainty around COVID-19 and concerns leading up to the Lunar New Year in China.

We made a total of $2.5 million in capital investments in the quarter, including $1.6 million in production equipment and machinery and $0.1 million on construction and building improvements. The construction on our new China facility is largely complete with all heavy construction done. Total 2020 capex was approximately $12.5 million, which is considerably below our prior expectations and reflects the slowdown in our business during Q4. We are still in the process of evaluating our capex plans for 2021, and we expect to share our numbers when they are available.

I would also like to provide a quick update on the at the market offering we announced in February of last year. To-date, we have raised $55 million in gross proceeds under this program, including $17 million raised in Q4. As we have stated previously, we intend to use these proceeds to continue to make investments in the business, including new equipment and machinery for production and research and development use.

Before moving to our outlook, I would like to provide an update on our operations in Texas, following the historic winter storm that occurred last week. I can report that our facilities did not suffer any meaningful damage as a result of the storm. Due to process control issues related to the extremely cold temperatures and the inability to obtain regular deliveries of chemicals, including liquid nitrogen, we were unable to run operations as normal last week. In addition, many of our employees suffered damage to their homes and were therefore unavailable for work during all or parts of last week.

We expect to incur some additional costs as we work to increase production over the next few weeks to ensure that we meet our customer commitments to the extent possible. Currently, we expect these costs to total between $0.5 million and $1 million and these expectations are included in our guidance.

Moving now to our Q1 outlook. We expect Q1 revenue to be between $47 million and $51 million and non-GAAP gross margin to be in the range of 23.5% to 25%. Non-GAAP net loss is expected to be in the range of $7.3 million to $9 million and non-GAAP loss per basic share between $0.23 and $0.28 using a weighted average basic share count of approximately 26 million shares.

With that, I will turn it back over to the operator for the Q&A session. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from Simon Leopold from Raymond James. Please go ahead. Hello, Simon, is your line muted?

Simon Leopold -- Raymond James -- Analyst

Sorry about that, yes, I was muted. You think, I'd know by now. So thanks for taking the question. Hopefully, the folks in Texas are thawing out and recovering from last week, I saw that on the news, sorry to hear about that. What I wanted to ask first about was specifically the new cable customer. So I am intrigued by this, I want to get a better understanding, when you talk about a new customer, is this a U.S. operator that is new to AOI or is this a new customer from outside the U.S. and what's the nature of the deployment, is it a DAA or some other application?

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Sure, Simon. First of all, thank you for your comments regarding all this down in Texas. It's thawing out nicely, we've -- we had a little bit of a rough week last week, but it's back to back to normal now, so I appreciate your kind words on that. With respect to the cable TV customer, it is a -- it's not a brand new customer, they've been with us for roughly a year, it is a U.S.-based company, they're a manufacturer or reseller of cable TV equipment and they are supplying primarily U.S. -- well, almost entirely U.S. and well, let's just North American MSOs with gear for upgrade projects. The specific products that we're selling to them right now are useful in both DAA and traditional applications and I think that probably the deployments that are going on there are a combination of both of those types of technologies.

Simon Leopold -- Raymond James -- Analyst

And I guess, I'd like to get a understanding of how you're thinking about the broader trend in your cable TV market in that? I recall speaking about this a couple of quarters ago, at which point you thought that maybe in the construction season spring to summer 3Q '21 you'd be getting back to kind of mid-teens revenue, I want to recheck where you're thinking today about the cadence of your cable business through '21.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

I think we probably can be significantly higher than that level later on in the year. We're sitting right now on the strongest backlog of cable TV products I think we've ever had. And as I've noted in our prepared remarks, this was the best -- the fourth quarter was the best quarter in cable that we've had in several years. So where we're standing right now I think I see pretty strong performance in the cable segment through -- certainly through Q3 and probably through the end of the year.

Simon Leopold -- Raymond James -- Analyst

Thanks. And then, maybe just one last one for me, if I might, is on your datacenter business, particularly the hyperscalers, I appreciate that quarterly visibility can be a little bit difficult, but what sort of linearity or expectations do you have for the full year? And part of my question goes back to the capital spending forecast look like high-teens to maybe 20% spending growth by the group as a whole, I just want to understand if that's a good indicator for the kind of growth rate we should think of for your business in that vertical? Thanks.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

I think it's difficult to draw a direct line between capital expenditures on the part of the hyperscale operators and our revenue. I mean, if you looked at our revenue in that segment over the years, it -- there's probably some high level correlation, sort of a macro-correlation, but it's very difficult certainly to draw any conclusion on a quarter-by-quarter or even annual basis really from those capex numbers. For us, in particular, I think a lot depends on the trajectory of 400 gig. As we mentioned, we do see 400 gig contributing revenue in the second half of the year and depending on exactly how soon and how fast that comes on and the trajectory of 100 gig as that occurs, that will kind of dictate our results in the year. So I can't give you firm guidance for the year on that, but I don't think it's reasonable to draw correlation directly from the overall capex in the market.

Simon Leopold -- Raymond James -- Analyst

I appreciate that. Thanks for taking the questions.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Thank you, Simon.

Operator

The next question is from Paul Silverstein from Cowen. Please go ahead.

Paul Silverstein -- Cowen and Company -- Analyst

Good afternoon. I trust from your response to the last question that your visibility in terms of what has been communicated to you by your varied status from the customers that it's relatively limited at this point or is that not the case? Let me ask the question more openly -- in a more open way, what has been the communication from those customers, if anything?

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Well, OK. So there's -- I guess there's two issues that we've been communicating significantly with our customers regarding -- one is, the sort of near term trajectory of the inventory draw-down to the extent that those customers have that situation. I would emphasize, it's not all of our datacenter customers that had too much inventory, it's limited to a couple of them. But with those customers, we've certainly had ongoing discussions about their inventory and relative to that, I would say our expectations continue to be in line with what we said on our last earnings call, and in our prepared remarks today, which is that we see that inventory correction persisting through Q1 and then resolving itself in Q2. So that's one area of discussion and I think that's largely unchanged from our previous expectations.

The second area where we've had some significant discussion with these customers or all of our datacenter customers really is around their 400 gig or I should say maybe 200 gig and 400 gig plans and I think those discussions, particularly with the customers who are implementing 400 gig continue to progress well as we noted in our prepared remarks. We continue to see more active cadence of discussions, questions now are moving -- in many cases are moving less from into sort of technical -- detailed technical specifications and topics like that into questions about capacity ramp up, timeframe for availability, things like that that would be in my mind, more indicative of a hardening of their plans to deploy in the second half of the year. And so those discussions I think have been quite positive as well.

Paul Silverstein -- Cowen and Company -- Analyst

All right. I assume it -- well, I assume it goes without saying, it's way too early to think about what pricing will look like?

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Yeah, I mean I can't give you any firm guidance on that. I mean, It's certainly a topic of discussion as well with the customers. Yeah, I don't have a -- I don't have an indication on when that will play out at this point, too early to say.

Paul Silverstein -- Cowen and Company -- Analyst

Understood. I appreciate it. I'll pass it on, guys.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Thank you, Paul.

Operator

[Operator Instructions] The next question is from Samik Chatterjee from J.P. Morgan. Please go ahead.

Samik Chatterjee -- J.P. Morgan -- Analyst

Hi guys, thanks for taking my question. If I can just start off on the 400 gig wins and you mentioned in the press release that you're seeing customer interest. I'm just wondering, what are your expectations in terms of timing of deployment because I'm just thinking if deployments are in the second half as most of the industries telegraphing at this point. Should we expect to see more acceleration in wins on 400 gig I think as far as the number you've announced one win at this point. So just help me think about what the pace of design wins should look like if you're expecting deployment in the second half or is that not really the case in terms of deployment timing right now?

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

I don't -- I wouldn't say it's late to hear on those wins at this point. We are having discussions with customers about our capacity ramp-up plans in the second half of the year. And so, I don't think they're feeling pressure right now that if they don't announce a win or something like that, that we're not going to be ready to go, they know our plans. So I would say that we -- in order to meet the plans that customers are indicating to us now, I would expect that we would have to have design wins by -- certainly by the end of Q2 or very early Q3. But it -- now, it's not alarming that we don't have more wins at this point in my mind.

Samik Chatterjee -- J.P. Morgan -- Analyst

Okay, and then, just a follow quick follow up. I think you mentioned on the slowdown that you've seen related to China telecom, you are starting to see that move up sequentially in 1Q. Just wondering is that more -- are you hearing anything that's more driven by the supply chain having worked through the restrictions on Huawei or is it that the supply chain is being offered to other customers and you are having to customize the product for other customers who have been deployed in the network?

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Yeah, that's a really good question. I want to use that opportunity to try to make sure that we're crystal clear on what we're trying to say regarding Huawei. It is not our intention to try to say that Huawei's ban necessarily caused any disruption to our customers' ability to deploy their networks. What we are saying is that there was significant uncertainty because of the speed and the unexpected nature of the Huawei ban that our customers had to take a pause in their deployment plans to reassess whether those plans were still able to be achieved either with Huawei or with an alternative source.

So it wasn't so much that we -- that customers had to necessarily scramble to find alternative sources. It was simply that they had to take a time out, if you will, to figure out and make sure that whatever they -- whatever plans they had didn't need to be changed in light of the Huawei ban. So that being said, what we have seen as you indicated and as we indicated in our prepared remarks is that some of our customers have begun to recover in the sense that we are seeing increased order flow related to 5G in China and the customers that haven't yet begun to place orders are talking to us about placing orders. So we're feeling fairly comfortable now that we will see some recovery in Q1, and then probably more activity in Q2, Q3, and probably toward the end of the year.

Now what we're hearing from our sources in China is that we still expect a pretty sizable increase in the number of towers, and therefore the amount of optics that's used in those 5G networks in 2021 compared 2020, we expect the number of towers deployed to be anywhere from 60% to 80% higher than what we saw in 2020 and that would indicate a similar increase in the number of optics that are deployed. So we're pretty bullish on China 5G in the year albeit getting off to somewhat of a slow start, but certainly better than what we saw in Q4.

Samik Chatterjee -- J.P. Morgan -- Analyst

Great. No, thank you. Thanks for the insight.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

No problem.

Operator

The next question is from Ryan Koontz from Rosenblatt Securities. Please go ahead.

Ryan Koontz -- Rosenblatt Securities -- Analyst

Hi, thanks for the question. Quick question on your strength in the cable TV segment there. Your cable capex not really doing a whole lot but you guys doing well, do you attribute that more to share gains in the optical new designs or do you attribute it more to a mix change of spending by the MSOs on more node splitting? Any thoughts there? Thank you.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Oh, yeah, I think it's both. We have been spending a lot of time and effort developing a new line of cable TV products, including some amplifier products and other node sub-assemblies and things like that related to these rollouts. So we've expected for some time that these rollouts would start to occur and we've engineered our products accordingly. So I do believe that we're picking up market share from what we had, let's say, in the previous deployments that had happened several years ago, but I also believe that the MSOs -- the observation that I have and AOI has been in the cable TV business now for nearly 20 years, 18, 19 years...

Ryan Koontz -- Rosenblatt Securities -- Analyst

Sure, yeah.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

And the observation that I have is the cable capex generally doesn't change that much, but the areas where the cable MSOs spend their capex can change dramatically. So I think right now, we're seeing a shift from spending in sort of central office and maybe certain CPE type applications...

Ryan Koontz -- Rosenblatt Securities -- Analyst

Yes.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

To investing in the network. So I think it's a combination of both and the related, right. We develop products because we felt that the MSOs based on their feedback were going to shift they're spending and start building on the outside plant again, and indeed that's what we've seen happen. So it's a combination of share gains and shift in spend.

Ryan Koontz -- Rosenblatt Securities -- Analyst

Yeah. Do you think some of what your differentiation is around expanding the addressable spectrum in the plant and looking for more upstream capacity? I mean, I imagine there is some kind of design...

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Definitely.

Ryan Koontz -- Rosenblatt Securities -- Analyst

Changes...

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Yeah.

Ryan Koontz -- Rosenblatt Securities -- Analyst

And requirements you have to meet.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Yeah. No, absolutely. I mean, the deployments that we're aware of and the equipment that our customers are purchasing for those deployments are squarely aimed at increasing the amount of bandwidth and as you indicated specifically, the amount of bandwidth in the return path direction. That's an absolute...

Ryan Koontz -- Rosenblatt Securities -- Analyst

Yeah.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Requirement for most of these deployments.

Ryan Koontz -- Rosenblatt Securities -- Analyst

Super helpful, Stefan. Thanks so much. Congrats on the quarter.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

All right. Thank you.

Operator

[Operator Instructions] The next question is from Tim Savageaux from Northland. Please go ahead.

Tim Savageaux -- Northland Securities -- Analyst

Hey, good -- Pardon me. Good afternoon. First question for me is on the kind of overall topic of diversifying customer base and you mentioned you need 10% customer in cable TV, you've also apparently got some new 8% customers, I think, thanks to some very helpful and transparent disclosure in your filing. On the datacenter side, I wonder if we might get some similar commentary and I thought that was great color you gave on the cable TV customer. I assume one of your datacenter operators is just another cloud titan whose name we haven't discussed yet, but what on the network equipment supplier -- I'd be interested if you had any color on the application there whether that's kind of a client interface for router type application or a switch guy heading the datacenter? Any color you might be able to add on this new pretty significant customers.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Yeah, it's a switch vendor who's selling largely into datacenter. So some hyperscale, a lot of Tier 2 and some enterprise.

Tim Savageaux -- Northland Securities -- Analyst

Okay, on the NEM side. And then, in terms of the direct datacenter operator, any color there or should we assume it's one of the bigger guys that have not been discussed in the past?

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

It's a fairly large datacenter operator, U.S. based.

Tim Savageaux -- Northland Securities -- Analyst

Got it. And congrats on that diversification. With regard to the potential recovery in the datacom business, and I think you mentioned a couple of separate issues around 100 gig inventory and I think it's notable that your 40 gig business has gotten so small, but -- and then, the up -- potential uptake and inventory situation there and a potential uptake of 200 or 400 gig, is there a potential relationship there, number one, I guess, between inventory digestion at 100 and preparation for a ramp at 200 and 400? And as you look at your Q1 guide in particular, that's sort of flattish to slightly down, it seems like telecom should be up, it seems like cable could be as well. So are you expecting that datacenter business to decline slightly and bottom out in Q1, and then recover as a result of perhaps both of those factors, 100 gig recovering and initial 200 or 400?

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Yeah, I think your characterization in terms of datacenter spend sort of bottoming out in Q1 is probably accurate. I would caution, Q1 when it comes to cable TV in Q1, just keep in mind that our cable TV production is largely done in our China factories, so we do have the Lunar New Year holiday and so our capability in terms of just broad number of days to produce product in the cable TV segment is limited in Q1 compared to other segments. Now, we have pretty strong demand, I mentioned earlier about the backlog. So -- and also this year in China, relative to other years, we had a lot more of our employees stay, either stay in the factory or at least nearby as opposed to returning to their homes, largely that's due to COVID and the Chinese government's discouragement of traveling long distances in -- for fear of spreading the disease.

So I think that we're on track to have a somewhat better result relative to Chinese New Year than we have in years past. But nevertheless, we do have at least a week where we can produce product in China and that product is largely and that's where most of these cable TV products are manufactured. So when you talk about cable TV likely to be up, the demand is certainly there, but again, our ability to deliver there is somewhat constrained in Q1, but we do expect, like I said, both in our prepared remarks and really in our last earnings call as well, that the 400 gig contribution will begin to ramp in the second half of the year and I think that will certainly -- if we're successful in getting those wins and we start to see that ramp and that will certainly contribute to revenue.

I don't believe that that has anything to do right now with the slowdown in 100 gig, I believe that the slowdown in 100 gig is related more to -- I mean, we saw a very large volume of purchases of 100 gig in the middle part of last year because of COVID. Well, I mean, it was because of the shift to -- it was a combination of the shift to working from home, driving demand and fears that our customers had whether those fears were well-placed or not that there would be supply chain disruptions -- significant supply chain disruptions because of COVID.

I think the working from home trend certainly played out, there was a lot of demand that was caused by that working from home, but I don't believe that our customers saw the magnitude of supply chain disruptions that they were fearful of and therefore by the end of the year, the inventory levels that they had accumulated were no longer necessary to support what they thought to be a tough patch in terms of their supply chain. So I think that's really why we saw a slowdown in Q4, in Q1 in datacenter. I think it will get a little better in Q2 and then, 400 gig hopefully will drive a lot of our performance in the second half of the year in that sector.

Tim Savageaux -- Northland Securities -- Analyst

Great, thanks very much.

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Pleasure.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Dr. Thompson Lin for any closing remarks.

Thompson Lin -- Founder, President, Chief Executive Officer, and Chairman of the Board

Good afternoon. Thank you for joining us today as always. Thank you to our investors, customers and employees for your continued support and we look forward to virtually seeing many of you in our upcoming investment conference.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Lindsay Savarese -- Investor Relations

Thompson Lin -- Founder, President, Chief Executive Officer, and Chairman of the Board

Stefan Murry -- Chief Financial Officer and Chief Strategy Officer

Simon Leopold -- Raymond James -- Analyst

Paul Silverstein -- Cowen and Company -- Analyst

Samik Chatterjee -- J.P. Morgan -- Analyst

Ryan Koontz -- Rosenblatt Securities -- Analyst

Tim Savageaux -- Northland Securities -- Analyst

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