Applied Optoelectronics, Inc. (AAOI) Earnings

Management highlights

- **Core Business Milestones**: This is the fifth consecutive quarter of record revenue, and the company achieved the key milestone of returning to non-GAAP profitability. Non-GAAP gross margin was 29.8% in line with guidance, non-GAAP earnings per share hit $0.06, above guidance of a $0.03 loss to $0.03 gain. The long-term target for non-GAAP gross margin is ~40%. - **Product Development & Customer Traction**: The company saw strong continued customer engagement for 800G and 1.6 terabit (1.6T) transceivers, driven by accelerating AI data center investment. Qualification of the 1.6T product for a major hyperscale customer is expected to finish within two weeks, with shipments starting later in Q3 2026, and this customer will return to being a 10%+ customer in Q3. Mediacom selected AOI as the primary vendor for its DOCSIS 4.0 network upgrades, marking broader commercial adoption of AOI's next-generation 1.8 GHz amplifiers and software solutions. - **Manufacturing Capacity Expansion**: The company has expanded its greater Houston, TX manufacturing footprint to over 1.6 million square feet, with new facilities in various stages of development. A 210,000 square foot facility dedicated exclusively to 800G/1.6T production will start initial production in late Q3 2026, freeing existing space for indium phosphide wafer capacity expansion. Additional Pearland/Houston facilities will come online in early 2027. Monthly production capacity for 800G/1.6T is now ~200,000 units, up from ~100,000 at the end of Q1, and is expected to exceed 930,000 units per month by the end of 2026, with over half of output from Texas. The same production lines can produce 800G and 1.6T with minimal incremental investment, creating flexible and efficient scaling. - **Strategic Advantages**: In-house laser manufacturing, a core AOI capability, has allowed the company to avoid some component shortages that impacted competitors. AOI is developing capacity for external light source (ELSFP) modules for co-packaged optics (CPO), targeting 400,000 units per month by 2028. In-house developed production machinery insulates the company from broader industry equipment supply bottlenecks.

Guidance

- **Q3 2026 Guidance**: Revenue is expected between $255 million and $290 million, representing 130% YoY growth at the midpoint. Non-GAAP gross margin is expected between 29% and 30.5%, non-GAAP net income between $10.1 million and $24 million, and non-GAAP EPS between $0.11 and $0.26. - **CATV Specific Guidance**: Q3 2026 CATV revenue is expected between $100 million and $110 million, with full-year 2026 CATV revenue projected to exceed $325 million. - **Product Growth Guidance**: 800G revenue is expected to grow nearly five times sequentially in Q3 2026, with continued growth limited only by production capacity and component supply in Q4. 1.6T revenue will begin contributing to total revenue in late 2026, with a larger ramp starting in 2027. By mid-2027, the company expects monthly data center revenue to reach ~$471 million, split into ~$90 million from 100G/400G, ~$217 million from 800G, and ~$164 million from 1.6T. - **Full-Year 2026 Guidance**: Management maintained its 2026 full-year revenue guidance of ~$1.1 billion, which is constrained by production capacity rather than customer demand, which is materially larger. - **Capital Expenditure Guidance**: CAPEX intensity will be higher in the second half of 2026 than the first half, to support expansion of 400G, 800G, and 1.6T production.

Segment performance

Applied Optoelectronics reported total Q2 2026 revenue of $191.9 million, an 86% year-over-year (YoY) increase and 27% sequential increase. - **Data Center Products**: $107.7 million revenue, 56% of total revenue, up 140.4% YoY and 32.3% sequentially. Breakdown by product: 100G transceivers accounted for 38.3% of data center revenue; 400G/200G transceivers accounted for 45% of data center revenue (400G revenue hit $48.4 million, up 4x YoY and 27.4% sequentially); 800G transceivers accounted for 11.9% of data center revenue (800G revenue hit $12.8 million, up 10x YoY and more than doubled sequentially); 10G/40G transceivers accounted for the remaining 4.4% of data center revenue. - **CATV Products**: $80.6 million revenue, 42% of total revenue, up 43.8% YoY and 20.6% sequentially, slightly above management expectations. - **FTTH, Telecom and Other**: 2% of total revenue.

Risks & headwinds

- Near-term revenue is capped by limited production capacity and tight supply of key components including DSPs and TIAs for high-speed transceivers, with customer demand 20% to 40% higher than current available capacity. - 100G revenue will see temporary weakness in Q3 2026, due to customer-side 100G switch shortages caused by broader memory chip supply constraints, with weakness expected to persist until memory supply recovers. - The details and scope of potential U.S. bans on Chinese imported transceivers are still unclear, so specific near-term business impacts cannot be quantified at this stage. - The company does not expect a material impact from newly announced U.S. tariffs at this time, but full impact assessment is still ongoing. - R&D spending will remain elevated to support customer-driven qualification of new 800G and 1.6T products, pressuring near-term operating expenses. Demand for high-power CPO and AI transceiver lasers far outpaces current global supply, requiring aggressive long-term capacity expansion that carries execution risk.

Analyst Q&A

• Q: How would a potential U.S. ban on Chinese transceivers impact AOI, and has this changed your capacity planning or customer conversations?

  A: It is too early to assess specific impacts as the ban is not yet finalized and details are still unknown. AOI's large domestic U.S. manufacturing footprint is already a core competitive advantage, and any policy favoring domestic production strengthens this advantage. Early customer feedback indicates AOI will likely gain additional market share from the shift, but all current capacity through Q2 2027 is already pre-booked, so any additional capacity to meet increased demand would only be added from Q3 2027 onward.

• Q: What is the status of the 800G ramp, and how much tooling and inventory is ready for production?

  A: Not all planned capacity is online yet: capacity additions will continue through 2027, as most of the newly acquired 1.6 million square foot Houston manufacturing space has not yet been built out or filled with equipment. Q3 2026 growth will be driven almost entirely by 800G, offset by a temporary $20-$25 million 100G revenue drop from the switch/memory shortage. Even with ongoing capacity expansion, demand still outpaces available supply, with large customers consistently pushing for faster delivery.

• Q: When will the previously announced $200 million 1.6T order be delivered, and how do you view competition from new Chinese laser manufacturing?

  A: Deliveries will start in late Q3 2026, ramp through Q4, with the bulk of the $200 million order delivered in Q4 2026 and a small tail in Q1 2027; this is just the first of what is expected to be a sustained stream of orders from this customer. Demand for high-power AI/CPO lasers is exponentially larger than current supply (8-10x larger than today's market for lower-power lasers), and new Chinese suppliers are still focused on lower-power 70mW products. The 300mW DWDM lasers required for CPO are not expected to be available from Chinese suppliers at scale for at least 2-3 years, so new entry will have no material impact on AOI's near or medium-term business.

• Q: What is AOI's status in the CPO market, and what is the capacity plan for CPO lasers?

  A: AOI has been a leading laser manufacturer since its founding, with best-in-class high-power narrow linewidth CPO lasers that are already qualified by multiple customers. The only constraint is production capacity: AOI currently prioritizes laser production for its own transceivers, so CPO laser volume will ramp as AOI expands its fab capacity. AOI is expanding current laser capacity by 300% by Q3 2027, and building a second fab in Houston that will be 4x the size of the current facility, but even this expansion will not meet all projected customer demand, so additional scaling is ongoing.