AAOI - Earnings call transcript Q2 2018 | Applied Optoelectronics, Inc.

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Operator

Good day. I will be your conference operator. At this time, I would like to welcome everyone to Applied Optoelectronics' Second Quarter 2018 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. that is note recorded. Please Instructions] this being event [Operator to the Investor I turn over Maria now will call Riley, AOI. Relations for Ms. Riley, begin. may you

Maria Riley

I'm a Results the results outlook The live. of release on at is Conference that third Thank Investor company's quarter be After XXXX on the being webcast website to Riley, Relations the financial This available and Maria today, recording of will Call. announcing and Second pleased A archived is call AOI page for XXXX. its website close the Investor and quarter issued found AOI's Financial you. ao-inc.com. one also its you for release to to the AOI and XXXX can Applied recorded be Quarter provided market link year. welcome press I'm Relations, Optoelectronics' second

Thompson Thompson today's CEO; Strategy Financial the on Officer. is details and call and prepared A QX and an third of question-and-answer our Stefan will Stefan outlook results, XXXX. us Officer remarks. Murry, Dr. will and provide session quarter Joining AOI's Chief financial will of overview AOI's follow Dr. the Founder, AOI's for Chairman Chief give and Lin,

company's remind Before assumptions and These current Harbor will we make results uncertainties well statements. in as I forward-looking differ and actual as such the you to those would anticipated forward-looking statements today's expectations, call, to to could begin, review Safe statements. On materially AOI's like forward-looking statement. management involve from cause risks which

with business company's conform by reason these company's date of results may set the Risk for financial the the of noted with intended or the basis, or terminologies Factors substitute or for expressions. other estimates today file update measures all about to unless exception no in statements the to expects, are company's SEC. identify revenue, forth financial considered on a More will, of reconciliation are anticipates, accordance be Non-GAAP measures isolation section earnings discussion statements discussed earnings Except not law, reports are as and otherwise. with our Also, as impact the information believes after to on GAAP. financial should, a our specifically non-GAAP the any in numbers that obligation in assume results our similar that included by non-GAAP are in changes statements can of to website. may, GAAP in by as measures prepared we call forward-looking is as forward-looking risks You as expectations. required between actual we A this well to present press non-GAAP such on why our available release a and plans,

the for the X. to results, like of November call our is third earnings Wednesday, to date XXXX financial quarter currently moving I'd scheduled Before note

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

Thompson Lin

generated activity remain CATV, of per our $X.XX the see and spot bright net Maria. environment in AOI the for the products. we you, revenue afternoon, million, us of achieved we by we everyone, record of you market. exceeding] strong and result was XXXG income $XX.X thank by Good we the our quarter [ph] expectation, to encouraged joining increased Thank in the In revenue million diluted encouragements the [was margin quarter, continues share. delivered driven our products. and demand gross datacenter Datacenter and improve, as a a for market-leading second $XX.X XX.X%, In for quarter, today. demand customer

including secured In in a design China. the have quarter, seven the our with operator pleased customer wins, are one still but customers, success achieved to marquee diversify our We with continue large work we with we to datacenter base.

as quarter and with our improves. pleased continue the solid execution the are in demand result We environment

by encouraged trend remain the the Looking see ahead, in we do market. we

We is of which this the half first largely this volume to over committed half, on year XXXG than continue the second of in more based year. QX the will in orders double expect we announced

in industry. drive and We double year. data later datacenter our volume competitive operators growth cross] over traffic additional prospects infrastructure XXXG In fiber-optic sales, this position. this the and that the will AOI next expect grow, [platform again growth to to upgrade developed their be that continue manufacturing [ph] requiring as to up confident to in year, are with to this in continues invested in year evolving segment to and and we datacenters keep technology CATV, Remote-PHY bandwidth we demand. remain and has Additionally, their ours this expand leader expect

platform Our be and manufactured back degree at automation. designed was a proprietary to of high with years specifically optical scale goes of number

Our XXXG. products as well. XXXG has we to been XXG data platform be rate] [ph] a used And from [applied to it expect in our to

We of our also optimize expand continue to innovate cost integration the structure across products. transceiver platform our our and optical and vertical

performance success. year Coarse success our transceiver building integration process end turn to XX% the this we QX of between end keys believe for details the to to now platform With QX. over WDM and our additional bill Stefan XXXG that, example, of plan AOI our foundation We and the focused the and are review position Stefan? outlook to year, an this for in materials For on and market, call vertical I of on remain products. in-source of for our strong of to this further manufacturing will proprietary

Stefan Murry

was Total above Thompson. quarter for $XX.X to was of second you, guidance million, Thank our which range the million million. $XX revenue $XX

for driven by the products. in mentioned, our Thompson As upside increased demand was the datacenter market-leading quarter

in in of came $XX QX with year. at reported million, compared million $XX.X last revenue datacenter Our

quarter, XXXG by revenue was In of XXXG derived products. record for our products. our from performance Our XX% was datacenter from quarter was the transceiver our XX% revenue and this driven products XXG our

We our XXXG traction with are products. are encouraged we the customer by generating

our for Looking remain ahead, we opportunities confident in growth.

is double over in second the based announced in of on more we As to QX of largely orders year this the than committed which Thompson we first to continue volumes this year. half, expect mentioned, half XXXG the

and data expect a expand is reflection infrastructure technologies we techniques and their competition. us innovative to our from also upgrade year. integration significant datacenters volumes of position up next strong flexibility advantage, that new have their year and our to this to bandwidth a growth time over and apart higher require We demand. believe in with afforded market accelerating is developed traffic momentum. the believe success cost sets operators factor the that our vertical We The will keep us to trends datacenter on double the us through well to this We build

at our the cost the in-source XXXG cost our and our XX% customers have by vertical year. extent reductions for additional efficiency our materials of manufacturing of the including transceiver for an the continued providing additional best We roadmap bill to of with a integration. innovate to on continue we As increasing CWDM products product of focused improvements, end plan remain by best the and the

We are also certain to manufacturing sufficient short-term, adding this are in additional demand throughput constrain of have In additional QX once again by meet that somewhat, will testing steps capacity our required customers. these but year. to steps the we expect

many our provides optical factor a but datacenter and shipping cost platform be levers to an proprietary The our with product low the key automated been be XXXG which that platform started And of mature, the a we leveraged generations. process did can also product structure manufactured to well and same expect cost as leveraged optimizing to platform only last this mentioned, to volume designed was XXG, high-quality reduce also as leverage across quarter. is has manufacturing provides way, XXXG, across in cost, specifically not transceivers. Thompson The platform just us in many As generations for we come.

and quarter and seven XXXG customer design large on design will wins, of allow us including China. diversifying record these track innovation to We successful of with datacenter We believe the operator maintain customer also had in new engagements. continue in to win cost be focus our many in the our base, a leadership

we in sequentially, $XX.X to Turning year. $XX.X XX% and of of we up last generated million, to market, Television our QX generated similar revenue the million Cable

when are in expect trends in product. with CATV, improving continue the year Remote-PHY pleased and market, picks for We this we this demand are growth especially later seeing to up

different an vendors. And our encouraging. the demonstration additional in with trials The in who already the broad-based several three community technology. field has have We was into CMTS phase interest to product. demonstrated is customer, moving MSO with And products Remote-PHY with our Remote-PHY the been customers by interoperate

So we terms to believe competitors of in market that this we time for lead technology. our

year-over-year, million revenue, networks in products XX% deployments growth demand ongoing delivered representing mobile telecom record of coming telecom advanced world. around from with the $X.X a Our

or XX% XX%, and respectively. quarter, customers XX% had XX% X% from XX% and from the from of that second we three quarter, contributed was the of products, business our CATV the remaining in with products, revenue telecom revenue datacenter total In other. FTTH, For datacenter XX% greater

which of Moving beyond of reported revenue. XX.X%, XX basis represents quarter. XX% margin points compared We last with an generated a gross increase

margin gross was pleased of margins or were higher or prior expense. strong quarter million to was compared the with I The expenses continue expectations ability in our with quarter. R&D Total line mostly $XX.X in revenue and industry. gross due in Our XX.X% the $XX.X the XX.X% am with to compared generate increase to million, of sequential operating to revenue

transceiver of will in operating invest we $X remainder, enable over while technologies cost income Operating the in production compared next at on income QX of million this $XX.X million in as products. our few to QX level datacenter next-gen products was as a our and well we remain expect As that quarters, reduction further R&D XXXX. new CATV with

diluted reported million employee XX.X% average exercised quarter benefit per or diluted diluted of during Our million GAAP for compared GAAP million tax net quarter. income quarter. was income per count X.X% for $X.X XX.X share QX net options $X.X was in were vested million to approximately compared share QX $X.XX $X.X recognized $X.XX $X operating share was that last increased or with QX last per restricted or in and The million million income margin weighted $XX.X share quarter net shares. diluted diluted We've with share $X.XX or the XXXX. from quarter. the stock in the $X.XX with second approximately of after-tax fully compared per that Non-GAAP

previous with quarter. cash, cash equivalents, end cash of short-term Turning We sheet. in the QX total million at the million and ended investments to $XX.X with compared now $XX.X balance restricted the

a in a XX, million inventory, reflect investments million. total now our be This of and $XX million $XX.X capital $X.X of to in production machinery, we year million in not capital improvements. brings efficient completed of schedule existing Ningbo, $XX.X CapEx made on We As forecast in had million for $X.X year-to-date and figure including beginning reduction capital the increase factory from investments million in revised includes early equipment equipment capacity. QX. still building expected quarter, total expect XXXX. construction in million. the June expenditures The in our construction lower in currently We approach also This production in a $XX.X slight $XX.X new more of XXXX utilization on and to manufacturing the to of reflects does and our

to like China. would the I tariff with situation few Lastly, comments make a on

As is products different are modules. we operates of in integration in you manufactured of Taiwan of operations Because efficiency. flexibility three subassemblies both China. manufacture only All strategy, both AOI and China manufacturing cost which three and us diversity of and vertical locations, maximize our volume. one order our used our of products significant capable the terms in in to components production and geographically that The of also gives know, manufacturing in the of manufacturing these these high transceivers manufacturing are capable with of types location adapting many locations

that are believe for will and adapt to political As contingencies. we we changed, plan such continue well-positioned to condition

Moving now to our QX outlook.

range share XX.X the of of share using $XX.X We $XX.X $XX shares. expected approximately $XX and Non-GAAP revenue to be XX.X%. net is margin to range in XX% And million diluted count million weighted the in gross between QX fully per expected between be million. to EPS million. $X.XX Non-GAAP income million non-GAAP to of and be to share expect average $X.XX is per

effective tax be income that, our Q&A to QX session… our X% to will turn and operator between net back the over With expect for I it rate We non-GAAP on XX%. the

Operator

you. thank Yes,

question begin [Operator Instructions] now time, this from James. will question-and-answer session. will roster. comes the At we momentarily the Leopold pause Simon first assemble with Raymond We to And the

Simon Matthew Leopold

facility, now that, for I you here. wanted commentary got in But I Great. some of Thank China are when appear In around your in to just we you it on follow-up see you've that scenario manufacture. the does terms in investing tariff. taking in question capacity in the a understand adding you flexibility place.

I'm of have exposure you I tariffs more do $XX Taiwan a simply to what proposed having beyond U.S. billion manufacture could that? you tariffs. if detail a or above place, understanding for in you those the existing and or without tariffs of an and and to have think of, so bit need Do out exposure you the penalty? little looking come

Stefan Murry

Hey, Simon.

tariff $XX none are So billion there, the products. at products list, our none initial least major of our on of

an basically the there ones, initial is analysis doing the impact smaller but still are We from all on tariff no list. of

tariffs AOI's Some to products products there will think say capability manufacture to on subsequent both the we And of minimal any. the that remarks if be And billion the list. trying of our prepared what on $XXX impact larger, those are point have business, we in those we locations. tariff were is in from do

Simon Matthew Leopold

Okay.

think quarter I landscape or I some impact, update secondary on Thank Does of a over the the you that two? and hoping minimal terms was you And has could exist? color additional primary how looking the color secondary I maybe supplier, supplier at-your-top changed last also customers, was the supplier? you. are competitive for. always that's us in So a

Stefan Murry

last been relative it for as the there position they of something any to maintain so in I are I - believe has think are we think since changes tariffs. about. because is think aware we several their that to anything to the been cost our do total that certainly quarters, cost for situation, major I mean, their equipment customers. that brought I concerned continue And positioning don't about, our mean, It's the with Yeah, a something competition. competitive major has ownership tariff adds up, that concerned those of you customers that I leadership they're

is something find And that AOI's attractive. also think so, I they flexibility

Simon Matthew Leopold

in customer, inventory largest about And you've That probably the isn't had I your customer, shifts. was customer, believe who a also architectural was past today. absorbing and talked some

see of the some in and Can the the of transceivers. smart-NICs of you demand a you one previous customers' of of top your was adoption snapshot outlook? terms today think patterns, for Thank I purchasing you. factors give position us the inventory where affecting

Stefan Murry

level, business that expected amount particular and to customer. I down would we with the the seen, so that be last a as said we what to quarter, mean, to I inventory Yeah, to is that we've see the think consider inventory customer. normalize expect that's I with see normal consistent from what of we

Simon Matthew Leopold

And long their built? may that building, and you then last to of what's for tail shell you've one this construction build operators a to maybe blue have the Great. observed building when a the structure be they these AOI, investment, the difficult a how one period and at them once But you. with long, takes look do some the new time and the How the fill of electronics? When is is it acquire land, answer. CapEx sky hyper-scale thoughts. datacenter, Thank

Stefan Murry

that's think that comment not I on. something easily Well, Simon, I can

we probably always lot it into is, of what To and which a to customer. clear, of it specific have sort that thing. think depends building be don't customer stage datacenter and insight I

in lot not I quickly on. it's Often of get I very there know trying the capital a building as times, us really investment. of anybody speculate on datacenters. quickly that is on The a make turned situations something a customers So deliver they're to as just as customers large datacenters the to to eager new lot possible. are can pressure where

exact quickly timing. as and takes, there that operational as length speculate So I an how a to couldn't possible. know of need deployed that I is get CapEx But to that as long

Simon Matthew Leopold

my understood. you taking questions. Yeah, for Thank

Stefan Murry

Thanks, Simon.

Operator

Silverstein comes from Paul question Cowen. with you. the Thank And next

Paul Silverstein

guys. Thanks,

the better EPS assume something that the significant follow-ups. off, reflect couple there First got of - business visibility concentration I've of the of lack to spread in your I lack it, significant else a way of And then, spread? put in a is or

Stefan Murry

between referring wider end being the the a the little the this No, to range, I think you're I is guidance mean, the spread end and quarter. lower - of spread bit higher

that given just possibilities. the that encompassing see, and I range our be all the sure that make uncertainties prudent reflects think - we it of to desire we're

Paul Silverstein

So, Stefan? extraordinary, nothing

Stefan Murry

No, not.

Paul Silverstein

being you're usual? more than conservative other than Maybe

Stefan Murry

could conservative it's more I if don't it's you than - say usual. know I guess,

I say there. possibilities range we out think the encompass you to to sure. of that's that more we're attending could And, guess, try see - I conservative,

Paul Silverstein

the your there All related so right. two on can is And any then environment, the of other us update heard And then side questions, if off, update. first [ph] XXXG, the pricing with, equation, I and XXG, you reduction provide an cost cost hoping some the general. the date going us future. quantification reminder the cost I'm or - quantification reduction give about reduction of recent comments you of in can forward of in any to

Stefan Murry

it's say in or anything expectations in surprising maintains what pricing that seen the there expected. for we've wouldn't I So our consistent pricing seeing environment pricing - environment going the is forward. with of we we're the terms

able In cost we we've close price is terms at rate we the think historically, that, so. had we've what a able do reduction, - reduction to to of is the expect reduce obviously to the been I to said cost and to continue very be that

Paul Silverstein

in roll revenue? especially And one for necessarily that's with one timing, you the final big us China, can I out, for hard seven I give one but to you any initial the design not it's know and expect out predicting sense wins, me, roll know that One to and same. respect when the meaningful

Stefan Murry

a time. we to this in they'll this revenue quarter already grow. would But some a happen from this we And already engagement, now. I that it I it for now, with we that overnight, and to reminder, we're to get And we've got customer in us as continue takes shipping any anticipate overtime mean, design-win, expect right design-win Just have announce customer it customer fact, means as when orders. new doesn't meaningful large

Paul Silverstein

Thank appreciate. the you. pass I'll I line.

Stefan Murry

you. Thank

Operator

Alex Thank Needham the you. Henderson Company. from & comes And next with question

Alex Henderson

Great.

like just attention kind ask seems like around that year of it the back is it's a starts got like XXX factor. still street. But to that a I'd question to of it's meaningful the on of First become lot timeline. It gig next before seems half

consistent So undermine XXX you to gig? And to be assume XXXX really gig initial way with about will XXX even that that your the ramp XXX anytime, gig of gig through would trajectory I in would Is XXX manage expectations. timeframe. right the how is think that the to that small it? expect growth

Stefan Murry

Alex, little getting XXX gig they're think that XXX XXX production a are it frankly you Yeah, so are very house as our pushing that customers seeing their their as still very to solution gig. think very have I that urgency the had we depends I likely be anytime to customer solution. evaluating other feet to gig, talk interested are customers some aren't on in bit soon. which And gig. behind wet XXX possible. recently, customers XXX hard for as XXX who quickly pushing in into We've Then gig and There in really gig

a realistically to think in actually customer being ready XXX earlier. would desire we among see reasonable So from I like the is there customers. saw I meaningful year diversity any different think of have meaningful it some with of supply to necessarily is quantity. again, timeframe it gig, entire translate it say ecosystem a customers the doesn't that, into to I although, kind next But probably revenue would back-half as

of your about think for gets timeframe tail the over. for than back-half to customers of So that and we're looking next customers, year so which for the kind I at other question or shifting second some longer

has long of that front XXX think it. I a road in is - gig

future. long growth a I may slower is in gig. there go of ways XXX by to meaningfully customers supplanted move in is customers Again, lot think certain XXX I But gets think quite that little move a for gig little may faster, before that the certain there foreseeable direction. a continuing

Alex Henderson

execute a been a it seen price? of market normalized the if you around the the of structure, players to it of of I somewhat Have that challenge you those the of pricing and get the landscape like rate. versus that between sounds some first could back back The some the decline going in the the we versus pricing to moderate And moderation product? half. seems for decline that moderation and is the half is but you that to like How large you're for second persistent rate the at the see two? relative last to into players Or really trying the year of declining, more rate aggressiveness suggesting deliver aggressiveness, to those have question press to half do a still what has been competitive ability of

Stefan Murry

way very scaling to put of seems perhaps I that's to really competitors, for I to try probably is, who a price had best guess, think, it business, up aggressive Well, get number me have on the but difficulties demand to have be there to required. of been level

have their So I to talk and deliver. ability the you from think, both in They those will products, record one to and pressure, say, in XX think, our us. And it switch actually a knowledge to meaningful transitions. price for generation take both about XXX be that those AOI's through that had competitor generations you we gig, when track over to And the to how manage have gig the of datacenter. multiple conditions for and product threat order demonstrated have you quoted from I the to scale, price

value I something think not and in, competitors value all our that that that find experience. customers of of I our think, have

them by so, are demand to pricing. of their And encountered I struggling perhaps they've think meet that the some

Alex Henderson

a - Or that? question, point? now your minimis last I'll involved much this Is a business see And around the one at are you Any floor. that of PSM? still portion de pretty comments non then with

Stefan Murry

seeing from as most PSM, a of shipping and feel our that I we is we've over like number most I and still what take change. applications CWDM, said mean, greater don't are PSM we we're we that's customers. mean, of probably share, CWDM have for and that for quarters, to expected We time even attractive products would predominate a in more expect some And I technology

Alex Henderson

you. Thank Right. Very helpful.

Operator

Thank next Davidson. with question you. D.A. comes Kelleher And Mark from the

Mark Kelleher

Great. there was Thanks there in think the questions. With may new you've a When deal, sign supply you situation the capacity? to the how contract going for be the with you was think question? Facebook got Facebook, ramping - close thinking with supply in you're I to be taking contract the where China, do running full that

Stefan Murry

are full to remarks, Well, to as our capacity. you in our this at running noted capacity I basically running mean, close prepared intention we run quarter. going very And we're to is

of we quite in production you we prepared capital expenditure investing we So facilities, record to But this year as our efficiency high and we're earlier, had of very plan it's existing remarks still last are more out CapEx, terms level get the not last because the aggressive on a a that increase or we but forecasted for of making. was new noted that our as have in as that's we so previous a continue expenditures year, year. think XX% the planning well over year,

our we're So additional continue as goal pace and see the is we with in conditions keep to demand that clearly improve. to manufacturing, invest

Mark Kelleher

until correct? that China of the facility, XXXX, online the end isn't is And do

Stefan Murry

XXXX. Early

Mark Kelleher

XXXX. Early

So China facility. volumes you double in without to are looking the XXXX

Stefan Murry

That's correct.

Thompson Lin

we equipment, can is and Okay, Taiwan with] [therefore [ph] the we automation, important [ph] in lot are more more both so increase China. circular adding talking

in of CapEx special automation. lot So through, the are China a too, investments the Taiwan only investing for works we

Mark Kelleher

you I bringing the run next Okay. you've that talked inside? vertical question. through kind And know, me us manufacturing components you're to integration you Can the just review of leaves certain going just certain about you've to those - of components timing that's got, be my internally. Can plan

Stefan Murry

bring really But specific I We a don't on specific in-house. think, many manufacture costs. sure say publically. that the Well, how I love of continue not to large in-house. reduce that I competitors get am of we I going our know do than but can to to can don't would of I what to there is, too want that, to plans, amount provide materials is want information the still more bill look, we're

more the that about to Thompson call addition the manufacturing talk those process in-house the materials in important of yields, just bring improving of by XX% is fact and to more bringing of parts, in-house, the to bill making to continuing in-sourcing we did more and efficient. the about very as I year. But think, automation, mentioned end addition in improve on plan the the components we the

that's think an important we our spend forward one be last cost fine lot strategy increasingly think time part I two. to of year tuning that I going a and efforts reduction of of the over moving lot this and a

Mark Kelleher

one just last All right. question, And something. numbers check to

You said XX% XX% was gig. of the datacenter XX revenue XXX gig,

I X%. gig? XXX that X% Is think that leaves

Stefan Murry

of of remaining. Some XX its XXX still is some and some gig it gig

Mark Kelleher

it. That's Okay. Thanks.

Operator

you. Markets. Thank Kisner comes next the And question James from with Loop Capital

James Kisner

So just a quick housekeeping. figure? Do you guys, was operations the cash from

Stefan Murry

X-K. our in It's

at the if want. number give you look it. can can You I

James Kisner

want. I Yes,

Stefan Murry

minus sorry, for the - $X million $XX about quarter. it's million Yeah,

James Kisner

Okay.

Stefan Murry

cash I'm sorry, $XX by QX, million quarter, operations. using the was That for net divided

James Kisner

Okay.

volumes half clarify front over that. you I'm quarter QX, now sort wise mean your big that of perhaps given of it now, was XXX I like most the gig half want that might a wondering driver gig, the gig and double is was So of have for times at where it sounds that be I outperformed gone this Does like just the XXX to versus for XXX forecast we half. up a sort thought what XXX second volume of half gig something, you ago? is outperformed said know just you've and

Stefan Murry

changed quarter-ago. a our much outlook has No, think don't from I

better had we contracts, the I little a we've fact the that's in that past coming say, our typically. portion a - makes bit think, more business large of have secured from, secure visibility our I would

before. changed And so I our in has think, really outlook from nothing

James Kisner

you last the talk your Okay. guess your net and operating quarter, here, of margins gross impact the expect you about I in do currency both margin this income on, Can in and guidance? impact on

Stefan Murry

Yeah, the too change consideration currency doesn't I us mean margin for much.

directions We but equal have most dollars dollars between flow And say purchased - things dollars. have that and in of U.S. both I dollars. materials and are we flow, wouldn't new we exactly renminbi, and our we and Taiwan raw have

it profit. impact great doesn't have our on a gross So

James Kisner

Okay. Last one…

Thompson Lin

in the the for that operating expense Okay, [ph] difficult or China.

Stefan Murry

Yes, depreciating cost in RMB lower out does yeah. our [indiscernible] obviously that Thompson was lowers labor China. our pointing - it the

James Kisner

fate Okay. And a kind in also this own making updated [ph] again transceivers effort after box saw XX ago. white Just manufacturing white would run give to obviously, that in quarter, at your be box and that another the if idea has kind worried their past something that thoughts of helpful. this in on serious to talked thoughts you in any updated kind been becoming head on you're that, a you're competitor, Thanks. about of partners you more topic that I'm of wondering, about player about customers, transceiver all? the space months going this is going any be just sure the I'm

Stefan Murry

specialized doing high-speed a manufacturing, specialized any making virtually is goes very high for like designs for electronic In not transceivers Well, think, I and that know modules. into is manufacturing it. of where of it's it's performance processes these technically in quite that factory a equipment very process and standardized kind perform. are there got difficult a proposition, particular that optical can us There and the lot how

think reduction, just as as we attempted the I not to easy our of automating into and very have and production, say more still in the that really have going competitors And some to those am things may there past on work it's fine work these had is tuning cost manufacture transceivers. the respect. in this seem put of I result. it So do let's that confident in mixed that

out a in so, And strategies I we we there. competitive place the see are that good relative business to think,

Thompson Lin

see who manufacturing the process missing responsible year is can is the in for loss responsible this clear. something radio, automation, And who not I for issue? the model is for quality for improvement, not is This

it think, there in I think I responsible believe for work. model. don't I don't job. issues believe right. be still will I Taiwan. kind in from really it this is many comes of this like people manufacturer there And All

is take to do it's It's okay. the of be responsible always not see, this, very they years. end-customer And order been become So think it responsible, right have the but many Will who easy. AOI be people don't to the empower. will a I healthy, really a lot for

to huge improve XX% to The This be could the company is different important. very difference. how very to do automation how XX%, between process. So we year a know from is big

So is responsible. whose

So that to answered. questions there's need be many

James Kisner

Thank you.

Operator

you. from the next Craig-Hallum. Thank comes question from And Richard Shannon

Richard Shannon

on Stefan, due all, on. there Stefan, Thompson, you of I understand, talked going taking headwind questions. the headwind and Hi, for about thanks first for when your A what's think, remarks, does for Can you couple prepared to quarter in me, evade? that going help us a testing my

Stefan Murry

relative have in so additional see to is were are we of forth. customers the on expect they we procedures, requirements so to that saying remarks, in Different we base. continue prepared different Yeah, our and testing and testing to customer as design what implementing diversify some terms so

So we're in manufacturing. steps undertaking some the additional testing

the them manufacture little that - it bit longer adds it link is will not the to will days to cost the modules. them. a It of it doesn't of does it's meaningfully that the - time throughput. takes it our But takes going manufacturing So impact to what transceivers, it manufacture few a to

more than expect expect fourth in will there production. words, prepared So we remarks we the we In other constraint quarter be by that quarter but quarter demand in early in in fourth our this supply to - as said normalize. the quarter, this we be our can that to

Richard Shannon

you're with that that ones? is to, across doing that customer And one new or over specific And is Okay. multiple referring a SKU for what a current one? is something or

Stefan Murry

it It new a to statistical need analysis the take to that large customers. including need of enough some certain applies for across to the customers, multiple existing for data doing multiple do size get sample that we we and we're customers, the It's applies board. SKUs some the and that so

Richard Shannon

Got it.

Makes Okay. sense.

is your that I current quarters, question your levels Another continuing in revenues or for about trailing on stayed, any a gig that there, eventually say, flattish updates is XX you there? decline you thought largely talked that eminent would Any line few process that product again see have datacenter, off.

Stefan Murry

that to fact I resilience, has off its don't of said of the XX a continue gig that tail it's going it's think, testament to see XX surprising gig. eminent been in Actually, think, I off, somewhat think for XX I some but the I an the to but time we falling gig. economics cliff,

are And good. some for customers still very instances certain

But continue to off the will expected dramatically drop tail time time future. would off in any wouldn't to to over So it expect I I near that gradually.

Richard Shannon

Okay. Helpful.

Next question for me.

You mentioned When your in the sales of volume expectation you say is that units or doubling XXXX XXX gig in XXXX. volume comment? over

Stefan Murry

unit. That's

Richard Shannon

is on customers, kind happen that it a more you that is, topic be profile? expect of this doubling, Yeah, okay. narrow broader do think do specific over to base of And you will follow-up then

Stefan Murry

customers a some infrastructure. right. that think a it's are combination see - of we I of factors, We in anticipating see their number growth mean, Well, I customers

new to we from China is that that about more customers contribute. products next that talked expect customer the that come us like see So And will datacenter year. also we we purchasing onboard

multiple it's we different it's factor, preponderance things not So of that at. looking one just are a the

Richard Shannon

gig into production of question expectation Last a then, next shipping some what's or four to over time, that or two quarters of that kind your Okay. of me, so? for testing? XXX you volume for mentioned period you're design ramp And win of

Stefan Murry

the It's for I it it's call gig deployment field XXX as - to guess, that or And think, testing. - is would XXX I far sort advanced you ramp-up, could going of used. be on our trials gig, as I not viewpoint say widely

I not wider say is bigger in to shares heading. going for gig a probably a the there the for who few acceptance and customer us gig is would interest Many customers it significant important that clearly to in direction us. to I customers, be base. it's get stone XXX think - the stepping XXX us gig they're part a is XXX think I is for But it. most gig XXX because that's have

Richard Shannon

it. Got

sense. makes that Okay,

that's think those. I all Thanks the me. question for for taking

Stefan Murry

You're welcome.

Operator

the from follow-up Paul Cowen. And you. with Thank Silverstein is last question a

Paul Silverstein

not you respect know volume, you've to you comment out on being I follow-up. to appreciate But, want the going Stefan, about coming supply, to your on I just I going you With it doesn't hope terms clarify. reconcile, maxed China move be? what if of ability are - our and being in need at to around, I to your to out if the manufacturing of to that's missing maxed in manufacturing clarify, just be online. I comments your around back facilities, am about taking risk Hey, trying got room you meaningful I'm supply all move new

Stefan Murry

look, Well, air I specific aren't up to is because, here I a get you in situation. too lot I to know. as tariff on lot the with plans, of tariffs yet, the mentioned, passed respect still want our - there a mean, there even is that's don't Paul, the as

many our to are of of in the manufacturing in So it a example, go a customers, is steps tariffs, many there We in that Currently, manufacturing could what world that do Europe have or the customers not then we rest do do I'm to other that that these subject you We know. the of different so location move we as U.S. places be different saying example, operations and have China by into steps locations. subject thing are could is location tariff. manufacturing. number to of all One possible in transceivers process would for into parts of not manufacturing the the also - significant even customers. for do, of other them of and those our one a portion that segregate several for do

customers locations or to manufacture are U.S. China for in So Taiwan. that other coming or products geographical we customers the in do potentially could and back places other not

a So do. out… we I what there lot was merely things can of are pointing

Thompson Lin

going R&D into convert we But we Taiwan, is next capacity can in more for still can with double there than the down, manufacturing in year. capacity us, If transceiver XXXG XXG And transceiver. space. other point China, R&D we all use space is our for XXG the

think otherwise, I be until in Taiwan. XXXX. can will new not equipment resource not and increase space We But Taiwan, is the about China in that's ready point. So probably the more facility got capacity

Paul Silverstein

But last don't just in of something. comments want to Got [One] materials one [ph] into get in-scouring. to I the the clarification. terms it. clarify bill Stefan, details your I want of heard in guys, you that

is today, had brought the previously you I think you publically my you XX% to percentage of announced? on memory not the top different and you announced I your so number serving and had new what was time that But BOM is part referenced that XX%. what the is parcel the that to me. plant you or in-house of referenced Maybe and last the previously XX% thought

Stefan Murry

being XX%. don't what front to in-source I But about The either, - statement think the we're is that that, able that we the of think year. between ourselves previously plans do to to end what talking eventually XX% have now Paul. was see and I XX% I me have in of we

Paul Silverstein

top wherever is XX% on you're just of at?

Stefan Murry

of materials of was at us top trying the year. QX, in say end say, of in-sourced. the the Adding is to in Q $XXX And - of On XX% the XX% to words, say, are by we that much of it what to at right. bill we materials of already of additional sourced, the $XX where up we I'm end of yeah, - materials, a - get right? bill That's of the end bill how other had

Paul Silverstein

hypothetical? us those you're or are numbers and just the Right, the giving

Stefan Murry

to - math Those earnings trying it's That's call. that not… just a into Oh, just - trying that I'm to example. no, mathematical the going the clarity I'm I'm through are you no. provide in

Paul Silverstein

Understood don't and to you those is want correct? clearly exact numbers, provide that

Stefan Murry

competitive confident going will not of we're is end of Yes, lot get be there it love to would that know there and that what out. out the year. the But I'm a what our are our universe in to information by that exactly people cost

Paul Silverstein

Thanks, guys. option, I it. the Just right, appreciate wanted to you all give

Stefan Murry

Thanks, Paul.

Operator

question-and-answer Thank And Lin conference to I for session. any to Dr. concludes return the Thompson our you. would closing this like remarks.

Thompson Lin

today. Okay. you And thank joining for us

continued employees As your thank investors, support. for our customers, always, we

Operator

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

lines. your disconnect now may You

Applied Optoelectronics (AAOI) 7 Aug 182018 Q2 Earnings call transcript