Applied Optoelectronics, Inc. Q2 FY2025 Earnings Call

Good afternoon. I will be your conference operator. At this time, I would like to welcome everyone to Applied Optoelectronics Second Quarter 2025 Earnings Conference Call. Please note that today's event is being recorded. I will now turn the call over to Lindsay Savarese, Investor Relations for Applied Optoelectronics. Ms. Savarese, you may begin.

Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics. I'm pleased to welcome you to AOI's Second Quarter 2025 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its second quarter 2025 financial results and provided its outlook for the third quarter of 2025. 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 Q2 results, and Stefan will provide financial details and the outlook for the third quarter of 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 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, suggests, intends, predicts, expects, plans, may, should, could, would, will, potential or think 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 the third quarter of 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 are set forth in the Risk Factors section of AOI reports on file with the SEC, including the company's annual report on Form 10-K 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 Dr. Thompson Lin, AOI's Founder, Chairman and CEO. Thompson?

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 expense 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 1.6Tb 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, certifications and ultimately revenue opportunities. During the quarter, we saw steady growth in our datacenter business. We completed our first volume shipment of high-speed single-mode 400G datacenter transceiver to a recently reengaged 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 on our 800G product, and we continue to have confidence in the second half ramp in 800G sales. In our CATV business, we continue to see strong demand in this market, and we announced that we completed testing and certification with Charter for our plan to deploy our 1.8 gigahertz amplifiers and QuantumLink 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 expense, as I mentioned earlier. Total revenue for our datacenter 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 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 8 times year-over-year, in line with our expectations. Our CATV revenue decreased 13% sequentially off a seasonally strong Q1 and 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?

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 1.6 terabit 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 emerge 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 datacenter 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 datacenter business. We completed our first volume shipment of high-speed, single-mode 400G datacenter transceivers to a recently reengaged 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 U.S.-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 continue 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 qualification. And 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 the second half of 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, who 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 QuantumLink 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 QuantumLink 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. And 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. While tariff developments continue to evolve, one thing remains certain: products manufactured in the U.S. 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 U.S. Importantly, in our 800G and 1.6 terabit 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 discussions with several key suppliers about onshoring their production to the U.S. 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 U.S. 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 in our current Texas facility footprint. This initial U.S.-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 1.6 terabit products by 8.5 times by the end of the year, and we are dedicated to achieving this goal. During the quarter, we are pleased to have received a 10-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 datacenter 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 datacenter products, with the remaining 2% from FTTH, telecom and other. In our datacenter business, Q2 revenue came in at $44.8 million, which was up 30% year-over-year and 40% sequentially. Sales for 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 datacenter 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 datacenter 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 8 times year-over-year and, in line with our expectations, 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 GameMaker-style amplifiers from Charter Communications and announced their plans to deploy our 1.8 gigahertz amplifiers and QuantumLink remote management software. As a reminder, Digicomm 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 near-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. As 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 datacenter 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 datacenter 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 G&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 a GAAP net loss of $26.1 million or a loss of $0.66 per basic share in Q2 of 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, if 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. This compares with $66.8 million at the end of the first quarter of 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 materials 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 1.6 terabit datacenter 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 from the 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 U.S.-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 datacenter 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. With that, I will turn it back over to the operator for the Q&A session.

Our first question will come from Ryan Koontz of Needham.

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? And any rough timing on when that might happen?

Yes. Great questions, Ryan. Thanks for asking. So 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 GameMaker. In the quarter, though, we'd already produced a significant quantity of GameMaker, 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 managing both of those platforms going forward. So we will continue to have production of both the Motorola and GameMaker 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 we continue to ship those amplifier products, both platforms as well as the QuantumLink software and some of the accessories that go with it, as we mentioned in our prepared remarks. With respect to the node, yes, we do expect to have the node product launching in Q4. And it will 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. I think I answered all your questions.

That's great. And then quickly flipping to datacenter. On the 800-plus transceivers, how many engagements do you have there with Tier 1s on the 800-plus?

I would say right now, we have at least three Tier 1 potential big customers. And right now, the good news is, I think, we'll start volume manufacturing either in this quarter or next quarter. But more importantly is 1.6Tb. I think we expect to start volume manufacturing maybe around June, July next year. I think that's really good news for us because we've been working with several customers for 1.6Tb. So right now, at least we got the 2, 3 series engagement, not only for sampling, but we are talking about some kind of volume manufacturing, all right, in, I would say, Q2 for sure, Q3. So that's why we really need to increase the capacity in Taiwan, especially United States.

Yes. And Ryan, just to emphasize what we said before, 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 all the production expansion activity that we're undergoing now can be used for either of those platforms.

Yes. The only difference is testing equipment. So 1.6T is 200G per lambda. But 400G and 800G can be shared, too, because they are all 100G per lambda. So that's good. Now the aforementioned equipment for assembly can be shared, okay? It doesn't matter if it's 400G, 800G or 1.6Tb. The only difference is testing between 100G to 200G per wavelength. That's it.

The next question comes from Simon Leopold of Raymond James.

The first thing I wanted to ask you about was the level of vertical integration you've achieved within the datacenter 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 silicon photonics? And two, are you in-sourced or outsourced? And what's the trajectory of in-sourcing?

Sure. So the answer to that first question, are we doing EMLs or silicon photonics, is we're doing both platforms. We do have our own production capacity for EMLs, but 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 is prudent for risk management purposes. So not everything is in-sourced, but we're in-sourcing what we can based on our customer commitments. And again, the silicon photonics, the lasers that are used there are CW lasers. We also produce those in-house as well. And I think I answered your question there. Did you have another one, Simon? I forgot the second.

So let me add a few more points. One, I think we are increasing our high-power CW laser for silicon photonics to maybe 2.5 million lasers per month by sometime next year. So right now, our in-house capacity is 100 EML. We should have 200 EML sometime soon, next year, for sure, the high-power laser for silicon photonics and VCSEL, the other new project, the 200G photo detector, okay? So this is all manufactured, 100% in Houston. VCSEL will be manufactured by our partner in Taiwan. The other is we have one new project. It's developed special silicon photonics with our big customer. For sure, we don't do silicon photonics, but we involve in the design, the testing, the assembly.

Yes. 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 in the future as a lever for gross margin improvement. So maybe the question is off-base and maybe I'm going down the wrong path. More bluntly, what will help the gross margin improve?

Yes. I think the key is wafer, okay? Right now, we are doing 2-inch wafer. But we're going to 3-inch wafers. The cost will reduce by, I don't know, 50%, 60%. Then we'll go to 4-inch wafer by end of next year. This is a major, much bigger cost savings than what you're talking about. I think right now, yes, we're only maybe using 30% to 40% of our lasers. We were using, I would say, two-thirds of AOI lasers, okay? It will depend on customer by customer. Some customers prefer all the AOI lasers. Some customers prefer 50-50, okay? So that's why it's different. But more importantly, the cost funnel of AOI lasers changed from 2-inch to 3-inch to 4-inch.

That's really helpful. I want to follow up on the cable TV side. You've mentioned production capacity for the datacenter, and I'm curious if we need a clearer understanding of your production capabilities given any constraints on cable TV. Additionally, I assume you have visibility into channel inventory because when customers deploy your amplifiers, it seems you would know when they are activated. I'm trying to gauge how much of your revenue might not be deployed yet and is still in the channel to assess the risk associated with sell-in from a channel buildup.

Let me quickly address your last question about gross margin expansion in relation to the cable TV business. We anticipate significant cost savings in this area over the next few quarters. While the cable TV business hasn't yet met its gross margin targets, we have a clear plan to achieve them. Additionally, an increased contribution from software will positively impact gross margins since it comes with a much higher gross margin rate. As for our manufacturing capacity for cable TV, we are essentially at our targeted production level. Our aim is to align production with the aggregate demand from our customers, and we are close to that goal. We did experience a minor slowdown last quarter for retooling, but we expect to see a sequential increase this quarter, maintaining levels similar to the previous quarter. Regarding channel inventory, we have a solid understanding of our customers' usage. We're comfortable with our inventory levels, which are supported by multiple customers purchasing our products. In fact, we currently have six different customers either actively buying or in various stages of qualifying our products. Therefore, we are confident that our channel inventory, while substantial, aligns with our customers' overall demand.

And Simon, let me add a few more points. So right 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, I would say, minimum $300 million to $350 million. And because the shipping is by ship, so usually it takes more than 6, 7 weeks. That's why we need inventory in the U.S. because the customer demand is like 3 to 5 days, okay? So we can't say we got an order then we manufacture in Taiwan and then ship here, it will easily take 2, 3 months. It doesn't work for this cable TV industry, okay? So that's the purpose: to meet the customer demand. But the demand is pretty big, all right? Just next year, that's the number we see right now, $300 million to $350 million of real demand, all right, for this customer in, I would say, the U.S., Canada.

The next question comes from Michael Genovese of Rosenblatt.

So on the prepared remarks, there was a lot of talk about qualification activity, 400G 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 1s. 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.

Absolutely. 100%, yes. All three of those that Thompson mentioned earlier are in qualification at various stages.

And are those all existing customers or anybody brand new to the company?

Those are all existing customers. I want to be sure that we're not mischaracterizing this. We also have a number of engagements with smaller Tier 2 operators as well. So it's not just those are the only customers that we have, but all three of those customers are existing customers.

Yes, I think my question was addressed earlier, but I want to confirm that I understood it correctly. Is most of that related to amplifiers, and do you have an estimate of how much timing might be involved? Perhaps not reaching 40%, but maybe in the mid-30s? What expectations do you have regarding the timing? Currently, our guidance is fairly stable at around 30%. It will take a few quarters before we see a more significant impact from the 800G business, along with the effects of cost reduction efforts and increased software revenue. This isn't strictly Tier 2; it may also involve Tier 1.

Depending on where you draw the line.

Based on the investment they announced, the next few could become Tier 1 and 2.

$300 million to $350 million that Thompson was talking about, that's a cable TV revenue target for 2026, is that correct?

Yes. But that's not only Charter. That's Charter plus more than 10 other customers.

nodes in there?

There should be some node business as well, but we haven't broken that out for you.

I found Simon's questions about the gross margins very insightful. However, I'm just curious if we're taking a one quarter at a time, wait-and-see approach.

talked about on the cable TV side. So a few quarters to get kind of the next uptick in gross margin.

Yes. I would say maybe Q2 or Q3, especially the volume is picking up very strongly in the next quarter, every quarter. Then 1.6Tb, I'd say will start in, I would say, June, July next year. And cable TV gross margin will improve, too. So I would say Q2, Q3 next year. Our target is 40%. So we hope we could be there by end of next year or early 2027. That's our target.

And our next question will come from Dave Kang of B. Riley FBR.

First question is regarding receivables. 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? And I'm assuming that's related to a cable TV customer.

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, the receivables are going to go up as well. We talked about the dynamics, because we wanted to get some of the cable TV products in particular into the country and ready to be staged, ready for customer acceptance, we have offered 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.

Got it. And then just a question on gross margin. Can you talk about the difference between transceiver versus the cable TV? Right now, you're at 30%. Maybe what the difference is and then your long-term 40%, what margins will be for cable TV and transceivers?

Yes. Currently, cable TV is in the low to mid-30% range, while the transceivers are below 30%, averaging out to around 30%. We have consistently stated our expectation for gross margin in cable to exceed 40%, and we believe we can achieve that. Regarding the transceivers, I think they can reach the mid- to upper 30% range, which should allow us to average around 40%.

Especially the 1.6Tb, the gross margin 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 the end of next year.

Got it. And my last question is regarding that major customer qualifying your facility. So what's left for, I guess, when companies say our 400-gig, 800-gig products are qualified, what else is left, I guess? And how long does it typically take between facility qualification versus product qualification?

400G is already qualified. The first volume shipments occurred in the last quarter that we're reporting on, Q2. That's already taken place. For 800G, not much is left to do. However, we need to have significant production capacity for 800G available before we can proceed with production. We're very close to achieving that now. We discussed our targets at OFC, and we're on track with them. Essentially, we need enough production capacity to accept substantial orders for them to complete the qualification.

In this quarter, this customer might account for 10% of our business. By Q4, I anticipate that 400G could become our largest revenue driver for the datacenter, surpassing 100G. This indicates the rapid growth of 400G revenue this year. However, 800G is expected to become our biggest revenue contributor by Q2 next year or definitely by Q3. Overall, revenue is accelerating, and 100G is not declining; it should remain stable. But 400G is experiencing strong growth in Q3 and Q4, potentially overtaking 100G in Q4. By Q2 or Q3 next year, 800G will likely exceed 400G as well. That’s the key point I want to make.

At this time, we have no further questions, and I will turn the call over to Dr. Thompson Lin for closing remarks.

Again, 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 driver of long-term demand of our business remains robust, and we are in a unique position to drive value from this opportunity. We look forward to seeing many of you at upcoming investor conferences. Thank you.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.