Applied Optoelectronics - Q3 2023

Transcript

Operator (participant)

Good afternoon. I will be your conference operator. At this time, I would like to welcome everyone to Applied Optoelectronics third quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I will now turn the call over to Lindsay Savarese, Investor Relations for AOI. Ms. Savarese, you may begin.

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 third quarter 2023 financial results conference call. After the market closed today, AOI issued a press release announcing its third quarter 2023 financial results and provided its outlook for the fourth quarter of 2023. 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 Q3 results, and Stefan will provide financial details and the outlook for the fourth quarter of 2023.

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, estimate, suggest, intend, predict, expect, plan, 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 our products into new markets and customer responses to our innovations, as well as statements regarding the company's outlook for the fourth quarter of 2023. 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 for the year-ended December 31st, 2022, and the company's quarterly report on Form 10-Q for the quarter-ended September 30th, 2023. 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.

I'd like to note the date of our fourth quarter and full-year earnings call is currently scheduled for February 22, 2024. Now I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics Founder, Chairman, and CEO. Thompson?

Thompson Lin (Founder, President, Chairman and CEO)

Thank you, Lindsay, and thank you for joining our call today. Our third quarter revenue and non-GAAP EPS were in line with our expectations, while our non-GAAP gross margin was better than our expectations. We are pleased by the continued progress we have made on improving our cost margin and by the continued strong growth we saw for our 100G and 400G products in our data center business during Q3. The combination of revenue growth and improving cost margin allow us to generate $3 million in adjusted EBITDA during the quarter. During the third quarter, we delivered revenue of $62.5 million, which was within our guidance range of $60 million-$66 million. We delivered non-GAAP gross margin of 32.5%, above our guidance range of 29.5%-31%.

Mainly driven by our favorable product mix shift and contribution from revenue recognized as part of our nonrecurring revenue from Microsoft. Our non-GAAP loss per share was $0.05, which was within our guidance range of a loss of $0.06 to earnings of $0.01. Total revenue in our CATV segment was $10.3 million, down 67% year-over-year and up 10% sequentially, in line with our expectations. Total revenue for our data center products of $48.8 million, more than double year-over-year and increased 77% sequentially, largely due to increased demand for our 100G and 400G products.

As we continue to see the run up of our 400G products, revenue for our 100G products nearly tripled year-over-year, while revenue for our 400G products increased more than 10x in the same period. With that, I will turn the call over to Stefan to review the details of our Q3 performance and outlook for Q4. Stefan?

Stefan Murry (CFO and Chief Strategy Officer)

Thank you, Thompson. As Thompson mentioned, our third quarter revenue and non-GAAP EPS were in line with our expectations, while our non-GAAP gross margin was better than our expectations. We're pleased by the continued progress we have made on improving our gross margin and by the continued strong demand we saw for our 100G and 400G products in our data center business during Q3. The combination of revenue growth and improving gross margin allowed us to generate $3 million in adjusted EBITDA during the quarter. Before turning to discuss our detailed results and outlook, I want to provide an update on the sale of our manufacturing facilities located in the People's Republic of China and certain assets related to our transceiver business and multi-channel optical sub-assembly products for the internet data center, fiber to the home, and telecom markets.

On September 12, 2023, we announced the termination of our purchase agreement with Yuhan Optoelectronic Technology. This decision was based on Yuhan's failure to meet agreed-upon deadlines, and we lost confidence in their ability to complete the transaction. We are exploring additional options with new potential buyers. Turning to the quarter. Our total revenue for the third quarter increased 10% year-over-year to $62.5 million, which was in line with our guidance range of $60 million-$66 million. As Thompson mentioned, the increase in revenue was largely due to growth of our 100G and 400G data center business. During the third quarter, 78% of our revenue was from our data center products, 16% was from our CATV products, with the remaining 6% from FTTH, telecom, and others.

In line with our expectations, CATV revenue in the third quarter was $10.3 million, which was down 67% year over year and up 10% sequentially. We are encouraged by the sequential growth that we saw in our CATV business in Q3. 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 will begin to take place in 2024.

Looking further ahead, we continue to carefully monitor MSO plans to move to DOCSIS 4.0 networks, and we continue to believe AOI is a leader in technologies that will enable DOCSIS 4.0, and that our products are well suited for when the push to install amplifiers and other network elements for DOCSIS 4.0 begins. In line with our new strategy of directly selling to the MSOs, we have continued to expand our product portfolio. Just last month, we announced the launch of QuantumLink, the latest solution within our Quantum Bandwidth line of products, designed to provide remote management and monitoring of cable amplifiers that we believe will reshape the cable broadband market. Operators using QuantumLink will now have the ability to remotely manage cable broadband amplifiers, ushering in a new era of efficiency, convenience, and enhanced service quality for our customers.

Last month, we attended the Society of Cable Telecommunications Engineers Expo, or SCTE, where we demonstrated our complete line of Quantum Bandwidth products, including various amplifiers and the QuantumLink control solution I mentioned above. We've received very positive reactions from many of our customers. They are particularly interested in our QuantumLink solution, which several customers have asked to become a standard for the CATV industry. We are pursuing this standardization with CableLabs and anticipate that this technology may be chosen by MSOs as their preferred control architecture for their upcoming deployments. Lastly, and in line with our new strategy, we are pleased to have secured a distribution relationship with Digicomm, a stocking distributor. Digicomm will be an exclusive go-to-market supplier of our Quantum12 high-gain balanced triple and high-gain dual system amplifiers and line extenders.

This relationship enables customers to receive the latest network equipment with the same quality and performance they expect, while providing the industry's best product delivery lead times. Turning to our data center business. Our Q3 data center revenue came in at $48.8 million, which more than doubled year-over-year and was up 77% sequentially, largely due to increased demand for our 100G and 400G products as our customers continued to purchase our existing products. In the third quarter, 74% of our data center revenue was from our 100G products, 13% was from our 200G and 400G transceiver products, and 7% was from our 40G transceiver products....

Notably, revenue for our 100G products increased 75% sequentially, while revenue for our 400G products increased 74% sequentially and accounted for just under 11% of our total data center revenue in Q3. Looking ahead, we're encouraged by the strong demand we have been seeing, and we expect Q4 to be similar to Q3. As a reminder, as we have discussed on our prior couple of earnings calls, we signed two agreements with Microsoft earlier this year, including a development program to make next-generation lasers for its data center, both for 400G and beyond, and for the development of their 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. During the quarter, we received requests from Microsoft to expedite our production ramp for these products, which we are attempting to accommodate. Based on these expedite requests, we believe demand for these products remains strong, and our production teams are working very hard to add capacity for this production, which we now expect will allow us to begin shipments later this month rather than in late December, as originally planned.

Notably, the revenue increase we saw from Microsoft this quarter is for mostly existing products. As I just mentioned, we still expect to begin shipping initial quantities of the products related to these new agreements to Microsoft by the end of this month for their testing and believe that production will begin to ramp up in December. We also believe that the value proposition that we offer to Microsoft is just as strong with other data center operators, and we are working with several of them to evaluate our technology and qualify our products. This includes our 800G products. During the quarter, we shipped samples of our 800G data center products to two different customers. By the end of the year, we expect to ship samples of 800G products to two additional data center customers.

This would bring our total to 4 different data center customers who would be evaluating our 800G products by year-end. Now turning to our telecom segment. Revenue from our telecom products of $3 million was down 55% year-over-year and down 27% sequentially, largely driven by softness in 5G demand, particularly in China. Looking ahead, we expect telecom sales to fluctuate around current levels. For the third quarter, our top 10 customers represented 96% of revenue, up from 86% in Q3 of last year. We had two greater than 10% customers, one in the data center market and one in the CATV market, which contributed 64% and 12% of our total revenue, respectively.

In Q3, we generated non-GAAP gross margin of 32.5%, which was above our guidance range of 29.5%-31% and was up from 24.8% in Q2 of 2023 and up from 18% in Q3 of 2022. The increase in gross margin was driven mainly by our favorable product mix shift and contribution from revenue recognized as part of our non-recurring revenue from Microsoft. 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 third quarter were $21.4 million, or 34.2% of revenue, which compared to 19.4% or 34.3% of revenue in Q3 of the prior year, largely driven by increasing legal costs, increased shipping costs commensurate with our increased revenue, and increased marketing spend to promote our CATV products. Looking ahead, we expect Non-GAAP operating expenses to range from $21-$23 million per quarter. Non-GAAP operating loss in the third quarter was $1 million, compared to an operating loss of $9.3 million in Q3 in the prior year.

GAAP net loss for Q3 was $9 million, or a loss of 27 cents per basic share, compared with a GAAP net loss of $15.6 million, or a loss of 56 cents per basic share in Q3 of 2022. On a non-GAAP basis, net loss for Q3 was $1.7 million, or a loss of 5 cents per basic share, which was in line with our guidance range of a loss of $1.9 million to a profit of $0.2 million, or a loss per share in the range of 6 cents to earnings of 1 cent per basic share, and compares to a net loss of $7.1 million or a loss of 26 cents per basic share in Q3 of the prior year.

The basic shares outstanding used for computing the net loss in Q3 were 32.8 million. Turning now to the balance sheet. We ended the third quarter with $31.2 million in total cash, cash equivalents, short-term investments, and restricted cash. This compares with $28.6 million at the end of the second quarter of this year. We ended the quarter with total debt, excluding convertible debt, of $46.6 million, down slightly from $46.9 million at the end of last quarter. As of September 30, we had $67.5 million in inventory, compared to $66.3 million at the end of Q2. We made a total of $2.1 million in capital investments in the third quarter, which was mainly used for production and R&D equipment.

As we disclosed in March, we initiated a new at-the-market offering. To date, we have raised $43.1 million, net of commissions and fees, under this new program, including $22 million raised in Q3 and $11.2 million raised after the end of the quarter. Moving now to our Q4 outlook. We expect Q4 revenue to be between $63 million and $67 million, and non-GAAP gross margin to be in the range of 34.5% to 36%. Non-GAAP net income is expected to be in the range of a loss of $0.9 million to income of $1.2 million... and non-GAAP income between a loss of $0.02 per basic share and income of $0.04 per basic share, using a weighted average basic share count of approximately 35.1 million shares.

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

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press Star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Jeff Couch with Raymond James. Please go ahead.

Jeff Couch (Analyst)

Yes, thanks, guys, and for Simon. Just really quickly on the Microsoft income that's non-recurring, can you talk about, maybe quantify it for the quarter and, like, what's built in for guidance and how we should think about that relative to the ramp? Be helpful. Thank you.

Thompson Lin (Founder, President, Chairman and CEO)

Yeah. Well, I can't comment on the exact amount of non-recurring engineering costs that would be covered under our non-disclosure agreement with Microsoft. So, it was not the primary contributor to the increase in gross margin, however, as we noted.

Jeff Couch (Analyst)

Okay, great. And then maybe you just give some color on the segments, like kind of how you're thinking about some of the other segments, going into December. Yeah, just-

Stefan Murry (CFO and Chief Strategy Officer)

Well, as we noted-

Jeff Couch (Analyst)

-start there.

Stefan Murry (CFO and Chief Strategy Officer)

Sure. Yeah. So as we noted, we're pretty excited about the progress that we're making on the data center business.

As we mentioned, you know, Microsoft is accelerating their demand for the new products that we've been discussing, based on the new contracts that we have. And that's really positive for us. I mean, there's a limit to how fast we can speed up the production, of course. So, you know, it's not gonna dramatically change our revenue picture in the fourth quarter, but we're encouraged by the increase in demand that we're seeing. We're also really encouraged by the progress that we've made on 800G. As we noted, we've sampled that already to several customers, and we expect to sample it to several more customers before year-end. So we're really excited about both of those, you know, the progress that we're making on that front.

On the cable TV side of things, we did have, you know, as you've seen from the other companies that have reported already, you know, the situation in cable right now across the board is muted compared to where it was a year or two ago, for sure. But we're encouraged by the, you know, sequential uptick in revenue there. And the progress that we made in terms of our new model of selling directly to the MSOs and the acceptance that the MSOs have had of our new technologies, like QuantumLink, which we talked about in the prepared remarks earlier, has been really phenomenal. And we're really, really excited about the progress that we've made there as well. So, you know, those two segments, I think, you know, obviously account for the vast majority of our business.

The telecom market will be somewhat muted. As we noted, the 5G, you know, business in China has been relatively slow, and I don't, you know, necessarily see a recovery of that in the short-term at least.

But certainly the two business segments that account for the vast majority of our revenue are both heading in the right direction.

Jeff Couch (Analyst)

So, could you see cable TV sequentially into December, or do you think that we continue to see sequential growth? And then, when do you see the inflection there from, from like you were saying, is that for DOCSIS 4.0, is that more 2024?

Stefan Murry (CFO and Chief Strategy Officer)

Right. So you were cutting in and out there a little bit, but I think I understood your question to be on cable TV. Do we expect to see some sequential growth into Q4? And, you know, I think you could tell from the guide, you know, we don't expect, like, dramatic growth in cable, but there's probably some opportunity for some growth there. As we discussed, you know, the cable market will recover, or we expect the cable market to recover, you know, substantially during the DOCSIS 4.0 introduction, which will happen in the middle part of next year. In the meantime, you know, we are seeing some customers that are finally, you know, starting to burn through their inventory of DOCSIS 3.1 products, the 1.2 gigahertz.

You know, so I expect to see some sort of modest improvement there, but the dramatic uptick that we expect to see will be with DOCSIS 4.0 in the middle part of next year.

Thompson Lin (Founder, President, Chairman and CEO)

Yeah. So basically, this is Thompson. We believe in CATV, we can see very, very strong growth in next year from, I would say, the end of Q2 or sometime in Q3 next years. And more important, the gross margin will be much better. That's the key. It's not only revenue, it's gross margin improvement.

Jeff Couch (Analyst)

Terrific. Appreciate the time. Thanks.

Operator (participant)

Again, if you have a question, please press Star then one. The next question comes from Tim Savageaux with Northland Capital Markets. Please go ahead.

Tim Savageaux (Senior Research Analyst)

Hey, good afternoon, and congrats on the results, and the positive EBITDA in particular. I have a question about the kind of pull-in that we're seeing from Microsoft in terms of, you know, 400G AOC type demands. And I guess one would be, you know, to what extent is that a factor in your guidance for Q4? And, you know, assume, given you're ramping up production this month and through December, that looks like, you know, to set you up for a full quarter of production, perhaps in Q1. And I'd love it if you can give us a sense of what that looks like for you guys from a revenue standpoint, or what might that look like? Thanks.

Stefan Murry (CFO and Chief Strategy Officer)

Sure. So, your question about Q4, I think, is the answer to that is that, you know, we're just beginning the production in Q4, so, you know, we don't expect it to meaningfully contribute to revenue in Q4. The reason for the commentary that we've been giving is just to illustrate the fact that the demand is still very strong for Microsoft. And, you know, in fact, I believe from other, you know, other data center operators as well, as we talked about. However, you know, our ability to increase the production capacity is, you know, we're doing the best that we can, but it's gonna take us a little bit of time to get there, right? So, we're not gonna be fully ramped right at the beginning of Q1 either.

There'll be some continued ramp during Q1. And in fact, you know, based on the production targets that they've asked us to meet, there'll be some increasing production capacity pretty much throughout next year. It's not gonna be done in, you know, a month or even a quarter. So there'll be some improvement throughout the year in terms of our capacity there. The encouraging thing for us really is, again, that Microsoft is really, you know, looking for us to make these products in greater quantities faster, and that's an exciting thing for us. With respect to, you know, exactly how much, you know, will be in Q1, we haven't given guidance for Q1 yet. A lot will depend on, you know, the progress that we make over the next month or two.

But certainly, you know, we believe this is incrementally positive in terms of timing and our overall production rate into Q1, and we're excited about that.

Tim Savageaux (Senior Research Analyst)

Great. Wanted to follow up on the 800G front, where you noted some, you know, progress in terms of customer samples. Realizing you're probably in pretty early stages, but, you know, are you at a point or when do you think, you know, pending customer evaluation of these products, is this something that could start to ship in calendar 2024?

Stefan Murry (CFO and Chief Strategy Officer)

Yes.

Tim Savageaux (Senior Research Analyst)

Okay, that was pretty clear, and then I'll try again, which is, you know, any sense of timing on that within calendar 2024?

Stefan Murry (CFO and Chief Strategy Officer)

That I think is a little too early to say right now. As you pointed out, I mean, you know, we're going early stages on it. I would say the demand picture for 800G looks pretty strong, and we're certainly having very constructive discussions with the customers. But, you know, how long it will take and the qualification process and that is a little too early to say, but I do expect it to be in 2024.

Thompson Lin (Founder, President, Chairman and CEO)

Yeah. So maybe sometime in Q2 or Q3 next year. Usually, qualification, it would take easily, you know, 4-6 months or longer. But the other thing that we—I want to emphasize is, we are working very close with several big customer, about 1.6T, with 200G per lambda. And they all believe we are the technology leader, and I think the demand will be very strong, too. Maybe it's from Q3, Q4 next year. So some 800G, there's a lot of things going on for the, the data center, the space, the high-speed transceiver technology, because the AI, the AI demand really is really strong.

So that's why we are jumping right now, not only from the 100G-400G in volume, and with, with 800G, we get into volume sometime next year, Q2, Q3, but even 1.6T, we would, we be able to see some volume too in Q4 next year.

Tim Savageaux (Senior Research Analyst)

Got it. Let's, let's stay on this topic for a second. Stephanie described four customers evaluating the products. Can you give us any indications of the type of customers those might be? Large cloud operators, networking OEMs, you know, what have you?

Stefan Murry (CFO and Chief Strategy Officer)

Mostly large cloud operators with at least one OEM that supplies some of the large cloud operators. So it's all, it's all cloud, it's all hyperscale cloud-related, whether it's directly or through, you know, an OEM that we supply.

Thompson Lin (Founder, President, Chairman and CEO)

One big AI company. You know what I'm talking about. I don't know how you define. It's not cloud operator, but it's really... Maybe they'll become the number one customer in the world for the data center transceiver.

Tim Savageaux (Senior Research Analyst)

Okay, great. And, and last one for me, and maybe kind of related to that, I mean, can you give us a sense of kind of, I don't know whether it's, you know, unit volumes or revenue dollars, but, you know, how do you assess the, the kind of total opportunity for AI-related, you know, we call it transceivers or, or AOCs? And, and how has that assessment of market opportunity evolved for you guys over the past quarter or so?

Thompson Lin (Founder, President, Chairman and CEO)

The number sounds crazy, okay? What we heard is, for 800G, I think we are talking about maybe at least minimum, 6million-8 million volume, with very good ASP, more than $600 or $700, so you can see opportunity next year.

Tim Savageaux (Senior Research Analyst)

... Thanks. Thanks very much.

Thompson Lin (Founder, President, Chairman and CEO)

So that $4 billion for us next year. And some people even come up, some even higher number rise. As well, you see, I'll be very happy if that's true. That's why we are putting our resource into 800G and the 1.6T business. 400G, I think we are very competent, that is very exciting. The volume is coming up for sure, but really the big jump is 800G and 1.6T for AI-related business. And that's what we heard from the customers.

Tim Savageaux (Senior Research Analyst)

Great. Thanks very much.

Thompson Lin (Founder, President, Chairman and CEO)

Bye.

Operator (participant)

Next, the next question is from Dave Kang with B. Riley, FBR. Please go ahead.

Dave Kang (Research Analyst)

Thank you. Good afternoon. First question is on cable TV. So, you said by middle of next year, we should be expecting pretty strong recovery. So are we talking about, like, you know, prior peak of, like, say, $30 million or so per quarter? Is that what we should be expecting, or not quite there yet?

Stefan Murry (CFO and Chief Strategy Officer)

I mean, without putting a specific quarter on it, yeah, certainly the expectation is that we can exceed the prior peak levels, because at that point, we weren't really in even an upgrade cycle, right? It was just a sort of business as usual case. As we move into an upgrade cycle, which is what we think will happen, that portends, you know, the growth in DOCSIS 4.0, I would say the opportunity there is significantly larger than, you know, than the previous peak, for sure. Not to mention the fact that because of the business model change, you know, our ASPs are gonna be higher, because we're not selling through, you know, a middleman, essentially. And so, you know, not only will it have higher unit demand, but ASPs will be higher as well.

Thompson Lin (Founder, President, Chairman and CEO)

Well, let me say that I would say by Q4 next year, our CATV business should be, I would say, more than $40 million in Q4 next year, which very good gross margin, I would say around 40%.

Dave Kang (Research Analyst)

Okay. And then on, just, on the data center, you know, 100G, a little surprised why that was so strong because, others are saying it's really, 800G that's enjoying strong demand, whereas, 100 gig, which is not believed, not considered to be part of, AI. You know, 100G is weak, weak. So are you just, like, gaining market share? And how should we think about, you know, you know, going forward, should we be expecting 100G to be flat and eventually, you know, decay? Can you just talk about what to expect over the next couple of years?

Stefan Murry (CFO and Chief Strategy Officer)

Sure. So I think in 100G, we're taking market share. You know, I think there's been some increase in purchasing with maybe a couple of customers, but I think we're gaining market share there. You know, we've talked about some of the dynamics, for example, that being a U.S.-based manufacturer gives us some advantages there in terms of being able to attract, I would say, more interest maybe than in the past, relative to some of our competition in China. And that's helpful for us in gaining this market share. As far as how that plays out in the future, I mean, I think... Look, what we saw at 40G is that the older technology has a very long tail.

I mean, it lasts a long time, and that's what I expect with 100G as well. I mean, I think that, you know, eventually 100G will decline as 400G begins to grow, but I don't think it's gonna be a dramatic. I mean, I kind of feel like we tell the same story every time there's a technology transition, right? Wall Street tends to think, well, one technology comes on and the other one goes away immediately, and we always try to caution that, no, that's not what happens, right? It's a gradual shift. The new technology tends to come on relatively quickly, but the old one tends to last a long time because there's already a number of switches, for example, that are out there that haven't been fully populated yet.

They're gonna fill out those ports and those switches, and, you know, that portends a long period of, I would say, relatively flattish, maybe down slightly, but relatively flattish, demand. So I would caution not to remove 100G from the picture as quickly as you might be tempted to.

Dave Kang (Research Analyst)

Got it. And just wanted to clarify, did you say that for regarding fourth quarter, expect similar revenue mix, with third quarter? Did I hear that right?

Stefan Murry (CFO and Chief Strategy Officer)

We're just saying that the data center portion of it will be, you know, consistent with Q3, right?

Thompson Lin (Founder, President, Chairman and CEO)

No, but,

Dave Kang (Research Analyst)

Okay.

Thompson Lin (Founder, President, Chairman and CEO)

Yeah, we can see some growth, but the mix will be different because we can see much more 400G than 100G.

Dave Kang (Research Analyst)

Okay. Okay.

Thompson Lin (Founder, President, Chairman and CEO)

Oh-

Dave Kang (Research Analyst)

Actually, yeah, that's what I was after. Yeah.

Thompson Lin (Founder, President, Chairman and CEO)

The combination are not the same. Yeah. It's a-

Dave Kang (Research Analyst)

Mm-hmm

Thompson Lin (Founder, President, Chairman and CEO)

... The 400G we quite a lot, but 400G will go down.

Dave Kang (Research Analyst)

Got it. And my last question is regarding that termination, that the fee of $3 million, who's responsible for that?

Stefan Murry (CFO and Chief Strategy Officer)

We believe that Yuhan is responsible for the breakup fee. We're pursuing, you know, them for the payment of that.

Dave Kang (Research Analyst)

Okay. Got it. Thank you.

Operator (participant)

Next, we have a follow-up question from Jeff Couch with Raymond James. Please go ahead.

Jeff Couch (Analyst)

Yeah, just really quickly, just wanna talk about your thoughts on data center going into March. Is it ridiculous to think that, you know, you could be up sequentially again? I know historically, that's not the strongest seasonally.

Stefan Murry (CFO and Chief Strategy Officer)

I mean, I think it's not ridiculous to think, because, again, our 400G business that we're talking about, the new programs with Microsoft will be ramping during the quarter. So you're correct, historically, that ordinarily Q1 is sort of a challenging quarter, just seasonally. A large part of that is because historically, most of our data center products have been made in China, and we do have, you know, Chinese New Year, both in China and Taiwan. In this case, we're producing more of these products in Taiwan and even in the U.S., and so the impact of Lunar New Year should be less for us.

That, in combination with the fact that, you know, the 400G will be ramping in terms of production capacity, you know, paints a pretty good picture in the March quarter for us, I think.

Jeff Couch (Analyst)

Great. Thank you so much.

Operator (participant)

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

Thompson Lin (Founder, President, Chairman and CEO)

Again, thank you for joining us today. As always, what we want to extend a thank you to our investors, customers, and employees. For your continuous support, we look forward to updating you on our next earnings call.

Operator (participant)

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