Applied Optoelectronics Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 8 speakers on the call.

Operator

Good afternoon. I will be your conference operator. At this time, I would like to welcome everyone to Applied Optoelectronics 4th Quarter and Full Year 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Please note this call is being recorded. I would now like to turn the call over to Lindsay Savary, Investor Relations for AOI. Ms. Savary, please you may begin.

Speaker 1

Thank you. I'm Lindsey Savarys, Investor Relations for Applied Optoelectronics. I am pleased to welcome you to AOI's 4th quarter and full year 2023 financial results conference call. After the market closed today, AOI issued a press release announcing its Q4 and full year 2023 financial results and provided its outlook for the Q1 of 2024. The release is also available on the company's website ata0inc.com.

Speaker 1

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 Doctor. Thompson Lin, AOI's Founder, Chairman and CEO and Doctor. Stefan Murray, AOI's Chief Financial Officer and Chief Strategy Officer.

Speaker 1

Thompson will give an overview of AOI's Q4 results, and Stefan will provide financial details and the outlook for the Q1 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.

Speaker 1

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 or 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 innovation as well as statements regarding the company's outlook for the Q1 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.

Speaker 1

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 ks 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. I'd like to note the date of our Q1 2024 earnings call is currently scheduled for May 9, 2024.

Speaker 1

Now, I would like to turn the call over to Doctor. Thompson Lin, Applied Optoelectronics' Founder, Chairman and CEO. Thompson?

Speaker 2

Thank you, Lindsey, and thank you for joining our call today. While our Q4 revenue came in below our expectations, our gross margin outperformed our projections, leading to non GAAP EPS at the high end of our expectations. We are pleased by the continued progress we have made in improving our gross margin, which combined with our expense management allow us to generate a small non GAAP net income in the Q4 for the first time in many years. Further, we generated positive adjusted EBITDA of $4,800,000 in Q4. During the Q4, we delivered revenue of $60,500,000 which was below our guidance range of $63,000,000 to $67,000,000 primarily due to somewhat lower than expected datacenter revenue as we began to see some softness in demand led in the quarter.

Speaker 2

We delivered non GAAP gross margin of 36.4%, which is highest quarterly gross margin that we have generated in the last 5 years and was above our guidance range of 34.5% to 36%, mainly driven by improved product mix and some contribution from nonrecurring engineering projects. We generated a small non GAAP net income of $0.04 per share, which was at high end of our guidance range of a loss of $0.02 to earnings of 0 point 4 dollars Total revenue for our datacenter products of $44,500,000 more than doubled year over year, but was down 9% sequentially. Revenue for our 100 gs products more than doubled year over year and revenue for our 400 gs products increased more than 8 times in the same period. Total revenue in our CATV segment was $12,600,000 which was down 67% year over year and up 22% sequentially, largely driven by generally slow sales of Dorsey 3.1 equipment as the industry prepares for transition to Doshi 4.0. With that, I will turn the call over to Stefan to review the details of our Q4 performance and now to Q1.

Speaker 2

Stefan?

Speaker 3

Thank you, Thompson. As Thompson mentioned, while our 4th quarter revenue came in below our expectations, our gross margin outperformed our projections leading to a non GAAP EPS at the high end of our expectations. We are pleased by the continued progress we have made on improving our gross margin, which combined with our expense management allowed us to generate a small non GAAP net income in the Q4 for the first time in many years. Further, we generated positive adjusted EBITDA of $4,800,000 in Q4. While we do see some softness in Q1 due to the combined effects of the New Year holiday in our Asian factories, along with some price reductions which are scheduled to take effect, we expect a strong recovery in Q2 and are currently anticipating a markedly improved second half of twenty twenty four.

Speaker 3

Despite the softness we are seeing in Q1, we have been experiencing significant traction with several new data center customers recently for both 400 gs and 800 gs products, and we expect 1 or more of these customers to begin to contribute meaningfully to revenue starting in Q2, which gives us a basis for the optimistic outlook despite the slow start to the year. While not likely to contribute meaningfully to revenue in 2024, we also are very optimistic about our 1.6 terabit products as we move into 2025. With the improvement we expect in the second half, we currently expect our first full year of non GAAP profitability since 2018. Turning to the quarter. Our total revenue for the 4th quarter decreased by 2% year over year to $60,500,000 which was below our guidance range of $63,000,000 to $67,000,000 As Thompson mentioned, this was largely due to somewhat lower than expected data center revenue as we began to see some softness in demand late in the quarter, which we attribute to timing of orders.

Speaker 3

During the Q4, 74% of our revenue was from our data center products, 21% was from our CATV products, with the remaining 5% from FTTH, Telecom and Other. In line with our expectations, CATV revenue in the 4th quarter was $12,600,000 which was down 67% year over year and up 22% sequentially. We are encouraged by the sequential growth that we saw in our CATV business in Q4. Looking forward, we continue to expect that our near term CATV business will be down compared to the historic highs we saw in 2021 2022 as the MSOs transition to next generation We anticipate this transition will begin to take place sometime in mid-twenty 24 and are optimistic about the second half of the year. We shipped initial test samples of our 1.8 gigahertz amplifier products to 2 major MSOs in Q4.

Speaker 3

While these are early samples, the feedback we received on their performance and pricing is extremely encouraging. We currently anticipate shipping final qualification units of various amplifier products between April June this year and expect revenue to begin shortly after the sample qualification is complete. As we stated last quarter, we continue to carefully monitor MSO plans to upgrade to DOCSIS 4.0 networks, we continue to believe AOI is a leader in technologies that will enable DOCSIS 4.0. Further, we are confident that our products are aptly designed for the deployment of amplifiers and other network elements required for DOCSIS 4.0. Turning to our data center business.

Speaker 3

Our Q4 data center revenue came in at $44,500,000 which more than doubled year over year and was down 9% sequentially as noted above. In the Q4, 56% of our data center revenue was from our 100 gs products, 36% was from our 200 gs and 400 gs products and 4% was from our 40 gs transceiver products. As we had anticipated, revenue for our 100 gs products decreased 31% sequentially. Revenue for our 200 gs and 400 gs products increased 79% sequentially, which we believe is largely driven by AI demand for compute infrastructure. As a reminder, as we have discussed on our prior few earnings calls, we signed 2 agreements with Microsoft in 2023, including a development program to make next generation lasers for its data center both for 400 gs and beyond and for the development of its 400 gs and next generation active optical cables.

Speaker 3

While not guaranteed, we continue to believe that the revenue opportunity for our 400 gs and 800 gs products could be greater and a longer duration than the revenue contribution we saw from this customer during the peak of the 40 gs product cycle, which suggests that revenue from these products may exceed $300,000,000 over the several years of these build outs. During Q3 and as we had discussed on our prior earnings call, we received requests from Microsoft to expedite our production ramp for these products, which I'm pleased to report we were able to accommodate. We began shipments during December and expect to continue to ship in Q1, although at a slower rate than we earlier expected as the data centers work to install the optics we shipped in Q4. We expect demand to resume later in the quarter with additional capacity coming online then for Q2 and beyond. Another item to note, we 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.

Speaker 3

This includes our 800 gs products. We shipped samples to 3 different data center customers in 2023 and have received initial positive feedback on our 800 gs products. We expect shipments of 800 gs to begin in Q3 this year. Now turning to our Telecom segment. Revenue from our Telecom products of $2,800,000 was down 56% year over year and down 8% sequentially, largely driven by ongoing softness in 5 gs demand, particularly in China.

Speaker 3

Looking ahead, we expect telecom sales to fluctuate around current levels. For the Q4, our top 10 customers represented 95% of revenue, up from 90% in Q4 of last year. We had 2 greater than 10% customers, 1 in the data center market and 1 in the CATV market, which contributed 51% 28% of our total revenue, respectively. In Q4, we generated non GAAP gross margin of 36.4%, which was above our guidance range of 34.5% to 36% and was up from 32.5% in Q3 of 2023 and up from 21.4% in Q4 of 2022. The increase in gross margin was driven mainly by our favorable product mix shift, our transition to a direct sales model in our CATV business and the impact of engineering sales during the quarter.

Speaker 3

We remain committed to the long term goal of returning gross margin to around 40% and believe that this goal is achievable. As a reminder, with the direct to MSO sales model we implemented late last year, we expect margins in our CATV business to be meaningfully higher than our historical average. Total non GAAP operating expenses in the 4th quarter were $21,600,000 or 35.7 percent of revenue, which were in line with our expectations and compared to $21,000,000 or 34.2 percent of revenue in Q4 of the prior year. Looking ahead, we expect non GAAP operating expenses to range from $22,500,000 to $24,000,000 reflecting some acceleration of R and D expenses to improve time to market for our 800 gs and 1.6 terabit data center products. Non GAAP operating income in the 4th quarter was $400,000 compared to an operating loss of $7,900,000 in Q4 in the prior year.

Speaker 3

GAAP net loss for Q4 was $13,900,000 or a loss of $0.38 per basic share compared with the GAAP net loss of $20,300,000 or a loss of $0.71 per basic share in Q4 of 2022. On a non GAAP basis, net income for Q4 was $1,600,000 or $0.04 per share, which was above our guidance range of a loss of 0 $900,000 to profit of $1,200,000 and at the high end of our guidance range of a loss per share in the range of $0.02 to earnings of $0.04 per basic share. This compares to a net loss of $5,400,000 or a loss of $0.19 per basic share in Q4 of the prior year. The fully diluted shares outstanding used for computing the earnings per share in Q4 were 44,800,000 dollars Turning now to the balance sheet. We ended the 4th quarter with $55,100,000 in total cash, cash equivalents, short term investments and restricted cash.

Speaker 3

This compares with $31,200,000 at the end of the Q3 of this year. We ended the quarter with total debt, excluding convertible debt, of 38 point $7,000,000 compared to $46,600,000 at the end of last quarter. Notably, during the 4th quarter, we successfully issued $80,200,000 of convertible senior notes due 2026. The notes will bear an interest rate of 5.25 percent per year. Concurrently with the offering, we exchanged or repurchased approximately all of our 2024 notes.

Speaker 3

As of December 31, we had $63,900,000 in inventory compared to $67,500,000 at the end of Q3. We made a total of $8,700,000 in capital investments in the 4th quarter, which was mainly used for production and R and D equipment. Moving now to our Q1 outlook. We expect Q1 revenue to be between $41,000,000 $46,000,000 and non GAAP gross margin to be in the range of 21% to 23%. Non GAAP net loss is expected to be in the range of $10,900,000 to $12,600,000 and non GAAP loss per share between $0.28 per basic share and $0.33 per basic share using a weighted average basic share count of approximately 38,400,000 shares.

Speaker 3

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

Operator

Our first question comes from Simon Leopold with Raymond James. Please go ahead.

Speaker 4

Great. Thank you for taking the question.

Speaker 5

A couple of things I wanted to unpack. One of which is you've given us, I think, some insight as to the total value of the opportunity from Microsoft and understand it's spread over years. Is there some sort of element you could offer to help folks understand or level set as to how that may ramp through 2024, how to size the expected contribution from the Microsoft project this calendar year?

Speaker 6

Yes. I mean, we

Speaker 3

haven't really given out the details on that project. Obviously, a lot of it is customer sensitive. But at this point, I mean, it started to ramp. As I noted in our prepared remarks, I mean, we shipped product in December, which was ahead of schedule. The data center the individual data centers where those are getting installed are taking a little bit longer than expected to actually deploy those transceivers in the data center.

Speaker 3

So there's a bit of a low right now while that goes on. And then we expect the ramp to resume later in this quarter and ramp throughout the year. We'll probably have more to say in terms of longer term forecast after we start to see the results of this first tranche being adopted in the data centers.

Speaker 5

Yes. I guess what I'm trying to get at is, I have the impression that there are some folks that have envisioned this as sort of $100,000,000 this year, dollars 100,000,000 next year and 100,000,000 dollars the year after that. And I think what you're describing is something that gradually ramps to that kind of run rate, but we're not getting to $100,000,000 in 2024. I want to verify that my understanding is reasonable.

Speaker 3

Yes. What I have said yes, no, that's accurate. What I have said is that it would be I think we said this on the last earnings call, but it is the same thought process now that we think it will be ramping to exit the year on a run rate that would support that $100,000,000 per year, but it's clearly not starting off the year. So it will you will not integrate out every 4 quarters of the year to be $100,000,000

Speaker 5

That's helpful. That's exactly

Speaker 3

what I would want. Which would imply in the out years that will be more yes, which would imply, of course, that in the out years it'll be more than $100,000,000 per year in those other years.

Speaker 5

Yes. No, that's what I was trying to pull out there. And then in terms of what's going on in the overall industry and applications, It seems as if a lot of the AI related use cases are calling for 800 gig connections. And so I'm wondering, are you seeing your 400 gig products being used in back end AI use cases or are there other applications? And if so, what are they?

Speaker 3

Yes, supporting AI. And I'm not quite sure what you mean by back end use cases, but it's supporting AI in the connections between the GPU cluster cluster and the switch primarily. Now, I mean, I think it's also likely being used in other non AI applications as well. I mean, there are other non AI compute applications out there. It's not clear to me precisely the extent to which it's being used in AI versus non AI applications that isn't really information that we're privy to.

Speaker 3

But certainly AI is what Microsoft and others, other large data center operators are primarily building the infrastructure around AI right now. So I would I think it would be reasonable to expect that the vast majority of it is being deployed in AI infrastructure.

Speaker 5

Great. And then just to flat, maybe a little bit more color on how you see the cadence of your cable TV business in that this quarter was actually a bit better, a bit stronger than what we expected. But it seems as if you're suggesting, or my interpretation of your suggestion is sort of a step function in the second half of the year. Anything you could do to give us some sort of bounds on what that implies?

Speaker 3

Yes. I mean, I think you're more or less correct in what you're saying in terms of the step function in the middle of the year. What's going on right now is that we're continuing to sell DOCSIS 3.1 products, which are on their way out. They're not obsolete yet. It's what's currently deployed in the networks.

Speaker 3

But those products that are being shipped now are being used in new builds, not upgrades, but just new areas that need to be built out or repairs, things like that. It's kind of a steady state business. What we expect to happen in the middle part of the year is that we'll layer on the new 1.8 gigahertz products, which are going to be used in new network upgrades, which is really where the excitement is, frankly, and that's why we tried to call out some specific dates in our prepared remarks earlier that we expect to have those amplifiers in for qualification between April June. There are several different models there, so they'll ship at various times within that time frame. And then we do expect revenue to begin pretty quickly thereafter because I think the there are several MSOs that are really appear to be very interested in starting those upgrades quickly as soon as the products become available.

Speaker 5

Great. Thank you for taking my questions.

Operator

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

Speaker 4

Great. Thanks a lot. So it sounds like, I mean, the narrative over the last quarter or so has been that your big customer here asked you to hurry up and expedite the development of the product, and it seems like you executed extremely well to do that. And then so it's sort of like a hurry up and now wait situation. So could you provide I mean is that

Speaker 3

kind of Yes, absolutely.

Speaker 4

Yes. Sorry, I

Speaker 3

didn't mean to interrupt that. That was the end of the question. Go ahead, please.

Speaker 4

No, no. I mean, yes. So I mean, well, I guess I was just going to also ask for more color on that. That. But also, if that is in fact the case, I hear you reiterating the $300,000,000 number that hasn't changed.

Speaker 4

But what else can give us confidence that this is just a timing delay and not any other kind of fundamental change here?

Speaker 3

Sure. So,

Speaker 4

first of

Speaker 3

all, I guess, some commentary on the slower start to the year that we're seeing, specifically with the data center deployment that I mentioned earlier. So these things are difficult to predict. What happens is that the product is qualified and put into use. Data centers order an initial quantity of it to begin putting product in there and then they start to deploy. And I'm sure you can probably understand just based on prudence that they don't always deploy the new technology as fast as they will once it's at a scale, right?

Speaker 3

They want to take it slow and make sure there's no issues. And I believe that's probably the most likely explanation for what's going on. And then once that initial phase of deployments proves that it's going well, then they'll order larger quantity to continue the deployment. As far as what we expect to see throughout the rest of the year, I mean, at the same time, by the way, we're still continuing to build manufacturing capability and capacity only thing that I could really point to is the fact that we continue to invest pretty heavily in CapEx. If you look at our CapEx in the Q4, it's ramped significantly from what it was earlier in the year.

Speaker 3

Clearly, not all of that investment came online and produced products in Q1. And so I think that along with our commentary about a markedly improved Q2 would hopefully give you guys some level of confidence that this is a temporary condition.

Speaker 2

And don't forget, we have said we have delivered we have the G Sample to 3 new hyperscale DSN customer in U. S. And we believe we, the volume, will start to ramp up by, I would say, end of Q2 or early Q3, something I think would be the Q2 to $400,000,000,000 be based on. Yes.

Speaker 4

Great. I'd like to follow-up on that point because I mean, we hear you saying delivering sample, but then also expectation of revenue in 2Q accelerating into Q3. So kind of the missing step between those two is qualification customer win. But given your confidence in Q3, it sounds like you're already must already be past that. Is that you must have already passed that milestone.

Speaker 4

Is that a correct understanding?

Speaker 3

Well, certainly for the opportunity that we were talking about earlier that we've been referring to on most of the questions, obviously, that is past the qualification standpoint, qualification point at this juncture. Other opportunities, I mean, we have various opportunities that are either past qualification or in qualification. We expect to finish up in time to be able to deliver revenue in Q2.

Speaker 4

Okay, great. And then just final one for me, just to sort of help understand that the business mix a little bit better. Could you give us a sense in data center right now, the revenue mix roughly between transceivers and lasers? And then if we look ahead to say the Q4 this year, Q1 of next year, is that going to remain constant or will we see some kind of change in that mix? So right now,

Speaker 3

the revenue mix in the data centers almost entirely transceivers are optical cables, probably 95% of it is transceivers and optical cables. I don't expect that to change too much. In fact, it will probably get closer to 100% because the new opportunities that we're talking about are all for either transceivers or active optical cable. So I think the thing that might be giving you a little bit of that might be behind that question, if I can kind of read into it, is this question of what we had 2 different projects with Microsoft, one for lasers and one for active optical cables, right? And that is true, but what I think you may be not completely understand is that most of the lasers, in fact, right now, all of the lasers are used in our own active optical cable.

Speaker 3

So the revenue, while we are making lasers and working on making lasers, the revenue will be for the active optical cables that ultimately utilize those lasers.

Speaker 4

Yes. That actually was my understanding, but I do get a lot of questions on that and I wanted to make sure that I understood it correctly. So much for the answers. I'm glad to be on the conference calls now and to be getting in here on a good time. Thank you.

Speaker 3

We're excited to have you. Thanks.

Operator

The next question comes from Tim Savageaux with Northland Capital Markets. Please go ahead.

Speaker 6

Hey, good afternoon. A couple of questions. First, on, I guess, some elements of guidance that you provided for the year. So I think you were talking or expecting to be profitable on a non GAAP basis. I don't know if that's net income or operating profit or both, but I just want to confirm that for the year.

Speaker 3

Yes. That would be net income, non GAAP net income profitable for the year, yes.

Speaker 6

Okay. Well, and I guess you've given us a range for OpEx. So I know you're starting the year pretty low from a gross margin perspective. But saying if you're able to get that, say up to 30% for the year, which may or may not be reasonable, mean, we can take a revenue range out of that. It's solidly over $300,000,000 I mean, obviously weighted toward the back half of the year.

Speaker 6

But am I doing that math right?

Speaker 3

Yes. Excellent.

Speaker 6

Okay. And then I'm going to follow-up on some details on the 400 gig category. You saw that increase about $10,000,000 in the quarter with pretty healthy declines on the 100 gig side. I assume that's where the weakness is from a demand standpoint. But I mean, is it fair to attribute most or all of that increase to the active optical cable shipments?

Speaker 6

And to the extent you expect it to turn back on, let's say, in Q2, is that the type of order of magnitude we should be expecting as you move your way toward exiting the year, say, at a $25,000,000 a quarter run rate?

Speaker 3

So, let's see a couple of questions embedded in there.

Speaker 6

The first one was,

Speaker 3

was the active optical cables responsible for most of the increase in 400 gs revenue? The answer to that is yes. The second part of that question was, I wasn't quite clear exactly how you're asking that is, I said earlier that we would expect that to be kind of on a run rate of $100,000,000 a year or $25,000,000 a quarter by the end of the year. Are you just trying to confirm that? Or was there another question that I kind of No.

Speaker 6

There was another little question there and that is to the extent you're expecting a bounce back or an improved Q2, which referenced in the release, should we say think that most or all of that improvement is returning to that Q4 level or above from an AOC perspective?

Speaker 3

I'd have to it's probably close to it. I'd have to kind of do the math to answer that question precisely. We do expect some other new 400 gig business to start ramping in Q2 as well. So I'm a little hesitant to say that's absolutely the dominant factor, but most likely it would be close to that.

Speaker 6

Okay, great. And then last one for me, I think at least, and you stepped through this before, but I want to make sure I understand. Last quarter, you talked about sampling 800 gig products to 4 customers, including 3 hyperscalers. I think I got that right. Is what you're saying when you expect 800 gig to be able to start to contribute mid year, end of Q2 into Q3.

Speaker 6

Is that one of those that you have sampled has turned into a production customer? And is there any update to the kind of customer engagement metrics sampling whatnot on either 400 or 800 gs in Q4 or Q4 and year to date 2024?

Speaker 3

Sure. So I mean, to be clear, we have not completed final qualification on any of those 800 gs products at this point. So we did have 3 customers that we sampled last year and the end of the year. And in addition to that, just within the last, I don't know, month or so, we've had some significant new interest from other new customers besides the 3 that we shipped to last year. So without trying to tip our hat too much here, I think it's likely that 1 or more of either the customers we shipped to last year or one of these newer customers will be a customer generating revenue for us in the Q3 timeframe for 800 gs.

Speaker 3

As far as the kind of the demand, I guess you could say the kind of the feeling that we have around demand, I would say that the need for 800 gig right now, it seems to be particularly acute. I think there's a lot of demand for that. And that typically means the qualification and revenue generation can go rather quickly. It's when demand may be somewhat low that you start to see the qualification cycle stretch out and things like that. And we're definitely not in that situation in my estimation for Energi at this point.

Speaker 6

Well, got it. Let me sneak one more in here. I'm sorry about that. But along those lines, I guess we spent a fair bit of time over the last couple of 3 quarters sizing the active optical cable opportunity at Microsoft. But as you look at your 800 gig pipeline and some of the customer engagements you have, I guess, how would you size that opportunity relative to what we've been talking about with Microsoft at 400 gig?

Speaker 3

I mean, the opportunity there is several times larger, many times larger. It remains to be seen how much of that market we can get. I don't want to create too much irrational exuberance at this point, but the market size, the market opportunity there is huge. And it's being driven by AI. I mean, there's nothing that should be mysterious about the demand profile, right?

Speaker 3

I mean, we heard NVIDIA talking today on their or yesterday on their earnings call about the amount of computing infrastructure that's being built, all of that needs to be interconnected and a lot of it is being interconnected at 800 gs. And frankly, we'll be probably moving to 1.6 terabits in some applications early next year. So the opportunity is huge. I think we're well positioned for that. Like I mentioned earlier, we've seen a lot of new customer inbound interest just recently.

Speaker 3

And there's a lot of work to be done and I'm not predicting we're going to get what percentage of that market will ultimately be able to get. It's a little early to say, but the market opportunity there is huge.

Speaker 6

Okay. Thanks very much.

Operator

Our next question comes from Dave Kang with B. Riley Securities. Please go ahead.

Speaker 7

Thank you. Good afternoon. My first question is regarding your Q1 outlook. Can you just provide more color in terms of each product segments, how they're going to decline sequentially?

Speaker 3

Well, we don't really give guidance by product segment. But clearly, the cable TV business, no matter kind of what happens there, it's not big enough. It's not going to collapse to 0. So whatever happens there is not likely to account for the majority of the decline. So that's going to come primarily from the data center business.

Speaker 3

We noted in our prepared remarks earlier that it's a combination of factors there that the Lunar New Year, a lot of these products are made in our China facility. And so the mix of those products shifted a little bit unexpectedly on us towards the end of last year, which resulted in having to make new products essentially that we hadn't necessarily planned for in advance. And that's why the Lunar New Year caught us a little bit unprepared this year. In addition to that, we did have some pricing reductions and again most of that you can assume is in the data center side that kicked in towards the end of last year. And both of those two factors account for the bulk of the decline.

Speaker 3

So

Speaker 7

on that, the second part about pricing reductions, was it mainly 100 gig also or involved 400 gig as well?

Speaker 3

No, it was mainly 100 gig. I don't believe we had any price reductions on 400 gig in the quarter.

Speaker 7

Got it. And then when you talked about 2nd quarter snapback, are you just talking about 400 gig or will 100 gig recover as well?

Speaker 3

We expect it will be mostly 400 gig. There may be some recovery in 100 gig, it's a little bit unclear, but that technology is clearly in the waning phase of its lifecycle. 400 gig is clearly going to be picking up more in the near future. And again, as we talked about earlier, later in the year, 800 gig, we expect to contribute as well.

Speaker 7

Right. And then on the Microsoft, do you have any kind of like backlog to speak of that gives us confidence that you'll that they'll ramp throughout this year or is it still based on their forecast?

Speaker 3

I mean, we have a small backlog like we always do, but it's consistent with what we've seen over the years. It's nothing that would guarantee a ramp throughout the year.

Speaker 7

Got it. And my last question is, you talked about Microsoft to add another supplier. What's the latest on that?

Speaker 3

I'm sorry, I didn't quite understand your question. You said Microsoft adding another supplier for the 4th year specifically or

Speaker 7

Yes, that AOC possibly adding another supplier in addition to you. Any latest update on that?

Speaker 3

Right. I mean yes, I get your question now. So I mean I'm not aware that there's any other supplier that's shipping at this point, but I really wouldn't really be able to share that information even if I were. But as a matter of fact, at this point, I'm not aware of it, so.

Speaker 7

Got it. All right. Thank you.

Speaker 3

You're welcome.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Thompson Lin for any closing remarks.

Speaker 2

Okay. 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 look forward to see many of you at overseas and to updating you on our next earnings call.

Operator

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

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Earnings Conference Call
Applied Optoelectronics Q4 2023
00:00 / 00:00
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