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DATE
Aug. 7, 2025 at 8:30 p.m. ET
CALL PARTICIPANTS
Founder, Chairman, and Chief Executive Officer — Thompson Lin
Chief Financial Officer — Stefan Murry
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TAKEAWAYS
Total Revenue-- $103 million in revenue for fiscal Q2 2025 (period ended June 30, 2025), which was in line with the non-GAAP guidance range of $100 million to $110 million and up 3% sequentially (non-GAAP), more than doubling year-over-year compared to Q2 2024.
Non-GAAP Gross Margin-- 30.4% non-GAAP gross margin for fiscal Q2 2025, matching the non-GAAP guidance range of 29.5% to 31% and up from 22.5% in Q2 2024 (non-GAAP).
Non-GAAP Loss Per Share-- $0.16 non-GAAP loss per share for fiscal Q2 2025, below non-GAAP guidance of a $0.09 to $0.03 loss due to higher than expected non-GAAP operating expenses.
Total Data Center Revenue-- $44.8 million (non-GAAP) data center revenue for fiscal Q2 2025, up 30% year-over-year (non-GAAP) and 40% sequentially (non-GAAP), mainly from 100G and 400G product demand.
100G Data Center Revenue-- Up 25% year-over-year compared to Q2 2024, accounting for 70% of data center segment revenue (non-GAAP).
400G Data Center Revenue-- Up 43% year-over-year (non-GAAP), with the majority of 400G business in higher-margin single-mode transceivers (non-GAAP).
CATV Segment Revenue-- $56 million (non-GAAP) CATV revenue for fiscal Q2 2025, representing more than an eightfold increase year-over-year on a non-GAAP basis, but down 13% sequentially (non-GAAP) after a record Q1 and a production retool.
Telecom Segment Revenue-- Telecom revenue was $1.9 million for fiscal Q2 2025, representing a 34% decline year-over-year (non-GAAP) and an 18% decrease sequentially (non-GAAP).
Operating Expenses-- $42.1 million (41% of revenue, non-GAAP) for fiscal Q2 2025, compared to $26 million in non-GAAP operating expenses in Q2 of the prior year, driven by R&D and SG&A spending to support new product and customer initiatives.
R&D Expense Increase-- R&D expenses were up $2.6 million compared to Q1, attributed to prototyping and sample projects tied to near-term revenue opportunities.
SG&A Expense Increase-- SG&A costs increased by $2.5 million over Q1, primarily reflecting higher shipping costs and trade show expenses.
Impact of Currency-- The strengthening Taiwan dollar accounted for under 10% of the non-GAAP operating expense increase.
800G Transceiver Milestone-- Major hyperscale customer completed a factory audit in Taiwan for 800G production approval, with volume shipments anticipated in late Q3 or Q4 2025.
CATV Amplifier Certification-- Completed testing and certification with Charter for 1.8 GHz amplifiers and Quantum Link remote management software, with significant shipments underway.
Revenue Customer Concentration-- Two customers each accounted for over 10% of total non-GAAP revenue in fiscal Q2 2025: and one in data center (34% of total revenue); top 10 customers combined for 98% of revenue.
Cash and Equivalents-- $87.2 million in total cash, cash equivalents, short-term investments, and restricted cash at quarter end, up from $66.8 million at the end of Q1 2025.
Total Debt (Excluding Convertible Debt)-- $54.3 million total debt (excluding convertible debt) as of the end of fiscal Q2 2025, up from $46.1 million the previous quarter.
Inventory-- $138.9 million inventory as of fiscal Q2 2025, up from $102.3 million at the end of Q1 2025, mainly from purchases of raw materials for upcoming production.
ATM Program Proceeds-- Raised $98 million, net of fees, during fiscal Q2 2025 for production and R&D investment.
Capital Expenditures-- $38.8 million invested in capital investments in fiscal Q2 2025, primarily for capacity expansion in high-speed transceivers.
CapEx Outlook-- $120 million to $150 million in total CapEx anticipated for the full year, focused on 400G, 800G, and 1.6T data center products.
Q3 2025 Guidance-- Revenue (non-GAAP) expected between $115 million and $127 million for fiscal Q3 2025; non-GAAP gross margin between 29.5% and 31% for fiscal Q3 2025; non-GAAP net loss of $5.9 million to $2 million for fiscal Q3 2025; non-GAAP loss per share of $0.10 to $0.03 on 62.3 million weighted shares for fiscal Q3 2025.
US-Based 800G Production-- Factory on track for late-summer production, targeting monthly capacity of approximately 40,000 transceivers (roughly 40% of advanced transceiver total capacity) later in 2025, with further scale-ups expected by mid-2026.
Customer Qualification Progress-- Three tier-one data center customers in qualification for 800G+ products, all existing relationships.
CATV Customer Diversification-- Six MSO customers are either ordering or qualifying 1.8 GHz amplifier products, with broader industry interest developing.
CATV Node Launch-- Market entry planned for Q4, with revenues expected by Q4 or Q1 next year.
SUMMARY
Applied Optoelectronics(AAOI -3.87%) delivered fiscal Q2 2025 results in line with its revenue and margin guidance, but bottom-line performance fell short due to elevated R&D and SG&A outlays supporting broad strategic initiatives. Major data center customers accelerated qualification and production of higher-speed optical products, with 400G and 800G transceiver momentum now evident in customer approvals and shipment schedules (non-GAAP). The CATV segment marked further diversification, with new certifications, expanded MSO engagements, and robust demand supporting management’s outlook for a sequential growth rebound in fiscal Q3 (non-GAAP) and a 2026 pipeline exceeding $300 million from Charter alone. Capital investments in advanced domestic and offshore manufacturing progressed as planned, securing both customer qualification for factory output and public incentives for US capacity, while customer concentration in key segments remained high.
Management cited a multi-quarter timeline to realize targeted mid-30% non-GAAP gross margins, with cost reductions and elevated software revenues anticipated as key levers.
Receivables increased significantly in tandem with expanded sales and extended terms to select cable TV channel partners in fiscal Q2 2025, supporting timely customer deployments.
CFO Murry said, "For the full year, we continue to expect achieving positive non-GAAP net income is possible." framing forward-looking profit potential as credible but not assured.
Sustained inventory build and new revolving credit facilities position the company to navigate working capital intensity as production scales for accelerating customer demand in both cable and data center markets.
INDUSTRY GLOSSARY
CATV: Cable television equipment and technology business segment, including amplifiers and distribution hardware.
MSO: Multiple System Operator; a company that operates multiple cable TV systems.
OFC: Optical Fiber Communication Conference; an annual industry trade show.
ATM Program: At-the-Market equity offering program, a mechanism to raise capital by selling shares into the open market at prevailing prices.
FTTH: Fiber-To-The-Home; deployment of fiber optic communication directly to residences.
EML: Electro-absorption Modulated Laser; a high-speed laser device used in optical transceivers.
SG&A: Selling, General, and Administrative expenses.
Full Conference Call Transcript
Thompson will give an overview of AOI's Q2 results and Stefan will provide financial details and the outlook for 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 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 statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond the company's control.
Forward-looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of its products into new markets and customer responses to its innovation, as well as statements regarding the company's outlook for 2025. Except as required by law, AOI assumes no obligation to update these 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 expectations. More information about other risks that may impact the company's business is set forth in the Risk Factors section of AOI Reports on file with the SEC, including the company's annual report on Form 10-Ks and quarterly reports on Form 10-Q.
Also, all financial results and other financial measures 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 the company's earnings press release that is available on AOI's website. Before moving to the financial results, I'd like to note that the date of AOI's third quarter 2025 earnings call is currently scheduled for November 6, 2025. Now I would like to turn the call over to Doctor Thompson Lin, AOI founder, chairman, and CEO.
Thompson?
Thompson Lin: Thank you, Lindsay, and thank you for joining our call today. While EPS came in below our expectations, primarily due to elevated operating expenses, the inherent strength of our business fundamentals was apparent with strong year-over-year top-line growth and gross margin expansion. The rise in our operating expenses is a direct result of strategic investment in R&D and SG&A expenses driven by increased business activity, including new customer qualification efforts for 800G and 1.6T transceivers. You can see from our results and some of our recent announcements that big expenditures are already translating into higher levels of customer engagement, certifications, and ultimately, revenue opportunities. During the quarter, we saw steady growth in our data center business.
We completed our first volume shipment of high-speed single-mode 400G data center transceivers to a recently re-engaged major hyperscale customer, and we are seeing increased sequential demand from other hyperscalers for this product as well. We continue to make progress on customer qualification for our 800G product and we continue to have confidence in the second half ramp in AI and EV sales. In our CATV business, we continue to see strong demand in this market. We announced that we completed testing and certification with Charter for plans to deploy our 1.8 gigahertz enterprise and Quantum Link remote management software.
During the second quarter, we delivered revenue of $103 million, which was in line with our guidance range of $100 million to $110 million. We recorded non-GAAP gross margin of 30.4%, which was in line with our guidance range of 29.5% to 31%. Our non-GAAP loss per share of $0.16 was below our guidance range of a loss of $0.09 to a loss of $0.03 due to larger than anticipated operating expenses as I mentioned earlier. Total revenue for our data center product of $44.8 million increased 30% year-over-year and 40% sequentially, largely due to increased demand for our 100G and 400G products. Revenue for our 100G product increased 25% year-over-year while revenue for our 400G product increased 43% year-over-year.
Total revenue in our CATV segment of $56 million increased more than eightfold year-over-year, in line with our expectations. Our CATV revenue decreased 13% sequentially off a seasonally strong Q1 as we retooled production to our Motorola-style amplifier product. With that, I will turn the call over to Stefan to review the details of our Q2 performance and outlook for Q3. Stefan.
Stefan Murry: Thank you, Thompson. As Thompson mentioned, while EPS came in below our expectations primarily due to elevated operating expenses, the inherent strength of our business fundamentals was apparent with strong year-over-year top-line growth and gross margin expansion. The rise in our operating expenses is a direct result of strategic investments in R&D and SG&A expenses driven by increased business activity, including new customer qualification efforts for 800G and 1.6T transceivers. As you can see from our results as well as some of our recent announcements, these expenditures are already translating into higher levels of customer engagement, satisfaction, and ultimately, revenue opportunities.
In Q2, we delivered revenue of $103 million, which was in line with our guidance range of $100 million to $110 million. We recorded non-GAAP gross margin of 30.4%, which was in line with our guidance range of 29.5% to 31%. Our non-GAAP loss per share of $0.16 was below our guidance range of a loss of $0.09 to a loss of $0.03. This bottom-line miss was due to higher than expected operating expenses in the quarter, mainly stemming from additional R&D and SG&A expenses in support of new customer opportunities.
R&D expenses were up $2.6 million compared to Q1 due mostly to increases in project expenses like prototypes and samples, which tend to be directly correlated with near-term revenue generation. As we've discussed in prior quarters, as customer demand for new products emerges or timelines get pulled in, R&D expenses necessarily increase to support the product customization and qualification efforts necessary to realize revenue from these new opportunities. In addition to R&D, SG&A costs also increased by $2.5 million compared to Q1, which is mostly due to increased shipping costs as we imported certain products ahead of tariff increases and supported shipping of samples and prototypes to customers, along with expenses from the OFC trade show in April.
Notably, tariffs were not a material factor to our income statement in Q2. Overall, OpEx was also unfavorably impacted by the rapid strengthening of the Taiwan dollar in the quarter. Slightly under 10% of the increase in OpEx was due to this currency fluctuation. Notably, we have recently seen some weakening of the NTD, so we believe the impact on Q3 will be muted. Our performance continues to be driven by strength in both our data center and CATV businesses, underscoring the strategic value of our diversified revenue streams. Our focused efforts on the key initiatives we set in motion over the past couple of years are translating into tangible business momentum and the long-term strength of our business.
We've remained focused on enhancing the company's resilience, broadening our manufacturing capabilities, deepening customer engagement, strengthening supply chain diversity, and scaling our production capacity. During the quarter, we saw steady growth in our data center business. We completed our first volume shipment of high-speed single-mode 400G data center transceivers to a recently re-engaged major hyperscale customer, marking the first significant shipments to this customer in several years. This milestone supports our expectations for increased transceiver sales in the second half of the year, driven by growing demand and ongoing US-based capacity expansion. We also saw a notable increase in 400G demand from other customers as well.
Also, as a reminder, the vast majority of our 400G business is for single-mode transceivers, which carry higher ASP and gross margin than is typical of short-reach transceivers based on multimode optics. We continued to make progress on customer qualifications on our 800G products. During the quarter, one of our major hyperscale customers completed an extensive audit of our factory in Taiwan and approved this factory for 800G production. This was a positive step forward, and we're approaching what we believe are the final stages for securing 800G product quality qualification. We believe the factory qualification demonstrates their intent to move forward with our products.
We continue to believe that we will produce meaningful shipments of 800G products sometime in 2025, likely in late Q3 or Q4. The schedule is constrained by our ability to build and qualify production capacity. We believe that the demand for 800G is strong, and we expect that when our production is ready, we will see a fairly quick ramp in revenue for 800G. While immaterial to our overall revenue, we did record some revenue for the second quarter in a row for our 800G products related to deliveries for customer qualification activity. In our CATV business, we continued to see strong demand in Q2.
On our past several earnings calls, we have discussed the continued shipments of our 1.8 gigahertz amplifiers for one of our major MSO customers. Our recent press release gives additional details on our 1.8 gigahertz amplifier deployments with Charter, which has been a valued long-standing customer of ours. Early in the quarter, we completed testing and certification with Charter for our 1.8 gigahertz amplifiers and Quantum Link remote management software. We also recently announced plans for deployment of these products in Charter's network. Our products are designed to help them continue to deliver the capacity and speeds that their customers need and expect.
We shipped a significant quantity of 1.8 gigahertz amplifiers to Charter in the quarter, and demand continues to be robust. In addition to Charter, we have six other MSO customers who have already begun to order and deploy our 1.8 gigahertz products or are in various stages of qualification of these products. We are very excited to see the broad-based appeal of our amplifiers and Quantum Link software across our potential customer base. Feedback from customers has been that our amplifiers are game-changing in terms of performance, ease of setup, and control and monitoring capabilities. We feel very good about our prospects with these six customers in addition to our very strong position with Charter.
During the second quarter, tariffs had less than a $1 million impact on our income statement. Tariff developments continue to evolve, but one thing remains certain: products manufactured in the US are not subject to tariffs. This makes having a cost-effective domestic production a strategic advantage as it relates to tariffs. Also, as I mentioned on our Q1 earnings call, while we do utilize some imported components in our transceivers, many key components like our laser chips are already manufactured in the US.
Importantly, in our 800G and 1.6T transceiver designs, less than 10% of the value of the components used is currently sourced from China, and we have a pathway as we scale production to further reduce this China content, ultimately to near zero. We also are in discussion with several key suppliers about onshoring their production to the US to support a robust domestic supply chain. As part of our strategic efforts during the second quarter, we made good progress on adding production capacity for 800G and higher transceivers at our existing facility in Texas.
This initiative was part of the strategic plan we outlined earlier this year at OFC for adding production capacity for 800G and higher transceivers in both our US and Taiwan factories. We remain on track to achieve the targets that we laid out. As a reminder, we expect this 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. It's important to note that we will be able to accommodate this expansion within our current Texas facility footprint. This initial US-based production is currently on track for beginning production later this summer.
Equipment has begun to arrive for this expansion, and bring-up is ongoing. Further, by mid-2026, we continue to expect to be able to produce over 200,000 pieces per month, with the majority produced in Texas. Just to reiterate, we currently have three manufacturing sites: one here in Sugar Land, Texas, where our headquarters is, one in Ningbo, China, and one in Taipei, Taiwan. As you may have heard me say at OFC, we expect to increase total production of 800G and 1.6T products by eight and a half times by the end of the year, and we are dedicated to achieving this goal.
During the quarter, we were pleased to have received a ten-year $2 million incentive from the city of Sugar Land, Texas, office of economic development for the onshoring of our manufacturing as we look to expand our manufacturing footprint in the area. Having achieved this economic incentive package, this opens the door for us to finalize lease negotiations and begin construction. We also made continued progress in outfitting our Taiwan facility for increased production. As I mentioned earlier, one of our potentially largest customers recently qualified this facility for production of 800G after having previously qualified it for 400G production.
With the factory qualified for both 400G and 800G, we currently expect that this customer could become a greater than 10% customer in Q3. As I mentioned on our last earnings call, we signed an agreement to lease an additional building in Taiwan late last year, which we began outfitting in Q1 and which we continued to outfit further in Q2 in order to increase production of our 100G, 400G, and 800G data center transceivers and CATV products there. Turning to our second quarter results, our total revenue was $103 million, which more than doubled year-over-year and increased 3% sequentially off a strong Q1, and was in line with our guidance range of $100 million to $110 million.
During the second quarter, 54% of revenue was from CATV products, 44% was from data center products, with the remaining 2% from FTTH, telecom, and other. In our data center business, Q2 revenue came in at $44 million, which was up 30% year-over-year and 40% sequentially. Sales of our 100G products increased 25% year-over-year, while sales for our 400G products increased 43% year-over-year. In the second quarter, 70% of data center revenue was from 100G products, 20% was from 200G and 400G transceiver products, and 9% was from 10G and 40G transceiver products.
Looking ahead to Q3, we expect a sequential increase in our data center revenue driven by continued growth in our 100G and 400G products, with the possibility of layering some additional increased 800G revenue late in the quarter. In our CATV business, CATV revenue in the second quarter was $56 million, which was up more than eight times year-over-year and in line with our expectations, but was down 13% sequentially from a record Q1. This significant year-over-year increase is due to the continued ramp in orders for our 1.8 gigahertz amplifier products. As we explained on our last earnings call, we expected a modest pullback sequentially in CATV revenue as we retooled production to our Motorola-style amplifier products.
As I mentioned earlier, we are pleased to have completed testing and received certification for both our Motorola and GainMaker-style amplifiers from Charter Communications and announced their plans to deploy our 1.8 gigahertz amplifiers and Quantum Link remote management software. As a reminder, Digicom International continues to play an important role in supporting the end-to-end experience for ongoing installations as we utilize their logistics services to continue to support our products. Looking ahead to Q3, we expect record or new record revenue in our CATV business. Now turning to our telecom segment, revenue from our telecom products of $1.9 million was down 34% year-over-year and 18% sequentially.
We have said before, we expect telecom sales to fluctuate from quarter to quarter. For the second quarter, our top 10 customers represented 98% of revenue, up from 94% in Q2 of last year. We had two greater than 10% customers, one in the CATV market, which contributed 54% of total revenue, and one in the data center market, which contributed 34% of total revenue. In Q2, we generated non-GAAP gross margin of 30.4%, which was in line with our guidance range of 29.5% to 31% and was up from 22.5% in Q2 2024 and compared to 30.7% in Q1 2025.
The year-over-year increase in our gross margin was driven primarily by our favorable product mix, including growth in our CATV revenue as well as growth of our newer generation data center products. Looking ahead, we continue to expect that our gross margin will improve as we see the impact of manufacturing efficiencies in our CATV production and improving product mix. We remain committed to our long-term goal of returning our non-GAAP gross margin to around 40% and continue to believe that this goal is achievable. Total non-GAAP operating expenses in the second quarter were $42.1 million or 41% of revenue, which compared to $26 million or 60% of revenue in Q2 of the prior year.
While operating expenses increased this quarter, as I discussed at length earlier, the rise is a direct result of strategic investments in R&D and SG&A expenses driven by increased business activity. Looking ahead, we expect non-GAAP operating expenses to be in the range of $41 million to $44 million per quarter. Non-GAAP operating loss in the second quarter was $10.8 million compared to an operating loss of $16.2 million in Q2 of the prior year. GAAP net loss for Q2 was $9.1 million or a loss of $0.16 per basic share compared with the GAAP net loss of $26.1 million or a loss of $0.66 per basic share in 2024.
On a non-GAAP basis, net loss for Q2 was $8.8 million or $0.16 per share, which compared to our guidance range of a loss of $4.8 million to a loss of $1.7 million or non-GAAP income per share in the range of a loss of $0.09 to a loss of $0.03. This compares to a non-GAAP net loss of $10.9 million or $0.28 per basic share in Q2 of the prior year. The basic shares outstanding used for computing the earnings per share in Q2 were 56.8 million. For the full year, we continue to expect achieving positive non-GAAP net income is possible.
Turning now to the balance sheet, we ended the second quarter with $87.2 million in total cash, cash equivalents, short-term investments, and restricted cash, compared with $66.8 million at the end of Q1 2025. We ended the quarter with total debt, excluding convertible debt, of $54.3 million compared to $46.1 million at the end of last quarter. Post-quarter, we announced a new revolving loan facility with BOK Financial of $35 million, which we intend to use to meet some of our working capital needs going forward. As of June 30, we had $138.9 million in inventory, which compared to $102.3 million at the end of Q1.
The increase in inventory is almost entirely due to purchases of raw material to be used in production of our products over the next several months. During the quarter, we completed our ATM program, which raised $98 million net of commissions and fees. As we have discussed 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, including the earlier mentioned production expansion in Texas. We made a total of $38.8 million in capital investments in the second quarter, which was mainly used for manufacturing capacity expansion for our 400G and 800G transceiver products.
On our last couple of earnings calls, we have discussed our plans to make sizable CapEx investments over the next several quarters as we prepare for increased 400G, 800G, and 1.6T data center production in 2025. For the year, we continue to expect between $120 million and $150 million in total CapEx. While these costs could be impacted by tariffs, given the evolving nature, it is difficult to predict what type of impact or by how much. Notably, we source equipment from all over the world, including both from domestic and international locations. We will continue to do our best to minimize any impacts.
It remains evident that US-based production is a priority for our customers, and we are fully committed to building out this capacity. Moving now to our Q3 outlook, we expect Q3 revenue to be between $115 million and $127 million, accounting for a modest sequential increase in CATV revenue as well as a sequential increase in data center revenue. We expect non-GAAP gross margin to be in the range of 29.5% to 31%.
Non-GAAP net income is expected to be in the range of a loss of $5.9 million to a loss of $2 million and non-GAAP earnings per share between a loss of $0.10 per share and a loss of $0.03 per share, using a weighted average basic share count of approximately 62.3 million shares. Operator?
Thompson Lin: With that, I will turn it back over to the operator for the Q&A session.
Operator: We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. At this time, we will pause momentarily to assemble the roster. And our first question will come from Ryan Kuntz of Needham. Please go ahead.
Ryan Kuntz: Great. Thanks for having me on and 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? Any rough timing on when that might happen? Thank you.
Stefan Murry: Yeah. Great questions, Ryan. Thanks for asking. So relative to, 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 GainMaker. In the quarter, though, we'd already produced a significant quantity of GainMaker, 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 production of both Motorola and GainMaker 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, you know, we continue to ship those amplifier products, both platforms, as well as the Quantum Link software and some of the accessories that go with it as we mentioned in our prepared remarks. With respect to the node, yeah, we do expect to have the node product launching in Q4. And, you know, it'll 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.
Ryan Kuntz: Great. I think I answered all your questions if I Yeah. Yeah. That's fine.
Stefan Murry: That's great. And then quickly, flipping to the data center. On the 800 plus transceivers, how many engagements do you have there with tier ones? On the 800 plus?
Thompson Lin: I would say right now, we are three. The tier one, the potential because And right now, the good news is I think we start body manufacture either in this quarter or next quarter. But more important is 1.6T as in the we expect to start by manufacturing maybe along June, July next year. That's I think that's a really good news for us. Because, you know, we've been working with several customers. For 1.6T. So right now, at least we got the two three c with engagement. Not only for sampling, but we are talking about some kind of the volume manufacturer. Or in I would say, Q2 for sure, Q3.
So that's why we really need to increase the capacity in Taiwan, especially United States. Yep. And, Ryan, just to just to emphasize what we said before,
Stefan Murry: just to be clear, the production capacity that we're building for 800 gig will also work for 1.6. It's a combination of both. So, you know, all the production expansion activity that we're undergoing now can be used for either of those platforms. The only difference is that equipment is one more 6,200 to lambda.
Thompson Lin: But 400G energy can be shared too because they are all 100 per lambda. So this is right now the aforementioned agreement. For assembly can be shared. Okay? Thirty minutes, 400G, 800G, or one by 60. The only tech difference is testing between 100G to 200G per reference. That's it.
Ryan Kuntz: Gotcha. Helpful. Thanks so much, Thompson. Thanks, guys. Appreciate it.
Thompson Lin: Thank you.
Operator: The next question comes from Simon Leopold of Raymond James. Please go ahead.
Simon Leopold: Great. Thank you for taking the question. The first thing I wanted to ask you about was the level of vertical integration you've achieved within the data center 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 so photonics? And two, are you insourced or outsourced? And what's the trajectory of insourcing?
Stefan Murry: Sure. So, the answer to that first question, you know, are we doing EMLs or silicon photonics is we're doing both platforms. We do have our own production capacity for EMLs. 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, you know, is prudent for risk management purposes. So not everything is insourced, but, you know, we're insourcing what we can based on our customer commitments.
And, again, you know, the silicon photonics, the lasers that are used there are CW lasers. We also produce those in-house as well. And let me see. I think I answered your question there. Did you have another one, Simon? I forgot the second one. Let me add two more points. One, I think we are in
Thompson Lin: increasing all the high power heat regulator for silicon photonics to maybe the 2,500,000 laser per month by sometime next year. So right now, we're in-house capacities. What are the email? We should have 200 email sometimes soon. Next year. Sure, the high power laser for signal photonics and Bexel. The other new project is 200G photo detector. Okay? So this is the old manufacturer, 1% in Houston. Next load could be manufactured by our partner, in Taiwan. The others, we had one new project is the back special silicon photonics with all the because for sure, we don't do silicon photonics, but we involve the design, the testing, and the assembly.
Simon Leopold: Yeah. And where I was trying to go with the question was to try to get a better sense of one of the elements to help the gross margin move towards that long term of 40. So what I was trying to tease out in this question was the degree that you're outsourcing today versus a change towards more vertical integration of future as a lever for gross margin improvement. So maybe the question's off base, and maybe I'm going down the wrong path. More bluntly, what will help the gross margin improve?
Thompson Lin: Yeah. I think the key is way. Okay? Right now, we're doing two-inch wafer. But we go to switch wafer. The cost will reduce by, I don't know, 50, 60%. Then we'll go to four-inch wafer by end of next year. This is major much bigger cost saving than what you're talking about. As in right now, yes, we only maybe using 30 to 40% our laser. But we were using our I would say two sub of. Okay? It's but it would depend on customer by customer. So some customers prefer all the AI laser. Some customers prefer fifty-fifty. Okay? So that's why it's different.
But more important is the cost sound of AI lens will change from two-inch to three-inch to four-inch.
Simon Leopold: That's really, really helpful. And then I want to follow-up on the cable TV side. You've talked to us about production capacity on data center and I'm just wondering whether or not we need a better understanding of your production capacity if there are constraints on cable TV. And the other aspect is just understanding whether I assume you've got visibility into channel inventory because I think when customers deploy your amplifiers, you would know when they're turned up. I believe that's the case. So I'm just trying to get a sense of how much of your revenue is perhaps not deployed yet in somewhere in the channel just to assess the risk of suing from a channel buildup?
Thank you.
Stefan Murry: Right. So let me touch on one thing real quick. It's kind of the tail end of your last question regarding gross margin expansion, and it relates to the cable TV business as well. There is still significant cost savings that we expect to achieve over the next few quarters in the cable TV business. That business is not yet hitting its gross margin targets, but we have a pathway to get there. The other thing that will help on the cable TV side relative to gross margin is a greater impact on software. As part of our revenue mix, software will come in with a significantly higher gross margin level.
So a couple of other things to add on the gross margin line even though that's sort of a follow-on to your previous question. Regarding the manufacturing capacity for cable TV, we're pretty much I've said this before. I mean, we're pretty much at the level that we expect to be at. Our goal for cable TV production is really to kind of match what we see all of our customers' aggregate demand being, and we're more or less there. You know, we had a little bit of a pullback last quarter as we retooled. We're expecting a sequential increase this quarter, and that's about the same level that we were the prior quarter.
So we're kind of at that level right now. Regarding channel inventory, yes, we do have a pretty clear line of sight into what the customer is using. You know, we're very comfortable with the level of inventory that we have. And as we discussed in our prepared remarks, it's not just one customer that we have. We have multiple customers now that are buying these products. And, you know, we have a number of other customers in the pipeline. As we talked about, we have six different customers that are either buying or in various stages of qualification of the products right now. So, you know, we're pretty comfortable with the inventory that we have in the channel.
It is substantial, but it's in line with our customers' demand in aggregate. And, Simon, let me add a few more points.
Thompson Lin: So going now, next year, we are very comfortable. Besides Charter, we should have more than 10 customers next year. And right now, based on the feedback from this customer, I think the real demand from this customer next year is, oh, it's a minimum $300 million to $350 million. And because the shipping is by ship, so usually, it takes more than six, seven weeks. That's why we need inventory in the US because the customer demand is three to five days. Okay? So we can say, we got an order, then we manufacture in Taiwan, and then ship here. It will easily take two, three months. It won't work for this cable TV industry. Okay?
So that's the purpose to meet the customer demand. But really the demand is pretty big. Alright? Just next year, this number we see right now. $300 to $350 million. Do you to make Alright? For this customer in, I would say, US, Canada. Alright?
Simon Leopold: Great. Really appreciate you taking all the questions.
Operator: The next question comes from Michael Genovese of blatt. Please go ahead.
Michael Genovese: Thanks very much. So on the prepared remarks, there was a lot of talk about qualification activity for 400 and 800G. It sounds like with this customer who should become a 10% customer in the third quarter and beyond. I guess I just wanted to ask, and then somebody else asked about sort of engagement with other tier ones. But I just wanted to ask sort of very specifically if there's qualification activity going on at 400G and above with other customers besides that one that I think you spoke a lot about on the call?
Stefan Murry: Absolutely. Yeah. 100%. Yes. All three of those that Thompson mentioned earlier are in various stages of qualification.
Michael Genovese: And are those all existing customers, or is anybody brand new to the company?
Stefan Murry: Those are all existing customers. I mean, you have, I mean, a number of I want to be sure that we're not mischaracterizing this. We also have a number of engagements with smaller tier two operators as well. So it's not just like those are the only customers that we have, but all three of those customers are existing customers. Yeah. It's not really key to KobeTEA or
Thompson Lin: I think it's depending on where you draw the line. But I know because based on the investment, they announced the next year, it could become tier one too.
Michael Genovese: Okay. Great. And then on the guide for the cable TV to be sort of near an all-time high in March, is that more than one customer, or is that still to the primary customer only?
Stefan Murry: More than one customer.
Michael Genovese: Yeah. Great. And I just want you know, I think my question might have been answered on the last question, but I just want to verify that I heard it correctly. Was that $300 to $350 million that Thompson was talking about? That's a cable TV revenue target for 2026. Is that correct?
Thompson Lin: Yes. Oh, this is only Charter. This Charter plus more than 10 other customers.
Michael Genovese: Right. And any sense of how much of that is, you know, I imagine the large majority of that's amplifiers. But is there any significant amount of nodes in there?
Stefan Murry: There should be some node business as well, but we haven't broken that out for you.
Michael Genovese: And then I thought Simon's questions about the gross margins were super helpful. But I guess now I'm just wondering about the timing maybe of, you know, not all the way to 40%, but maybe, like, mid-thirties. Is there any kind of timing expectation you'd want to set there, or is it, like, a one quarter at a time wait and see?
Stefan Murry: No. I mean, I think, you know, our guide right now is kind of consistent at around 30%. It's going to take us a couple of quarters to see a bigger impact from 800G business and the impact of some of the cost reduction efforts and increased software revenue that we talked about on the cable TV side. So a few quarters to get kind of the next uptick in gross margin.
Thompson Lin: Yeah. I would say maybe Q2 or Q3, Q4. They had disease. The bottom is picking up very strongly. You know, next quarter, every quarter. Then 1.6, I said we'll stop buying. In, I would say, June, July next year. And cable TV goes now we improved too. So I would say yeah, Q2 Q3 next years. But I'll talk to you for you, but So we hope we could be there we could we could be there by end of this year next year's or early two thousand twenty-seven. That's our target.
Michael Genovese: Okay. Perfect. I'll pass it on. Thanks again. Thank you.
Operator: Again, if you would like to ask a question, please press star then 1. And our next question will come from Dave Kang of B. Riley FBR. Please go ahead.
Dave Kang: Yes. Thank you. Good afternoon. First question is regarding receivable. So they went up what, like, $50 million over $50 million last quarter, first quarter, and now it's another approximately $40 million. Just can you go over the dynamics why receivables are going up? I know it's I'm assuming that's related to cable TV customer?
Stefan Murry: I mean, a lot of it is. Receivables are going up because business is going up. Right? We more than doubled our revenue over last year. So, naturally, receivables are going to go up as well. We talked about the dynamics it, although because we wanted to get some of the cable TV products in particular into the country and ready to be I mean, staged, ready for customer acceptance, we have offered, you know, some extended payment terms to certain customers in that channel chain to be able to accommodate that additional amount of revenue so that it's here when the customers need it. So I mean, that's the story. Increased revenue slightly larger payment terms. Equals increased receivables.
Dave Kang: Got it. And then just a question on gross margin. Can you talk about the difference between transceiver versus cable TV? Right now, you're at 30%, maybe you know, what the difference is, and then your long-term 40%, what the, you know, margins will be for cable TV and transceivers?
Stefan Murry: Yeah. So, I mean, cable TV right now is kind of in the low to mid-30% range. And obviously, the transceivers are below, you know, 30% at this point. They average out to be around 30%. I think we can get I mean, we've been pretty consistent that our expectation for gross margin in cable is to get above 40%. So and we think we can achieve that. So, you know, that's where that is heading. With respect to the transceivers, again, mid to upper 30% is I think where it can be such that we can blend out to you know, around 40%. Especially the 1.6, the gross margin.
Thompson Lin: Should be more than 40%. The 800G should be close to 40%. That's why we said the gross margin should be 35 to 40% by end of next year. Got it. And my last question is regarding that major customer, you know, qualifying your facility. So what's left, you know, for, I guess, when a couple companies say are 400 gig, 800 gig products are qualified, what else is left? I guess? And how long does it typically you know, take? Between, you know, facility qualification versus, you know, product qualification.
Stefan Murry: Right. So 400G is already qualified. We talked about the first volume shipments occurring this quarter. That means I mean, last quarter this quarter, they're reporting on Q2. So that's already happened. 800G, there's really not much that has to happen. But as we discussed in our prepared remarks, we have to have production capacity available for 800G meaningful production capacity available for 800G before, you know, there's any need for them to give us a green light to go ahead and produce. We're pretty close to that right now. You know, we outlined our targets at OFC, and we're sticking to that. We're tracking pretty well to those targets.
So, really, all that has to happen is we got to have enough production capacity to be able to accept meaningful orders for them to finish the qualification.
Thompson Lin: So, basically, in the so I think this quarter, this customer may maybe become a 10% customer. And by Q4, I would say 400G may become our biggest revenue creator for data center bigger than 100G. In Q4. So you can see how fast the 400G revenue is coming up. In this year. But for sure, the 800G become the biggest contribution to buy, I would say, Q2. Next year, for sure Q3. You can see overall how fast the revenue one is not going down. Okay? Don't take me wrong. I'm saying 100G will stay the similar a 400G down so strong, and Q4, 400G become the biggest. in Q3, Q4, even bigger than 100G.
But at the same time, by Q2, Q3 next year, 800G will be even bigger than 400G. Okay? That's my point. Got it. Thank you.
Operator: At this time, we have no further questions. And I will turn the call over to Doctor Thompson Lin for closing remarks.
Thompson Lin: Okay. And 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 fundamental drivers of long-term demand for our business remain robust. We are in a unique position to drive value from this opportunity. We look forward to seeing many of you at upcoming investor conferences.
Stefan Murry: Thank you.
Operator: The conference has now concluded. Thank you for attending today's presentation. And you may now disconnect.