Q2 2021 Applied Optoelectronics Inc Earnings Call
[music].
Good afternoon. My name is Christian I will be your conference operator.
At this time I would like to welcome everyone to applied Optoelectronics second quarter 2021 earnings conference call. Today, All participants had been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Asked the question during the Q&A session. You May Press Star then 1 on the Touchtone phone to withdraw your question. Please press Star then 2.
Please note that this call is being recorded I would now like to turn the call over to Lindsay salaries Investor Relations for a O I Miss Everest you may begin.
Okay.
Thank you I'm Lindsay salary Investor relations for applied Optoelectronics and I'm pleased to welcome you to Aoi's second quarter 2021 financial results conference call.
After the market closed today <unk> issued a press release.
Now the thing at second quarter, 2021 financial results and provided its outlook for the third quarter of 'twenty 'twenty 1.
The release is also available on the company's website at Ao, Inc. Dot com.
This call is being recorded and webcast slides of linked to the recording can be found on the Investor Relations section of the ally website and will be archived for 1 year.
Joining us on today's call his Doctor Thompson, Lin Aoi's, founder, Chairman and CEO and Dr. Stefan Murry, Aoi's, Chief Financial Officer, and Chief Strategy Officer.
It sounds simple give an overview of <unk>.
<unk> Q2 results and Stefan will provide financial details and the outlook for the third quarter of 'twenty 'twenty 1.
A question 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 the assumptions and current expectations, which could cause the companys actual results to differ materially from those anticipated in such forward looking statements.
In some cases, you can identify forward looking statements by terminology such as believes anticipates estimates intends predicts.
Expects plans may should could would will or thinks and by other similar expressions that convey uncertainty of future events or outcomes.
Forward looking statements also include statements regarding managements beliefs and expectations related to the expansion of the reach of our products into new markets and customer responses to our innovation as well of statements.
Regarding the company's outlook for the third quarter of 2021.
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 the statements to actual result, what are the changes in the companys expectations.
More information about other risks that may impact the company's business are set forth.
And the risk factors section of the company's reports on file with the SEC, including the company's annual report on form 10-K for the year ended December 31.2020.
Also with the exception of revenue all financials discussed today are on a non-GAAP basis, unless specifically noted otherwise non-GAAP financial measures are not intended to be considered in isolation, whereas the substitute for results prepared in accordance with GAAP a reconciliation between our GAAP and non-GAAP measures.
As well as the discussion of why we present non-GAAP financial measures are included in our earnings press release that is available on our website.
Before moving to the financial results I'd like to announce that a lot of management will virtually participate in 1 on 1 meetings at the Jefferies semiconductor hardware and communications infrastructure summit on August 31st.
We hope to have the opportunity to interact with many of you virtually.
Additionally, I'd like to note that the date of our third quarter 2021 earnings call is currently scheduled for November 4th 2021 now.
Now I'd like to turn the call over to Dr. Thompson Lin applied optoelectronics per.
Rounder, Chairman and CEO Thompson.
Thank you Lindsey thank you for joining us today.
It would give you the revenue and non-GAAP EPS in those expectations.
Expectations.
Yeah.
Gross margin came in slightly below our expectations, mostly due to unfavorable product mix you know the of television.
The increase coals from the component shortage, we skew us in the quarter total.
For second quarter of <unk> for $2 million decreased 16, 9% compared to a strong second quarter.
For us, but was up 9 of the squeeze Judy.
Sequential growth was led by our CATV citizens.
This quarter.
All of the data center.
The Congress for Q2 up the sales total revenue.
All of the ATV demand environment.
In the store as I missed part of Cuba.
Most of the medical.
Continuing to upgrade the anymore.
Total net revenue loss via television for dose.
The inquiries more of the the full food year over year in Q2.
<unk> 48, 1% sequentially off of a strong fourth quarter 2 of record $27.6 million.
As we expected with viewers of jewelry salt Q2 conditions in the debt in the second 1.
The jobs total revenue for our data center per dose of $22.4 million.
Decrease.
7.4% year over year, and 13, 7% sequentially.
We are pleased to the project with Q2, new design wins with 2 customers for all of 400 Mg per dose during Q2.
In addition to the design wins, we had 5 ticketing called fortification of our for LNG per dose.
Which Stephen will discuss in more detail.
We are encouraged by the traction we are seeing.
We saw 400 G product.
As our customers start to degrade.
We expect the order book will continue as our customers start to realize the benefit of outperformance of all for and the Zip solution.
Based on this we continue to respect all of death in the business to begin to increase in the second half of all of the EU as our customers begin for 1 of the upgrades.
The inventory issue 1 of the G normalize.
Turning to our telecom segment well.
While we do see all of a sign of a recovery in Q1.
So mixed conditions in Q2.
With some customers present, new orders, while others continue to use the existing inventories.
Overall, we see muggings from Nishu.
The China Telecom monkeys.
Continuing so we pitch the.
Timing and cadence of the <unk>.
There remain somewhat opaque.
The result.
Revenue for all of our telecom products of <unk>.
We close the meeting.
What's the 146% year over year.
95, 6% sequentially.
Moving on the hit would believe China will continue.
Investment in both the <unk>.
And the fiber to a whole infrastructure.
Expect higher revenue in the second 1 in the second half of the easier.
Compared to the force com.
With that I'll turn the.
The call over to Stefan to review the details of our Q2 of the homeless and out of Q3 stood at.
Thank you Thompson.
As Thompson mentioned, we delivered revenue and non-GAAP EPS in line with our expectations.
However, our gross margin came in below our expectations, mostly due to unfavorable product mix and our CATV segment and increased costs associated with the component shortages, we saw during the quarter.
While we continued to see softness in the data center market and conditions in the China <unk> market remains somewhat soft we are pleased with the continued strength and record results. We are seeing in the CATV market.
And looking ahead, we are encouraged by the traction we're seeing with our 400 G products, which we believe will drive growth in our data center business as order volumes ramp later in the year.
Notably we are pleased to report that we secured 2 design wins for our 400 G products during Q2.
In total for the second quarter, we secured 3 new design wins, among 3 customers all of which are existing customers.
All 3 of the design wins were in our datacenter business and 2 of the 3 were for 400, G, which I'll discuss in more detail shortly.
Total revenue of $54.2 million decreased 16, 9% compared to a strong second quarter in the prior year.
And was up 9% sequentially.
Our Q2 revenue was in line with our guidance range of $51 million to $56 million.
As we expected the headwinds we saw in Q1 continued into the second quarter in the datacenter market related to the inventory normalization. The followed the shift to working from home early last year.
We believe these headwinds will begin to subside in the second half of the year driven by several of our customers who will begin to ramp for <unk> deployments.
Additionally, we believe the inventory conditions in our 1 <unk> business will begin to normalize later in the year.
On the 400 G front as Thompson and I mentioned, we secured 2 new design wins with 2 customers for our 400 G products during Q2.
1 of the design wins was with the data center equipment manufacturer.
And the other was with the Hyperscale datacenter operator.
Both our U S based companies and both our existing customers.
As a reminder for Oi of design win occurs when we have successfully completed both the technical qualification of the product as well as received an initial order from the customer.
In addition to these 2 design wins, we also have successfully completed technical qualifications on 5 other 400 G opportunities.
We are optimistic that many of these qualifications will become design wins in the near future. Once we receive orders for these products from our customers.
The technical qualifications are with 2 different data center operators and the data center equipment Oems.
All of our U S based companies.
We are encouraged by the traction we are seeing and expected for energy will begin its ramp with US later in Q3.
In the second quarter, 51% of our revenue was from CATV products.
41% was from our data center products with the remaining 8% from <unk> Telecom and other.
And our CATV product segment. The overall demand environment remains very strong as the Msos, particularly in North America continue to upgrade their networks.
We generated revenue of $27.6 million in Q2 up 48, 1% sequentially and up 349% from $6.1 million in Q2 of the prior year.
We are still seeing component shortages in our CATV business and we continue to work with our suppliers to improve delivery schedules for these critical components and in some cases, adding additional suppliers.
We anticipate that these shortages will adversely affect our third quarter revenue by about $3 million.
As we work to improve our supply chain, we may continue to have longer than usual backlog for several quarters.
Our Q2 data center revenue came in at $22.4 million.
Compared with $52.5 million in the second quarter of the prior year.
In the second quarter, 33% of our datacenter revenue was from our 40 G transceiver products and 59% was from our 100 G products.
Turning to our telecom segment.
Revenue from our telecom products of $3.3 million.
Decreased 25, 6% sequentially.
Primarily driven by continued slow demand in China for <unk> upgrades there.
And 46% from $6.2 million in Q2 of the prior year.
Looking ahead, we continue to believe China will increase investments in both the <unk> and <unk> infrastructure and.
And we believe we are well positioned to sell lasers into both of these markets.
For the second quarter, our top 10 customers represented 86, 8% of revenue.
Consistent with the 86, 9% in Q2 of the prior year.
We had for 10% or greater customers in the second quarter, 2 of which were in the datacenter market and 2 of which were in the CATV market.
These customers contributed 24, 1%.
21, 3%.
The 11, 2% and 10, 9% of total revenue respectively.
In Q2, we generated non-GAAP gross margin of 25%, which was below our guidance range of 25, 5% to 27, 5% for the reasons I mentioned previously and compared favorably to 23, 1% in Q2 of the prior year.
We expect the downward pressure on gross margin due to unfavorable product mix and our CATV segment to persist through Q3 before starting to recover to a more normal mix in Q4.
We are currently uncertain when the increased costs due to supply chain disruptions will subside, but we also see that persisting through Q3, which will also negatively affect gross margin.
Total non-GAAP operating expenses in the second quarter were $20 million.
Or 36, 9% of revenue compared with $20.6 million or 31, 6% of revenue in Q2 of the prior year.
Non-GAAP operating loss in the second quarter was $6.5 million compared to an operating loss of $5.6 million in Q2 of the prior year.
GAAP net loss for Q2 was $8.2 million.
For a loss of 31 per basic share compared with the GAAP net loss of $18.6 million or a loss of <unk> 89 per basic share in Q2 of 2020.
On a non-GAAP basis net loss for Q2 was $4.1 million or loss of <unk> 15 per basic share, which was in line with our guidance range of of loss of $3.8 million to $5.6 million or a loss in the range of 14.
The 21 per basic share and compares to a net loss of $5 million or a loss of 24 per basic share in Q2 of the prior year.
The basic shares outstanding used for computing, the net loss in Q2 for $26.9 million.
Turning now to the balance sheet, we ended the second quarter with $55 million in total cash cash equivalents short term investments and restricted cash. This compares with $49.3 million at the end of the first quarter and reflects $5.9 million in cash used for operations.
As of June 30, we had $104 million in inventory compared to $106.3 million at the end of Q1.
Inventory decreased primarily due to utilization of inventory for customer orders.
This inventory reduction is consistent with our long term plan as we focus on rationalizing the inventory levels.
We made a total of $3.2 million in capital investments in the second quarter, including $2.9 million in production equipment and machinery and an immaterial amount of construction and building improvements.
We continue to expect 2021, capex will be approximately $16 million, although as we have noted in prior years, there can be significant variability in this estimate as the year progresses.
As we disclosed in February of this year, we initiated a new at the market offering.
To date, we have raised the <unk> 9 million under this new program.
We intend to use these proceeds to continue to make investments in the business, including new equipment and machinery for production and research and development use.
Moving now to our Q3 outlook.
We expect Q3 revenue to be between $51 million and $56 million and non-GAAP gross margin to be in the range of 19, 5% to 21, 5%.
Non-GAAP net loss is expected to be in the range of $6.9 million to.
To $9 million.
And non-GAAP loss per basic share between 25 and 30 <unk>.
Using a weighted average basic share count of approximately $27.7 million shares.
With that I will turn it back over to the operator for the Q&A session operator.
We will now begin the question and answer session. As a reminder to ask a question you May Press Star then 1 on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
If at any time of your question has been addressed and you would like to withdraw it.
Please press Star then 2 at this time, we will pause momentarily to assemble our roster.
Today's first question comes from the Simon Leopold with Raymond James. Please proceed.
Thanks for taking the question.
To start out first just if you could clarify the.
The CATV headwind.
You quantified it as $3 million headwind due to supply constraints.
There are a couple of ways, 1 could interpret that but I.
I think what I.
Imagining youre, suggesting is looking at this quarter's sales.
Roughly $27.5 million and subtracting $3 million from that but alternatively, I could sort of think of hey, I wish I was the imagining it would be 30%, but with 3 million of headwinds it'll be 27, So I guess I'm trying to understand the baseline or for maybe a little bit finer detail the impact of that hedge.
<unk> you highlighted.
Yes, Simon thanks for bringing that up so the.
I think the answer is it's more like the latter scenario that you had not necessarily that those numbers are what we had in mind, but what we're saying is that relative to what we could otherwise deliver that is based on orders and request the delivery schedules.
Shipping schedules and all of that we could have delivered $3 million more than our cable TV segment, but for the fact that those raw materials are constrained at this point.
And let me just clarify that it is that $3 million hit in the June quarter or is that $3 million headwind your forecast for September.
It has some forecast for the September quarter, So we're saying in the.
In the in the next quarter in the in the third quarter of the 1 that we're in currently.
We would have been able to deliver based on our current forecast approximately $3 million more revenue then.
Then we now believe that we can do to component shortages.
Great.
Wanted to see if maybe you could help us understand how to think about your opportunities in the 400 gig market.
And where you see essentially.
Competing with ZR products, because I imagine there.
Yes, your products are probably cheaper than the <unk>, but have shorter reach.
And so just trying to get a better idea of how youre thinking about sizing that market opportunity in let's say 2022.
Sure so.
First of all I mean, we're pretty excited about the progress that we made in the 400 gig market. We highlighted the not only the 2 design wins that we had in the quarter, but also the fact that we have 5 technical qualifications, which as we noted is a significant milestone I would say the technical qualification is typically.
The biggest hurdle to get over.
In logging of design win the remaining hurdle would be really just receiving an order which typically.
Involves getting getting set up with proper purchasing codes in negotiating some pricing and things like that so those hurdles are relatively low the technical qualification is really the key piece that I think typically takes the longest so we're pretty excited about the progress that we had with those 2 design wins and the 5 technical.
Vacations.
With respect to your question about kind of where we fit in in the ecosystem I think as you mentioned.
Our products are positioned to be a lower cost version of 400 gig that can be used primarily in intra data center applications. So.
Of distances up to.
A couple of kilometers as opposed to longer distances than that which is where ZR is typically targeted nausea are of course, we'll work it shorter distances, but at a higher price as you noted.
And as far as the market sizing for for next year.
I can.
Point, you to some third party estimates and things like that for the overall market size I think what we're hearing from our particular customer base is that they're going to.
The begin implementing 400 gig later in the third quarter and into the fourth quarter. My anticipation is that that will be a relatively slow incremental ramp.
At that time, because thats typically how it goes with these customers when they try to implement a new technology like 400 gig.
They don't instantly.
Start to implement that technology, they put it in incrementally test it make sure everything is working as expected and then begin to ramp up after that so this kind of a 2 phased ramp is what I would expect there.
And the second phase, which would probably be a stronger ramp is probably sometime in the middle part of next year.
Great and then just maybe a quick 1 if I might.
We've seen awards coming out of China for <unk> technology. The there was the 700 Megahertz award of few weeks ago, and then more recently, China Unicom and telecom made tenders for for ran just wondering how we can maybe look at those events in terms of helping give us some sense of when you.
Your China business related to the <unk> backhaul front haul.
Should should improve.
Yes, that's of Great question, Simon I mean.
The <unk> market is a little bit hard to make out right now as we noted in our earlier remarks.
Some of our customers in China have begun.
<unk> more products from us, which implies that their inventory levels are.
Down to whatever level, they think is comfortable.
They're they're placing new orders other customers haven't yet.
The started to place those new orders yet so I think we are.
By the way I'm interpreting that as that we're in a period where.
New orders are starting to flow from for either new orders are starting to flow from the carriers like China Telecom and China Unicom.
Or that.
There's a line of sight to those new orders and some of our vendors are getting ready.
While other vendors probably still have some buffer inventory that they want to drawdown before they start to place new orders. So it feels like that should start to turn.
With more of our customers in this quarter or certainly by the fourth quarter and the data points that you gave around the new bandwidth awards and new product.
Orders coming out.
Of China Telecom and China Unicom I think those are significant data points. The point also in that direction of a gradual recovery in the next quarter or 2.
Thanks for taking my questions.
My pleasure.
The next question comes from Alex Henderson with Needham.
Thanks.
The 7 can you give us a little bit of the granularity around.
Whats your thoughts are between the data center into the in the guide for the <unk>. What does what are we assuming there is the <unk>.
Picked up in <unk>, and abnormal spike and it's going to.
Stabilizer declined sequentially back to a more normalized growth.
The revenue level or is that a new base that will be growing the CATV off of.
<unk>.
Clearly the.
It's nice getting.
For 100 gig wins, but the data center business declining sequentially into what is normally a seasonally strong quarter is that.
No trend line words, you should expect for the 40 gig to the.
The roll over a little bit faster going forward as people don't want.
Of 40 gig products.
And the.
To put new into their networks.
Little help there.
Sure. So I'll take your first question for.
First witches.
What's what's the trajectory for cable television.
As I noted in our prepared remarks, our cable television revenue is limited over the next quarter or perhaps beyond by component availability.
And we talked about the magnitude of that in the third quarter being about $3 million. So you can get a pretty good picture of that.
At least in Q3, and I would say that.
After that.
In subsequent quarters after that depending on component availability, we should be at about that level as well. So I think we're kind of out of new.
A new level in cable TV, and theirs and theres opportunities to grow from there, particularly as we overcome some of these supply constraints, which is currently the limiting factor to deliver revenue there at.
At the same time then your second question is about.
The trajectory in Datacom and I do think Q2.
Probably represents the.
The low point in Datacom revenue for us at least the local minimum.
That is I think we'll see some incremental improvement in Datacom and as we noted in our prepared remarks, that's going to be driven.
By 2 factors 1 is the 400 G design wins and are beginning that first phase ramp that I spoke with the assignment of out earlier in the 400 G business.
And at the same time I also expect to see some recovery in our 100 G business as some of the customers that had previously purchased inventory are finally getting that inventory back down to a level that they think is appropriate to begin placing new orders.
So those 2 factors I think can drive some incremental growth in the data center business.
So it sounds like data center up modestly a couple of million dollars.
You are talking about.
The other ones probably.
Telecom it sounds like it's up a little bit sequentially off of a pretty low base.
So that would suggest that you do expect the little bit of a retrenchment in the CATV to get to your guide I would assume.
Yes, that's correct and we highlighted that that's largely due to component shortages.
Okay Alright.
Got it that's perfect I wanted to go back to the inventory your inventory carry rate is very high relative to.
To your revenue base.
Relative to the industry standards.
And I get it.
This environment, that's probably not a bad thing.
Do we have any concerns about having potentially and the issues of having too much of.
Say older product.
Our lower speed products that might not be applicable to the future demand picture.
Do you have the right inventory in that mix.
I think we do.
If you if you remember.
In some prior quarters, we've talked a lot about the fact that our or for energy platform and our 1 energy platform and our 40 G platform share of lot of commonality in terms of of the design and the parts.
And so to that extent, there's inventory of raw materials and things that that may have been applicable to even 40 G products that we could still continue to use in <unk> and certainly in our cable TV wall.
Some of the older generation products.
Maybe slower selling than the current stuff, there's still a lot of demand EBIT for older generation products. So we feel pretty good about the inventory that we have I should say, we feel good about the the quality of the inventory that we have now your point about inventory level being high is well taken.
We did bulk up on inventory quite a bit.
On the <unk>.
Actually even prior to Covid in.
And the Chinese new year period going back last spring.
<unk>.
Yeah.
I think that that probably we've probably got a little bit out of ahead of our skis in terms of the amount of inventory that we have to your point.
It's comforting to have that inventory around with all of the uncertainties that we've endured in the last year, but we do want to continue to draw that inventory level down we've made some significant progress in that regard I mean, we've pulled our inventory I think it maxed out at around $113 million and were down to just about $100 million at the end of the quarter. So I mean.
Okay.
Well I don't think that the weaknesses is kind of.
A long term thing.
It has to do with just the confluence of of order patterns across a couple of different customers.
And as we.
As we discussed I think that profit probably represents a local minimum in terms of.
Datacenter revenue.
And I think the catalyst going forward is again.
Inventory normalization with R 100, G customers, especially 1 of our large energy customers as well as some headwinds or excuse me is from Tailwinds from the 400 gig is that starts from him.
Okay Fair enough second question on 400 gig.
I'm curious what those 5 technical qualifications that you talked about are those with new customers of our existing customers or can you break that down.
All of the 400 gig technical qualifications are with the existing customers.
Okay, great. Thank you and then I have lost 1 for me on cable T V. I know I think last call you talked about.
Having visibility and the order book out through the end of the year.
I know you know supply constraints are gonna capped out a bit but can you talk about where you said in terms of visibility today, and if that order books of extending out.
In the next year at all and yeah any color of their would be helpful. Yes. The order book is extending out in the next year.
The component availability situation I mean, I I was listening in on the Cob scopes call and they're they're saying similar things about component availability. So I think it's kind of an industrywide trend. So we're not seeing customer sort of pulling back on orders and shifting order patterns I think it's quite the contrary what we're experiencing is that cuss.
Customers are.
Working with us to try to pull in inventory as quickly as they can.
Players have factories and things.
And those of those how those things play out in terms of timing is a little bit difficult to project at this point, but I think it's fair to say it it should persist through the third quarter end.
Hopefully we'll find.
The ways around it in the fourth quarter, but it's not totally clear at this point.
And regarding component shortages is that just mainly in cable TV I mean, you're not experiencing similar situation in the data center market.
Yeah, and I think of lot of that has to do with the inventory that we talked about earlier I mean, Alex had a very good point that our inventory levels are rather elevated and that's the point that we've made also on our last few calls.
That's the double edge sword of course for tying up cash and there's always some risk of obsolescence, although as I mentioned in response to Alex's question I don't think Thats the.
The major concern for us at this point.
But.
But the bright side to that is that.
If you do have inventory, then youre not as likely to suffer from compliance from supply shortages. So in the data center business, where we have longer history in a more.
A better track record in terms of order patterns, and we were able to bulk up on those products ahead of Chinese new year last year and that inventory is continuing to help.
Help us out when it comes to component shortages in the present time.
The cable TV part of our business as you as you can appreciate with significantly smaller.
A year ago, and we didn't have the same bulk of inventory going.
Going into going.
Going from pre Covid times into.
The first the second quarter of last year, and therefore, we don't have that same cushion of inventory there and that's where we're sort of.
Scrambling to try to find the inventory that we need to continue to grow the revenue in that segment.
Okay and my last question is on 400 gig.
The.
Sure.
Kind of gauge what kind of trajectory, we should be expecting.
The first of all I just wanted to clarify did you say did you say 400 gig will ramp in the third quarter or fourth quarter and then.
Mike can you just talk about your expectations and maybe when does it become the.
Percent, 20% of revenue.
So I think.
I said that the 400 gig will start to ramp at the end of the third quarter, which means it's probably not going to be of big.
Non of revenue in the third quarter, but it should start to start to become.
Got it thank you.
Oh.
The next question comes from Tim <unk> with Northland capital markets.
Good afternoon. Thanks for.
Not a lot left here.
Maybe I'll follow up on 400 gig timing and maybe.
Kind of the magnitude of the opportunity.
It seems that the 1 area where discussion of 400 ZR would be relevant for.
For you guys would be at Microsoft where.
They've stayed pretty plainly that they need to get that Dci rollout going before they can upgrade inside the data center.
And I'm not saying, that's 1 of your design wins, but you're free to add some color on that but.
With a scenario like that.
Explain a why your design wins are coming.
Kind of maybe a little late in the game.
And B.
The kind of support the.
Kind of a small ramp and then and then bigger ramp in the mid year type of scenario.
Debt you're discussing.
Yeah, I mean I think.
Youre right in the sense that for.
For all of our customers and Microsoft certainly has historically been.
1 of if not our largest.
A largest data center customer it has been recently, it's been our largest data center customer.
And so.
Anything that would affect the.
Timing and magnitude of the rollout of Microsoft's 400 G efforts.
Would certainly be of interest to us and could be.
And the answer session at this time I would like to turn the conference back over to the Doctor Thompson Lin for any closing remarks.
Okay. Thank you for joining us today as always thank you to all the investors customers and employees for your continuous support and we look for to see many of you virtually.
I'll come the investment conference.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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Good afternoon. My name is Christian I will be your conference operator at.
At this time I would like to welcome everyone to applied Optoelectronics second quarter 2021 of her name's conference call.
Today, all participants had been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.
To ask a question during the Q&A session. You May press. The Star then 1 on a touchtone phone to withdraw your question. Please press the Star then too.
Please note that this call is being recorded I would now like to turn the call over to Lindsey salaries Investor Relations for a Oh I. Miss every you may begin.
[noise]. Thank you I'm Wendy's salary Investor relations for applied Optoelectronics and I'm pleased to welcome you to allies second quarter of 2021 financial results Conference call.
After the market the today A-life issued a press release announcing it second quarter of 2021, the financial results and provided its outlook for the third quarter of 2021 the.
The least there's also available on the company's website at a O Dash, Inc. Dot com.
This call is being recorded and webcast lives of links the recording can be found on the Investor Relations section of the AI website and will be archived for 1 year.
Joining us on today's call his Doctor Thompson Lin a lie founder Chairman and C E O and Doctor Stefan Mary a likes Chief Financial Officer, and Chief strategy off of there.
It sounds simple give an overview of allies Q2 results and step in the look provide financial details and the outlook for the third quarter of 2021.
A question answer session will follow our prepared remarks.
Before we begin I would like to remind you to review allies Safe Harbor statement.
On today's call management will make forward looking statements. These for and looking statements involve risks and uncertainties.
As well as assumptions and current expectation, which could cause the company's actual results to differ materially from those anticipated in such forward looking statements.
In some cases, you can identify forward looking statements by terminology such ads believe anticipate estimate intense predicts.
Expect plans may should could would will for things and by other similar expressions that convey uncertainty of future events or outcomes.
For 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 of responses to our innovation as the statement.
Regarding the company's outlook for the third quarter of 2021.
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 the statements to actual results were to changes in the company's expectations.
More information about other risk that may impact the company's business are set for.
And the risk factors section of the company is the reports on file with the S. E C, including the company's annual report on form 10-K for the year end of December 31st 2020, all.
So with the exception of revenue all financial discussed today.
Oh, I've got basis, unless specifically noted otherwise.
Now I've got financial measures are not intended to be considered in isolation, whereas the substitute for results of prepared in accordance with gap of <unk>.
Reconciliation between our gas and non got measures as well as the discussion of why we present knockout financial measures are included in our earnings press release that is available on our website.
Well for moving to the financial results I'd like to announce that a lot of management will virtually participate in 1 on 1 meetings at the Jeffries semiconductor I T hardware and communications infrastructure Summit on August 31st we hope to have the opportunity to interact with many of the virtually.
Additionally, I'd like to note that the date of our third quarter 2021 earnings call is currently scheduled for November 4th 2021 now.
Now I'd like to turn the call of the Doctor Thompson Lin applied optoelectronics per founder.
Founder Chairman and C E O Thompson.
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Thank you Thompson.
As Thompson mentioned, we delivered revenue and non-GAAP EPS in line with our expectations.
However are of gross margin came in below our expectations, mostly due to unfavorable product mix and R. C. A T V segment and increased costs associated with the component shortages, we saw during the quarter.
While we continued to see softness in the data center of market and conditions in the China 5 G market remained somewhat soft we are pleased with the continued strength and record. The results. We are seeing in the C. A T V market.
And looking ahead, we are encouraged by the traction we are seeing with our 400 G products, which we believe will drive growth in our data center business as order volumes ramps later in the year.
Notably we are pleased to report that we secured to design wins for our 400 G products during Q too.
In total for the second quarter, we secured 3 new design wins, among 3 customers all of which are existing customers.
All 3 of the design wins were in our data center business.
And 2 of the 3 were for 400, G, which I'll discuss in more detail shortly.
Total revenue of 50 for $2 million decreased 16.9% compared to a strong second quarter in the prior year.
And was up 9% sequentially.
R Q2 revenue was in line with our guidance range of $51 million to $56 million.
As we expected the headwinds we saw in Q1 continued into the second quarter of the data center market related to the inventory normalization that followed the shift to working from home early last year.
We believe these headwinds will begin to subside in the second half of the year driven by several of our customers who will begin to ramp for Hunter G deployment.
Additionally, we believe that inventory conditions and R..100, G business will begin to normalize later in the year.
On the 400 G front as Thompson that I mentioned, we secure too new design wins with 2 customers for our 400 G products during Q too.
1 of the design wins was with the data center equipment manufacturer and.
And the other was with the Hyperscale data centre operator.
Both are us based companies and both of our existing customers.
As a reminder for ally of design when occurs when we have successfully completed both the technical qualification of the product as well as received an initial order from the customer.
In addition to these 2 design winds. We also have successfully completed technical qualifications on 5 other for Hunter G opportunities.
We are optimistic that many of these qualifications will become design wins in the near future. Once we received orders for these products from our customers.
The technical qualifications are with 2 different data center operators and the data center equipment Oh, yes.
All of our use based companies.
We are encouraged by the traction we're seeing an expected for Hunter <unk> will begin the tramp with US later in Q3.
In the second quarter, 51% of our revenue was from CATV products.
41 per cent was from our data center products with the remaining 8% from the F T Th telecom and other.
And our CATV product segment. The overall demand environment remains very strong as msos, particularly in North America continue to upgrade their networks.
We generated revenue of $27.6 million in queue to up $48, 1 per cent sequentially and up 349% from $6.1 million and Q2 of the prior year.
We are still seeing component shortages in our CATV business and we continue to work with our suppliers to improve delivery schedules for these critical components and in some cases, adding additional suppliers.
We anticipate that these shortages will adversely affect our third quarter revenue by about $3 million.
As we work to improve our supply chain, we may continue to have longer than usual backlog for several quarters.
R Q2 data center revenue came in at $22 for a million dollars compared with $52.5 million in the second quarter of the prior year.
In the second quarter, 33% of our data center revenue was from our 40 G. Tressy for products and 59% was from R..100 G products.
Turning to our telecom segment.
The revenue from our telecom products of $3.3 million decreased 25, 6% sequentially.
Primarily driven by continued slow demand in China for 5 G upgrade Sir and.
And 46% from $6.2 million in Q2 of the prior year.
Looking ahead, we continue to believe China will increase investments in both of our 5 G and F T th infrastructure and.
And we believe we are well positioned to sell lasers into both of these markets.
For the second quarter, our top 10 customers represented 86, 8% of revenue consistent with the 86.9% and Q2 of the prior year.
We had for 10% or greater customers in the second quarter, 2 of which were in the data center market and 2 of which were in the sea of television market.
These customers contributed to 24.1%.
21.3 per cent.
11, 2 per cent and 10.9% of total revenue respectively.
In queue too we generated non-GAAP gross margin of 25%, which was below our guidance range of 25.5% to 27.5 per cent for the reasons I mentioned previously and compared favorably to $23.1 per cent and Q2 of the prior year.
We expect the downward pressure on gross margin due to unfavorable product mix and R. C of television segment to persist through Q3 before starting to recover 2 of more normal mix in queue for.
We are currently uncertain when the increased costs due to supply chain disruptions will subside, but we also see that persisting through Q3, which will also negatively affect gross margin.
Total non-GAAP operating expenses in the second quarter, where $20 million or 36.9% of revenue compared with $26 million or 31.6% of revenue in Q2 of the prior year.
Non-GAAP operating loss in the second quarter was $6.5 million compared to an operating loss of $5.6 million in Q2 of the prior year.
GAAP net loss for Q2 was $8.2 million or a loss of 31 cents per basic share compared with the gap net loss of $18.6 million or of loss of 89 cents per basic share and Q2 of 2020.
On a non-GAAP basis net loss for Q2 was for $1 million or loss of 15 cents per basic sure which was in line with our guidance range of of loss of $3.8 million to $5.6 million for a loss in the range of 14 cents.
The 21 per basic share and compares to of net loss of $5 million or loss of 24 cents per basic share in Q2 of the prior year.
The basic shares outstanding used for computing, the net loss in queue to where $26.9 million.
Turning now to the balance sheet, we ended the second quarter with $55 million in total cash cash equivalents short term investments and restricted cash. This compares with $49.3 million at the end of the first quarter and reflects $5.9 million in cash used for operations.
As of June 30, we had $100.4 million in inventory compared to $106.3 million at the end of Q1.
Inventory decreased primarily due to utilization of inventory for customer orders.
This inventory of production is consistent with our long term plan as we focus on rationalizing inventory levels.
We made a total of $3.2 million in capital investments in the second quarter, including $2.9 million in production equipment and machinery and an immaterial amount of construction and building improvements.
We continue to expect 2021, capex will be approximately $16 million, although as we have noted in prior years, there can be significant variability in this estimate as the year progresses.
As we disclosed in February of this year, we initiated of new at the market offering to.
The date, we of right zero point $9 million under this new program.
We intend to use these proceeds to continue to make investments in the business, including new equipment and machinery for production and research and development use.
Moving now to our Q3 outlook.
We expect Q3 revenue to be between $51 million and $56 million and non-GAAP gross margin to be in the range of 19.5% to 21.5%.
Non-GAAP net loss is expected to be in the range of $6.9 million to $9 million and non-GAAP loss per basic share between 25 and 33 cents using.
Using a weighted average basic share count of approximately 27.7 million shares.
With that I'll turn it back over to the operator for the Q&A session operator.
We will now begin the question and answer session. As a reminder to ask a question you may process Star then 1 on your touchdown from.
If you are using a speaker phone please pick up your handset before pressing the keys.
If at any time of your question has been addressed and you would like to withdraw it.
Please press Star then too at this time, we will pause momentarily to assemble our roster.
Today's the first question comes from the Simon Leopold with Raymond James. Please proceed.
Thanks for taking a question I wanted to start out first just if you could clarify the the C. A T. The headwind you quantified. It is at 3 million dollar headwind do the supply constraints.
I I guess there are a couple of ways, 1 could interpret that but I I think what I I'm imagining you're suggesting is looking at this quarter sales of roughly 27 and a half million.
And subtracting 3 million from that but alternatively, I could sort of think of Hey, I was I was imagining it would be 30, but with 3 moving of headwinds it'll be 27, So I guess I'm trying to understand the baseliner for maybe a little bit finer detail the impact of that headwind you you highlighted.
Yes, I'm in thanks for bringing that up so the I think the answer is it's more like the latter scenario that you had not not necessarily that those numbers are are what we had in mind, but what we were saying is that relative to what we could otherwise deliver that is based on orders and request the delivery schedules and shipping schedules and all of that we can.
Could have delivered $3 million more in our cable television segment, but for the fact that those raw materials are constrained at this point.
And and let me just clarify that it is that 3 million hits in the queue of quarter or is that 3 million headwind your forecast for September.
It is forecast for the September quarter. So we're safe in the in the in the next quarter in the in the third quarter of the 1 that we're in currently.
We would have been able to deliver based on our current forecasts approximately $3 million more revenue than.
Then we now believe that we can do to component shortages great.
Great and I wanted to see if maybe you could help us understand how to think about your opportunities in the the 400 gig market.
And where you see essentially competing with Z our products because I imagine there your products are probably cheaper than the Z ours, but have shorter reach and so just trying to get a better idea of how you you're thinking about sizing that market opportunity and let's.
Say 2022.
Sure So uhm.
First of all I mean, we're pretty excited about of progress that we made in the 400 gig market. We highlighted the not only the 2 design wins that we had in the quarter, but also the fact that we have 5 technical qualifications, which as we noted as as of significant milestone I would say the technical qualification is typically.
The biggest hurdle to get over.
In logging of design when the remaining hurdle with the really just receiving an order which typically.
Involves getting getting setup with the proper purchasing codes and negotiating some pricing and things like that so those hurdles are relatively low the technical qualification is really the key piece that I think typically takes the longest so we're pretty excited about the progress that we had with those 2 design wins and the 5 technical.
Technical qualifications.
With respect to your question about you know kind of where we fit in in the ecosystem I think as you mentioned.
Our products are positioned to be a lower costs version of of 400 gig that can be used primarily in into a data center applications. So.
Of distance is up too.
A couple of kilometers as opposed to longer distances and that which is where <unk> is typically targeted nosy are of course will work at shorter distances, but at a higher price as you noted.
And as far as the market sizing for for next year.
I can.
Point, you to some third party estimates and things like that for the overall market size I think what we're hearing from our particular customer basis that they're going to begin implementing 400 gig later in the third quarter and into the fourth quarter.
The anticipation is that that'll be a relatively slow incremental ramp throughout that time, because that's typically how it goes with these customers when they tried to implement of new technology like 400 gig.
They don't instantly.
Start to implement that technology, they put it in incrementally test it make sure everything's working as expected and then begin to ramp up after that so this kind of 2 phase ramp is what I would expect there.
And the second phase, which would probably be a stronger ramp is probably some time in the middle part of the next year.
Right and then just maybe a quick 1 if I might've.
We seen awards coming out of China for 5 G technology. The there was the 700 Megahertz Award a few weeks ago, and then more recently, China Unicom of Telecom made tenders for for ran.
Wondering how we can maybe look at those events in terms of helping give us some sense of when you're China business related to the 5 G backhaul front Hall.
Should should improve.
Yeah, that's a great question Simon I mean.
The the 5 G market is is a little bit hard to make out right now as we noted in our earlier remarks.
Some of our customers in China have begun.
Ordering more products from us, which which implies that their inventory levels are down.
Down too.
Other level of they think is comfortable in the in the in there the replacing new orders other customers haven't yet.
Started to place of those new orders, yet so I think we're.
By the way I'm interpreting that is that we're in the period where.
New orders are starting to flow from either new orders of starting to flow from the the carriers like China Telecom in China Unicom or that.
There's a line of sight to those new orders and some of our vendors are getting ready.
While other vendors probably still have some buffer of inventory that they want a drawdown before the start to place new orders. So it feels like that should start to turn.
With with more of our customers in this quarter or certainly by the fourth quarter and the data points that you gave around the new bandwidth the words and new product.
Orders coming out.
Of China Telecom of China, Unicom, I think those of significant data points of the point also in that direction of a gradual recovery in the next quarter or 2.
Thanks for taking my questions.
My pleasure.
The next question comes from Alex Henderson with Needham.
Thanks.
7 can you give us a little bit of of granularity of rooms.
What's your thoughts are between the data center and CATV in the guide for 3 of <unk>. What what is what are what are we assuming there is the the spiked up in <unk>.
An abnormal spike and it's going to the.
Stabilizer decline sequentially back to a more normalised growth.
The revenue level or is that of new base that will be growing the CATV.
The.
Clearly.
Nice getting.
400 gig when the the data center business the declining sequentially.
What is normally seasonally strong order is that now.
No of trend line words, you should expect reported gig to into the rollover a little bit faster going for those people don't want the.
Or for the good products and.
Oh, the put new into their network cable.
Little little out there.
Sure. So I'll take the first question for.
<unk>, which is.
What's what's the trajectory for cable television.
As I noted in our prepared remarks, our cable television revenue is limited.
Over the next quarter or perhaps beyond by component availability.
And we talked about the magnitude of that in the third quarter being about $3 million. So you can get a pretty good picture of that.
At least in Q3, and I would say that.
After that.
Subsequent quarters after that depending on component availability, we should be at about that level of as well. So I think we're kind of it of new.
A new level and cable television and there's and there's opportunities to grow from there, particularly as we overcome some of these supply constraints, which is currently the limiting factor to deliver revenue there at the same time then the second question is about.
The trajectory and data Com and I do think Q too.
Probably represents the.
The low point in data com revenue for us at least the local minimum.
That is I think we'll see some incremental improvement and date of common as we noted in our prepared remarks, that's going to be driven.
By 2 factors 1 is the 400 G design wins and are beginning that first phase ramp that I spoke with the assignment about earlier in the 400 <unk> business.
And at the same time I also expect to see some recovery in R..100 G business of some of the customers that had previously purchased inventory are finally getting that inventory back down to the level that they think is appropriate to begin placing the orders.
So those 2 factors I think can drive some incremental growth in the data center business.
So it sounds like data center up modestly a couple of million dollars.
You're talking about.
The other 1 is probably.
Telecom it sounds like it's up a little bit sequentially off of the fairly low base.
So that would suggest that you do expected a little bit of of the retrenchment in the CATV to get to your garden I would assume.
Yes, that's that's correct and we highlighted the that's largely due to component shortages.
Okay.
That's perfect I wanted to go back to the inventory of your inventory carry rate is very high relative to the.
2.2 of revenue base.
And relative.
Relative to the industry standards.
And I get it the in this environment, that's probably not a bad thing do we have any concerns about having potentially any issues of having too much of the.
Say older product.
Or lower speed products that might not be applicable to the future demand picture of.
Do you have the right inventory in that mix.
I think we do.
If you if you remember.
And some prior quarter's we've talked a lot about the fact that our our for energy platform of our 1 energy platform in our 40 G platform share a lot of commonality in terms of of the design and the parts.
And so to that extent, there's inventory of raw materials and things that that may have been applicable to even 40 G products that we could still continue to use and <unk> and and certainly cable television wall.
Some of the older generation products.
The slower selling than than the current stuff, there's still a lot of demand even for for older generation products. So we feel pretty good about the inventory that we have I should say, we feel good about the the quality of the inventory that we have now your point about inventory level of being high is well taken.
We did bulk up on inventory quite a bit in.
In the.
Actually even prior to Covid.
In the Chinese new year period going back last spring and.
I think the that problem, we've probably got a little bit out of the head of our skis in terms of the amount of inventory that we have to your point, it's comforting to have that inventory around with all of the uncertainties that we've endured in the last year, but we do want to continue to draw that inventory level down we've made some significant progress.
In that regard I mean, we've pulled our inventory I think maxed out at around $113 million and we're down to just about $100 million at the end of the quarter. So I mean, that's that's good progress I want to continue to make progress on that regard and and bring that inventory level down to a number of that I think would be.
More appropriate for the business, which is probably in the 80 million dollar vicinity.
1 technical question, you said 0.9 million Mark to market.
For the market the.
Issued was that shares or was that revenue the.
Cash in.
The best dollars, that's that's the amount of celebrities for the dollar.
Okay for the new thanks.
Thanks.
All right. Thank you.
The next question comes from the sand Peterman with Craig Hallum.
Hi, guys Sam on for Richard Here, a couple of questions I think I'll start with data center.
I know you guys to talk about.
Inventory burns ending.
In the second quarter and starting to recover from there, which looks like it's going to happen, but you've been given that data centers down and it looks like a little bit more of them.
The expected of them and was there kind of worst inventory burns, the unexpected or or something else and data center that can kind of explain the weakness of their this quarter.
Well I don't think that the weaknesses is kind of Ah.
A long term thing.
It has to do with just the confluence of of order patterns across a couple of different customers.
And as we.
As we discussed I think that profit probably represents a.
Local minimum in terms of.
Datacenter revenue.
And I think the catalyst going forward is again.
The inventory normalization with R 100, G customers, especially 1 of our large energy customers as well as some headwinds or excuse me from Tailwinds from the 400 gig is it starts from him.
Okay Fair enough second question on for Hunter gig.
I'm curious what those 5 technical qualifications that you talked about are those with new customers of our existing customers or can you break that down.
All of the 400 gig technical qualifications are with the existing customers.
Okay, great. Thank you and then the last 1 for me on cable television I know I think last call you talked about.
Having the visibility and the order book out through the end of the year.
I know supply constraints are kind of cop out a bit but can you talk about where you said in terms of the visibility today and if an order of bucks of extending out.
And the next year at all in.
Any color of their would be helpful.
Yes, the order book is extending out in the next year of the.
The component availability situation I mean I.
I was listening in on the cough scopes call and they're saying similar things about component of availability. So I think it's kind of an industrywide trend. So we're not seeing customer sort of pulling back on orders and shifting order patterns I think it's quite the contrary what we're experiencing is that.
Customers are.
Working with the <unk> try to pull in inventory as quickly as they can.
Rather than.
Trying to move orders to somebody else or something.
Okay, great. Thanks, that's all for me.
Okay.
As a reminder, if you do have a question. Please press the Star then 1 on your touchdown zone.
Our next question comes from the day of Kang with be Riley.
Good afternoon.
My first question is on gross margin Uhm revenue is going to be kind of flattish sequentially in third quarter and yet you're.
Picking gross margin declined by 5.
Sequentially can you just go over some of the factors.
Sure there's 2 factors.
1 has some product mix within our cable television segue.
Segment.
Just.
Different customers sort of.
Boxing and waiting in terms of what they're buying.
And then the other factor is related to the component of shortages that we're experiencing and so we are experiencing increased cost as we try to pull in.
Those components. So we're paying for example, expedite fees.
2 suppliers were in some cases.
Qualifying new suppliers that may even be higher cost suppliers, just because they have availability things like that that are also negatively impacting our gross margin of the quarter. So we discussed that we think that the cable television.
Mix is probably of 1 quarter thing I think it will shift more back towards.
More favorable product mix in the fourth quarter.
The component availability of the little bit unclear, how long that is going to last.
I think it will certainly last through the third quarter may last into the fourth quarter.
But it's not totally clear exactly how fast we're going to be able to recover from that it.
It is a very fluid situation.
Some of those component availability situations are caused by for example, COVID-19 shutdowns in certain parts of the world, where suppliers have factories and things and and those those how those things play out of in terms of timing is a little bit difficult to project at this point, but I think it's fair to say it it should persist through the third quarter and.
Hopefully we'll find ways.
Ways around it in the fourth quarter, but it's not totally clear at this point.
And regarding component shortages is that just mainly and cable T V. I mean, you're not experiencing similar situation and the <unk>.
Data center market.
Yeah, and I think a lot of that has to do with the inventory that we talked about earlier I mean, Alex had a very good point that our inventory levels are rather elevated and that's the point that we've made also on our last few calls.
That's the double edged sword of course for tying of cash and there's always some risk of obsolescence, although as I mentioned in response to Alex's question I don't think that's the major concern for us at this point.
But.
But the.
The the bright side to that is that.
If you do have inventory then you are not as likely to suffer from comply from supply shortages. So in the data center business, where we have a longer history at of more.
A better track record in terms of of order patterns, but we were able to bulk up on those products ahead of Chinese new year last year and that inventories continuing to.
To help us out of it when it comes to component shortages in the present time.
The cable television part of our business as you as you can appreciate it was significantly smaller a year ago and we didn't have the same bulk of inventory going into.
Going from pre Covid times into the.
The first or second quarter of last year, and therefore, we don't have that same cushion of inventory of their and that's where we're sort of.
Scrambling to try to find the inventory that we need to continue to grow the revenue in that segment.
Okay and my last question is on 400 gig kind of <unk>.
Kind of gauge what kind of trajectory, we should be expecting first of all of it just wanted to clarify. The you say did you say for when you gig little ramp and the third or fourth quarter and then you know like can you just talk about the your expectations, maybe when does it become the person.
Percent 20 per cent of revenue.
So I think.
I said that the the 400 gig will start to ramp at the end of the third quarter, which means it's probably not going to be a big.
Of revenue in the third quarter, but it should start to start to become.
More meaningful in the fourth quarter I did also highlight an answer to I believe it was Simon's question earlier that we typically see in these scenarios a sort of 2 phase ramp right. So there is an initial phase of Ram where we go from zero to some relatively small number.
That's associated with initial orders from customers who are trying out.
Putting these products into their actual live networks, and making sure that they perform as well in that environment as they did and all of the lab testing that they've been doing.
And in the qualification phase.
They tend to be.
Appropriately.
Circumspect when it comes to ordering and that the first phase and then what's the can become more comfortable that everything's working correctly. Then there is the second phase where the ramp becomes more.
More substantial and we expect that base of would probably be some time in the middle part of the next year.
Okay. If I can just squeezing 1 more regarding 400 gig how should we think about.
Margins of between 100 gig versus for me to gig.
Broadly similar.
There can be variations in gross margin among the.
The that product family the either the 100 gig of 400 gig based on the the particular the particular customers in the particular types of Transceivers that are being ordered but overall I would expect the margins to be broadly similar between 100 gagan for energy.
Got it thank you.
Oh.
The next question comes from 10 set of go with Northland capital markets.
Good afternoon this for uhm.
Not a lot left here, but maybe I'll follow up on 400 gig timing and maybe.
Kind of of the magnitude of the opportunity.
It seems that the 1 area where discussion of 400 G R would be relevant for.
For you guys would be of Microsoft where.
They've stayed pretty plainly that they need to get that Dci rollout going before they can upgrade inside the data center.
And I'm not saying that's 1 of your design when spring you you're free to add some color on that but.
Uhm with a scenario like that.
Explain a while your design Windsor coming.
Kind of maybe a little late in the game.
N b.
You know kind of support the.
Kind of a small ramp and then and then bigger ramp in the mid year type of scenario that you're discussing.
Yeah, I mean, I think I think.
You are right in the sense that.
For all of our customers and Microsoft certainly has historically been.
1 of if not our largest.
Largest datacenter customer it has been recently, it's been our largest datacenter customer.
And so.
Anything that would affect the.
Timing and magnitude of the rollout of Microsoft's 400 G efforts.
Would certainly be of interest to us and could be of.
Partial.
Explanation for some of the the ramp rates that we have.
I have talked about earlier.
That's not to say certainly not all of the design wins, our technical qualifications that we had our or even necessarily any of them or with Microsoft but we.
We have multiple customers that are involved in that but certainly we're watching the situation with Microsoft in any of the factors that affect their rollout would likely be affecting us as well.
Got it and in terms of the the magnitude of that opportunity, where it should things go reasonably well.
For you at 400 gig I mean can you imagine the scenario sometime next year, where your 400 gig businesses.
Approaching the size of your current overall data center business on a quarterly basis.
You know.
I could imagine that scenario I think.
Wanted out of a lot of things have to go right.
I would expect that.
That that 400 gig can can approach say, 10% of of revenue at some point next year.
Which would put it at roughly the the the level of our current data center business. So I think that that's.
Achievable clearly, we're a little ways out from from seeing that actually happened and having a tremendous amount of confidence in that but I think it's certainly possible.
Okay. Thanks, very much and congrats for the design words.
Thank you.
This concludes our question and answer session. At this time I would like to turn the conference back over to the Doctor Thompson Lin for any closing remarks.
Okay. Thank you for joining us the day is always thank you to all of the investors customers and employees for your continuous the pole and we look for to see many of you virtually.
I'll come the investment conference.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.