Optical-components maker Applied Optoelectronics (NASDAQ:AAOI) recently announced preliminary results for the second quarter of 2017, and it was a doozy. From top-line revenues to bottom-line earnings, every metric came in above the top end of management's guidance targets, and AOI's share price rose as much as 10.1% the next day.

At this point, AOI investors have enjoyed market-stomping returns of 253% in 2017 and 600% over the last 52 weeks. These massive gains are based on unrelenting demand for AOI's data-center products, to the point where the company must continue to improve its manufacturing operations in order to exploit the huge customer interest.

Let's take a closer look at the data-center components behind Applied Optoelectronics' success in 2017.

Data-center floor with several rows of server racks

Image source: Getty Images.

Welcome to the data center

While waiting for the full second-quarter report, let me point out that data center sales accounted for 83% of AOI's sales in the first quarter, up from 77% in the year-ago period. In particular, leading customers Amazon.com (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) added up to 73% of the company's total sales in 2016, as their rapidly growing cloud-computing services require epic numbers of high-speed data-center networks.

Copper-based Ethernet cables are going out of style for these applications, because the data streams moving around modern data centers can overwhelm gigabit cables, and faster Ethernet solutions are limited by data loss over long cable runs. The top-shelf Cat 7 cables required for 10-gigabit Ethernet connections are only rated for up to 100 meters of cable length.

That's where AOI and its sector rivals step in with fiber-optic transceiver modules rated for speeds up to 100 gigabits per second -- with no practical limit on cable lengths in the confines of a data center. AOI's 40-gigabit (40G) and 100G modules for data-center applications are listed at maximum cable runs as long as 10 kilometers.

An optical transceiver module, disconnected, on a plain white background.

A 40-gigabit QSFP+ LR4 data-center module. Image source: Applied Optoelectronics.

Optical transceiver modules

About two-thirds of AOI's data-center sales are for 40G optical transceivers; the remainder comes from 100G transceivers. The mix is changing as customers look into next-generation 100G networks, and AOI is already developing 200G and 400G transceivers for future use.

The basic design of these faster solutions is not changing. The popular QSFP package seen above combines a small physical footprint with low power consumption, allowing device builders and data-center operators to cram a lot of bandwidth into small spaces. Instead, the core research is going into developing faster laser diodes. Inside 40G modules there's a bundle of four 10-gigabit diodes; the diode speed steps up to 25G in a 100G module and 56 gigabits per second in the recently introduced 200G module.

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