Applied Optoelectronics (AAOI.US) Q2 conference call: Demand related to AI remains strong, with capacity and supply of key components becoming the main constraints for short-term growth.

Applied Optoelectronics (AAOI.US), an American optical communication technology company, announced a strong performance for the second quarter of 2026. During the earnings call, the management positioned the second quarter as a significant turning point, with the company returning to Non-GAAP profitability driven by record revenue growth. They indicated that demand related to AI infrastructure remains robust. Simultaneously, the company repeatedly emphasized that demand, particularly for its 800G and upcoming 1.6T products, is outstripping its current production capacity. The guidance for the third quarter indicates that the company expects substantial revenue and profit increases. In the future, the market's focus on Applied Optoelectronics will center on: the ramp-up speed of new capacity in Texas; supply constraints of key components like DSP/TIA; other material supply challenges; and the short-term pressure on its 100G business caused by insufficient customer switch supply. Overall, the current growth logic of Applied Optoelectronics still revolves around AI data center demand, but the pace of future growth will depend on its ability to overcome capacity and supply chain bottlenecks. Below are key points from the Applied Optoelectronics earnings call for the second quarter of 2026. Management Insights Dr. Tom Lin, founder, chairman, president, and CEO of Applied Optoelectronics, stated, We achieved record revenue for the fifth consecutive quarter and reached an important milestone this quarter by returning to Non-GAAP profitability. He added, In the short term, our revenue growth is almost entirely limited by production capacity and key component supply. Tom Lin emphasized the acceleration in demand for next-generation products and the execution of capacity ramp-up. He noted, In the second quarter, we witnessed strong mass production ramp-up of our 800G products, with a sequential increase of more than double. He also pointed out, By mid-2027, market forecasts predict that demand will continue to exceed our production capacity. Dr. Stephen Murray, CFO and Chief Strategy Officer, mentioned that the company is advancing execution around three key priorities in the second quarter: expanding the scale of next-generation data center products; diversifying the revenue base; and enhancing operational execution to improve margins and prepare for long-term profitability. Murray provided updates on the development of the 800G and 1.6T products. He stated, We expect the revenue from our 800G products to achieve nearly 5-fold sequential growth in the third quarter. Additionally, we anticipate completing comprehensive customer certification for our first 1.6T product in the coming weeks and starting shipments later this quarter. Financial Performance Applied Optoelectronics achieved revenue of $191.9 million in the second quarter, with a Non-GAAP gross margin of 29.8%, reporting a Non-GAAP net profit of $5.5 million (Non-GAAP earnings per share of $0.06). Balance sheet and financing updates include: total cash balance of $508.8 million; inventory of $278.8 million. Murray elaborated on the revenue structure for the second quarter: 56% of revenue came from data center products, while 42% came from CATV products. He mentioned that the CATV business achieved record CATV revenue of $80.6 million. Regarding customer concentration, Murray remarked, We have three customers contributing over 10% of revenue, with one customer accounting for 42% of total revenue, and the other two customers contributing 26% and 24%, respectively. On costs and one-time expenses, Murray noted that Non-GAAP operating expenses were $67.6 million, higher than expected primarily due to increased transportation costs and higher-than-expected R&D expenditures. However, he added, We expect no further additional transportation costs in the third quarter and beyond. Murray also stated, To date, we have raised $538.8 million through a new ATM stock issuance program. Total capital investments for the second quarter reached $565.5 million, including $280 million in advance payments for equipment. Performance Outlook Management expects third-quarter revenue to be between $255 million and $290 million, with Non-GAAP earnings per share (EPS) projected to be between $0.11 and $0.26. Non-GAAP gross margin is expected to be between 29% and 30.5%. Murray reiterated the company's annual performance expectations: We anticipate revenue for 2026 to reach approximately $1.1 billion. He emphasized, This revenue level is constrained by production capacity and supply chain limitations, not by market demand. Tom Lin pointed out that short-term product structural changes will be impacted by the decline in 100G products. He noted, The 100G business will decrease by $20 million to $25 million. However, he emphasized that growth primarily comes from 800G, and the decline in the 100G business is only a short-term impact. Q&A Session When asked about the potential ban on Chinese optical transceivers in the U.S., Murray responded, It is too early to make judgments. However, he added that Applied Optoelectronics has a domestic production footprint in the U.S., which increases our attractiveness. Tom Lin noted a more positive demand from customers for U.S. manufacturers: Customers are more likely to grant us a larger share especially for U.S. manufacturers. When asked about the readiness for 800G product expansion, Murray said, If we could produce more products, we could ship more right now. He explained that the companys capacity is ramping up from about 200,000 units per month to approximately 650,000 units per month by the end of this year. Regarding the delivery timeline for the previously mentioned 1.6T orders, Murray stated, Deliveries will start very late in the third quarter and will gradually ramp up in the fourth quarter. Most of these products should complete delivery in the fourth quarter. When asked about risks from Chinese laser supplies, Tom Lin stated that the future capacity needed in the CPO laser market would need to increase 8 to 10 times compared to the current scale. He added, I believe there will be no impact because the demand scale far exceeds the existing global capacity. When inquired about substrate supply constraints, Murray answered, We have secured our supplies for next year. Tom Lin mentioned, The company works with two suppliers from Europe, two suppliers from Japan, and three suppliers from China. When asked about challenges in ramping up capacity and trends in gross margin, Tom Lin stated, DSP and TIA are the key limiting factors. Regarding profit margins, he indicated, I think it could be around 32% to 33%. He also emphasized: 1.6T is a high-margin product. Market Sentiment Analysis Analysts overall held a slightly negative tone, focusing primarily on supply chain bottlenecks, the ramp-up time for production capacity, and risks related to competition and regulation in China. Management maintained a slightly positive outlook while emphasizing capacity and supply limitations, repeatedly stating, Short-term revenue is almost entirely constrained by production capacity and key component supply, and We certainly do not wish to over-promise. Compared to the previous quarter, managements confidence in strong market demand remains unchanged, but analysts were more focused during the Q&A on issues related to the Chinese market and short-term supply constraints. Tom Lins repeated emphasis on not wanting to over-promise was also reflected in the Q&A session. Risks and Concerns Supply constraints remain a core issue. Tom Lin mentioned key component supplies and DSP and TIA in the 800G and 1.6T products. The company noted that demand for 100G products is being impacted by customer switch supply limitations. Murray stated that one customer is unable to obtain a sufficient number of 100G switches, and this issue is related to memory shortages. Tax uncertainty is also a risk factor. The company noted, The direct tax impact is $1.9 million. Murray stated that the company received approximately $5.7 million in refunds, but is still assessing the new tax policies.