What happened

Shares of Applied Optoelectronics (AAOI 5.38%) jumped as much as 17.8% higher on Thursday, following the release of a decent third-quarter earnings report. By 1:10 a.m. EST, the stock had settled down to a 13.5% gain.

So what

The maker of optoelectronic components for high-speed networking equipment saw third-quarter sales fall 37% to $56.4 million. That's within the updated guidance range the company released at the end of September and in line with the analyst consensus.

On the bottom line, adjusted earnings plunged 87% to $0.14 per diluted share. Here, analysts would have settled for roughly $0.01 per share.

Some fiber-optic cables plugged into an Ethernet-equipped transceiver.

Transceivers like this one are the lifeblood of Applied Optoelectronics' business. Image source: Getty Images.

Now what

So this report was strong in the specific sense of outperforming the Street's most recent forecasts. Sales and earnings plummeted and should stay constricted in the fourth quarter as well.

The guidance update showed quality issues with a specific product for a single data center customer as the culprit behind this whole mess. In a conference call with analysts, Applied Optoelectronics CFO Stefan Murry said that the contract with this customer didn't include any provisions that would move the missing revenue into the fourth quarter or the next fiscal year. Instead, Murry admitted, sector rivals may have absorbed some or all of the lost sales.

Applied Optoelectronics has now bounced back 21% above the yearly lows it hit in September, but has another 56% to go before recapturing July's 52-week highs. Expect more turbulence in the months ahead.