Applied Optoelectronics, Inc. 2026 Q2 Earnings Call

Thank you. I'm Lindsay Savarese, investor relations for Applied Optoelectronics. I'm pleased to welcome you to AOI second quarter 2026 financial results conference call. After the market closed today, AOI issued a press release announcing its second quarter 2026 financial results and provided its outlook for the third 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 one year. Joining us on today's call is Dr. Thompson Lin, AOI's Founder, Chairman, and CEO, and Dr. Stefan Murry, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q2 results, and Stefan will provide financial details and the outlook for the third quarter of 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 terminology such as believes, forecasts, anticipates, estimates, suggests, 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 third 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 Forms 10-K and quarterly reports on Form 10-Q. 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 ao-inc.com. Before moving to the financial results, I'd like to note that AOI management is attending Rosenblatt's Sixth Annual Technology Summit virtually on August 18th.

This discussion will be webcast live and a link to the webcast will be available on the investor relations section of ao-inc.com. I'd like to note that the date of AOI's third quarter 2026 earnings call currently scheduled for November 5th, 2026. 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 second quarter results that were in line with or better than our expectations, driven by robust demand in both our data center and CATV business. We generated our fifth consecutive quarter of record revenue, and we achieved an important milestone as we return to non-GAAP profitability in the quarter. Demand to support next generation AI infrastructure remains so robust that our near-term revenue is bounded almost entirely by production capacity and key component availability. We continue to anticipate steady sequential revenue growth this year and continue non-GAAP profitability. During the second quarter, we delivered revenue of $191.9 million and non-GAAP gross margin of 29.8%, in line with our expected guidance range and our non-GAAP income per share of $0.06 came in above our expectations.

During the quarter, we saw continued robust customer engagement around our 800G and 1.6 terabit products. We saw a strong volume ramp of our 800G product in Q2, which more than doubled sequentially. Forecast demand continue to outpace our production capacity through mid-2027. We are working hard to add additional capacity to meet this demand. We continue to believe our 2026 revenue will be around $1.1 billion this year. I will turn the call over to Stefan to review the detail of our Q2 performance and outlook for Q3.

Stefan. Thank you, Thompson. As Thompson mentioned, we are pleased to deliver solid second quarter results that were in line with or better than our expectations.

We generated our fifth consecutive quarter of record revenue. We achieved an important milestone as we returned to non-GAAP profitability in the quarter. Our performance continues to be anchored by robust demand across both our data center and CATV businesses, validating the power of our dual growth strategy and diversified revenue streams. Demand to support next generation AI infrastructure remains so robust that our near-term revenue is bounded almost entirely by our production capacity and key component availability. Because of this, we continue to anticipate steady sequential revenue growth and continued non-GAAP profitability this year as more capacity comes online. In Q2, we delivered revenue of $191.9 million, which was in line with our guidance range of $180 million-$198 million.

We recorded non-GAAP gross margin of 29.8%, which was in line with our guidance range of 29%-30%. Our non-GAAP income per share of $0.06 was above our guidance range of a loss of $0.03 to earnings of $0.03. Notably, we continued to make progress on our key priorities in the second quarter, which included, 1, scaling our next generation data center products, including both our 400G and 800G solutions, by expanding our production capacity in a disciplined manner. 2, diversifying our revenue base. 3, strengthening operational execution to improve our margins and position us for long-term profitability. Today, that execution is directly translating into tangible business momentum. During Q2, we continued to see robust customer engagement around our 800G and 1.6 terabit products, particularly as AI-driven data center investments accelerate.

In line with our expectations, we saw a strong volume ramp of our 800G products in the second quarter. 800G revenue of $12.8 million, or 11.9% of our total data center revenue, increased more than tenfold year-over-year and more than doubled sequentially in Q2. Looking ahead, we expect revenue from our 800G products to grow by nearly 5 times sequentially in the third quarter and expect continued strong growth, gated by our production capacity and component supply in the fourth quarter. During the quarter, in line with our expectations, we saw continued strength in our 400G business. 400G revenue of $48.4 million, or 45% of our total data center revenue, increased more than fourfold year-over-year and 27.4% sequentially in the second quarter.

As a reminder, 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 had received 2 new volume orders from this customer for our 800G single mode transceivers. We began delivering these 800G orders in Q2. We expect full qualification of our first 1.6 terabit product by this customer within the next couple of weeks, followed by shipments of 1.6 terabit beginning later this quarter. We continue to expect that shipments of these orders will return this customer as a 10% plus customer for us in Q3. 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 and secure necessary key components to meet this demand.