Good day and welcome everyone to Applied Optoelectronics' First Quarter 2024 Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the call over to Lindsay Savarese, Investor Relations for AOI. Please go ahead.

Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics. I am pleased to welcome you to AOI's first quarter 2024 financial results conference call. After the market closed today, AOI issued a press release announcing its first quarter 2024 financial results and provided its outlook for the second quarter of 2024. The release is also available on the company's website at ao-inc.com. This call is being recorded and webcast live. A link to the recording can be found on the Investor Relations section of the AOI website and will be archived for one year. Joining us on today's call is Dr. Thompson Lin, AOI's Founder, Chairman and CEO; and Dr. Stefan Murry, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q1 results, and Stefan will provide financial details and the outlook for the second quarter of 2024. 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 of the company, or its industry 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, projects, intends, predicts, expects, plans, may, should, could, would, will, potential or words 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 our products into new markets and customer responses to our innovation, as well as statements regarding the company's outlook for the second quarter of 2024. Except as required by law, we assume no obligation to update forward-looking statements for any reason after the date of this earnings call to confirm 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 the company's reports on file with the SEC, including the company's annual report on Form 10-K and the company’s quarterly report 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 our earnings press release that is available on our website. Before moving to the financial results, I'd like to announce that AOI management will virtually participate at the Needham Technology, Media and Consumer Conference on May 16th. And I’d like to note that the date of our second quarter 2024 earnings call is currently scheduled for August 8, 2024. Now, I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics' Founder, Chairman and CEO. Thompson?

Thank you, Lindsay. Thank you for joining our call today. Our revenue and gross margins for the first quarter came in below expectations. However, non-GAAP EPS was in line with our expectations, despite the slow start to the year. Based on our current forecast and very constructive customer interactions, we remain very positive about improvements in the second half of the year. In the first quarter, we delivered revenue of $40.7 million, which was just below our guidance range of $41 million to $46 million. We delivered non-GAAP gross margin of 18.9%, which was below our guidance range of 21% to 23%, mainly driven by a difference in quarter mix. Our non-GAAP loss per share was $0.31, which was less than the guidance range of a loss of $0.28 to a loss of $0.33. Total revenue for our data center products of $29 million was up 42% year-over-year, and was down 35% sequentially. Revenue for our 100G product increased 33% year-over-year, and revenue for our 400G product more than doubled in the same period. Total revenue in our CATV segment was $8.7 million, which was down 59% year-over-year and down 30% sequentially, largely driven by continued slow sales of DOCSIS 3.1 equipment as the industry prepares to transition to DOCSIS 4.0. With that, I will turn the call over to Stefan to review the details of our Q1 performance and outlook for Q2. Stefan?

Thank you, Thompson. As Thompson mentioned, our first quarter revenue and non-GAAP gross margin came in below our expectations while our non-GAAP EPS was in line with our expectations. Based on our current forecasts and very constructive customer interactions, we remain very positive about improvements in the second half of the year. We believe that the long-term demand drivers remain strong for both our data center and CATV businesses, and we believe we are well positioned to capitalize on these opportunities. Looking to the back half of the year, there are a few key items to note that give us a basis for an optimistic outlook, despite the slow start to the year. The first is that we have begun to receive forecasted orders for the pixel-based 400G active optical cables for which Microsoft provided development funding last year. While the pace of product adoption has been somewhat slower than we anticipated, we believe that the fact that we are now receiving forecasts for these products for delivery in Q3 is a significant step in seeing meaningful business improvement. The second is that follow-on projects to our 400G AOC program, specifically for our 800G and 1.6 terabit products, have been fast-tracked with our customers as they address an acceleration in demand for infrastructure around AI. We are being asked to compress the time from development to scale production as much as possible in order to meet this accelerated demand. The third is that we have continued to experience significant traction and have meaningful discussions with multiple large data center customers, some of which are new to AOI or customers that we have not worked with in many years, specifically for our 400G, 800G, and 1.6 terabit products. We expect one or more of these customers will begin to contribute meaningfully to revenue starting in Q3. And lastly, we believe that the transition to DOCSIS 4.0 will begin to take place in Q3 and that our products are actually designed for the deployment of amplifiers and other network elements required for DOCSIS 4.0. We shipped our first fully production-ready DOCSIS 4.0 amplifier samples to a major customer last week, and the feedback, while early, has been exceedingly positive. With the improvement we expect in the second half, we continue to believe that 2024 can be our first full year of non-GAAP profitability since 2018. Turning to the quarter, our total revenue for the first quarter was $40.7 million, which was down 23% year-over-year and 33% sequentially, and was just below our guidance range of $41 million to $46 million. As we have discussed on our prior earnings call, the softness in Q1 was largely due to the combined effects of the Lunar New Year holiday in our Asian factories, along with some price reductions which took effect in the quarter. During the first quarter, 71% of our revenue came from our data center products, 22% was from our CATV products, and the remaining 7% came from FTTH telecom and other sources. Turning to our data center business, our Q1 data center revenue came in at $29 million, which increased 42% year-over-year and was down 35% sequentially. In the first quarter, 73% of our data center revenue was from our 100G products, 17% was from our 200G and 400G transceiver products, and 3% was from our 40G transceiver products. As we have discussed on several prior earnings calls, we signed two agreements with Microsoft in 2023 for the development of 400G products and beyond. This included a development program to make next-generation lasers for data centers and for the development of its 400G and next-generation active optical cables. While not guaranteed, we continue to believe that the revenue opportunity for our 400G and 800G products could be greater and have a longer duration than the revenue contribution we saw for this customer during the peak of the 40G products' lifecycle, which suggests that revenue from these products may exceed $300 million over the several years of these buildups. We began shipments late last year and have started to receive new forecasted orders which we expect to contribute to revenue later in Q2, and we believe will continue to ramp strongly in Q3 and Q4. Also, as a reminder, in 2023 we shipped samples of our 800G products to three different data center customers and have received initial positive feedback. As we discussed in the past, we are in detailed discussions with several hyperscaler data center operators about ramping production for our 800G and 1.6 terabit products starting in Q3 for 800G and early Q1 of 2025 for 1.6 terabit products. These dates are several months earlier than we had previously been requested to deliver, and we believe the acceleration in the schedule is being driven by the faster deployment of technology needed by AI workforce. Turning to our CATV business, CATV revenue in the first quarter was $8.7 million, which was down 69% year-over-year and down 30% sequentially, largely driven by generally slower sales of DOCSIS 3.1 equipment as the industry prepares to transition to DOCSIS 4.0. Looking forward, we continue to expect that our near-term CATV business will be down compared to the historic highs we saw in 2021 and 2022 as the MSOs transition to next-generation architecture. We anticipate this transition to DOCSIS 4.0 will begin in Q3, and we are optimistic about the second half of the year and 2025. As a reminder, we shipped initial test samples of our 1.8 gigahertz amplifier products to two major MSOs in Q4 of last year, and we received encouraging feedback on their performance and pricing. We are pleased to report that we shipped final qualification units of various amplifiers last week, and we expect revenue to begin as early as the end of Q2 with significant ramp in the second half as we increase manufacturing capacity for these new products. As Thompson mentioned, we will continue to carefully monitor MSO plans to upgrade to DOCSIS 4.0 networks. We continue to believe AOI is a leader in technologies that will enable DOCSIS 4.0, and that we have the right portfolio in place to address our customers’ needs. Now turning to our telecom segment, revenue from our telecom products of $2.3 million was down 39% year-over-year, and down 19% sequentially, largely driven by ongoing softness in 5G demand, particularly in China. Looking ahead, we continue to expect telecom sales to fluctuate from quarter to quarter. In the first quarter, our Top 10 customers represented 92% of revenue, down from 93% in Q1 of last year. We had two greater than 10% customers; one in the data center market, and one in the CATV market which contributed 62% and 21% of our total revenue respectively. In Q1, we generated non-GAAP gross margin of 18.9%, which was below our guidance range of 21% to 23%, and was down from 36.4% in Q4 of 2023, and down from 23.2% in Q1 of 2023. The decrease in gross margin was driven mainly by product mix and some pricing reductions which took effect during the quarter. Looking ahead, we expect improving gross margins throughout the year as product mix improves in our data center business and CATV revenue begins to ramp. We remain committed to the long-term goal of returning gross margin to around 40%, and believe that this goal is achievable. Total non-GAAP operating expenses in the first quarter were $24.8 million or 61% of revenue, which compared to $19.6 million or 36.9% of revenue in Q1 of the prior year due to higher R&D spend. Looking ahead, we continue to expect non-GAAP operating expenses to range from $24 million to $26 million for the quarter to account for the acceleration of R&D expenses to improve time to market for our 800G and 1.6 terabit data center products. Non-GAAP operating loss in the first quarter was $17.1 million compared to an operating loss of $7.2 million in Q1 of the prior year. GAAP net loss for Q1 was $23.2 million or a loss of $0.16 per basic share compared with the GAAP net loss of $16.3 million or a loss of $0.56 per basic share in Q1 of 2023. On a non-GAAP basis, net loss for Q1 was $12 million or $0.31 per share, which was within our guidance of a loss of $10.9 million to a loss of $12.6 million, and in line with our guidance range of a loss per share in the range of $0.28 to a loss of $0.33 per basic share. This compares to a net loss of $7.1 million or a loss of $0.25 per basic share in Q1 of the prior year. The fully diluted shares outstanding used for computing the earnings per share in Q1 were $38.4 million. Turning now to the balance sheet, we ended the first quarter with $17.4 million in total cash, cash equivalents, short-term investments and restricted cash. This compares with $55.1 million at the end of the fourth quarter. This cash balance reflects a few slow-paying AR receipts totaling about $11 million, which were subsequently received in the first two weeks of Q2. Also note that we used almost $4 million in cash to reduce debt during the quarter. At the end of the quarter, total debt excluding convertible debt was $34.8 million compared to $38.7 million at the end of last year. As of March 31, we had $54.3 million in inventory compared to $63.9 million at the end of Q4. We made a total of $7.8 million in capital investments in the first quarter, mainly used for production and R&D equipment. Moving now to our Q2 outlook, we expect Q2 revenue to be between $41.5 million and $46.5 million, and non-GAAP gross margin to be in the range of 25.5% to 27.5%. Non-GAAP net loss is expected to be in the range of $11.6 million to $13.5 million, and non-GAAP loss per share between $0.29 per basic share and $0.34 per basic share using weighted average basic share count of approximately 39.2 million shares. Looking ahead, as the widespread adoption of generative AI continues to place increased demands on our customer data centers, we believe these customers will ultimately need to deploy more infrastructure to meet these needs, which will provide a long tailwind of demand for the optical industry. Our US-based production ability combined with our automated manufacturing capabilities and experience puts us in a unique competitive position to address these needs. Further, as our CATV customers transition to next-generation architecture and implement new technologies like DOCSIS 4.0, we believe that we have positioned ourselves as a leader in technologies that will enable DOCSIS 4.0, and we are confident that we have the right product portfolio, team, and strategy in place to capitalize on this upcoming transition. We have spent several years developing these products and we expect that they will be going to market in the next few months. In summary, we believe that the long-term demand drivers remain strong for both our data center and CATV businesses, and we believe we are well positioned to benefit from these growing long-term trends. With that, I will turn it back over to the operator for the Q&A session.

And the first question will come from Simon Leopold with Raymond James. Please go ahead.

Thanks for taking the question. A couple of quick ones, maybe. I think on the prior conference call, you had given us some indication that you’ve got the full year revenue, it could exceed $300 million. Given the slower start to the year, it does sound like you still expect a much stronger second half, but how do you feel about that full year $300 million target?

Well, what we've said is that we think we can be profitable for the year. So, if you can run the numbers on that, we don't give guidance. I wouldn’t have pulled back anything, but I think it was a little more challenging considering where we started the year, but I think it's still very achievable.

Okay. And then, you did give us some indication of the operating expense expectations for the year at that $24 million to $26 million per quarter. And I think we were anticipating more of a $22 million to $24 million per quarter, and that may simply be just extrapolating too much from the first quarter forecast. Did something change in terms of your expectation of what you need to spend on sales, marketing and R&D?

As mentioned in our prepared remarks, we've increased our R&D spending slightly because we are receiving requests for product development from customers earlier than expected. Therefore, we need to allocate additional resources to R&D. While it's not a significant overall increase, we are accelerating our spending. This does indicate a slight rise in our R&D budget. Regarding sales and marketing, there isn’t a notable increase expected in that area.

And then, I remember at our meeting at RFC, you had talked about sort of a product roadmap going from the vexcel-based solutions to vexcels EMLs and ramping up to higher per channel speed. Could you give us an overview of the roadmap you expect in terms of launches over the next year or plus?

Right. So the vexcel-based products are already in production, and we will likely add higher speed to main vexcels to that portfolio next year. With respect to the EML-based products, we have some products in production now with higher speed. Data center products with EMLs will go into production in Q3 or Q4.

What was your 400 gig for the quarter? I missed that.

17% of the data center amounts to $29 million from that segment.

Okay. And that was just 400 gig, not about…

400 doubling.

Let's say that again.

That's a little over doubling compared to the same period last year.

Great. Thank you very much for taking the questions. Appreciate it.

The next question will come from Michael Genovese with Rosenblatt Securities. Please go ahead.

To start with, I wanted to ask a question about Microsoft. Like, if you had any more color on why you think that it's going slower than initially expected? But then secondly, how do you expect orders to trend in the second quarter? Like we see orders in the month of June being above the month of May; is there any visibility to that? And then finally, it sounds like you're coming from the overall presence of $300 million plus has maybe gotten a little bit more bullish, but maybe that's because you've added 800G to it. So, if you could help us understand that as well? Thank you.

I'm sorry, what?

I was just raising reminding the first one was, why the delay?

Yes. I wouldn’t really say it’s an overall delay. If my prepared remarks sounded that way, that's not what I was trying to say. There was a slight delay in one particular program which really just reflects the fact that it's a new product, and sometimes new product launches just take a little longer than expected. There is nothing in particular that I can point to you with respect to that. It is positive that we're getting new updated forecasts now that would indicate shipments beginning later in Q2, and then ramping quickly in Q3 and Q4. So that's all positive. I wouldn't read too much into the delay itself. Overall, the revenue in our data center business is about where we expected it to be in Q2. So there's not really a significant change from earlier thinking. That small delay in business from Microsoft is being more than compensated by the other data center customers, so it’s not anything that I am trying to point to, it’s just that one particular product that had something to do.

Your second question had to do with the $300 million target and whether that represents a change. No, fundamentally, other than that we mentioned that we're having to pull an 800 gig in 1.6 terabits faster. Now, 1.6 terabits won't be a factor this year, but it will be early next year, but the acceleration in 800 gig is certainly helpful to try to meet that goal. And then I'm sorry, I forgot your third question. What was it? Next and last question regarding the orders. If we consider the forecasts suggesting that June will show an increase compared to April, and if you're observing that trend at this customer, I wanted to ask how you view your data center revenues trending in the second and third quarters, especially since you mentioned they were aligning with your expectations.

I want to clarify that, overall, the data center numbers for Q1 and Q2 are in line with our expectations. However, the revenue from cable TV in Q2 is slightly below our projections. This is the reason we delayed our guidance for Q2, as any changes in our outlook were related to cable TV rather than the data center. In fact, the data center performance is slightly better than we had anticipated. While there was a delay with one Microsoft product, we have seen positive growth with other customers that more than offsets this delay in Q2.

We are feeling more optimistic now than we did a few months ago, mainly because we can see several large customers, especially in the energy sector. Our Cable TV segment is somewhat sluggish as all resources are focused on developing 1.0 edgy products. Therefore, the delays in Cable TV are not surprising, as you may have observed with other companies.

Michael, I just want to touch on your last question there. I’ll try to answer it directly. Are we seeing a trend of more orders kind of month by month? And the answer is, yes. As I mentioned earlier, that one program, for example, for Microsoft, is somewhat delayed. We do expect it to pick up towards the end of this quarter, so that in June, the month would be busier than May and that would certainly begin in April. So we are seeing that trend with that product but overall, we expect to see that trend somewhat throughout the quarter. Although, again, I would say for the most part of the data center business, outside some of these new programs, especially the 800 gig products later in the year, it’s relatively consistent business at this point.

Okay, great. I may come back later or take my questions offline. Thank you.

The next question will come from Tim Savageaux with Northland Capital Markets. Please go ahead. Tim, your line may be muted.

Yes, sorry about that. I'm here. Can you hear me?

Yes, we can hear you.

With the updated operating expense forecast, it appears that you will need something over $300 million to achieve your goals, indicating a substantial increase in the second half, nearly three times what was seen in the first half. We have recently observed similar patterns at several companies, including Coherent. As you consider this increase and the potential for 800 gig opportunities, I hope you can provide an estimate similar to the way you have discussed the Microsoft 400 gig opportunity. That’s my first question.

And you've talked about new data center customers or some old data center customers coming back. Should we assume this discussion around 800 gig, 1.6 also applies to Microsoft, or is it more focused on the new players? No, I mean, I may not have been completely clear in my prepared remarks, but it includes our existing customers along with the new customers for the 800 gig and 1.6 terabit products; Microsoft certainly falls into the category of existing customers. Regarding the market size, what we are observing is that the 800 gig opportunity is several times larger than the 400 gig opportunity. This signifies a substantial growth potential within the same customer base. When you consider the new customers we are talking about, the market size increases significantly.

Great. As you consider the data center ramp for the second half, do you envision transitioning from your current 400 gig to something like 800 gig, or how are you approaching that? Also, to what extent do you anticipate a significant contribution from Cable TV networking in the second half as part of that ramp?

Yes, I believe that's the main point. The disappointment we experienced in Q2 is primarily due to Cable TV ramping up slower than we anticipated. As we've mentioned before, this is somewhat expected. We remain hopeful that the MSOs will accelerate their progress with the 1.8, but it has taken longer than expected to complete the necessary qualifications and training. However, we anticipate that they will ramp up in the second half of the year, which will significantly contribute to revenue growth and also enhance our gross margin, as it is substantially higher in the Cable TV segment compared to the data center.

And I can add. For the 800 gig business, we can see we are discussing with at least current 3 to 4 customers, which include Microsoft and others, who are worth more than $500 million, $600 million next year for AOI for 800 gig.

Is that figure based on the total amount or is there a specific timeframe we should consider? Stef, could you provide more details about the $500 million to $600 million that I've heard mentioned?

I think we are doing quite well. I believe we can reach the target of $500 million to $600 million for AOI by the end of Q3, or at the latest by Q1 to Q4 next year.

That was going to be my last question actually. In terms of your detailed discussions, is that around qualification? Where do we stand on that front? Are we discussing guidance related to crossing the TSM contracts? A little more color there.

Well, I am not sure to what extent the contracts really come into play there. What we're talking about now is planning around deployment scenarios, when they're going to be products, how much product we are going to need, pricing; that sort of thing. The feedback from the customers is, how fast can you deliver this amount of products for us, right. It's about how fast can we be ready to deploy or to manufacture the products that they need to deploy.

AOI has been investing $200 million in cash for more than 10 years for automation, including much of our own equipment. I think we are moving to Phase 2, and possibly Phase 3 by the end of this year. We plan to measure Phase 3 in Q1 and Q2 next year, which will allow us to manufacture in Houston despite higher costs than in Taiwan and China. This is very appealing to our customers, including some who have left but are now returning. The key is the rates for the 100G, 200G, the Vexcel, and the EML, and I believe we can produce all of these in Houston. This is also a significant factor for the customers.

Great. Thanks very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Dr. Thompson Lin. Please go ahead, sir.

Okay. 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 long-term demand drivers remain strong for our data center and CATV business, and we believe we are well positioned to capitalize on this opportunity. Thank you.

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