Applied Optoelectronics, Inc. Aktie

Good afternoon. I will be your conference operator. At this time, I would like to welcome everyone to Applied Optoelectronics First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note that this call is being recorded.

I will now turn the call over to Lindsay Savarese, Investor Relations for AOI. 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 First Quarter 2026 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its first quarter 2026 financial results and provided its outlook for the second quarter of 2026. 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 1 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 2026. 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 terminologies such as beliefs, forecasts, anticipates, estimates, suggest, intends, predicts, expects, plans, may, should, could, would, will, potential or things 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 second quarter of 2026 and for the full year of 2026.

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's 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 AOI 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 AOI website. Lastly, I'd like to note that the date of AOI's Second Quarter 2026 earnings call is currently scheduled for August 6, 2026.

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. We are pleased to deliver solid fourth quarter results, still in line with our expectations, driven by robust demand in both our data center and CATV business, 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 deployments, and we anticipate a sequential revenue growth throughout the year with a significantly large rent expected started in Q3 as additional capacity come online.

During the fourth quarter, we delivered revenue of $151.1 million non-GAAP gross margin of 29.2% and non-GAAP loss per share of $0.07, or in line with anticipated guidance range. Importantly, during the quarter, we saw and continue to see strong customer engagement around our 800T and 1.6T products, particularly as AI-driven data center investment is late.

We completed our fourth volume shipment of our 800T single mall transceiver to one of our large hyperscale customers in Q1, and we continue to anticipate strong volume rate of our 800 product started in Q2. During the fourth quarter, we announced that we received our fourth value order for our 1.6T transceiver from another long-term major hyperscale customer along with 2 new value orders from this customer for our 800T single-mode transceivers. Looking ahead, focused demand continued to outpace our production capacity throughout 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 in 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?

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 1.6 terabit 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 4x the quantity of 800G compared to our Q1 shipments.

In Q1, we announced that we received our first volume order for our 1.6 terabit transceivers from another one of our long-term major hyperscale customers. We also announced that we have received 2 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 and the 1.6 terabit 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. Looking ahead, forecast demand for 800G and 1.6 terabit modules are 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 1.6 terabit products. As a reminder, our U.S. manufacturing footprint is anchored in sugar land just outside Houston. Through a combination of real estate acquisition and leases, we have expanded our Texas manufacturing footprint to about 900,000 square feet. This includes 135,000 square feet of existing capacity at our headquarters.

Two new buildings of 388,000 square feet in Pearland, Texas, a 210,000 square foot facility, which is under development and a 154,000 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 ].

During the quarter, we made progress building out our recently leased 210,000 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 will be entirely dedicated to manufacturing of 800G and 1.6 terabit 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 1.6 terabit transceivers. We expect these facilities to come online in early 2027. As a reminder, internationally, we have 795,000 square feet across 3 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 100,000 units per month of 800G and 1.6 terabit capacity. Looking ahead, we expect to continue to rapidly expand our production capacity to approach $150,000 per month of 800G and 1.6 terabit this quarter. As a reminder, we expect by the end of this year that we will be capable of producing over 650,000 pieces of 800G and 1.6 terabit 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 930,000 pieces of 800G and 1.6 terabit 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 1.6 terabit products.

As a reminder, our 800G and 1.6 terabit products can be manufactured on the same production line with the same process. While our 1.6 terabit products will require a 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 1.6 terabit product, we continue to believe that our 800G products will drive the near-term data center ramp. Our 1.6 terabit products are on track to begin to contribute to our overall revenue later this year with the bigger ramp beginning in 2027.

At OFC, we also discussed our plans to increase our manufacturing capacity for our external light source or EL SSP, that's for co-packaged optics or CPO. This utilizes the ultra narrow line with high-power laser that we announced late last year. We have very limited production of these modules now, but we anticipate ramping production later this year and into 2027. Ultimately culminating in about 400,000 pieces per month by the end of 2027.

As a reminder, we will be making the high-power lasers for these modules for the in-house production of the EL SSP. We believe our in-house laser capabilities continue to be a strategic advantage for the company. As we have mentioned before, we've 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 the end of 2027.

A central element of our strategy is a high 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 1.6 terabit 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 design 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've 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're 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 IEEPA tariffs, 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 center product, 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, 41.9% of data center revenue was from 100G products, 46.7% was from 200G and 400G product. 5.6% was from 800G transceiver products. and 5.6% was from 10G and 40G transceiver products.

In our CATV business, CATV revenue was $66.8 million, which was up 4% year-over-year and 24% sequentially. The and was at the high end of our expectations of $61 million and $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 continue to see momentum with a 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 3 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 of 2025 and 30.7% in Q1 2025.

As we discussed on our last quarterly earnings call, while 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 operations.

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 our net of a contra revenue amount 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 AOI 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. Looking ahead, we expect non-GAAP operating expenses to be in the range of $50 million to $58 million per quarter.

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 $0.3 million and non-GAAP income per share in the range of a loss of $0.09 to breakeven. This compares to a non-GAAP net loss of $0.9 million or $0.02 per share in Q1 of the prior year.

The basic shares outstanding used for computing the 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 the fourth quarter 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 1.6 terabit transceiver products.

We expect to continue to make sizable CapEx investments this year as we prepare for increased 400G, 800G and 1.6 terabit 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 loan agreements 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. 800G revenue will be approximately $217 million and 1.6 terabit 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 Instructions]. Our first question comes from Simon Leopold with Raymond James.

I wanted to dig in a little bit to understand the risk profile for 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 the -- any kind of timing or disruption? And help us understand sort of how to prioritize the risk for meeting your schedule? And then I've got a quick follow-up.

Sure, Simon. I think it's important to understand that the expansion that we're undergoing, while it's large in scope is not something that's brand new to us, right? We've built significant capacity especially in our Asian factories over the last couple of years. And now we're basically adding additional increments to that capacity, the same type of equipment, the same manufacturing process mainly here in the U.S., okay, here in Texas, as we talked about during the call.

So from a risk standpoint, the risk of doing something that you've already done is a lot lower than doing something that's brand new, right? As we mentioned on the call, on the prepared remarks, a lot of this equipment is developed in-house. So the risk of supply chain disruptions for the equipment I mean it's not eliminated, right, of course, but it's 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, right?

So I think those 2 risks are minimized because of the nature of the manufacturing process that we have. It's worth noting, too, that because the process for us is very highly automated. We're not hiring a lot of people. So the labor, the risk associated with quality control issues or being able to scale labor doesn't really exist to any great extent for us as well. So it's really just a matter of can we get the equipment in and can we put it into production on time. And so far, we're executing very well to that, which isn't surprising because we've done a good job of it over the last couple of years already.

Yes, 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 of production by the middle of '27. 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 we should assume some haircut to that for lower utilization.

This is Thompson, that's based on revenue. Actually, the actual capacity is higher. But you understand -- we've got equipment in the several months to hire people qualification. So let me space the order in hand or minimum commitment from a customer pros. The equipment has been fully qualified. So that means June, July, less there we believe we can deliver.

For sure, not only I think -- another risk is material. So this is why we are working with all the material suppliers to see -- keen material supply. That's a number we feel comfortable to commit at this moment. But if you say the actual demand could be even higher than this number, but that's the best we can do. And let me say that, the actual number from a customer is bigger. And actually, what they expect is April, not June, July. So we are -- every in the pure 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 in the middle part -- starting in the middle part of next year.

Next, we have George Notter with Wolfe Research.

Jaren on for George Notter. On the OSP business, can you talk a little bit more about the customer engagements you're seeing there? Who are you working with? Or how many customers are you working with any details would be appreciated.

Yes, we have a couple of large customers that we're working with. We haven't said who they are, but...

Let me say that right now, we are working on a long-term agreement with -- including laser, including ESP. So that's the number we are talking about. That's why now in the transceiver, we are expanding very fast about our laser capacity. And right now, we have been doing a 4-inch growth process. Our targets go to 6-inch by end of next year. So yes, I think we need to do more investment to meet the demand for CPO market.

As you know, the CPU laser is about 300-milliwatt to 400-milliwatt compared to 70-milliwatt for AND transceiver and 100-milliwatt for 1.6 terabit transceiver. The size is much bigger, okay? [indiscernible] maybe 5x or 6x bigger. That's why we need to go to maybe the low we already got from like 2-inch to 3 to 4-inch in the past 18 months, but we still plan to go to 6-inch by end of next year. including -- they will increase our capacity a lot. But at same time, we are adding a lot of capacity like MOCVD, EP and -- everything, okay?

Jarren, we see a shortage of indium phosphide laser manufacturing capacity across the industry right now, and we think that's going to persist and even get more acute with the advent of ELSS, as Thompson mentioned. That's why we see this need to really expand our -- phosphide fabrication capability pretty dramatically over the next 12 to 18 months.

Great. And then just to follow up on that. How do you see the ability to secure the substrate capacity for the aluminum phosphide?

Right now, we record -- supplier with some kind of discussion -- sorry, not much we can say. But 4 of them are outside of China. So I would say right now, we should have enough inventory minimal almost 1 year. But since the volume, we increased surface, we are making calls with all the suppliers.

I would say we've got good line of sight into how we think we can not see the shortage there. But we can't say too much about it specifically at this point because a lot of it is under discussions.

Our next question comes from Michael Genovese with Rosenblatt Securities.

Can you give us more granularity on when you expect qualification for 800G with this hyperscaler. It sounds like we'll be your third hyperscale 10% customer. But when in the quarter, exactly do you think you'll have this qualification. And then does your guidance derisk it, meaning that if you got it see or if things went to plan, would there be upside in the quarter?

Well, as we mentioned in our prepared remarks, we've already started shipping. So I'm not sure what the qualification question really is referring to.

So we had 2 big cost, one is qualified, another one almost qualified. The one give us a large order for, I don't remember, 100, I don't know, 40 million in they are negotiated with AOI with some kind a long-term agreement with a very big volume. The qualification is pretty smooth. I think we started shipping some value in next month.

For another customer, we've been working for a long time, has qualified. We increased the capacity in this month -- this quarter too. So we started shipping volume to big customers, not console.

Got it. Okay. And then your guidance for the year, you've you're doing about 1/3 of the revenue for the year in the first half. And then obviously, you expect a big sequential growth in the third quarter. Would then we have more big sequential growth in the fourth quarter? Or is 3 and 4 more linear. Like how should we think about the shape of the second half?

That is a very great question. Right now, as I say, because dynamic expand to you -- order equipment and qualification, installation, everything and sometimes we liability. Even in Asia, it will take 5 to 7 months. In the U.S., it's adding another 2 months because of shipping, okay? So that's why the ramping from the Q3, not Q2, okay, even we've got some equipment in already, but still need to go through a lot of process which will take several months. So right now in Q3, we can see compared to Q2, 60% to 80% increase. Q4 should be similar, and you can figure out the number. And let me say that the actual demand is not 1.1 billion, it should be 1.4 billion, 1.5 billion. So our target still go to 1.1 billion or 1.2 billion, but we still need to work very hard, like the supply chain -- manpower -- but right now 1.1 billion is the number we feel very competent and this increased from 1 billion we commit in the last quarter. But our internal number is high.

Mike, just to summarize what Tom has said, right, the limiting factor for deliveries is our ability -- the manufacturing capacity that we have available. So once that capacity that we've been building, we talked in detail about the real estate that we have and the number of square feet that we've added and the equipment, Simon asked some very detailed questions about our equipment capacity and how confident we are in that once that starts to come online, it's not going to be a linear type of thing. It's going to be another large increment and then another large increment in Q4, as Thompson outlined. But that's why it's not you can't extrapolate from the first half and go, well, there's only a certain growth rate. No, when you have new factories coming along, that adds capacity very quickly.

And that said, even you got the equipment, okay? It is still take easily in -- type ton. It takes at least more than 3 months or even longer to deliver revenue, okay? Because sometimes costs will need to do another onset audit, some clarification. So we got a light equipment in, but cloud rerailing is more like Q3. So that's what I told you. Yes, I think Q2, we had maybe 30% growth. Let's limit backout capacity. But Q3, Q4, we took now 60%, 70% or even 80% of growth in every quarter or actually even Q1 next year -- in the next few quarters, of course will be very fast because that's when we can start the deliver to the customer.

Our next question comes from Ryan Koontz with Needham.

Great. I just want to ask about get back to the Indian phosphide topic here 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 kind of walk us through some of the major milestones we should think about for the laser supply internal here over the next couple of quarters?

Right. Great question. So as I said earlier, I think 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's one of the big things that they like about us, especially now that we're seeing shortages across the industry. So our fab expansion is well underway.

As Thompson mentioned, we've got a number of critical pieces of equipment and coding 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 don't want to take a risk of having an unknown quality issue there.

So a lot of that is already here and already undergoing qualification or it's very close to being here. And that's why we can be pretty confident that our capacity is going to be where we need it to be. It's just a matter of going through that qualification process internally, which is, by the way, different from the transceiver qualification here, I'm talking about our internal qualification of new equipment as it comes in.

Let me say, it is very -- transceiver, the latest front day, you pressed order to our equipment supply. You take minimum 18 months or even longer. Even right now, I think with the equipment delivered take 21 to 24 months for us to start to deliver later to the customer, okay? Because sometimes the custom require 3,000 hours or even 5,000 hours of reliability data.

So we placed a lot of orders every -- more than 50 suppliers, let me say that. We got a commitment from the supplier, and we're getting some equipment in-house already almost every month. And let me say that by end of next year, we should be a minimal top 3 laser worldwide okay? I can't tell you how many equipment we had is competent. That's why we are working, we serve a customer for, now needed for laser, not only for transceiver, including laser for ESP. As I said, ESP is very challenged. This is very high spec and very high power as within control. I would say the tranche is more than 10x of like 70 or 80, 100 -- for transceiver, this total different ball game.

That is our focus. And you know AOI has been doing laser since day 1, including my previous users has been doing it laser since 1990. So we know how to do a good job.

If I can -- a quick follow-up there in terms of your margins and how we should think about that and the mix. As you production mix of 800 moves up here? Should we think about that the tailwind for margins? Maybe can you unpack that for us just a little bit how to think about the mix.

Yes. The margins get a lot better as we expand the capacity. Right now, what's going on is we're in this shifting mix between 400 and 800 and between predominantly cable TV and predominantly data center, right? So as we see that continue to shift and as 800 takes precedent you'll start to see growth in gross margin in the second -- primarily in the second half of the year.

So we go to 35% gross margin by end of this year. And at the same time, in Q1, Q2 since we started ramping up under the no, we need the time to fine-tune the process, okay? Efficiency size as good as what we expect. But I think within 2, 3 months, I think with a fully automated manufacturing line, we can crew out efficiency in it very fast. That's the major advantage of automation. By Q3 or by Q4, the gross margin, the whole company should be, I would say, more that 40% or special with the laser in that will kick in Q3, Q4 next year.

[Operator Instructions]. Our next question comes from Tim Savageaux with Northland Capital Markets.

First question is trying to understand where you are capacity-wise versus what you're forecasting. So I think in the release, you talked about 100,000 units a month exiting Q1 in 800 gig. And that puts your capacity revenue-wise well over $100 million, right, a quarter. We've got orders in hand for $124 million of 800 gig. The capacity theoretically to ship those quarters, and yet you're guiding to, what, $18 million, $20 million in 800 gig revenue. What I'm trying to understand is that delta? And what's driving that apparent disconnect? And I have a follow-up.

It's just timing on how long it takes to do the manufacturing process really. Not all that $100,000 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 middle to even tunes the way through the quarter. It's just the timing of the manufacturing lead time.

So that's what I said on [indiscernible] why we're talking about [ $471 million ] for June, July, the next year. That's why I said that is the revenue. Not capacity, the capacity is much higher because as I said, when capacity, you need have added more than 1 month on a future cycle time of 6 weeks. For us, maybe customer needs to do -- auditing, quite -- and this all kind of requirements. So that you have -- even you install [indiscernible] everything, it still easy to take another 2, 3 or 4 months to realize revenue or even some of the customers, even have like some kind of light hub, all kind of -- processes -- why I made clear when we're talking about $471 million -- capacity and we're talking about equal to about [ 780,000 ] of transceiver per month by mid of next year, but actually, it could be high. Actually, it's high.

Okay. Got it. Yes. I mean, incidentally, that would make you about the same size as coherent after kind of a multiyear ramp over there. sort of numbers on a yes -- another question.

Yes, go ahead.

Speaking of competition, earlier this week, we had a prominent contract manufacturing space, announced 2 deals whereby they would be making transceivers for hyperscale customers directly. How would you assess the competitive and margin impact of that development on AI?

We don't really know. But anyway, right now, I think the demand is more support we get delivered in this one. Let me say that the LTE, we are negotiated with these 3 customers the 3-year number is quite high, okay. And it depends, let me say that for money more, okay, it's easier, maybe you can use like fiber or whatever or even for like [indiscernible] it's easy to manufacture, but it will be very tough for the 800T or 1.6T to buy FFO because you need for laser. But key is the sensing, can you get late or not? Even there's many laser transceiver supplier by how quick these laser from. Right now, dementia to cable book even broken -- so with all that, I can make intent.

Got it. And last one for me. This goes back to the 1.6 comments where Stefan, I think you talked about some revenue contribution later in the year and a bigger ramp in '27. And yet, I think it was my understanding that the big order that you announced was -- was that to be shipped completed in '26? Has there been some change there? Or what's the...

It means that order is just a small order compared to what we're going to see in 2027.

Much bigger. I think the bar slide [indiscernible].

All right. So we got to define our terms. $200 million is not a big amount. Okay. I got it. Exactly.

Next year, we are talking about more than $2 billion, 1.6 transceiver -- have much more than $1.6 billion we need to deliver in the next year.

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.

Again, Singapore joined us today, as always, we want to extend a thank you to our investors, customers and employees for your continued support is an exciting time for our industry as for AOI. We continue to believe the fundamental driver of long-term demand for our business remains robust, and we are unique position to drive value from this opportunity. We look ahead to see my view at upcoming investor conference. Thank you.

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

Good afternoon. I will be your conference operator on today's call. At this time, I would like to welcome everyone to Applied Optoelectronics Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] Please also note that this call is being recorded today.

I'll now turn the call over to Lindsay Savarese, Investor Relations for AOI. Ms. Savarese, you may begin.

I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics. I'm pleased to welcome you to AOI's Fourth Quarter and Full Year 2025 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its fourth quarter and full year 2025 financial results and provided its outlook for the first quarter of 2026. 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 1 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 Q4 results, and Stefan will provide financial details and the outlook for the first quarter of 2026. The 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 suggest 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 management's beliefs and expectations related to the expansion of the reach of its products into new markets and customer responses to its innovations as well as statements regarding the company's outlook for the first quarter of 2026 and for the full year of 2026. 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. For information about other risks that may impact the company's business are set forth in the Risk Factors section of AOI's reports on file with the SEC, including the company's annual report on Form 10-K and quarterly reports on Form 10-Q.

Also, our 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 AOI management is attending the Susquehanna Annual Technology Conference virtually tomorrow as well as the Raymond James Annual Institutional Investors Conference on March 3. Additionally, management will host an investor session at OFC on Tuesday, March 17 in Los Angeles. This discussion will be webcast live, and a link to the webcast is available on the Investor Relations section of the AOI website. Lastly, I'd like to note that the date of AOI's First Quarter 2026 earnings call is currently scheduled for May 7, 2026.

Now I would like to turn the call over to Dr. Thompson Lin, AOI's Founder, Chairman and CEO. Thompson?

Thank you Lindsay. Thank you for joining our call today. We are pleased to deliver record fourth quarter results that were in line with or better than our expectations and which came off the strongest year in our company's history. Our results were driven by robust demand in both our CATV and datacenter business.

In 2025, total revenue increased 83% compared to 2024 to a record $456 million compared to the revenue of $196 million, increased 32% compared to 2024, while our CATV revenue nearly tripled to $245 million in the same period. We entered 2026 with strong momentum. And due to the software investment we have made, we have materially expanded our manufacturing capacity. We believe this position us well to meet increasing customer demand and we lead to accelerating growth this year.

During the quarter, we announced that we received our fourth 800G volume order from one of our major hyperscale customers to support its AI datacenter growth. This was an important milestone in our next-generation datacenter roadmap and followed the successful clarification of our energy products by the customer. It also reflects both the strength of our product portfolio and the deep relationship we have with these hyperscale customers. We continue to work with this customer to finalize the firmware use in this module to ensure inability across their network, which we believe will be completed in March. We have begun ramping up production of this 800G module in anticipation of a strong volume ramp starting in Q2. We focused demand for 800G module are projected to exist our production capacities through mid-2027, and we are working to add additional capacity to meet this demand.

During the quarter, we saw particular strength for our 400G products with this customer, which more than offset our 800G revenue which came in below our expectation of $4 million to $10 million. Due to the ongoing firmware optimizations, I mentioned about looking ahead we expect continued strength in our 4G business. Also 800G is expected to dominate our revenue beginning in Q2. As a reminder, our Taiwan facility was already qualified for production of several 800G product types from this hyperscale customer during 2025. Our tax facility was also qualified for production of some of our 800G products. During the quarter, we made investment with qualifying additional product from our Texas facility with this customer and expect full qualification by Mid East.

We expect that we move throughout the year to ship an increasing amount of 800G products from our tech facility as we expand our capacity. In addition to this for major 800G customers, we have had indications from another existing hyperscale customers that they intend to begin to order 800G from us soon. Finally, a new hyperscale customer has become a discussion about qualifying our 800G and 1.6T products just within the last few weeks. So we feel increasingly confident about our trajectory in 800G and 1.6T receiver with multiple customers. During the fourth quarter, we delivered revenue of $134.3 million, which was in line with our guidance range of $125 million to $140 million.

We recorded non-GAAP gross margin of 31.4%, which was above the high end of our guidance range of 29% to 31%. And on non-GAAP loss per share of $0.01 was narrowed than our guidance range of a loss of $0.13 to a loss of $0.04. Total revenue for our data center product of $74.9 million, increased 69% year-over-year and 70% sequentially. Sales of our products increased 54% year-over-year, and sales for 400G products increased 141% year-over-year. Total revenue in Q4 in our CATV segment was $54 million, which was up 3% year-over-year and in line with our expectations, was down 24% sequentially from a later Q3, similar to the last couple of quarters, we see a significant quality of 1.8 gigahertz amplify to our largest CATV customers in Q4, and demand from then continue to be robust. In addition to these customers, we continue to see momentum from a new set of MSO customers.

With that, I will turn the call over to Stefan to review the details of our Q4 performance and outlook for Q1. Stefan?

Thank you, Thompson. As Thompson mentioned, we are pleased to deliver record fourth quarter results that were in line with or better than our expectations and which capped off the strongest year in our company's history. Our performance was driven by robust demand in both our CATV and data center businesses.

We entered 2026 with strong momentum. And due to the thoughtful investments we have made, we have materially expanded our manufacturing capacity. We believe this positions us well to meet increasing customer demand and lead to accelerating growth this year. Throughout 2025, our focus remained on a few key priorities. 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 factory; three, diversifying our revenue base; and four, strengthening operational execution to improve our margins and long-term profitability. I'm pleased to report that we made significant progress on each of these fronts and these will continue to be key priorities in 2026.

Importantly, we saw and continue to see strong customer engagement around 800G and 1.6 terabit products, particularly as AI-driven data center investments accelerate. In 2025, total revenue increased 83% compared to 2024 to a record of $456 million. Datacenter revenue of $196 million increased to 32% compared to 2024, while our CATV revenue nearly tripled to $245 million in the same period. Additionally, we expanded our gross margins and made progress on our path to profitability.

Turning to the quarter. In Q4, we delivered revenue of $134.3 million, which was in line with our guidance range of $125 million to $140 million. We recorded non-GAAP gross margin of 31.4%, which was above our guidance range of 29% to 31%. Our non-GAAP loss per share of $0.01 was narrower than our guidance range of a loss of $0.13 to a loss of $0.04. During the quarter, we announced that we received our first 800G volume order from one of our major hyperscale customers to support its AI data center growth. This was an important milestone in our next-generation data center road map and follows the successful qualification of our 800G products by this customer. It also reflects both the strength of our product portfolio and the deepening relationship we have with this hyperscale customer.

We continue to work with this customer to finalize the firmware used in these modules to ensure interoperability across their network, which we believe will be completed in March. We have begun ramping our production of these 800G modules in anticipation of a strong volume ramp starting in Q2. Forecast demand for 800G modules are projected to exceed our production capacity through mid-2027, and we are working to add additional capacity to meet this demand. During the quarter, we saw particular strength for our 400G products with this customer, which more than offset our 800G revenue, which came in below our expectations of $4 million to $8 million due to the ongoing firmware optimization I mentioned above.

We expect continued strength in our 400G business, although 800G is expected to dominate our revenue beginning in Q2. As a reminder, our Taiwan facility was already qualified for production of several 800G product types from this high-scale customer during 2025. Our Texas facility was also qualified for production of some of our 800G products. During the quarter, we made advancements with qualifying additional products from our Texas facility with this customer and expect full qualification by midyear. We expect as we move throughout the year to ship an increasing amount of 800G products from our Texas facility as we expand our capacity. Given the strong demand, we have continued to invest in our manufacturing capacity to support current and future demand.

During the fourth quarter, we made solid progress on the production capacity ramp we outlined last year at OFC. Over the past several years, we have purposely developed and scaled automation across key elements of our production process from laser fabrication to transceiver assembly and testing. This automation not only improves yield but it also supports rapid scale up with greater flexibility in terms of geographic location of production and lower geographic index labor cost relative to many of our competitors who rely on traditional more labor-intensive manual operation. As we continue to bring new automated lines into production, we expect this differentiation to increasingly translate into execution strength and significant revenue expansion.

As we discussed at length at OFC last year, our focus remains on scaling manufacturing capacity for our next-generation transceivers, particularly 800G and 1.6 terabit products, and we remain on track with the milestones we previously discussed. As we exited the year, we neared our target of 100,000 units per month of 800G capacity, with approximately 90,000 units per month of 800G capacity at year-end with roughly 31% of that production based in the U.S. We made tangible progress during the quarter through facility expansion and equipment installations, both of which are critical steps as we prepare for higher volume production.

Our production capacity in the U.S. is currently in our existing footprint in Texas. During the fourth quarter, we announced that we signed an agreement to lease an additional building in Sugar Land. We began construction on this new facility earlier this month and are working hard to scale our production towards the middle end of this year to achieve our 2026 targets. Looking further ahead, we expect that by the end of this year, we will be capable of producing over 500,000 pieces of 800G and 1.6 terabit products per month with about 1/4 of that output coming from Texas as we expand into additional facility space and bring new production online. These investments reflect measured scaling of our footprint while aligning with strong and growing customer demand and qualification progress across both 800G and 1.6 terabit products.

Further, we have recently had dialogue with another large hyperscale customer who has been a long-term customer of ours, and it was eager to begin qualification efforts for our 1.6 terabit products. This customer has also indicated a desire to purchase potentially significant quantities of 800G products from us in 2026 and 2027. We continue to discuss capacity availability, and expect orders for 800G from this customer soon. It's also important to note our 800G and 1.6 terabit products can be manufactured on the same production line with the same process, while our 1.6 terabit products will require a different final testing, our 800G automated manufacturing lines have been developed with an architecture that will allow us to support future higher-speed products as customer demand materializes and evolves over time. While we are encouraged by the conversations we are having with our customers pertaining to our 1.6-terabit products, we continue to believe that our 800G products will drive the near-term data center ramp and our 1.6 terabit products are on track to begin to contribute to our overall revenue later this year.

Before moving on to our fourth quarter results, I'd also like to reemphasize our in-house laser capabilities, which we believe continue to be a strategic advantage for the company. As we have mentioned before, we've been manufacturing lasers internally for many years. Having these capabilities has allowed us to avoid some of the shortages that affect 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 plan to continue to expand our laser manufacturing capacity in Texas in order to accommodate these future growth drivers.

During the fourth quarter, direct tariffs had a $1.2 million impact on our income statement. As it relates to tariffs, as I have previously mentioned, while we do utilize some imported components in our transceivers, many key components like our relationships are already manufactured in the United States. Importantly, in our 800G and 1.6 terabit transceiver designs, less than 10% of the value of these components used is currently sourced from China, and we have a path to further reduce that exposure to near 0 that we have discussed on our prior earnings calls. Given the recent court decision on IEEPA tariffs, it's worth noting that AOI acted as the importer of record for many, if not most, of the tariff shipments we incurred in 2025.

Turning to our fourth quarter results. Our total revenue was a record $134.3 million, which increased 34% year-over-year and increased 13% sequentially off a strong Q3 and was in line with our guidance range of $125 million to $140 million. During the fourth quarter, 56% of revenue was from data center products, 40% was from CATV products and the remaining 4% was from FTTH, telecom and other. In our datacenter business, Q4 revenue came in at $74.9 million, which was up 69% year-over-year, and 70% sequentially. Sales of our 100G products increased 54% year-over-year and sales of our 400G products increased 141% year-over-year. In the fourth quarter, 51% of data center revenue was from 100G products, 41% was from 200G and 400G transceiver products and 8% was from 10G and 40G transceiver products.

In our CATV business, CATV revenue was $54 million, which was up 3% year-over-year but was down 24% sequentially from a record Q3 and was in line with our expectations of $50 million to $55 million. Similar to the last couple of cores, we shipped a significant quantity of 1.8 gigahertz amplifiers to our largest CATV customer in Q4, and demand continues to be robust. In addition to this customer, we continued to see momentum with a newer set of MSO customers that we have talked about on our prior couple of earnings calls. Looking ahead to Q1, we expect our CATV revenue will be between $61 million and $67 million.

Looking further ahead, the broad-based appeal of our CATV amplifiers and software solutions has been evident in these customer engagements, and we see software as an increasingly important part of our CATV offering. Our QuantumLink software suite is designed to provide operators with enhanced remote management, visibility and control over HFC network element, reducing operational costs and improving service quality. If current momentum continues and while it is still early in the year, we still believe that it's feasible that we could generate nearly $300 million annually. 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, and we will share more on the amount and timing as we progress throughout the year.

Now turning to our telecom segment. Fourth quarter revenue from our telecom products of $5.1 million, was up 45% year-over-year and 37% sequentially. As we have said before, we expect telecom sales to fluctuate from quarter-to-quarter. For the fourth quarter, our top 10 customers represented 96% of revenue compared to 97% of revenue in Q4 of 2024. We had 3 greater than 10% customers, 1 in the CATV market, which contributed 39% of total revenue and 2 in the datacenter market, which contributed 31% and 21% of total revenue, respectively. Of note, one of these data center customers became a 10% customer for the first time in a long time and is a U.S.-based large hyperscale customer.

In Q4, we generated non-GAAP gross margin of 31.4%, which was above the high end of our guidance range of 29% to 31% and was up from 31% in Q3 of 2025 and 28.9% in the prior year quarter. The year-over-year increase in our gross margin was driven primarily by our favorable product mix and our cost reduction efforts. Looking ahead, we expect continued gradual improvement in gross margins, although we continue to expect that the revenue mix in data center in the next few quarters will be a slight headwind. We remain committed to our long-term objective of returning non-GAAP gross margins to around 40%, and we believe that this goal is achievable as our mix shifts towards higher-margin products and as we capture additional efficiencies across our operations. That margin expansion, combined with increased scale positions us to move towards sustainable profitability, which we currently expect to achieve on a non-GAAP basis beginning in Q2 of this year.

The revenue figures presented above are net of a contra revenue amount 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 AOI has provided warrants in exchange for future revenue. In Q4, the amount of this contra revenue was $0.73 million. Total non-GAAP operating expenses in the fourth quarter were $49.3 million or 37% of revenue, which compared to $31.5 million or 31% of revenue in Q4 of the prior year and were in line with our expectations of $48 million to $50 million. Looking ahead, we expect non-GAAP operating expenses to be in the range of $50 million to $57 million per quarter.

Non-GAAP operating loss in the fourth quarter was $7.1 million compared to an operating loss of $2.5 million in Q4 of the prior year. GAAP net loss for Q4 was $2 million or a loss of $0.03 per basic share compared with a GAAP net loss of $119.7 million or a loss of $2.60 per basic share in Q4 of the prior year. On a non-GAAP basis, net loss for Q4 was $0.6 million or $0.01 per share, which was narrower than our guidance range of a loss of $9 million to a loss of $2.8 million or non-GAAP income per share in the range of a loss of $0.13 to a loss of $0.04. This compares to a non-GAAP net loss of $1 million or $0.02 per share in Q4 of the prior year. The basic shares outstanding used for computing the earnings per share in Q4 were $70.3 million.

Turning now to the balance sheet. We ended the fourth quarter with $216 million in total cash, cash equivalents, short-term investments and restricted cash. This compares with $150.7 million at the end of the third quarter of 2025. We ended the fourth quarter with total debt, excluding convertible debt of $67.3 million compared to $62 million at the end of last quarter. As of December 31, we had $183.1 million in inventory, which compared to $170.2 million at the end of Q3. The increase in inventory is primarily due to raw material purchases or increasing production. We made a total of $84 million in capital investments in the fourth quarter, which was mainly used for manufacturing capacity expansion for our 400G and 800G transceiver products.

In 2025, we made a total of $209 million in capital investments, which was above the CapEx projections we gave on our Q4 call last year of $120 million to $150 million for the full year. This was primarily due to increased customer demand projections. In Q4, the direct tariff impact on capital equipment was $3.1 million. As we have mentioned before, while we will continue to do our best to minimize any impacts. Tariff rates and equipment import mix may cause future results to vary materially. Notably, we source equipment from all over the world, including for both domestic and international locations.

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 recent surge in customer inquiries and apparent rising demand, we believe that by mid-2027, 100G and 400G revenue will be approximately $90 million. 800G revenue will be approximately $217 million and 1.6 terabit revenue will be approximately $71 million monthly. Altogether, this represents $378 million in monthly revenue for transceiver products. However, we believe that the customer demand is even larger than this. In order to accommodate this expected surge in demand, we plan to more than triple our laser manufacturing in Texas. We are evaluating our CapEx projections for 2026, and we intend to share those at a later date.

Moving now to our Q1 outlook. We expect Q1 revenue to be between $150 million and $165 million, accounting for a sequential increase in CATV revenue as well as the sequential increase in our data center revenue. We expect non-GAAP gross margin to be in the range of 29% to 31%. Non-GAAP net income is expected to be in the range of a loss of $7 million to a loss of $0.3 million and non-GAAP earnings per share between the loss of $0.09 per share and breakeven, using a weighted average basic share count of approximately 76.4 million shares.

Looking more broadly at 2026. While it's still early in the year, we expect to generate over $1 billion in revenue this year, with a non-GAAP operating profit of over $120 million. 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 continued strong sequential revenue growth in the first 2 quarters with 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' forecast 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 Instructions] We will take our first question, which will come from Simon Leopold with Raymond James.

First, just a very quick clarification, if I might. I missed the value you mentioned on 800 gig revenue, I know you had a little bit of a software firmware glitch and said it was below the guided for the $4 million or so. But what was the value of 800 gig in the quarter?

We didn't break out exactly, but it was below $4 million.

A lot below or a little below?

Below is delayed to Q1. But we have emphasized the revenue will be big in Q2 next year across the target. Our revenue in this year is $1 billion.

And I wanted to really focus on the trajectory for gross margin improvement. And I want to maybe first start with understanding how much of your laser production is in-house today versus external merchant lasers. And I guess I appreciate that typically, as you ramp production, there's sort of a learning curve of improving yields and things like that. So I'd like to make sure we have a good understanding of really the time line or trajectory to achieve that target, you mentioned of 40%. So sort of where are we now? And when do we -- what's the roadmap?

Because as I said, the gross margin for [ 1.6 ] is much, much higher than the other product. And I would say that, okay, as we say, I've seen by Q2 or the monthly revenue sometime in Q2, like June, July or something like that, the revenue is like $378 million. So it depends on the portion of 1.6 transceiver. So at the time, I believe the gross margin should be 35% to 38% overall gross margin for all the transceiver revenue. So I believe we're going to achieve 40% growth margin by late Q3 or Q4 next year.

By the way, Simon, just to make sure you're on the same page, the revenue figures that Thompson mentioned, were 2027 in Q2, not this year.

Yet, not this year. Yes, yes. It's very important, okay, not misstated.

Because I wrote down '26. So you anticipated my mistake.

Okay. It's impossible.

No, I appreciate that. And then before I pass maybe just a quick check in on the cable TV side of the business in that it sounds like you remain very confident in the trajectory However, the outlook offered by big cable operators was not as inspiring. Can you sort of help folks triangulate between the CapEx forecast and your involvement in cable TV upgrades?

Sure, Simon. I mean, I think as we've said consistently, where the money -- I mean, the overall CapEx numbers are one thing, but where the money gets spent is another thing. And I think they're spending this year and next year a significant amount of their spend is going towards the amplifiers, the outside plant, part of the network, and that's where we play. So there are some other parts of the network in the nose and other things that maybe are a little slower to ramp, although I think those are also ramping pretty significantly as well. So really you have to look at it on a kind of granular basis. The other thing is we've got a lot of new customers that we alluded to in the call earlier, and we'll start to see some significant contribution from those newer customers as well. So it's not just the 1 or 2 or 3 top largest MSOs, but also a wider swath of smaller companies that are contributing to our revenue.

And Simon I'll let you know, by end of this year, I would say more than 95% unless the because there's a huge issue of laser shortage and actually even some supplier to us, want to get it from them, we need to add at least 1 year or even longer. So that's why we announced we'll invest $300 million in Texas. The purpose as we said, we need to triple even more than triple our laser magnet capacity by Q2 next year, and that's to fulfill our transceiver demand. And let me emphasize, actually, transceiver demand is much bigger than what we projected. Right now, the number we said, the $378 million of transceiver revenue in June, July next year, not this year is limited by our capacity and the supply chain is not limited by the customer demand.

And our next question will come from Michael Genovese with Rosenblatt Securities.

So it sounds like instead of having a steady kind of ramp on this 800G, we're expecting to come in was really big numbers starting 2Q this year and then huge numbers next year by 2Q next year. I guess for the ramp in 2Q this year, could you just go over some of the milestones, maybe talk about the issue on the sub, but also the ongoing qualification milestones that you have to hit to kind of have that ramp in 2Q?

So as you mentioned, in order for the ramp to start in earnest, our 800G products have to be interoperable with all the different platforms that are out there at this particular customer. And there's a lot of them. So the firmware has to be modified to work with all those different platforms. So hardware-wise, everything is fine. No problem with that. Firmware is good on most of the platforms, we just have to make some tweaks to get it to work across all of the end platforms that they have. And that's really -- the customer and us have agreed that, that should be done in the middle of next month. So a couple of weeks, 3 weeks from now, something like that. And then that's basically the last hurdle to kind of unleash the ramp.

As we talked about, we've already started manufacturing products for that ramp. So from a manufacturing standpoint, we're gearing up just to touch on your -- the beginning part of that question, too, about the kind of nonlinearity of the ramp. That's because what you're seeing is our production capacity comes online, right? It's not gated by demand. It's gated by our ability to produce, and that doesn't come on in a linear fashion, right? You build a production line and you get a step function, not a smooth ramp.

Yes. So let me emphasize because every customer has some many different switch, transceiver supplier, so many different kind of ASIC. And when the customer adding more switch, the change the firmware. We are supposed to get a green light to ship already in December last year. The delay is not our problem or whatever. It's because how come build AI, the whole is much more complicated than before. That's why it takes much longer and do now, I think we feel very comfortable. And then I never said, okay, we have got almost 2 years of loading forecast from more than one customer, let me say that okay, 800G. And right now, let me say that more on customer at least 2 or even 3, they would like to buy all the transceiver we can make for 800G, 1.6T because AOI laser. And right now, it's limited by our capacity in the manpower and the supply chain. So that is why we are trying everything to ramp it take time. They take time. This say, right now this year, we said [ 1 billion ]. And let me say that demand is much, much bigger than [ 1 billion ]. But that's the number we feel comfortable.

At least we see a minimum 99% competent we can deliver. Otherwise, the raise much bigger than that way. Same thing for the 1.6T transceiver for the June, July next year is still limited by supply chain. So that's a lot of issue we need to solve. And the other thing I can tell you, in the short term, we should receive more than $100 million of 800G transceiver within a few months, maybe 1 month, 2 months for sure less than 3 months, we should receive more than $200 million or 1.6T transceiver.

Transceiver orders. We're not buying the transceivers, we're receiving the orders.

So for sure, that's how great is the market. But something is slot, okay? It's very comprise the whole is working great. This is good -- but we are never say that. All right. .

I got it. Sounds great. I guess is it fair to say that it sounds though when you say demand on the 800G side is already very high. Does that mean orders? I mean, do you have that level of orders already in for 800G?

Coming through at least from 2 customers because they want to make sure we commit to our promise. You not the problem, they will give us a loading forecast. But to make sure we guarantee what we promised, then sometimes we need to allow agreement and send down for sure they give us order, okay, at least by year or something like that.

Okay. Perfect. And then last question for me. On the 500,000 units, I think you said by second quarter next year, and I think that's 800G and 1.6...

[indiscernible].

End of this year, okay. Just the mix between Taiwan and the U.S. I mean it sounds like you're expanding capacity in both places. Is it, I guess, harder and more expensive to do it here, which is why only a quarter of the capacity will be here. Would you prefer to have more here if you -- if it was easier, like what's the decision making that on that where to do it?

Take much longer time to spend in U.S. takes us great since it's -- I would say the best in the U.S., let me say that. So -- but let me say by end of next year, I would say more than 55% will be manufactured in the U.S. or even 60% or 65% for 800G and 1.6T because that's why we just -- you know that we just got breaking a few weeks ago, it take time, we need more green more space, it's quite expensive and it take time to give the care they don't get heavy equipment, then we do a quite vacation training. It take time while it's catching up. All right? So the number will change a lot. Let me say that, more than 80%, 85% of investment will be in Texas.

Okay. Perfect. Really exciting, looking forward to following us more and seeing you guys at OFC.

And our next question will come from George Notter with Wolfe Research.

Really impressive conversation here in terms of the demand profile. I guess I'm just curious about what you're seeing on tariffs. Obviously, we've had some moves on tariffs recently, 15% across the board tariff. I'm not sure if transceivers are going to be exempt or what the situation is. But can you just talk about kind of the tariff situation, maybe the perception your customers have on tariffs and how that may or may not be translating into orders?

Yes. I guess there's 2 ways to say that. First of all, I mean, I think anybody that's telling you they confidently know exactly what the tariff situation is going to be throughout the year is probably not being truthful I certainly don't -- we have a viewpoint on obviously, on the current tariffs, it's pretty much in line with where we've been in terms of tariffs. I mean I don't expect -- if things stay the same as they are now, I don't expect it to dramatically change kind of the tariff picture that we outlined on the call earlier. That being said, we are looking at the pro in terms of the IEEPA tariffs. Those have been outlawed. So at least there's some pathway where we might be able to recoup some of those.

The other thing that I've said pretty consistently, and I think it ties in with Thompson's earlier comments, while it takes a while to build capacity in the United States, the one thing I could say is -- the one place where I'm pretty confident in saying it's not going to be tariff, it's a product that's made in the U.S., and that's what we're scaling up to do. So the more -- as time goes on, the more we can manufacture in the U.S. and the more that we can attract other supply chain partners, which we are doing to move their production to the U.S. as well. that will help us in the long term, that's going to be the solution for really minimize the tariff impact.

Got it. And then the comment about recouping tariffs. I think you said you were the shipper of record. Is there -- how much could that be? What is the potential upside you guys could get if indeed, you can recoup that?

I mean, sorry, if we could recoup all of it, we had about $4.6 million, I believe, just last quarter in tariffs. We probably paid last year $7 million or $8 million in tariffs overall. Again, we're still analyzing exactly how many of those are IEEPA related, not all tariffs that way. So there's a lot of nuance there, but I mean it's not going to dramatically change our picture, but -- but it certainly would be a welcome cash flow development for sure.

[Operator Instructions] Our next question will come from Ryan Koontz with Needham & Company.

Just maybe stepping back a little bit. As you think about the ramp in 400G with your large customer and 800G, which is pending, maybe can you compare kind of the production and demand view compare and contrast those 2 that gives you confidence in executing your own capacity and visibility from your customer for those 2 different product lines?

Sure. I mean, the 400G products, as we said, are going to continue -- I think there's going to be a continued strength in the sales of those products, driven by a couple of large customers, pretty much the same ones that we've already been shipping to, although we're seeing increased demand from at least one of those customers. But as we said in our prepared remarks earlier, 800G is expected to dominate those sales starting in Q2 of this year. So we'll see more revenue in 800G in Q2 than we did in 400G and then moving through the year and into next year, I think we're going to continue to see a very strong ramp in 800G because that's most closely associated with AI, right? That's the closest to the AI computing clusters at least until we get to 1.6 terabit later this year.

That's helpful. And then on your laser supply indium phosphide, we were down to your facility in the fall, where are you in terms of the equipment you need and kind of lead times with regards to expanding indium phosphide production? Any color you can give us there? And in terms of building out your new facilities and acquiring necessary equipment?

Yes. I mean, as Thompson mentioned, we're planning to triple our production of indium phosphide-related devices here, laser devices made on new phosphide materials by the middle part of next year. And we have line of sight into all that equipment. Some of it is already -- I mean, it would be a very long conversation to go through every piece of equipment and how -- what the schedule is. But the bottom line is, when we talk about tripling our capacity, that includes the equipment that we either have on order or have line of sight into order that will be delivered in time to accommodate that ramp. .

Great. And maybe just one last if I can squeeze in. In terms of cable TV, you mentioned another customer. I assume that's a large U.S. customer moving forward of 1.8 gigahertz here in terms of ES 4.0 East E.

Yes, it is. We have a number of customers. I would -- again, I want to caution, none of those customers are as large as our largest customer, okay? But in aggregate, I think there could be a significant contributor to the revenue, which is what I was trying to outline earlier in my response to Simon's question.

And our next question will come from Tim Savageaux with Northland Capital Markets.

A couple of questions I wanted to follow up on. It looks like given the increase in cable in Q1, you expect data center revenues up about $10 million. I guess what's driving that if you don't expect to 800 gig to ramp until Q2?

Well, I think we're going to see 2 things. We'll see a growth in 400 gig continued growth in 400 gig. And then, we're also -- we also do expect to see some revenue in 800 gig, just not the dramatic ramp that we expect to see starting in Q2.

Okay, great. So principally 400-gig. And you mentioned some, I guess, near-term gross margin headwinds driven by mix, I think you said, but you do have cable TV up in Q1. So I want to get a little more color on what's happening gross margin was there in Q1.

Yes. As we said, I mean, at the end of the day, if you look at our guidance, it's kind of a wash in terms of gross margin, we're seeing a little bit of headwind coming from the product mix, especially 400G, as I mentioned earlier, is going to continue to grow in Q1 until later when 800G started to take over. Meanwhile, in cable, gross margins there are better and they're actually expanding. So that's kind of the put and take on that. That's why it ended up being kind of a wash.

As we said, with the [indiscernible] 800G, we need time to fine-tune the production in the year. That's why this is early stage of volume mix future 800G -- that's what I say, by Q2 next year will be the overall gross margin will be 35% to 38% just for transceiver. By the end of next year, we believe we can achieve more than 40% to see gross margin for order transceiver by Q4 2027.

Okay. Maybe just 1.5 more here. You mentioned expectations for 800 gig to, I guess, dominate revenue? Trying to get a sense of what that means in Q2. You should have about in the $40 million range for 100 gig probably will be in the $40 million a quarter range for 400 gig. Would you expect 800 gig to be larger than both of those combined in Q2? Or how might you frame that?

What we're saying is it will be our largest segment within the data center. And the largest -- it will be the largest contributor to revenue of those 3 800 gig, 100 gig and 400.

I seem to be more than $25 million or $30 million, I don't know something -- as I said, -- the issue in the demand, okay? The Q1, the Q4 delays due to the firmware optimization, but Q2, Q3 is limited by our capacity, all right? It's not demand issues. Let me say that as we said, we got demand from a customer from 2 customers. Even I would say we got the order from that pretty soon, we use in a few weeks. Then the next issue is the supply chain and our manufacture capacity. So when I would say, I'm very common $25 million, but customers could be $35 billion to $40 billion. So this we just say what we see come right now. There is -- all the numbers we say here is not customer demand issue. It's AOI, manufacture and supply chain issue.

Okay. Great. And then I guess last question for me. Talk about the potential for $1 billion in revenue in calendar '26. I think, are in total, I wonder from a customer standpoint, I mean, would you -- I guess, how would you expect customer concentration to look in that scenario? I know you got a big guy on the cable side, I'm principally talking about data center. Do you think primary customer will be half of that or what have you?

So if you break down the revenue, right, if you just take a round number of $1 billion, right? So track the [ 300-ish ] that we have in cable TV, that gives you $700 million-ish left over. Right now, I would expect that's going to be dominated by -- most of that is going to be 2 large hyperscale customers. And they'll probably be roughly equivalent exiting the year. We'll see how that plays out. That's -- it's pretty early to say exactly how the timing on that is going to go. But I would expect at least 2 to be sort of comparable in size, let's put it that way. And then obviously, the third one that would be smaller in scale, still significant.

So I would say we were 2 hyperscale datacenter customers to be more than 10% or much more than 10% for the whole year.

And at this time, we have no further questions. I'll turn the call now over to Dr. Thompson Lin for any closing remarks.

Okay. And thank you for joining our call today. As always, we want to extend a thank you to our investors, customers and employees for your continued support we continue to believe the fundamental driver of long-term demand for our business remain robust, and we are uniquely positioned to deliver to drive value from those opportunities. We look forward to see many of you at upcoming investor conference as well OFC. Thank you.

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

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to Applied Optoelectronics Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this call 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 Third Quarter 2025 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its third quarter 2025 financial results and provided its outlook for the fourth 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 1 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 Q3 results, and Stefan will provide financial details and the outlook for the fourth 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, forecast, anticipate, 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 innovations as well as statements regarding the company's outlook for the fourth 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's 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 fourth quarter and full year 2025 earnings call is currently scheduled for February 26, 2026.

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. We successfully deliver revenue, gross margin and [indiscernible] per share in line with our expectations. [indiscernible] recorded the highest quarterly revenue in our history, driven by strong demand [indiscernible] achieved revenue in the third quarter. The strength we saw in our CATV business more than offset our [indiscernible] revenue is trending [indiscernible] with our expectations, largely due to the timing of certain shipment at quarter end.

In [indiscernible] were approximately $6.6 million in shipping our of [ 400G ] transceiver to a large [indiscernible] customer, who was not able to return into revenue during the quarter due to very shipping and receiving delays and [indiscernible] in Q4. Despite this delay, our financial results clearly highlight the range of having diversified revenue stream as a result of a revenue on a combined basis increased 15% sequentially and [ 22% ] year-over-year.

Probably, we continue to make profits on customer colocation [indiscernible]. As we mentioned last quarter, we believe we are [indiscernible] the final stage of qualifications with several customers. We expect qualifications in the near-term [indiscernible] that we are having with our customers, and we continue to believe that we will produce meaningful shipment [indiscernible] in the fourth quarter. [indiscernible] would be the revenue of [ $118.6 ] million [indiscernible] in line with that kind of a range of $150 million to $127 million. We recorded non-GAAP gross margin of 31%. This was in line with [indiscernible] range of 29.5% to 31%. And on [indiscernible] $0.09 [indiscernible] in line with our guided range or a loss of [ $0.10 ] to a loss of [ $013 ].

Total revenue for our [indiscernible] of $43.9 million increased 7% year-over-year, but was down sequentially. Revenue for our [indiscernible] products includes 32% year-over-year, while revenue for our [indiscernible] product was [indiscernible] year-over-year or $7.1 million. [indiscernible] due to the timing of certain shipment this quarter and [indiscernible].

Total revenue in Q3 in our [ DSD ] [indiscernible] was a [indiscernible] [ $17.6 million ] with more than triple year-over-year and was up 26% sequentially from a strong Q2. This increase is due to the continued ramp in orders for our [indiscernible] products for both existing as well as new customers.

With that, I will turn the call over to Stefan to review the details of our Q3 performance and outlook for Q4. Stefan?

Thank you, Thompson. As Thompson mentioned, we successfully delivered revenue, gross margin and a non-GAAP loss per share in line with our expectations. In fact, we recorded the highest quarterly revenue in our history, driven by strong demand in the CATV market, which also achieved record revenue in the third quarter. The strength that we saw in our CATV business more than offset our data center revenue, which came in a touch below our expectations, largely due to the timing of certain shipments at quarter end.

In particular, we had approximately $6.6 million in shipments of 400G transceivers to a large hyperscale customer, which was not able to be turned into revenue during the quarter due to various shipping and receiving delays and which we have booked in Q4. Despite this delay, our financial results clearly highlight the advantage of having diversified revenue streams. As a result, our total revenue on a combined basis increased 15% sequentially and 82% year-over-year. In Q3, we delivered revenue of $118.6 million, which was in line with our guidance range of $115 million to $127 million. We recorded non-GAAP gross margin of 31%, which was in line with our guidance range of 29.5% to 31%.

Our non-GAAP loss per share of $0.09 was also in line with our guidance range of a loss of $0.10 to a loss of $0.03. We continue to make progress on customer qualifications on our 800G products. As we mentioned last quarter, we believe we are near the final stages of qualification with several customers. We expect qualification in the near term based on conversations that we are having with our customers, and we continue to believe that we will produce meaningful shipments of 800G products in the fourth quarter.

For the third quarter in a row, we did record immaterial revenue for our 800G products related to deliveries for customer qualification activity. As we have mentioned before, our schedule on ramping up our production is largely constrained by our ability to build and qualify production capacity. On that front, we are pleased to report that we made good progress on getting our production ready during the third quarter and remain nearly on track to achieve the targets that we laid out at OFC.

As a reminder, we expect this will culminate later this year with what we believe will be the largest domestic production capacity for 800G or 1.6 terabit transceivers, approximately 35,000 transceivers per month or roughly 35% of our overall capacity for these advanced optical transceivers. Notably, we will be able to accommodate this expansion in our current Texas facility footprint. 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. As I just mentioned, we made solid headway towards these targets for next year.

As you may have seen, we announced last week that we signed an agreement to lease an additional building in [ Sugarland ], Texas. We will begin construction on this new facility later this year and are confident in our ability to scale our production towards the middle to end of next year to achieve our 2026 targets.

It's also important to note that AOI has had an in-house laser manufacturing capability for many years, and we have been expanding and improving this capability recently. While we have heard talks about laser shortages, having a laser production capability in-house gives us an advantage. And to date, we have not experienced a shortage of lasers that has affected our ability to deliver products according to our customers' requests. We've spent years developing our automated manufacturing capabilities, which gives us an advantage in the ability to do manufacturing virtually anywhere in the world that we would like to and makes building out another facility in a cost-effective way in Texas possible.

The message from our customers is consistent. Many of them have a strong preference for production in North America. And so that's what we have been and are currently focused on. When we talk about adding capacity, the lead time for us to add new equipment and add machinery to our production process is typically less than the lead time it would take to hire and train the types of skilled operators that are needed to do the manual processes that are used by most of our competitors.

Just to reiterate, we currently have 3 manufacturing sites, one here in [ SugarLand] , Texas, where our headquarters is and which will soon involve 2 facilities, 1 in [ Ningbo] , China and 2 in Taipei, Taiwan with an additional one under construction. As you may have heard me say at OFC, we expect to increase the total production of 800G and 1.6 terabit products by 8.5x by the end of the year, and we are on track and dedicated to achieving this goal.

During the third quarter, direct tariffs had a $1.1 million impact on our income statement. As it relates to tariffs, also, as I mentioned on our prior couple of earnings calls, 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 reducing this China content, ultimately to near 0.

We are also in discussion with several key suppliers about onshoring their production to the U.S. to support a robust domestic supply chain.

Turning to our third quarter results. Our total revenue was $118.6 million, which increased 82% year-over-year and increased 15% sequentially off a strong Q2 and was in line with our guidance range of $115 million to $127 million. During the third quarter, [ 60% ] of revenue was from CATV products, 37% was from data center products, with the remaining 3% from FTTH, telecom and other.

In our data center business, Q3 revenue came in at $43.9 million, which was up 7% year-over-year and was down 2% sequentially. Sales of our 100G products increased 32% year-over-year, while sales for our 400G products decreased 65% year-over-year or $7.1 million, which was primarily driven by the timing of certain shipments at quarter end that I previously discussed. In the third quarter, 83% of data center revenue was from 100G products, 9% was from 200G and 400G transceiver products and 7% was from 10G and 40G transceiver products.

Looking ahead to Q4, we expect a substantial sequential increase in our data center revenue, driven by growth in 400G revenue as well as layering in some increased 800G revenue.

In our CATV business, we saw exceptionally strong demand in Q3. CATV revenue in the third quarter was a record $70.6 million, which more than tripled year-over-year and was up 26% sequentially from a strong Q2. This increase is due to the continued ramp in orders for our 1.8 gigahertz amplifier products. Similar to last quarter, we shipped a significant quantity of 1.8 gigahertz amplifiers to Charter in the quarter and demand continues to be robust. On our last earnings call, we had discussed how in addition to Charter, we had 6 other MSO customers who had already begun to order and deploy our 1.8 gigahertz products or are in various stages of qualification of these products. We were pleased to see continued momentum with these new customers and are excited to see the broad-based appeal of our amplifiers and [ QuantumLink ] software.

During the quarter, we announced the addition of 4 new software modules to our [ Quantum Link HFC ] remote management solution which offers our customers actionable intelligence to optimize network performance, reduce operational costs and improve the broadband experience. The new suite of software modules are add-ons to our existing [ Quantum Link ] Central, providing telemetry, adding unified visibility, predictive diagnostics and automated controls to our remote amplifier management platform. Most software features will be available this quarter. The feedback we are hearing from our customers is very positive.

In September, we attended the Society of Cable Telecommunications Engineering Expo. We had great interactions with customers and potential customers during the expo. And as I just mentioned, feedback from our customers continues to be very positive with many noting that our amplifiers are groundbreaking in terms of performance, ease of setup and control and monitoring capabilities. As cable operators prepare for substantial upgrades to their infrastructure to meet increased spectrum and bandwidth demand, it's clear that the deployment of next-generation amplifiers and related equipment has become essential. Looking ahead to Q4, we expect strength in our CATV business to continue, although we expect revenue in this business to moderate to between $50 million and $55 million next quarter, following this quarter's exceptionally strong results.

Now turning to our Telecom segment. Revenue from our Telecom products of $3.7 million was up 34% year-over-year and 93% sequentially. As we have said before, we expect telecom sales to fluctuate from quarter-to-quarter. For the third quarter, our top 10 customers represented 97% of revenue, up from 96% in Q3 of last year. We had 2 greater than 10% customers, one in the CATV market, which contributed 66% of total revenue and one in the data center market, which contributed 24% of total revenue.

In Q3, we generated non-GAAP gross margin of 31%, which was in line with our guidance range of 29.5% to 31%, and was up from 25% in Q3 2024 and compared to 30.4% in Q2 2025. The year-over-year increase in our gross margin was driven primarily by our favorable product mix. Looking ahead, we expect continued gradual improvement in gross margin although we expect that the revenue mix in data center in the next few quarters will be a slight headwind. We remain committed to our long-term goal of returning our non-GAAP gross margin to around 40%. The progress we have made so far demonstrates that we're on the right track, and we continue to believe that this goal is achievable.

The revenue figures presented above are net of a contra revenue amount 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 AOI has provided warrants in exchange for future revenue. In Q3, the amount of this contra revenue was immaterial at about $50,000.

Total non-GAAP operating expenses in the third quarter were $47.1 million or 40% of revenue, which compared to $27.9 million or 43% of revenue in Q3 of the prior year. While operating expenses increased this quarter and were a bit higher than our forecast, this rise was largely driven by increased shipping costs related to increased business activity in our CATV business this quarter. Looking ahead, we expect non-GAAP operating expenses to be in the range of $48 million to $50 million per quarter.

Non-GAAP operating loss in the third quarter was $10.3 million compared to an operating loss of $11.7 million in Q3 of the prior year. GAAP net loss for Q3 was $17.9 million or a loss of $0.28 per basic share compared with a GAAP net loss of $17.8 million or a loss of $0.42 per basic share in Q3 of 2024. On a non-GAAP basis, net loss for Q3 was $5.4 million or $0.09 per share, which was in line with our guidance range of a loss of $5.9 million to a loss of $2 million or non-GAAP income per share in the range of a loss of $0.10 to a loss of $0.03. This compares to a non-GAAP net loss of [ $8.8 million ] or $0.21 per share in Q3 of the prior year. The basic shares outstanding used for computing the earnings per share in Q3 were $63.3 million.

Turning now to the balance sheet. We ended the third quarter with $150.7 million in total cash, cash equivalents, short-term investments and restricted cash. This compares with $87.2 million at the end of the second quarter of 2025. We ended the third quarter with total debt, excluding convertible debt of $62 million compared to $54.3 million at the end of last quarter. As I mentioned on our prior earnings call, earlier this year, we announced a 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 September 30, we had $170.2 million in inventory, which compared to $138.9 million at the end of Q2. This 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 initiated a new ATM program. We completed this program during the quarter, raising $147 million net of commissions and fees, which we intend to use mainly for new equipment and machinery for production and research and development use, including the earlier mentioned production expansion in Texas. We made a total of $49.9 million in capital investments in the third quarter, which was mainly used for manufacturing capacity expansion for our 400G and 800G transceiver products. On our last few 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 data center production in 2025.

To date, this year, we have made a total of $124.9 million in capital investments and we are tracking at or above our CapEx projections we gave earlier this year of $120 million to $150 million in total CapEx. We have noted on our prior couple of earnings calls that these costs could be impacted from tariffs, but that given the evolving nature, it is difficult to predict what type of impact or by how much.

In Q3, the direct tariff impact on capital equipment was $1.9 million or roughly 4%, but tariff rates and equipment import mix may cause future results to vary materially. We source equipment from all over the world, including both from domestic and international locations. We have and will continue to do our best to minimize any impacts. It's clear that U.S.-based production is a priority for our customers, and we remain fully committed to expanding our capacity to meet that demand.

Moving now to our Q4 outlook. We expect Q4 revenue to be between $125 million and $140 million, accounting for a sequential decrease in CATV revenue as well as a more substantial sequential increase in our data center revenue. We expect non-GAAP gross margin to be in the range of 29% to 31%. Non-GAAP net income is expected to be in the range of a loss of $9 million to a loss of $2.8 million and non-GAAP earnings per share between a loss of $0.13 per share and a loss of $0.04 per share using a weighted average basic share count of approximately 70.3 million shares.

With that, I will turn it back over to the operator for the Q&A session. Operator?

[Operator Instructions] Our first question comes from Simon Leopold of Raymond James.

I'm going to ask two and start with the cable TV side. So clearly, a strong blowout number here this quarter. So the moderation makes sense. And I guess where I'd like to go is to understand how you're thinking about the broader outlook for CATV in that I recall last quarter, we talked about the potential to do over $300 million in 2026. If we sort of run rate out what you're doing, you're certainly on that trajectory. But I want to assess this given the lumpy nature of cable TV.

Yes, thanks for bringing that up. So yes, I mean, we do think $300 million plus in cable TV revenue is still achievable next year. As you pointed out, we're kind of approaching a run rate there in this quarter. What I think is significant to point out, though, and we pointed this out on the last earnings call as well, that a lot of that growth is going to come from new products that we've announced, and we discussed in our prepared remarks a few minutes ago about the great success that we had at the Society of Cable Telecommunications Engineering Show, showcasing some of our new products, including the software products that we highlighted.

So yes, I think the $300 million plus mark is achievable next year. However, it's not likely to come just from the amplifier products, although again, we expect strong results in the amplifiers, but the additional revenue that we expect to see from those other products should get us up to that $300 million mark.

As we said in the script, we expect the cable TV revenue in Q4 will be reduced to maybe $50 million to $55 million. So that means the data center growth should be a lot, okay? Since the revenue increased by about [ 10% ] compared to Q3. So revenue will increase by $25 million to $40 million in Q4. Because...

Thanks. And then...

Yes, sorry. Go ahead.

Yes. No. So that's why I wanted to follow up on the data center, particularly around your comment about 400 and 800 gig being up, given 800 gig is key right now, I'd like to unpack that a little bit because I don't think you've announced certifications, qualifications on 800 gig yet. It sounds like that's somewhat imminent but I don't want to over interpret.

So maybe just drill down specifically to how you think about 800 gig in that 4Q? And then, of course, how should we think about the timing of when to start thinking about 1.6T? I understand that's not in 4Q, but should we be thinking about that for next year?

Yes. So 800 gig, we do expect meaningful shipments in the fourth quarter, as we said in our prepared remarks. Now the growth in Q4 is largely going to come from 400 gig, but we do expect meaningful revenue from 800 gig in this quarter. And as you pointed out, that would require product qualification to be pretty imminent, which is what we believe.

With respect to 1.6 terabits, yes, we do think that we'll see revenue from 1.6 terabit later next year, but it's not going to be a factor in Q4, as you pointed on, and probably not in the first half of next year.

[indiscernible] especially [indiscernible]. The 1.6T [indiscernible] transceiver we have right now would say [indiscernible] So we are working very hard [indiscernible] by end of this year early next year. [indiscernible] more like I would say, June, July next year for 1.6T. And we have several [indiscernible] products for 1.6T [indiscernible] transceiver and we will announced previously [indiscernible].

Also, Simon, I just want to reiterate something that we've mentioned repeatedly and talked about a little bit on the call. But just for clarity, the factory that we're building both here as well as the increased capacity that we've been adding in Taiwan is capable of manufacturing both 800G and 1.6 terabit on the same production line. The only difference really is in the final testing in terms of the type of equipment that we need.

The next question comes from George Notter of Wolfe Research.

I was just curious if you could tell us more about the shipping and receiving delay at the end of the quarter. I'm just wondering what that was. And can you confirm that it was a single customer? Was it multiple customers? Any insights there would be great. And I've got a follow-up, too.

Sure. It was a single customer, a single hyperscale customer, which is a relatively new customer addition for us. And as a result of that, some of the shipments at the end of the quarter, I can't go into too many details because it's obviously nondisclosure agreements and such. But let's just say that not all the systems that were -- all the inventory management systems and all that have been properly configured at that point to be able to receive those goods in time for us to book them as revenue in the third quarter.

So we resolved that in the first few days of the fourth quarter and have booked that revenue since then. So it wasn't anything that we expect to recur or anything like that. It was just kind of unique to this, I would say, sort of start-up business, if you will, with this particular large hyperscale customer.

Got it. Okay. I'm sorry. So the products were delivered to the customer, but it sounds like ownership couldn't transition because it hadn't been through their inventory management system. Is that the right view?

Yes, basically. I mean there's a system integrator that's involved, again, without going into too many details, but it essentially comes down to just a timing issue with the computer systems on all sides that need to be [indiscernible].

Okay. Got it. And then can you give us an update on the capital spend? I mean you said you're tracking ahead of the $120 million to $150 million for the year. What does that look like now when you layer in Q4? And then how about 2026? Do you have an initial view on what CapEx would look like next year?

Yes. So we don't have -- a lot of the Q4 guidance comes down to sort of timing on when we're going to receive a lot of the equipment. So we're still looking at that. It's probably going to be ahead of that $150 million top end that we said before, but it's unclear at this point exactly how much of that equipment will really be able to be delivered in this quarter. So we'll get back to you on that.

Similarly, for 2026, we're still working on the CapEx plans for 2026. So I would expect it to be above what we're seeing in 2025, but I don't have a precise number yet on that. We're still going through this time.

[Operator Instructions] And our next question comes from Michael Genovese of Rosenblatt Securities.

I guess for 400G with that customer becoming a run rate business. And if I'm not mistaken, I was thinking about 100,000 units per month. So maybe you could update on that. But is that the right way to think about it? And is it getting there in the fourth quarter? And then we should think about that customer being at the same level of 400G per quarter all year in 2026. Am I thinking about that the right way?

So it is approaching -- I mean, it is on track to becoming sort of a run rate business, as you mentioned, that is -- when I hear the term run rate business, so I'm assuming you mean is sort of capacity limited, right? That is we can -- we'll be selling a relatively consistent amount every quarter based on our capacity. So it's on -- it is moving in that direction. We will not be fully at capacity in Q4, not to mention the fact that we're continuing to add some capacity, especially in Taiwan, like we talked about earlier. So it won't reach its maximum potential in Q4 by any means, but it will be a meaningful contributor to revenue.

As Thompson mentioned earlier, if you think about the guidance that we gave, right, cable TV has an implied decline of, let's just say, $15 million roughly, give or take, while the overall revenue is going to be up roughly $15 million, again, give or take, within the ranges that we specified. And so the rest of that growth is going to come from data center. And most of that is going to come from 400G as we discuss earlier. A little bit of 800G, but not a lot. Most of it is going to come from 400G.

[indiscernible] limited our capacity. So right now, for 400G single transceiver in Q4, we can maybe close to 60,000 per month. Then Q2, [indiscernible] to 110,000 to 120,000 per month. So it depends on our capacity [indiscernible] to spend [indiscernible] Taiwan and U.S. The other [indiscernible] laser capacity. it's very important as you know, it's a short news we have laser capacity. That's why AI right now is doing 3-inch, 4-inch next year. At the same time, not to mention the other laser our 25G [indiscernible] for the silicon photonics, we are talking about our target by December next year is at least more than 2 million per month. Where we spend all the CapEx, [indiscernible] all kind of stuff. And for sure, we are working on 6-inch wafer, but it will be more like a [indiscernible] project. But I think 4-inch probably is ongoing and pretty...

Okay. Great. And then it sounds like you've got pretty high confidence of an 800G qualification coming soon if you're putting some in the fourth quarter guidance. So I just want to double click on that confidence. But then also if we just back up 3 months ago, is this process going the way you expected? I know matter of a couple of weeks on either side of no big deal, but did you think you have it by now? Or is this kind of going the way you thought it would go?

I think we should get pretty soon. We will send [indiscernible] 3 to 4 weeks or even sooner. [indiscernible] So finally, they get into volume, but really not [indiscernible] because [ the 150,000 per month or even 200 ] a month. But now we are talking about maybe 10,000, 20,000. So it's not a of [ 100,000 ] per month. By end of [indiscernible], [ 100,000 per month]. By end of June next year we have 20,000 per month. We spend money is based on customer commitment, okay? It's not based on our wish list, let me say that, okay? And don't forget especially in U.S. [indiscernible] space, the capacity, [indiscernible] money. [indiscernible] based on very strong commitment [indiscernible] order...

[indiscernible] directly answer your question about relative to expectations. I think we said that we expected the qualifications to be coming in, in the late Q3 or early Q4. And so we're still in that range, but I would consider what we expected and we're basically still on track for that schedule.

Okay. If I can ask another, what should 100G be doing in '26 versus '25? And just when you compare the ASP of 100G to 800G are we at an 8x multiple? Or is it even higher than that for the ASP of 800 versus 100?

It's not an 8x multiple. It's less than that. With respect to what 800G -- or sorry, what 100G will do next year, I think it's going to be pretty consistent. I don't see a big falloff for sure. It could even go up a little bit. There continue to be new deployments of 100G. So -- but I think the best scenario that I would model in is sort of a flat 100G business next year.

Okay. If I could just ask one more. How are you guys feeling about the -- with the CapEx plans and the expansion plans, you've gone to the market a few times this year. Are you at a good place for your spending next year? Or do you think you're going to have to do more fundraising?

I think we're going to continue to raise the capital that we need to fund the CapEx. I mean our plans continue to expand. What we're hearing from our customers is more and more bullish in terms of the volume that they need and particularly the volume that they'd like to have out of U.S.-based factories, which we don't have yet. I mean we just announced the lease a week or 2 ago of the new facility, which still has yet to be built out. So that's basically a 2026 event. So we're going to continue to add capacity as we see that demand coming from our customers, and it's very strong right now.

But let me say point. One, we have some discussion with 1 or 2 major customers for the U.S. capacity. I think maybe customers will invest AOI maybe [ $200 million ] under discussion. Number two, we are working very close [indiscernible] fund rasing some support, including the U.S. government [indiscernible]. So I think maybe we can get some good money from both Texas and the U.S. government. But number three, don't forget next year, we should be profitable quite a lot. I would say no surprise, our net profit should be more than $150 million next year or even higher. So some of the expansion can be paid by our profit.

The next question comes from Ryan Koontz of Needham & Co.

On the follow-up on the transceiver products here and it sounds like you guys are doing well in silicon photonics. I wanted to ask your view on kind of the macro of [ Sipho ] versus EML versus VCSELs and what you're hearing from your customers about their interest as the data rates move up here to 800 to 1.6?

Well, I would say, first of all, what we're hearing from our customers may just be a function of where they view us in terms of our technological capabilities and what they need. So that is to say, I'm not saying that, for example, when I tell you that our customers like [ Sipho ], they like our [ SiPho ] solution for sure. That's not to imply that they're going to switch all their products over to [ Sipho ]. They have other vendors that are working with EMLs, for example.

So -- but all that being said, I think broadly speaking, I think [ Sipho ] is seen as a technology that has more scalability in terms of its ability to go to higher data rates in the future. I think we're at the early stages of implementing silicon photonics in terms of volume manufacturing and all that. So it's going to take some time for them to become sort of comfortable and let that technology ramp up, but it certainly has more legs in terms of higher data rate than...

Especially you need less laser for [ Sipho ] [indiscernible] a very serious problem shortage of lasers, especially for EML, okay? Not to Mention 200G [indiscernible] EML. So for EML, [indiscernible].

Great. And maybe shifting gears to cable. How are you feeling about share there at your larger customers? Do you feel like the uptick in demand here for cable is this share gain? Is this higher deployment rates? Any view on how you feel about share versus customer spend?

I would say it's share gain primarily. We the customers' plans continue to evolve. But as I mentioned, we've had some very, very successful interaction with our major customers, including the larger MSOs like we talked about with Charter and others, but also with a number of smaller operators. The Society of Cabled Telecommunications Engineers show that we were at was really very, very positive for us. So I think we're taking slacks that could have potentially gone somewhere else and gaining that share.

So besides Charter, we have 6 other customers, and we sized order from 2 of them. So total, we have 7 customers right now for cable TV, 1.8 gigahertz, okay, including 1.2 gigahertz. But next year, we're talking about another 10. So that by end of next year, [indiscernible] 17 [indiscernible] in North America, Latin, Australia, even Asia. So now [indiscernible] customer...

Great. And when you talked about the new products coming in cable, are you referring to nodes or the software products for the amps that you mentioned earlier?

Both. Yes.

Don't forget software is pretty good. That's very important quantum customers really like a lot of problem of the customer. They solve a lot of issues. They can take a lot of operating expense, and that's why they like it. That's why I would say, become the #1 supplier in cable TV. It's only hardware, but integration of hardware and software and system.

[Operator Instructions] Our next question will come from Tim Savageaux of Northland Capital Markets.

A couple of questions, but I want to start with what we've been hearing pretty much all week here is about a pretty dramatic kind of step function increase and really across a lot of the different areas in AI optical, including inside the data center for modules. Focused on 1.6 to some degree, but pretty broad-based seeing.

My first question is, are you seeing that in terms of your conversations with customers about overall levels of transceiver demand, just I don't know, in the last 4 to 6 weeks.

Just look at our I'm sorry, I cut off there. I didn't hear the first part of your question.

No, all good. Go ahead. Sorry.

Yes. So yes, I mean, we're seeing very strong increase in demand. If you look at our guidance, again, just kind of go back to the segment guidance that we gave, it implies a dramatic ramp in data center revenue in the fourth quarter. And we didn't give annual guidance for next year, but we certainly believe that's the beginning of a sustained ramp. So I think we're exactly in sync with what you described. We're seeing that ramp first at 800 gig. But as we talked about later next year, we expect 1.6 to be a strong contributor as well.

Does that answer your question, Tim?

Yes. And I wanted to follow up on your capacity targets exiting the year I think at 100,000 units a month. And Thompson had mentioned before commitments from customers, I guess. And I want to kind of dig into that a little bit more, which is would you be in a position to ship that full -- given there's -- we're running out a year a little bit here, but would you be in a position to ship that full capacity in the first quarter? And do you have either orders on hand, commitments, however you want to describe it to kind of cover those type of volumes starting in Q1 next year?

I would say more like Q2. Don't forget the Chinese New Year and the cycle time is 1.5 months. So we got all ready, we are doing the pilot right now, both in Taiwan and U.S. [indiscernible] going to maybe 90,000 to 100,000 pieces per month of revenue, more like Q2.

And to answer your first question, right now [indiscernible] crazy number, okay? A total more than 300,000 of 800 [indiscernible]. So for sure, we spend money until we got the commitment. So yes, it's true. Right now, all the hyperscale data center customers are really serious. So it's not [indiscernible].

Tim, I just wanted to touch on one thing that your question asked earlier. I want to make sure we're on the same page. So you mentioned the capacity of 100,000 per month. That is our 800 gig or 1.6 terabit, but again, 800 gig primarily this year capacity. In addition to that, we also have capacity for 400 gig. Those are not shared, right? So the 400-gig capacity, as Thompson mentioned, should be 120,000 pieces or more early next year. And we do have customer commitments that would cover that.

At this time, we have no further questions, and I will turn the call back 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. We continue to believe the fundamental driver of long-term demand for our business remain robust, and we are unique position to drive value from these opportunities. We look forward to welcome some of you to our Texas factory tour next week and seeing many of you at the upcoming investor conference. Thank you.

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

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. [Operator Instructions] 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 1 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 expense, 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 expense 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 level 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 8x 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 time lines 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 6 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 6 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 reducing this China content ultimately to near 0. We also are in discussion 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 3 manufacturing sites: 1 here in Sugar Land, Texas, where our headquarters is; 1 in Ningbo, China; and 1 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 8.5x 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 8x 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 2 greater than 10% customers: 1 in the CATV market, which contributed 54% of total revenue; and 1 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. Operator?

[Operator Instructions] 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 sort of 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 minimum 3 Tier 1s 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 important is 1.6Tb. I think we expect to start volume manufacturing maybe around June, July next year. I think that's a 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 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, 2/3 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, really helpful. And then I want to follow up on the cable TV side. You've talked to us about production capacity on datacenter. And I'm just wondering whether or not we need a better understanding of your production capacity if there are constraints on cable TV. And the other aspect is just understanding whether -- I assume you've got visibility into channel inventory because I think when customers deploy your amplifiers, you would know when they're turned up. I believe that's the case. So I'm just trying to get a sense of how much of your revenue is perhaps not deployed yet and somewhere in the channel just to assess the risk of [ sell-in ] from a channel buildup.

Right. So let me touch on one thing real quick at kind of the tail end of your last question regarding gross margin expansion, and it relates to the cable TV business as well. There is still significant cost savings that we expect to achieve over the next few quarters in the cable TV business. That business is not yet hitting its gross margin targets, but we have a pathway to get there. The other thing that will help on the cable TV side relative to gross margin is a greater impact on software as part of our revenue mix. Software will come in with a significantly higher gross margin level. So a couple of other things to add on the gross margin line, even though that's sort of a follow-on to your previous question.

Regarding the manufacturing capacity for cable TV, we're pretty much -- I've said this before, I mean, we're pretty much at the level that we expect to be at. Our goal with cable TV production is really to kind of match what we see all of our customers' aggregate demand being, and we're more or less there. We had a little bit of a pullback last quarter as we retooled, we're expecting a sequential increase this quarter, and that's about the same level that we were at the prior quarter. So we're kind of at that level right now.

Regarding channel inventory, yes, we do have a pretty clear line of sight into what the customer is using. We're very comfortable with the level of inventory that we have. And as we discussed in our prepared remarks, it's not just one customer that we have. We have multiple customers now that are buying these products. And we have a number of other customers in the pipeline. As we talked about, we have 6 different customers that are either buying or in various stages of qualification of the products right now. So we're pretty comfortable with the inventory that we have in the channel. It is substantial, but it's in line with our customers' demand in aggregate.

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 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, U.S., Canada, all right?

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 3 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 like those are the only customers that we have, but all 3 of those customers are existing customers.

It's not really Tier 2, it could be Tier 1.

Depending on where you draw the line.

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

Okay. Great. And then on the guide for the cable TV to be sort of near all-time high in 3Q, is that more than one customer? Or is that still to the primary customer only?

More than one customer.

Yes. Great. I think my question might have been answered on the last question, but I just want to verify that I heard it correctly. That $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.

Right. And any sense of how much of that is -- I imagine the large majority of that is amplifiers, but is there any significant amount of nodes in there?

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

And then I thought Simon's questions about the gross margins were super helpful. But I guess now I'm just wondering about the timing maybe of not all the way to 40%, but maybe like mid-30s. Is there any kind of timing expectation you'd want to set there? Or is it like a one quarter at a time, wait-and-see?

No. I mean I think our guide right now, as you could see, is kind of consistent at around 30%. It's going to take us a couple of quarters to see a bigger impact from 800G business and the impact of some of the cost reduction efforts and increased software revenue that we 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.

[Operator Instructions] 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. So I mean, cable TV right now is kind of in the low to mid-30% range. And obviously, the transceivers are below 30% at this point. So they average out to be around 30%. I think we can get -- I mean, we've been pretty consistent that our expectation for gross margin in cable is to get above 40%, and we think we can achieve that. So that's where that is heading. With respect to the transceivers, again, mid- to upper 30% is, I think, where it can be such that we can blend out to 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 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?

Right. So 400G is already qualified. We talked about the first volume shipments occurring this quarter -- I mean, last quarter, the quarter that we're reporting on, Q2. So that's already happened. 800-gig, there's really not much that has to happen. But as we discussed in our prepared remarks, we have to have production capacity available for 800G, meaningful production capacity available for 800G, before there's any need for them to give us the green light to go ahead and produce. We're pretty close to that right now. We outlined our targets at OFC, and we're sticking to that. We're tracking pretty well to those targets. So really, what has to happen is we've got to have enough production capacity to be able to accept meaningful orders for them to finish the qualification.

So as in this quarter, this customer maybe will become 10% customer. And by Q4, I would say 400G may become our biggest revenue creator for datacenter, bigger than 100G in Q4. So you can see how fast the 400G revenue is coming up in this year. But for sure, the 800G will become the biggest contributor by, I would say, Q2 next year; for sure, Q3. So you can see overall how fast the revenue -- and 100G is not going down, okay, don't take me wrong. I would say 100G will stay similar, but 400G is picking up so strong in Q3, Q4. And Q4, 400G become the biggest, even bigger than 100G. But at the same time, by Q2, Q3 next year, 800G will be even bigger than 400G, okay? That's my point.

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.