• Revenue: $65.2 million, up 4% year over year and up 51% sequentially.
• Non-GAAP Gross Margin: 25%, within guidance range of 24% to 26%.
• Non-GAAP Loss Per Share: $0.21, above expected range of $0.14 to $0.20.
• Data Center Revenue: $40.9 million, down 16% year over year, up 90% sequentially.
• CATV Revenue: $20.9 million, up 104% year over year, up 260% sequentially.
• Telecom Revenue: $2.8 million, down 9% year over year, up 18% sequentially.
• Total Cash and Equivalents: $41.4 million at the end of Q3.
• Total Debt: $39.4 million, excluding convertible debt.
• Inventory: $64.4 million, up from $54.3 million in Q2.
• Capital Investments: $11.4 million in Q3.
• Q4 Revenue Outlook: $94 million to $104 million.
• Q4 Non-GAAP Gross Margin Outlook: 27.5% to 29.5%.
• Q4 Non-GAAP Net Income Outlook: Loss of $1.9 million to income of $1.7 million.

• Warning! GuruFocus has detected 5 Warning Signs with AAOI.

Release Date: November 07, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Applied Optoelectronics Inc (NASDAQ:AAOI) recorded strong double-digit growth in its data center business, driven by new wins for its 400G products.
• The company's CATV business more than tripled from the second quarter, driven by customer transitions to new architectures.
• Revenue for 400G products increased by 114% year over year, indicating strong demand and market acceptance.
• Applied Optoelectronics Inc (NASDAQ:AAOI) began receiving initial orders for 400G products from another large hyperscale customer, with expectations for additional orders into 2025.
• The company expects continued growth in both its data center and CATV businesses, driven by the adoption of generative AI and next-generation architectures.

Negative Points

• Applied Optoelectronics Inc (NASDAQ:AAOI) reported a larger-than-expected loss per share of $0.21, above the anticipated range due to accelerated R&D spending.
• Total revenue for data center products was down 16% year over year, despite a 90% sequential increase.
• Non-GAAP operating expenses increased significantly, primarily due to higher R&D spending and expedited shipping costs.
• The company's non-GAAP gross margin decreased from 32.5% in Q3 2023 to 25% in Q3 2024.
• Applied Optoelectronics Inc (NASDAQ:AAOI) anticipates continued elevated operating expenses in the near term, impacting profitability.

Q & A Highlights

Q: What is driving the increased demand for 400G products, and is this demand sustainable? A: Stefan Murry, CFO and Chief Strategy Officer, explained that the demand is driven by data center customers needing interconnections for AI networks. He anticipates this demand will not decrease in the near or medium term, as 400G is essential for next-generation architectures. The demand is expected to continue growing, especially with new customers beginning to purchase 400G products.

Q: Can you comment on the types of transceivers expected to be sold, particularly in relation to 800G products? A: Stefan Murry stated that the company focuses primarily on edge-emitting technology, such as electro-absorption modulated lasers and silicon photonics-based solutions. While there is interest in VCSEL-based solutions, the bulk of demand is expected to be for longer-distance transmitters.

Q: How does the company view its customer base among the top hyperscale data center operators? A: Stefan Murry confirmed that Applied Optoelectronics has three out of the top five data center customers. He noted that they are re-engaging with a former sizable customer, which could potentially become a 10% customer in the future.

Q: What is the outlook for margins, particularly with the transition to 800G and 1.6 Terabit products? A: Stefan Murry indicated that cable TV margins are currently higher than data center margins and are expected to improve due to manufacturing efficiencies. The transition to 800G and 1.6 Terabit products should also be accretive to gross margins, with a long-term target of 40% margin.

Q: What factors are driving the expected revenue increase in Q4, and how do different products contribute to this growth? A: Stefan Murry noted that Q4 growth is driven by continued strength in cable TV and data center segments, particularly 400G products. While 800G will contribute slightly in Q4, it is expected to ramp significantly in Q1. The company also sees unexpected strength in 100G products.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.