Applied Optoelectronics - Q1 2024

Transcript

Operator (participant)

Good day, and welcome to the Applied Optoelectronics Q1 2024 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone, and to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Lindsay Savarese, Investor Relations for AOI. Please go ahead.

Lindsay Savarese (Head of Investor Relations)

Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics. I am pleased to welcome you to AOI's Q1 2024 financial results conference call. After the market closed today, AOI issued a press release announcing its Q1 2024 financial results and provided its outlook for the Q2 of 2024. The release is also available on the company's website at ao-inc.com. This call is being recorded and webcast live. A link to the recording can be found on the investor relations section of the AOI website and will be archived for one year. Joining us on today's call is Dr. Thompson Lin, AOI's Founder, Chairman, and CEO, and Dr. Stefan Murry, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q1 results, and Stefan will provide financial details and the outlook for the Q2 of 2024.

A question-and-answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AOI's Safe Harbor statement. On today's call, management will make forward-looking statements. These forward-looking statements involve risks and uncertainties, as well as assumptions and current expectations, which could cause the company's actual results, levels of activity, performance, or achievements of the company or its industry to differ materially from those expressed or implied in such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as believe, forecast, anticipate, estimate, 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 our products into new markets and customer responses to our innovations, as well as statements regarding the company's outlook for the Q2 of 2024. Except as required by law, we assume no obligation to update forward-looking statements for any reason after the date of this earnings call to 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 the company's reports on file with the SEC, including the company's annual report on Form 10-K and the company's 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 our earnings press release that is available on our website. Before moving to the financial results, I'd like to announce that AOI management will virtually participate at the Needham Technology, Media, and Consumer Conference on May 16th.

I'd like to note that the date of our Q2 2024 earnings call is currently scheduled for August 8, 2024. Now, I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics founder, chairman, and CEO. Thompson?

Thompson Lin (Founder, Chairman and CEO)

Thank you, Lindsay. Thank you for joining our call today. Our revenue and non-GAAP cost margin for the Q1 came in below our expectations, and our non-GAAP EPS was in line with our expectations, despite the slow start to the year. Based on our current forecast and very constructive customer interactions, we remain very positive on improvement in the H2 of the years. During the Q1, we delivered revenue of $40.7 million, which was just below our guidance range of $41 million-$46 million. We delivered non-GAAP cost margin of 18.9%, which was below our guidance range of 21%-23%, mainly driven by difference in product mix. Our non-GAAP loss per share was $0.31, which was within our guidance range of a loss of $0.28-$0.33 per share.

Total revenue for our data center product of $29 million was up 42% year-over-year and was down 35% sequentially. Revenue for our 800G product increased 33% year-over-year, and revenue for our 400G products more than doubled in the same period. Total revenue in our CATV segment was $8.7 million, which was down 69% year-over-year and down 30% sequentially, largely driven by continued generally slow sales of DOCSIS 3.1 equipment as the industry prepares to transition to DOCSIS 4.0. With that, I'll turn the call over to Stefan to review the details of our Q1 performance and outlook for Q2. Stefan?

Stefan Murry (CFO and CSO)

Thank you, Thompson. As Thompson mentioned, our Q1 revenue and non-GAAP gross margin came in below our expectations, while our non-GAAP EPS was in line with our expectations. Based on our current forecast and very constructive customer interactions, we remain very positive on improvements in the H2 of the year. We believe that the long-term demand drivers remain strong for both our data center and CATV businesses, and we believe we are well positioned to capitalize on these opportunities. Looking to the back half of the year, there are a few key items to note that give us a basis for our optimistic outlook despite the slow start to the year. The first is that we have begun to receive forecasted orders for the VCSEL based 400G active optical cables, for which Microsoft provided development funding last year.

While the pace of product adoption has been somewhat slower than we anticipated, we believe that the fact that we are now receiving forecasts for these products for delivery in Q3 is a significant step in seeing meaningful business improvement. The second is that follow-on projects to our 400G AOC program, specifically for our 800G and 1.6T products, have been fast-tracked with our customers as they address an acceleration in demand for infrastructure around AI. We are being asked to compress the time from development to scale production as much as possible in order to meet this accelerated demand.

The third is that we have continued to experience significant traction and continue to have meaningful discussions with multiple large data center customers, some of which are new customers to AOI or customers that we have not worked with in many years, specifically for our 400G, 800G, and 1.6T products. We expect one or more of these customers will begin to contribute meaningfully to revenue starting in Q3. And lastly, we believe that the transition to DOCSIS 4.0 will begin to take place in Q3, and that our products are aptly designed for the deployment of amplifiers and other network elements required for DOCSIS 4.0. We shipped our first fully production-ready DOCSIS 4.0 amplifier samples to a major customer last week, and the feedback, while early, has been exceedingly positive.

With the improvement we expect in the H2, we continue to believe that 2024 can be our first full year of non-GAAP profitability since 2018. Turning to the quarter, our total revenue for the Q1 was $40.7 million, which was down 23% year-over-year and 33% sequentially, and which was just below our guidance range of $41 million-$46 million. As we had discussed on our prior earnings call, the softness in Q1 was largely due to the combined effects of the Lunar New Year holiday in our Asian factories, along with some price reductions, which took effect in the quarter. During the Q1, 71% of our revenue was from our data center products, 22% was from our CATV products, with the remaining 7% from FTTH, telecom, and other.

Turning to our data center business. Our Q1 data center revenue came in at $29 million, which increased 42% year-over-year and was down 35% sequentially. In the Q1, 73% of our data center revenue was from our 100G products, 17% was from our 200G and 400G transceiver products, and 3% was from our 40G transceiver products. As we have discussed on several prior earnings calls, we signed two agreements with Microsoft in 2023 for the development of 400G products and beyond. This included a development program to make next-generation lasers for its data center and for the development of its 400G and next-generation active optical cables.

While not guaranteed, we continue to believe that the revenue opportunity for our 400G and 800G products could be greater and a longer duration than the revenue contribution we saw from this customer during the peak of the 40G product cycle, which suggests that revenue from these products may exceed $300 million over the several years of these build-outs. We began shipments late last year and have begun to receive new forecasted orders, which we expect to contribute to revenue later in Q2 and we believe will continue to ramp strongly in Q3 and Q4. Also, as a reminder, in 2023, we shipped samples of our 800G products to three different data center customers and have received initial positive feedback.

As we discussed above, we are in detailed discussions with several hyperscale data center operators about ramping production for our 800G and 1.6T products starting in Q3 for 800G and early Q1 of 2025 for the 1.6T products. These dates are several months earlier than we had previously been requested to deliver, and we believe the acceleration in the schedule is being driven by faster deployment of technology needed by AI workflows. Turning to our CATV business. CATV revenue in the Q1 was $8.7 million, which was down 69% year-over-year and down 30% sequentially, largely driven by generally slow sales of DOCSIS 3.1 equipment as the industry prepares to transition to DOCSIS 4.0.

Looking forward, we continue to expect that our near-term CATV business will be down compared to the historic highs we saw in 2021 and 2022, as the MSOs transition to next-generation architecture. We anticipate this transition to DOCSIS 4.0 will begin to take place in Q3, and we are optimistic about the H2 of the year and 2025. As a reminder, we shipped initial test samples of our 1.8 GHz amplifier products to two major MSOs in Q4 of last year, and we received encouraging feedback on their performance and pricing. We are pleased to report that we shipped final qualification units of various amplifiers last week, and we would expect revenue to begin as early as the end of Q2, with significant ramp in the H2 as we increase manufacturing capacity for these new products.

As Thompson mentioned, we will continue to carefully monitor MSO plans to upgrade to DOCSIS 4.0 networks, and we continue to believe AOI is a leader in technologies that will enable DOCSIS 4.0, and that we have the right portfolio in place to address our customers' needs. Now turning to our telecom segment. Revenue from our telecom products of $2.3 million was down 39% year-over-year and down 19% sequentially, largely driven by ongoing softness in 5G demand, particularly in China. Looking ahead, we continue to expect telecom sales to fluctuate from quarter to quarter. For the Q1, our top 10 customers represented 92% of revenue, down from 93% in Q1 of last year.

We had two greater than 10% customers, one in the data center market and one in the CATV market, which contributed 62% and 21% of our total revenue, respectively. In Q1, we generated non-GAAP gross margin of 18.9%, which was below our guidance range of 21%-23% and was down from 36.4% in Q4 of 2023, and down from 23.2% in Q1 of 2023. The decrease in gross margin was driven mainly by product mix and some price reductions, which took effect during the quarter. Looking ahead, we expect improving gross margins throughout the year as product mix improves in our data center business and CATV revenue begins to ramp. We remain committed to the long-term goal of returning gross margin to around 40% and believe that this goal is achievable.

Total non-GAAP operating expenses in the Q1 were $24.8 million, or 61% of revenue, which compared to $19.6 million, or 36.9% of revenue in Q1 of the prior year, due to higher R&D spend. Looking ahead, we continue to expect non-GAAP operating expenses to range from $24 million-$26 million per quarter to account for the acceleration of R&D expenses to improve time to market for our 800G and 1.6T data center products. Non-GAAP operating loss in the Q1 was $17.1 million, compared to an operating loss of $7.2 million in Q1 in the prior year.

GAAP net loss for Q1 was $23.2 million, or a loss of $0.60 per basic share, compared with the GAAP net loss of $16.3 million, or a loss of $0.56 per basic share in Q1 of 2023. On a non-GAAP basis, net loss for Q1 was $12 million, or $0.31 per share, which was within our guidance range of a loss of $10.9 million-$12.6 million, and in line with our guidance range of a loss per share in the range of $0.28 to a loss of $0.33 per basic share. This compares to a net loss of $7.1 million, or a loss of $0.25 per basic share in Q1 of the prior year.

The fully diluted shares outstanding used for computing the earnings per share in Q1 were 38.4 million. Turning now to the balance sheet. We ended the Q1 with $17.4 million in total cash, cash equivalents, short-term investments, and restricted cash. This compares with $55.1 million at the end of the Q4. This cash balance reflects a few slow-paying AR receipts totaling about $11 million, which were subsequently received in the first two weeks of Q2. Also note that we used almost $4 million in cash to reduce debt during the quarter. We ended the quarter with total debt, excluding convertible debt, of $34.8 million, compared to $38.7 million at the end of last quarter.

As of March 31, we had $54.3 million in inventory, compared to $63.9 million at the end of Q4. We made a total of $7.8 million in capital investments in the Q1, which was mainly used for production and R&D equipment. Moving now to our Q2 outlook. We expect Q2 revenue to be between $41.5 million and $46.5 million, and non-GAAP gross margin to be in the range of 25.5%-27.5%. Non-GAAP net loss is expected to be in the range of $11.6 million-$13.5 million, and non-GAAP loss per share between $0.29 and $0.34 per basic share, using a weighted average basic share count of approximately 39.2 million shares.

Looking ahead, as the widespread adoption of generative AI continues to place increased demands on our customer data centers, we believe that these customers will ultimately need to deploy more infrastructure to meet these needs, which will provide a long tailwind of demand for the optical industry. Our U.S.-based production ability, combined with our automated manufacturing capabilities and experience, puts us in a unique competitive position to address these needs. Further, as our CATV customers transition to next-generation architecture and implement new technologies like DOCSIS 4.0, we believe that we have positioned ourselves as a leader in technologies that will enable DOCSIS 4.0, and we are confident that we have the right product portfolio, team, and strategy in place to capitalize on this upcoming transition.

We have spent several years developing these products, and we expect that they will go to market in the next few months. In sum, we believe that the long-term demand drivers remain strong for both our data center and CATV businesses, and we believe we are well positioned to benefit from these growing long-term trends. With that, I will turn it back over to the operator for a Q&A session. Operator?

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Simon Leopold with Raymond James. Please go ahead.

Simon Leopold (Managing Director)

Hey, thanks for taking the question. A couple quick ones, maybe. I think on the prior conference call, you had given us some indication that you thought the full year revenue could exceed $300 million. Given the slower start to the year, it does sound like you still expect a much stronger H2, but how do you feel about that full year $300 million target?

Stefan Murry (CFO and CSO)

Well, what we've said is that we think we can be profitable for the year. So, you know, if you can run the numbers on that, I—we don't give guidance, you know, annual guidance, really. So, I wouldn't say we're pulling back on anything. It's obviously gonna be a little more challenging considering where we started the year, but I think it's still very, achievable, let's say that.

Simon Leopold (Managing Director)

Okay. And then, you did give us some indication of the operating expense expectations for the year at that $24 million-$26 million per quarter. And I think we were anticipating more of a $22 million-$24 million per quarter, and that may simply be just extrapolating too much from the Q1 forecast. Did something change in terms of your expectation of what you need to spend on sales, marketing, and R&D?

Stefan Murry (CFO and CSO)

As we noted in our prepared remarks, we've you know increased our R&D spend a little bit, because we're getting, you know, as I talked about, we're getting customers that are pulling in their request for product development months ahead of schedule. And so we need to spend additional R&D. I wouldn't say it's additional overall, but we're spending it quicker than we otherwise would. So it does represent a slight increase to our R&D. Sales and marketing, not too much increase in sales and marketing.

Simon Leopold (Managing Director)

Thanks. Then, I remember at our meeting at OFC, you had talked about sort of a product roadmap going from the VCSEL based solutions to VCSELs and EMLs and ramping up to higher per-channel speeds. Could you give us an overview of the roadmap you expect in terms of launches over the next, you know, year plus?

Stefan Murry (CFO and CSO)

Right. So the VCSEL based products are, you know, already in production. And, you know, we'll likely add higher speed lane VCSELs to that portfolio next year. With respect to the EML based products, you know, we have some products in production now. The higher speed data center products with EMLs will go into production in late Q3 or late Q4.

Simon Leopold (Managing Director)

And what was your 400G in the quarter? I missed that.

Stefan Murry (CFO and CSO)

400G in the quarter. Let me get you that number here. It was 17% of the data center revenue, so $29 million, 17% of that.

Simon Leopold (Managing Director)

Okay, and that was just 400G, not, not 400-

Stefan Murry (CFO and CSO)

400 doubling last year.

Simon Leopold (Managing Director)

Wait, say that again?

Stefan Murry (CFO and CSO)

And that's a little over doubling compared to... Well, it was slightly over doubling from the same period last year.

Simon Leopold (Managing Director)

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

Stefan Murry (CFO and CSO)

Thanks a lot.

Operator (participant)

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

Michael Genovese (Managing Director and Senior Research Analyst)

Oh, great! Thanks. I guess to start with, I wanted to ask some questions about Microsoft. Like, if you had any more color on why you think that it's going slower than initially expected. But then secondly, you know, how do you expect orders to trend in the Q2? Like, do you see orders in the month of June being above the month of May? Is there any visibility to that? And then finally, it sounds like your comments on the overall size of this $300 million plus have maybe gotten a little bit more bullish, but maybe that's because you've added 800G to it. So if you could help us understand that as well. Thank you.

Stefan Murry (CFO and CSO)

Sure.

Michael Genovese (Managing Director and Senior Research Analyst)

First one is-

Stefan Murry (CFO and CSO)

I'm sorry, what? I missed that.

Michael Genovese (Managing Director and Senior Research Analyst)

Sorry, I was just reminding you, the first one was why the delay.

Stefan Murry (CFO and CSO)

Yeah, I wouldn't really say it's an overall delay. If my prepared remarks sounded that way, that's not what I was trying to say. There was a slight delay in one particular program, which really just reflects the fact that it's a new product, and, you know, sometimes new product launches just take a little longer than expected. There's nothing, you know, nothing particular that I can point to with respect to that. It is positive that we're getting new updated forecasts now that, you know, would indicate shipments beginning later in Q2, and then ramping quickly in Q3 and Q4. So that's all, that's all positive. I wouldn't read much into the delay itself. Overall, the revenue in our data center business is about where we expected it to be in Q2.

So there's not really a, you know, significant change from our earlier thinking. That small delay in the business from Microsoft is being more than compensated by, you know, other data center customers. So it's not anything overall that I'm trying to point to there, just that one particular product that's got somewhat of a delay. Your second question had to do with the $300 million target and whether that represents a change. No, fundamentally, other than that, you know, we mentioned that we're having to pull in 800G and 1.6T faster. Now, 1.6T won't be a factor this year, but it will be early next year. But the acceleration in 800G is certainly helpful to try to meet that goal. And then, sorry, I forgot your third question there. What was it?

Michael Genovese (Managing Director and Senior Research Analyst)

Well, I'll tie that in with my next and last question. So, it was about the orders. If, for instance, you think that, you know, if there's a reason to think as you're seeing these forecasts, that, for instance, June would be up from, you know, up from May, which is up from April, if you're seeing that kind of trend at this customer. But I might as well just ask, I mean, you said, you know, 1Q data center revenues were about where you expected them to be. How do you see them trending in Q2 and 3Q, if you could address that, and then that would be it.

Stefan Murry (CFO and CSO)

I wanna be clear. Yeah, well, first of all, maybe I misspoke earlier. Q1 and Q2 data center numbers are about what we expected them to be. Cable TV in Q2 is coming in a little lighter than what we had expected. And that explains, you know, to the extent that, I mean, we didn't give guidance until now in Q2, but to the extent that, you know, there was some change in our thinking, it had to do with Cable TV, not data center. Data center overall is doing almost, you know, actually, it's slightly ahead of plan compared to where we thought it was gonna be.

I mentioned earlier, Microsoft had a delay in one product, but the rest of them are going fine, and that slight delay in that one product was more than compensated for in Q2 by growth in other customers. So, with respect to,

Thompson Lin (Founder, Chairman and CEO)

So this is Thompson. Let me say, as in overall for data center, I think we feel more positive right now compared to a few months ago. The main reason is 800G. Right now, I think at least we can see several big customer, especially two hyperscaler customer, are pulling the schedule for 800G. But Cable TV, you know, Cable TV is quite slow because all the customers are waiting for 1.0 AG product. So, you know, the usual delay in Cable TV is not surprising, as you can see from other companies.

Stefan Murry (CFO and CSO)

Michael, I just wanna touch on your last question there and try to answer it directly. Yeah, you know, are we seeing a trend of more orders kind of month by month? And the answer is yes. As I mentioned earlier, you know, that one program, for example, from Microsoft, that's somewhat delayed. We do expect it to pick up towards the end of this quarter, so that would, you know, mean June months would be bigger than May, and that was certainly bigger than April. So we are seeing that trend with that product, but overall, we expect to see that trend somewhat throughout the quarter.

Although, again, I would say, for the most part, the data center business, outside some of these new programs, and especially the 800G products later in the year, is, you know, it's a relatively consistent business at this point.

Michael Genovese (Managing Director and Senior Research Analyst)

Okay, great. I'll pause for now. I might come back later or send my questions for offline. Thank you.

Stefan Murry (CFO and CSO)

Okay, sounds great. Thanks.

Operator (participant)

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

Tim Savageaux (Senior Research Analyst)

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

Stefan Murry (CFO and CSO)

Yep, we can hear you.

Tim Savageaux (Senior Research Analyst)

Hello, hello. All right, great.

Stefan Murry (CFO and CSO)

Hello?

Tim Savageaux (Senior Research Analyst)

Yeah, I'd say with the new OpEx forecast, it seems like maybe something reasonably over $300 million is what you would need to get you there. And so that's a pretty significant ramp in the H2, you know, almost 3x over the first, although we've seen that recently, a couple different places, most recently at Coherent. So I guess as you look at that ramp, and then the 800G opportunities in particular, I'm hoping you might be able to size those for us in a fashion maybe similar or analogous to how you've been talking about the Microsoft 400G opportunity. That's one question. And you've talked about new data center customers or some old data center customers coming back. Should we assume this discussion around 800G and 1.6T also applies to Microsoft, or is it more focused on the new players?

Stefan Murry (CFO and CSO)

No, I mean, we specifically, maybe I, maybe I wasn't totally clear from the prepared remarks, but it's, it's, you know, our existing customers that we have now, plus the new customers for those 800G and 1.6T products. So Microsoft clearly is, would be included in the category of existing customers. And as far as the size of the market, you know, what we're seeing right now is that 800G is, is several times as large, as the 400G opportunity. So it represents, you know, a dramatic expansion, and that's, that's, you know, within the same customer. If you add on, you know, the new customers that we're referring to, the market size there gets, you know, commensurately larger.

Tim Savageaux (Senior Research Analyst)

... Great. And so as you look at that data center ramp, into the H2, I mean, would you imagine between your current 400G, would you imagine that to be, I don't know, half 800G? Or, or how are you looking at it now? And, and to what extent are you looking at a material, cable TV networking contribution in the H2 as, as part of that ramp?

Stefan Murry (CFO and CSO)

Yeah, I think that's the key point, really, is the cable TV has been, you know, kind of to the extent that there's been a disappointment in Q2, it's mainly that cable TV is ramping slower than we expected. And that's just, as Thompson mentioned, you know, somewhat that's par for the course. I mean, we were optimistic that the MSOs would move a little faster into 1.8, but, you know, it's taken them a little longer to get through the qualification and get all the necessary, you know, training and what have you done. But we do expect them to ramp in the H2 of the year, and that, that will contribute meaningfully towards the revenue ramp, but it'll also help us improve the gross margin, which is, you know, significantly higher in the Cable TV segment than it is in data center.

Thompson Lin (Founder, Chairman and CEO)

I can add something. It's for the 800G business, we can see, I think we are discussing with at least I think three, four customers, for sure, including Microsoft. I think it's, I would say more than $500 million-$600 million next years for AI. Just 800G.

Tim Savageaux (Senior Research Analyst)

Sorry. Thompson, is that, is that in the, in the aggregate, or what kind of time period, or maybe we can, Sam, can we put some more brackets around that $500-$600, as I think I heard you say?

Thompson Lin (Founder, Chairman and CEO)

I think we are doing qualification. I think we should get some volume order by next Q3. So it's about the next year, Q1 to Q4 next year, I would say, just 800G only is more than $500 million or even $600 million for AI, based on this customer.

Tim Savageaux (Senior Research Analyst)

That was going to be my last question, actually, in terms of the nature of these detailed discussions and, kind of, is that around qualification or, you know, where do we stand on that front?

Stefan Murry (CFO and CSO)

No, it's around-

Tim Savageaux (Senior Research Analyst)

Or are we talking about, you know, putting the, you know, dotting the I's and crossing the T's on contracts, a little more color there?

Stefan Murry (CFO and CSO)

Well, I'm not sure, you know, to what extent the contracts really come into play there. What we're talking about now is detailed planning around deployment scenarios, when they're going to need products, how much product they're going to need, pricing, that sort of thing.

Tim Savageaux (Senior Research Analyst)

Okay, thanks.

Stefan Murry (CFO and CSO)

Commentary from the customers is how fast can you deliver X amount of product for us, right? It's, it's, it's about how fast can we be ready to deploy or to, to manufacture the products that they need to deploy.

Thompson Lin (Founder, Chairman and CEO)

The very important key, as I say, is AOI has invested a few hundred million dollars in the past, as in more than 10 years for automation, including we develop a lot of our own equipment for automation. So I think right now we are doing aphase II. Maybe I would say we will dophase II light,phase III light by end this year and do aphase III full automation Q1, Q2 next years. So we can do 800G manufacturing in Houston with, I would say, similar or a bit higher cost than in Taiwan and China. I think that's very attractive to the customer, including the big customer we used to have seven years ago, I think they are coming back. Number two, the key is, you know, the laser is a key component, key technology.

The 100G, 200G, the VCSEL, the EML, and I think we can make all our lasers in Houston. That's also very, I think the key factor, for the customer, I think for sure is not only the cost, the, the key is the risk management.

Tim Savageaux (Senior Research Analyst)

Great. Thanks very much.

Operator (participant)

Again, if you have a question, please press star, then one. Our next question will come from Dave Kang with B. Riley FBR. Please go ahead.

Dave Kang (Senior Research Analyst)

Thank you. Good afternoon. Regarding that 800G, first question is, do you have 200G per lane, VCSELs and EML? What's the status on that?

Thompson Lin (Founder, Chairman and CEO)

We will have the volume effect will be more like Q1 next year. Right now is, you know, you need to go through the whole R&D, especially as the customer is very concerned about the quality. But that's for 1.6T or not for 800G. 800G is still, still the per lane. And I'm talking about is the 800G, I'm talking about the opportunity for AI next year is $500 million-$600 million higher. They're single-mode, okay? It's like 2 kilometer higher. It's not a short reach, it's not AOC, so it's a pretty, the high ASP, high cost margin product, okay?The 1.6T, I think next year is more like the will be the multi-mode and single mode together, but for shorter distance, maybe, you know, 500 meter and low, and below. But we will have all of them, pretty soon.

Dave Kang (Senior Research Analyst)

Got it. And then on sticking with 800G, I think I used something like maybe two customers that will ramp Q3. Just wondering if you've been qualified or you got POs already?

Thompson Lin (Founder, Chairman and CEO)

The ramp will be more like late Q3 or early Q4. But, you know, we are doing a qualification, so it's the single mode, 2 kilometer and higher, including the DR4 and 2x FR4. So, just I would say more than 2 customers. A hyperscaler, I would say maybe 3 customer, including, there are some other smaller customer. The volume manufacturer, for sure, they're pushing Q3, so we are trying our best to catch up the volume. But I would say Q4 for sure. Q3 schedule is a bit tight, but maybe September.

Dave Kang (Senior Research Analyst)

Got it. And then, you, regarding your press release, at the beginning of OFC about that 800G AOC, that you jointly developed with, Credo. Can you just, give more color exactly what they provide and what you guys provide? And what, and where, where are we as far as, you know, sampling or even, you know, going to production?

Stefan Murry (CFO and CSO)

Credo makes a DSP, and we make an active optical cable around it. We haven't commented on any production schedules for it.

Dave Kang (Senior Research Analyst)

Okay, thank you.

Operator (participant)

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

Thompson Lin (Founder, Chairman and CEO)

Again, thank you for joining us today. As always, we want to extend a thank you to all investors, customers, and employees for your continuous support. As we discussed today, we believe the long-term demand driver will remain strong for both our data center and CATV business, and we believe we are well positioned to capitalize on these opportunities. Thank you.

Operator (participant)

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