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DATE

Thursday, May 7, 2026 at 4:30 p.m. ET

CALL PARTICIPANTS

  • Founder, Chairman, and CEO — Thompson Lin
  • Chief Financial Officer — Stefan Murry

TAKEAWAYS

  • Total Revenue -- $151.1 million, up 51% year over year and 13% sequentially, marking a fourth straight quarterly record.
  • Non-GAAP Gross Margin -- 29.2%, in line with guidance of 29%-31% and down from 31.4% in Q4 2025.
  • Non-GAAP Net Loss -- $4.9 million, or $0.07 per share, matching the guided loss range of $0.09 to breakeven.
  • Data Center Revenue -- $81.4 million, growing 154% year over year and 9% sequentially; 41% from 100G products, 46.7% from 200G/400G, and 5.6% from 800G transceivers.
  • 800G Product Revenue -- $4.6 million, or 5.6% of total data center sales, with first volume shipment completed to a major hyperscale customer in Q1.
  • CATV Revenue -- $66.8 million, increasing 4% year over year and 24% from the previous quarter, reaching the top of its $61 million to $67 million guidance.
  • Telecom Revenue -- $2.6 million, declining 13% year over year and 50% sequentially.
  • Top Customer Mix -- Three customers exceeded 10% of revenue: one CATV customer at 44%, and two data center customers at 26% and 25%, respectively; top 10 customers contributed 98% of Q1 revenue versus 97% the prior year.
  • Manufacturing Capacity -- Exited Q1 with 100,000 units per month of 800G/1.6T capacity; target is 150,000 this quarter and over 650,000 by year-end, with 30% from Texas; by 2027, 930,000 units per month anticipated,>50% from Texas.
  • Capital Investments -- $68.7 million in Q1 for 400G/800G/1.6T capacity expansion; quarterly CapEx expected to increase.
  • U.S. Real Estate Expansion -- Texas manufacturing footprint now totals 900,000 square feet, including new and existing facilities in Sugar Land, Pearland, and Houston.
  • Q2 Guidance -- Revenue of $180 million to $198 million, non-GAAP gross margin of 29%-30%, non-GAAP net loss of $2.5 million to net income of $2.8 million, and EPS between a loss of $0.03 per share and earnings of $0.03 per share, using 80.7 million shares.
  • Full-Year 2026 Outlook -- Revenue now expected to exceed $1.1 billion and non-GAAP operating income to surpass $140 million; company stated, "this revenue level is limited by our production capacity and supply chain, not market demand."
  • Q1 Operating Expenses -- Non-GAAP operating expenses were $51.4 million, or 34% of revenue, aligning with guidance.
  • Top-Line Demand -- Forecast demand for 800G and 1.6T modules projected to outpace production capacity through mid-2027.
  • Tariff Impact -- Tariffs reduced Q1 income by $1.4 million; management applied for a $5.7 million refund pending AIPA tariff overturn, but recovery timing is uncertain.
  • Contracted Orders -- In Q1, received first volume order for 1.6T transceivers and two new volume orders for 800G single-mode products from a major hyperscale customer; qualification and shipments scheduled for Q2 and Q3.
  • Laser Manufacturing Expansion -- Plans to expand indium phosphide laser fabrication by about 350% by 2027, with ongoing transition from four-inch to six-inch wafers to address rising ELSFP and CPO demand.

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RISKS

  • Stefan Murry stated, "the revenue mix in data center in the short term will be a slight headwind" for gross margins, with gradual improvement expected as higher-margin products scale.
  • Thompson Lin highlighted potential material supply risks, saying, "another risk is material. This is why we are working with all the material suppliers."
  • Uncertainty in timing of tariff refunds was noted: "the process is still very new, we currently cannot estimate the time frame for recovery of these tariffs."

SUMMARY

Applied Optoelectronics (AAOI 11.76%) directly reported record quarterly revenue driven by sustained data center and CATV demand, while confirming that production capacity, not market appetite, remains the key constraint on sales growth. Management signaled a step-function increase in output as additional U.S. and global capacity comes online, with detailed breakdowns of facility expansions and automation initiatives to support forecasted demand well into 2027. New volume orders for both 800G and 1.6T transceivers from global hyperscale customers, along with three-year supply agreements for high-power ELSFP lasers, anchor revenue visibility and tie the company to accelerating AI infrastructure cycles.

  • Thompson Lin explained, "We completed our first volume shipment of our 800G single‑mode transceiver to one of our large hyperscale customers in Q1, and we continue to anticipate a strong volume ramp starting in Q2."
  • Stefan Murry said, "by mid‑2027, 100G and 400G revenue will be approximately $90 million monthly, 800G revenue will be approximately $217 million monthly, and 1.6T revenue will be approximately $164 million monthly. In total, this is about $471 million per month of data center transceiver revenue."
  • The company noted its top three customers alone accounted for 95% of Q1 revenue, underscoring concentrated account exposure as large customers scale bandwidth for AI workloads.
  • Investments in laser fabrication and in-house automation were emphasized as core strategic advantages mitigating equipment and labor supply risks, with management stating, "most of this equipment is developed in house, which means that we are not generally in direct competition with other similar companies for supply."
  • Management explicitly noted that industry shortages of indium phosphide laser capacity reinforce the necessity to accelerate internal capability expansions for both existing transceiver and emerging ELSFP requirements.

INDUSTRY GLOSSARY

  • CATV: Cable television equipment and network infrastructure, primarily amplifiers, distributed by the company to broadband service providers.
  • 800G/1.6T Transceivers: High-speed optical modules supporting data rates of 800 gigabits per second or 1.6 terabits per second; critical for hyperscale AI and cloud datacenter connectivity.
  • ELSFP: External Light Source Pluggable—an optical module with a high-power laser source positioned externally to the main data transfer path, supporting co-packaged optics in data center switches.
  • CPO: Co-packaged optics—an architecture where optical engines are co-located with switch ASICs or processors, dramatically improving bandwidth and power efficiency.
  • MOCVD: Metal-organic chemical vapor deposition—an advanced process used to fabricate semiconductor laser materials, indispensable for high-power photonics manufacturing.
  • Indium Phosphide: A semiconductor compound used as the material base for high-performance optical laser devices in modern transceivers.

Full Conference Call Transcript

Thompson will give an overview of Applied Optoelectronics, Inc.’s Q1 results, and Stefan will provide financial details and the outlook for 2026. A question and answer session will follow our prepared remarks. Before we begin, I would like to remind you to review Applied Optoelectronics, Inc.’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 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 2026 and for the full year 2026. Except as required by law, Applied Optoelectronics, Inc. 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 are set forth in the Risk Factors section of Applied Optoelectronics, Inc.’s reports on file with the SEC, including the company's annual report on Form 10 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 Applied Optoelectronics, Inc.’s website. Before moving to the financial results, I would like to note that Applied Optoelectronics, Inc. management is attending the 21st Annual Needham Technology, Media, and Consumer Conference on Wednesday, May 13. This discussion will be webcast live, and a link to the webcast will be available on the Investor Relations section of the Applied Optoelectronics, Inc. website. Lastly, I would like to note that the date of Applied Optoelectronics, Inc.’s second quarter 2026 earnings call is currently scheduled for 08/06/2026.

Now I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics, Inc.’s founder, chairman, and CEO. Thompson.

Thompson Lin: Thank you, Lindsay, and thank you for joining our call today. We are pleased to deliver solid first quarter results that were in line with our expectations, driven by robust demand in both our data center and CATV businesses. We generated our fourth consecutive quarter of record revenue as we executed well to expand our manufacturing capacity. We continue to see accelerating customer demand needed to support the next wave of AI infrastructure deployment, and we anticipate solid sequential revenue growth throughout this year, with a significantly larger ramp expected starting in Q3 as additional capacity comes online.

During the first quarter, we delivered revenue of $151.1 million, non-GAAP gross margin of 29.2%, and non-GAAP loss per share of $0.07, all in line with our expected guidance range. Importantly, during the quarter, we saw and continue to see strong customer engagement around our 800G and 1.6T products, particularly as AI-driven data center investment accelerates. We completed our first volume shipment of our 800G single‑mode transceiver to one of our large hyperscale customers in Q1, and we continue to anticipate a strong volume ramp starting in Q2.

During the first quarter, we announced that we received our first volume order for our 1.6T transceiver from another long-term major hyperscale customer, along with two new volume orders from this customer for our 800G single‑mode transceivers. Looking ahead, forecast demand continues to outpace our production capacity through mid-2027. We are working hard to add additional capacity to meet this demand. Based on new demand and our anticipated capacity ramp, we now believe our 2026 revenue will exceed $1.1 billion, and we now expect to generate more than $140 million in non‑GAAP operating income this year. With that, I will turn the call over to Stefan to review the details of our Q1 performance and outlook for Q2. Stefan?

Stefan Murry: Thank you, Thompson. As Thompson mentioned, we are pleased to deliver solid first quarter results that were in line with our expectations, driven by robust demand in both our data center and CATV businesses. We generated our fourth consecutive quarter of record revenue as we executed well to expand our manufacturing capacity. We continue to see accelerating customer demand needed to support the next wave of AI infrastructure deployment, and we anticipate solid sequential revenue growth throughout this year, with a significantly larger ramp expected starting in Q3 as additional capacity comes online. In Q1, we delivered revenue of $151.1 million, which was in line with our guidance range of $150 million to $165 million.

We recorded non‑GAAP gross margin of 29.2%, which was in line with our guidance range of 29% to 31%. Our non‑GAAP loss per share of $0.07 was in line with our guidance range of a loss of $0.09 to breakeven. Notably, we continued to make progress on our key priorities in the first quarter, which included: one, scaling our next‑generation data center products, including both our 400G and 800G solutions; two, expanding our production capacity in a disciplined manner to support anticipated demand, particularly in our Texas facility; three, diversifying our revenue base; and four, strengthening operational execution to improve our margins and long‑term profitability.

Importantly, during the quarter, we saw and continue to see strong customer engagement around our 800G and 1.6T products, particularly as AI‑driven data center investments accelerate. We completed our first volume shipment of our 800G single‑mode transceivers to one of our large hyperscale customers. Notably, 800G revenue in the first quarter was $4.6 million, or 5.6% of our total data center revenue. Looking ahead, we continue to anticipate a strong volume ramp of our 800G products starting in Q2. During the quarter, in line with our expectations, along with the increasing demand for our 800G products, we also saw particular strength for our 400G products.

Looking ahead, we expect continued strength in our 400G business, and we expect to ship nearly four times the quantity of 800G compared to our Q1 shipments. In Q1, we announced that we received our first volume order for our 1.6T transceivers from another one of our long‑term major hyperscale customers. We also announced that we had received two new volume orders from this customer for our 800G single‑mode transceivers. Following product qualification, we expect to begin delivering these 800G orders in Q2, the 1.6T order as early as Q3, and to complete all of the deliveries by the end of this year.

This hyperscale customer has been a key and valued customer of ours for many years, and we are excited by the increased engagement and meaningful discussions we have had as this customer boosts its network bandwidth for AI workloads. We expect these orders to return this customer as a 10%‑plus customer for us. Forecast demand for 800G and 1.6T modules is projected to continue to exceed our production capacity through mid‑2027. We are working to add additional capacity to meet this demand. At OFC in March, we provided more color on our ambitious plans to increase our manufacturing capacity. During the first quarter, we made solid progress on this production capacity ramp, particularly for our 800G and 1.6T products.

As a reminder, our U.S. manufacturing footprint is anchored in Sugar Land, just outside Houston. Through a combination of real estate acquisitions and leases, we have expanded our Texas manufacturing footprint to about 900 thousand square feet. This includes 135 thousand square feet of existing capacity at our headquarters; two new buildings of 388 thousand square feet in Pearland, Texas; a 210 thousand square foot facility which is under development; and a 154 thousand square foot building in Houston, Texas. For those of you who are not familiar with the Houston area, all of these facilities are located within a 15‑mile radius of our current headquarters facility in Sugar Land.

During the quarter, we made progress building out our recently leased 210 thousand square foot facility. We expect to begin initial production in this facility in the third quarter. Notably, this facility is located just a few hundred yards from our headquarters, and it will be entirely dedicated to manufacturing of 800G and 1.6T transceivers. While this will not directly increase our indium phosphide wafer capacity, we plan to move the existing transceiver production from our current headquarters facility to this new building, which will allow expansion of our indium phosphide capacity. The facilities in Pearland and Houston will be built out to expand our production capacity for 800G and 1.6T transceivers.

We expect these facilities to come online in early 2027. As a reminder, internationally, we have 795 thousand square feet across three facilities in Taiwan focused on optical transceivers, as well as a larger 1.2 million square foot facility in Ningbo, China primarily dedicated to transceiver and cable TV manufacturing. Exiting Q1, our total manufacturing capacity approached 100 thousand units per month of 800G and 1.6T capacity. Looking ahead, we expect to continue to rapidly expand our production to approach 150 thousand per month of 800G and 1.6T this quarter.

As a reminder, we expect by the end of this year we will be capable of producing over 650 thousand pieces of 800G and 1.6T products per month, with about 30% of that output coming from Texas, as we expand into additional facility space and bring new production online. By the end of next year, 2027, we expect to grow our production capacity to be able to produce over 930 thousand pieces of 800G and 1.6T products per month, with over half of that output coming from Texas. These investments reflect measured scaling of our footprint while aligning with our strong and growing customer demand and qualification progress across both 800G and 1.6T products.

As a reminder, our 800G and 1.6T products can be manufactured on the same production line with the same process. While our 1.6T products will require different final testing, our 800G automated manufacturing lines have been developed with an architecture that will allow us to support future high‑speed products as customer demand materializes and evolves over time. While we continue to be encouraged by the conversations we are having with our customers pertaining to our 1.6T product, we continue to believe that our 800G products will drive the near‑term data center ramp. Our 1.6T products are on track to begin to contribute to our overall revenue later this year, with a bigger ramp beginning in 2027.

At OFC, we also discussed our plans to increase our manufacturing capacity for our external light source, or ELSFP, for co‑packaged optics, or CPO. This utilizes the ultra‑narrow linewidth high‑power laser that we announced late last year. We have very limited production of these modules now, but anticipate ramping production later this year and into 2027, culminating in about 400 thousand pieces per month by 2027. As a reminder, we will be making the high‑power lasers for these modules for the in‑house production of the ELSFP. We believe our in‑house laser capabilities continue to be an advantage for the company. As we have mentioned before, we have been manufacturing lasers internally for many years.

This has allowed us to avoid some of the shortages that affected others in the industry. As we continue to expand our footprint in Texas, our in‑house laser manufacturing positions us well to support both near‑term customer needs and longer‑term growth. We believe that in the future, CPO will continue to drive increased demand for high‑power lasers, and we plan to continue to expand our laser manufacturing capacity in Texas in order to accommodate these future growth drivers. We expect to further expand our laser fabrication capacity by around 350% by 2027.

A central element of our strategy is a high‑automation process for transceivers, which allows us to deploy production capacity where it makes the most sense economically and geopolitically while scaling output quickly, reliably, and efficiently. As I mentioned, this automation platform is also highly flexible, enabling us to produce across multiple generations—from 400G to 800G to 1.6T—using many of the same techniques and equipment. In a fast‑moving AI environment, that flexibility is critical, as it allows us to rapidly ramp specific products and shift production in response to changing customer demand. This capability is the result of over a decade of investment in proprietary, in‑house‑designed equipment and tightly integrated product and process engineering.

The plans that we have unveiled have been evolving for some time. So while some of the required equipment does have long lead times, we have already ordered many of the key pieces of equipment and are working closely with our vendors to ensure on‑time delivery. Notably, equipment availability has not been a problem for us to date, which we believe is largely due to the fact that most of this equipment is developed in house, which means that we are not generally in direct competition with other similar companies for supply of the necessary machinery and equipment to build our factories.

There are exceptions to this, of course, but overall, we feel that our in‑house developed technologies give us an edge in ensuring reliable supply of production equipment. During the first quarter, direct tariffs had a $1.4 million impact on our income statement. With the overturn of the AIPA tariff, we have applied for a refund, which we currently anticipate will be at least $5.7 million. Our application for the refund has been approved, but as the process is still very new, we currently cannot estimate the time frame for recovery of these tariffs.

Turning to our first quarter results, our total revenue was a record $151.1 million, which increased 51% year over year and increased 13% sequentially off a strong Q4, and was in line with our guidance range of $150 million to $165 million. During the first quarter, 54% of revenue was from our data products, 44% was from cable TV products, and the remaining 2% was from FTTH, telecom, and other. In our data center business, Q1 revenue came in at $81.4 million, which was up 154% year over year and 9% sequentially. Sales of our 100G products increased 36% year over year, while sales for our 400G products increased tenfold year over year.

In the first quarter, 41% of data center revenue was from 100G products, 46.7% was from 200G and 400G products, 5.6% was from 800G transceiver products, and 5.6% was from 10G and 40G transceivers. In our CATV business, CATV revenue was $66.8 million, which was up 4% year over year and 24% sequentially, and was at the high end of our expectations of $61 million to $67 million. Similar to the last couple of quarters, we shipped a significant quantity of 1.8 gigahertz amplifiers to our largest CATV customer in Q1, and based on recent conversations with customers, we believe demand will be somewhat higher than our initial projections for 2026.

We continued to see momentum with the newer set of MSO customers that we have talked about on our prior few earnings calls. Looking ahead to Q2, we expect our CATV revenue will be between $75 million and $80 million. Looking further ahead, we now currently expect to generate over $325 million annually in CATV. While the vast majority of our CATV revenue expectations for this year are related to our amplifiers, we do anticipate that we will generate some revenue from our software solutions this year. Now turning to our telecom segment. First quarter revenue from our telecom products of $2.6 million was down 13% year over year and 50% sequentially.

As we have said before, we expect telecom sales to fluctuate from quarter to quarter. For the first quarter, our top 10 customers represented 98% of revenue compared to 97% of revenue in Q1 of last year. We had three greater‑than‑10% customers: one in the CATV market, which contributed 44% of total revenue, and two in the data center market, which contributed 26% and 25% of total revenue, respectively. In Q1, we generated non‑GAAP gross margin of 29.2%, which was in line with our guidance range of 29% to 31%, and compared to 31.4% in Q4 2025 and 30.7% in Q1 2025.

As we discussed on our last quarterly earnings call, we do expect continued gradual improvement in gross margins; we continue to expect that the revenue mix in data center in the short term will be a slight headwind. We remain committed to our long‑term objective of returning non‑GAAP gross margins to around 40% and believe that this goal is achievable as our mix shifts towards higher margin products and as we capture additional efficiencies across our operation. That margin expansion, combined with increased scale, positions us to move towards sustainable profitability, which we continue to expect to approach on a non‑GAAP basis beginning this quarter.

The revenue figures presented above are net of contra‑revenue amounts due to the accounting for warrants provided to customers. As a reminder, this amounts to approximately 2.5% of revenue derived from certain customers to whom Applied Optoelectronics, Inc. has provided warrants in exchange for future revenue. In Q1, the amount of this contra‑revenue was $1 million. Total non‑GAAP operating expenses in the first quarter were $51.4 million, or 34% of revenue, which compared to $35.5 million, or 36% of revenue, in Q1 of the prior year, and were in line with our expectations of $50 million to $57 million.

Non‑GAAP operating loss in the first quarter was $7.3 million compared to an operating loss of $4.8 million in Q1 of the prior year. GAAP net loss for Q1 was $14.3 million, or a loss of $0.19 per basic share, compared with a GAAP net loss of $9.2 million, or a loss of $0.18 per basic share, in Q1 of the prior year. On a non‑GAAP basis, net loss for Q1 was $4.9 million, or $0.07 per share, which was in line with our guidance range of a loss of $7 million to a loss of $300,000 and non‑GAAP earnings per share in the range of a loss of $0.09 to breakeven.

This compares to a non‑GAAP net loss of $900,000, or $0.02 per share, in Q1 of the prior year. The basic shares outstanding used for computing earnings per share in Q1 were 76 million. Turning now to the balance sheet. We ended the first quarter with $449.4 million in total cash, cash equivalents, short‑term investments, and restricted cash. This compares with $216 million at the end of 2025. We ended the first quarter with total debt, excluding convertible debt, of $77 million, which compared to $67.3 million at the end of last quarter. As of March 31, we had $206.2 million in inventory, which compared to $183.1 million at the end of Q4.

The increase in inventory is primarily due to raw material and work in progress needed for production, partially offset by a decrease in finished goods inventory as purchase orders to customers were fulfilled in the quarter. We made a total of $68.7 million in capital investments in the first quarter, which was mainly used for manufacturing capacity expansion for our 400G, 800G, and 1.6T transceiver products. We expect to continue to make sizable CapEx investments this year as we prepare for increased 400G, 800G, and 1.6T data center production. On a quarterly basis, we expect our capital expenditures to be above the total that we spent in Q1.

We expect to finance these investments through a combination of cash on hand, cash generated from operations, and some equity sales along with additional debt. Notably, in Q1, we increased availability under existing and new loans by $13.4 million and added another $14.5 million in April. Going forward, we believe we are well positioned for sustained growth across both our data center and CATV businesses, and the capital investments underway are expected to fundamentally strengthen the company as we execute on these opportunities. Given the rising demand, we now believe that by mid‑2027, 100G and 400G revenue will be approximately $90 million monthly, 800G revenue will be approximately $217 million monthly, and 1.6T revenue will be approximately $164 million monthly.

In total, this is about $471 million per month of data center transceiver revenue, with about 40% of this capacity in the U.S. Moving now to our Q2 outlook. We expect Q2 revenue to be between $180 million and $198 million, accounting for a sequential increase in CATV revenue as well as a sequential increase in our data center revenue. We expect non‑GAAP gross margin to be in the range of 29% to 30%.

Non‑GAAP net income is expected to be in the range of a loss of $2.5 million to income of $2.8 million and non‑GAAP earnings per share between a loss of $0.03 per share and earnings of $0.03 per share using a weighted average basic share count of approximately 80.7 million shares. Looking more broadly at 2026, we now expect to generate over $1.1 billion in revenue this year, with a non‑GAAP operating profit of over $140 million. As we have discussed previously, this revenue level is limited by our production capacity and supply chain, not market demand, which we believe is much larger.

Based on our planned capacity additions, we expect to see an acceleration in the second half of the year as new production capacity comes online and additional customer qualifications are completed and orders begin to ship. We believe that this is an ambitious yet achievable target based upon our customers' forecasts and what we know about the unprecedented investments that are being made in AI infrastructure. With that, I will turn it back over to the operator for the Q&A session. Operator?

Operator: We will now open the call for questions. Please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw the question, please do so now. At this time, we will pause momentarily to assemble our roster. Our first question comes from Simon Matthew Leopold with Raymond James. Please go ahead.

Simon Matthew Leopold: I wanted to dig in a little bit to understand the risk profile ramping the capacity. I appreciate the nuance that you do a lot of your own tooling and machinery, and so that should put it in your control. But I wonder if you could reflect on sort of the prior capacity expansions—what led to any kind of timing or disruption—and help us understand how to prioritize the risks for meeting your schedule. And then I have a quick follow‑up.

Stefan Murry: Sure, Simon. I think it is important to understand that the expansion that we are undergoing, while it is large in scope, is not something that is brand new to us. We have built significant capacity, especially in our Asian factories, over the last couple of years, and now we are basically adding additional increments to that capacity—the same type of equipment, the same manufacturing process—mainly here in the U.S., here in Texas, as we talked about during the call. So from a risk standpoint, the risk of doing something that you have already done is a lot lower than doing something that is brand new.

As we mentioned in the prepared remarks, a lot of this equipment is developed in house, so the risk of supply chain disruptions for the equipment—it is not eliminated, of course—but it is a lot lower than if we were relying on the same equipment that was being bid up by other suppliers and it had limited supply to begin with. I think those two risks are minimized because of the nature of the manufacturing process that we have. It is worth noting too that because our process is very highly automated, we are not hiring a lot of people.

So the labor risk associated with quality control issues or being able to scale labor does not really exist to any great extent for us as well. It is really just a matter of: can we get the equipment in, and can we put it into production on time? So far, we are executing very well to that, which is not surprising because we have done a good job of it over the last couple of years already.

Thompson Lin: Great.

Simon Matthew Leopold: Just a quick follow‑up. I want to make sure I understand and clarify the metric you shared with us towards the end of the call—the $471 million monthly production by 2027. I want to make sure I understand: Is that a capacity number, or is that a number that assumes a certain percent utilization of the total capacity available? How should we take that $471 million value? Is that a revenue forecast, or is that a capacity capability, and we should assume some haircut to that for lower utilization? Thank you.

Thompson Lin: Simon, this is Thompson. That is based on revenue. Actually, the actual capacity is higher. But you understand, when you get equipment, you need to save a month to hire people and do qualification. So that means, based on the orders in hand or minimum commitments from customers, plus the equipment fully qualified, we believe we can deliver that level in June, July next year. For sure, another risk is material. This is why we are working with all the material suppliers. That is the number we feel comfortable committing to at this moment. The actual demand could be even higher than this number, but that is the best we can do.

The actual number from the customer is bigger, and actually what they expect is April, not June, July. So that is why everything is being pulled in. And, Simon, just to make it really clear, if you go back to our remarks in the last earnings call, that number was $378 million monthly. So that $471 million is directly comparable to that, and it represents almost $100 million a month of additional revenue starting in the middle part of next year.

Simon Matthew Leopold: Appreciate it. Thank you.

Thompson Lin: You are welcome.

Operator: Up next, we have George Notter with Wolfe Research. Please go ahead.

Analyst: Hey, guys. It is Terren Cott on for George Notter. On the ELSFP business, can you talk a little bit more about the customer engagements you are seeing there? How many customers are you working with? Any details would be appreciated.

Stefan Murry: We have a couple of large customers that we are working with. We have not said who they are.

Thompson Lin: Let me say that right now, we are working on three‑year long‑term agreements with several customers—around three—including lasers and the ELSFP. That is the number we are talking about. That is why, not only for transceivers, we are expanding very fast in our laser capacity. Right now, we have been doing a four‑inch growth process. Our target is to go to six‑inch by end of next year. So, yes, I think we need to do more investment to meet the demand for the CPO market. As you know, the CPO laser is about 300 to 400 milliwatts, compared to 70 milliwatts for 800G transceivers and 100 milliwatts for 1.6T transceivers.

The die size is much bigger—minimum maybe five or six times bigger. That is why we already went from two‑inch to three‑inch to four‑inch in the past 18 months, and we still plan to go to six‑inch by end of next year. That will increase our capacity a lot. At the same time, we are adding a lot of capacity, like MOCVD, e‑beam, and everything.

Stefan Murry: Yes, Terren. We see a shortage of indium phosphide laser manufacturing capacity across the industry right now, and we think that is going to persist and even get more acute with the advent of ELSFP, as Thompson mentioned. That is why we see this need to really expand our indium phosphide fabrication capability pretty dramatically over the next 12 to 18 months.

Analyst: Great. And then just to follow up on that, how do you see the ability to secure substrate capacity for the indium phosphide?

Thompson Lin: Right now, we have four to five suppliers. We are in some discussions—sorry, I do not know how much we can say—but four of them are outside of China. I would say right now, we should have enough inventory minimum for almost one year. But since the volume will increase so fast, we are making calls with all the suppliers.

Stefan Murry: I would say we have good line of sight into how we think we can not see a shortage there. But we cannot say too much about it specifically at this point because a lot of it is under discussion.

Analyst: Got it. Thank you.

Thompson Lin: Welcome.

Operator: Our next question comes from Michael Edward Genovese with Rosenblatt Securities. Please go ahead.

Michael Edward Genovese: Great. Thank you. Can you give us more granularity on when you expect qualification for 800G with this hyperscaler that sounds like it will be your third hyperscale 10% customer? When in the quarter exactly do you think you will have this qualification? And then does your guidance derisk it—meaning that if you got it sooner or if things went to plan, would there be upside in the quarter?

Stefan Murry: Well, as we mentioned in our prepared remarks, we have already started shipping. So I am not sure what the qualification question really is referring to.

Michael Edward Genovese: Okay. So—

Thompson Lin: We have two big customers. One is qualified. Another one is almost qualified. The one that gave us a large order for—I do not remember—$140 million, I think, because it was AI with some kind of three‑year long‑term agreement with a very big volume. The qualification is pretty smooth. I think we start shipping volume next month. Another customer we have been working with for a long time is qualified. We will increase the capacity in this month and this quarter too. So we start shipping volume to two big customers, not including smaller ones.

Michael Edward Genovese: Got it. Okay. And then your guidance for the year—you are doing about a third of the revenue for the year in the first half, and then obviously expect big sequential growth in the third quarter. Would we then have more big sequential growth in the fourth quarter, or is 3Q and 4Q more linear? How should we think about the shape of the second half?

Stefan Murry: Not linear. That is a great question. Right now—

Thompson Lin: Let me explain. From the day when you order equipment—qualification, installation, everything—and some reliability, even in Asia it usually takes five to seven months. In the U.S., it adds another two months because of shipping. That is why the ramp is from Q3, not Q2. Even if we got some equipment in already, it still needs to go through a lot of process, which still takes several months. So right now in Q3 compared to Q2, we see 60% to 80% increase. Q4 should be similar. And you can figure out the number. Let me say that the actual demand is not $1.1 billion. The actual demand is $1.4 to $1.5 billion.

Right now, our target is still to go to $1.2 billion, but we still need to work very hard with the supply chain, adding manpower, everything. Right now, $1.1 billion is the number we feel very confident in, and it has increased from the $1.0 billion we committed in the last quarter. But our internal number is higher.

Stefan Murry: To summarize what Thompson said, the limiting factor for deliveries is our manufacturing capacity. Once that capacity that we have been building—we talked in detail about the real estate that we have, the number of square feet that we have added, and the equipment—once that starts to come online, it is not going to be a linear type of thing. It is going to be another large increment, and then another large increment in Q4, as Thompson outlined. You cannot extrapolate from the first half and assume only a certain growth rate. When you have new factories coming online, that adds capacity very quickly.

Thompson Lin: And even when you get equipment, it still takes, including the manufacturing cycle time, at least more than three months—or even longer—to deliver revenue. Sometimes customers need to do another on‑site audit and qualification. So we got a lot of equipment in, but the count of when we are ready is more like Q3. That is why I said Q2 we may have maybe 30% growth—that is limited by capacity—but Q3 and Q4 we are talking about 60%, 70%, or even 80% growth in each quarter. Actually even in Q1 next year too. The next few quarters will be very fast because this plan lets us start delivering to the customer.

Michael Edward Genovese: Perfect. Great. Thank you so much. Appreciate the color.

Operator: Our next question comes from Ryan Boyer Koontz with Needham. Please go ahead.

Ryan Boyer Koontz: Great, thanks. I want to get back to the indium phosphide topic and where you are in terms of that capacity relative to your demand and the different fab equipment you need to support that growth. Can you maybe walk us through some of the major milestones we should think about for the laser supply internal here over the next couple of quarters?

Stefan Murry: Great question. As I said earlier, indium phosphide capacity is critical right now. The fact that we have our own in‑house laser manufacturing capability is one of our key advantages. Certainly when you talk to customers, that is one of the big things that they like about us, especially now that we are seeing shortages across the industry. Our fab expansion is well underway. As Thompson mentioned, we have a number of critical pieces of equipment—MOCVDs, coating machines, and others—that are in various stages of either being delivered or being qualified. It does take a pretty extended period of time to qualify a new piece of laser manufacturing equipment, as you can imagine.

You do not want to take a risk of having an unknown quality issue there. A lot of that equipment is already here and already undergoing qualification, or it is very close to being here. That is why we can be pretty confident that our capacity is going to be where we need it to be. It is just a matter of going through that qualification process internally, which is, by the way, different from the transceiver qualification—here I am talking about our internal qualification of new equipment as it comes in.

Thompson Lin: Let me say it is very different from transceivers. For lasers, from the day you place the order to the equipment supply, it takes a minimum of 18 months or even longer. Right now we saw equipment delivery could take 21 to 24 months for you to start to deliver lasers to the customer. Sometimes the customer requests 2 thousand hours or even 5 thousand hours of reliability data. So we placed a lot of orders to more than 50 suppliers. We got commitments from the suppliers, and we are getting some equipment in house already every month. Let me say that by end of next year, we should be, I would say, minimum top three in laser production worldwide.

I cannot tell you how many pieces of equipment we have—it is cumbersome. That is why we are working with customers for long‑term needs for lasers, not only for transceivers, including lasers for ELSFP. As I said, ELSFP is very challenging. There is very high spec and very high power, especially with wavelength control. I would say the challenge is more than 10 times that of a 70 or 100 milliwatt laser for transceivers. It is a totally different ballgame. That is our focus. And, you know, Applied Optoelectronics, Inc. has been doing lasers since day one, including my PhD—our team has been doing lasers since 1990. So we know how to do a good job.

Ryan Boyer Koontz: That is impressive, Thompson. Thank you. If I could have a quick follow‑up in terms of your margins and how we think about that and the mix. As your production mix of 800G moves up here, should we think about that as a tailwind for margins? Maybe unpack that for us a little bit—how to think about the mix? Thank you.

Stefan Murry: The margins get a lot better as we expand the capacity. Right now, what is going on is we are in this shifting mix between 400G and 800G and between predominantly cable TV and predominantly data center. As we see that continue to shift and as 800G takes precedence, you will start to see growth in gross margin primarily in the second half of the year.

Thompson Lin: I would say we go to 35% gross margin by end of this year. At the same time, in Q1 and Q2, since we start ramping up, we need time to fine‑tune the process. So the efficiency is not as good as what we expect, but I think within two to three months, with a fully automatic manufacturing line, we can tune the efficiency very fast. That is the major advantage of automation. For sure, by Q4, the gross margin—by Q3, the whole company—should be, I would say, more than 40%, especially with the laser business. That will kick in Q3, Q4 next year.

Ryan Boyer Koontz: That is helpful. Thank you both.

Thompson Lin: Alright. Yep.

Operator: Please press star then 1. Our next question comes from Timothy Savageaux with Northland Capital Markets. Please go ahead.

Timothy Savageaux: Hey, good afternoon. First question is trying to understand where you are capacity‑wise versus what you are forecasting. In the release, you talked about 100 thousand units a month in 800G exiting Q1, and that puts your capacity revenue‑wise over $100 million a quarter. You have orders in hand for $124 million of 800G. You have the capacity, theoretically, to ship those orders. And yet you are guiding to, what, $18 million to $20 million in 800G revenue. What I am trying to understand is that delta and what is driving that apparent disconnect. I have a follow‑up.

Stefan Murry: It is just timing on how long it takes to do the manufacturing process, really. Not all of that 100 thousand was online in the middle of the quarter, and then you add the cycle time to it. It puts the real production output for that closer to the middle to even two‑thirds of the way through the quarter. It is just the timing of the manufacturing lead time.

Thompson Lin: That is why when we talk about $471 million for June, July next year, that is revenue, not capacity. The capacity is much higher because, as I say, when you have capacity, you need to add more than one month and my phase—cycle time of six weeks—plus maybe the customer needs to do on‑site auditing and qualification. There are all kinds of requirements. So the day you even install, download the trial run—everything—you still would take another two, three, or four months to realize the revenue. Some customers even have different processes.

That is why I made clear: when we are talking about $471 million, it is revenue, not capacity, and we are talking about equal to about 780 thousand transceivers per month by middle of next year. Actually, it could be higher.

Timothy Savageaux: Got it. Speaking of competition, earlier this week we had a prominent contract manufacturer in the space announce two deals whereby they would be making transceivers for hyperscale customers directly. How would you assess the competitive and margin impact of that development on Applied Optoelectronics, Inc.?

Thompson Lin: We do not really know. But right now I think the most important part is delivery, and there are LTAs we are negotiating with these three customers. The three‑year numbers are crazy high. For multimode, it is easier—maybe you can use VCSELs or even do it for DR. It is easier to manufacture. But it would be very tough for 800G or 1.6T 2xFR4, because you need four lasers. The same thing: can you get lasers or not? Even for many transceiver suppliers, how quickly can they get lasers? Right now, MOCVD is on complete backlog—even program. Without lasers, how can you make any transceivers?

Timothy Savageaux: And last one for me. This goes back to the 1.6T comments where, Stefan, I think you talked about some revenue contribution later in the year and a bigger ramp in ’27. And yet my understanding was that the big order would be shipped and completed in ’26. Has there been some change there, or what is the schedule for that particular order?

Thompson Lin: It means that order is just a small order compared to what we are going to see in 2027. The 2027 one is much, much bigger. I think the volume is like—

Stefan Murry: Alright, so we have to define our terms—$200 million is not a big ramp.

Thompson Lin: Exactly. Next year, we are talking about more than $2 billion for 1.6T transceivers—much more than $1.6 billion we need to deliver next year.

Timothy Savageaux: Thanks very much.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Dr. Thompson Lin, founder, president, and CEO, for any closing remarks.

Thompson Lin: Again, 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. It is an exciting time for our industry and for Applied Optoelectronics, Inc. We continue to believe the fundamental drivers of long‑term demand for our business remain robust, and we are in a unique position to drive value from this opportunity. We look forward to seeing you at upcoming investor conferences. Thank you.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.