Applied Optoelectronics, Inc. (AAOI) Earnings Call Transcript & Summary

Good afternoon. I will be your conference operator. And at this time, I would like to welcome everyone to Applied Optoelectronics' Second Quarter 2026 Earnings Conference Call. [Operator Instructions] And then also please note that this call is being recorded. I would now like to turn the conference over to Lindsay Savarese, Investor Relations for AOI. Ms. Savarese, you may begin.

Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics. I'm pleased to welcome you to AOI's second quarter 2026 financial results conference call. After the market closed today, AOI issued a press release announcing its second quarter 2026 financial results and provided its outlook for the third quarter of 2026. The release is also available on the company's website at ao-inc.com. This call is being recorded and webcast live. A link to the recording can be found on the Investor Relations section of the AOI website and will be archived for 1 year. Joining us on today's call is Dr. Thompson Lin, AOI's Founder, Chairman and CEO; and Dr. Stefan Murry, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q2 results, and Stefan will provide financial details and the outlook for the third quarter of 2026. A question-and-answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AOI's safe harbor statement. On today's call, management will make forward-looking statements. These forward-looking statements involve risks and uncertainties as well as assumptions and current expectations, which could cause the company's actual results levels of activity, performance or achievements of the company or its industry to differ materially from those expressed or implied in such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as believes, forecasts, anticipates, estimates, suggest, intends, predicts, expects, plans, may, should, could, would, will, potential or thinks or by the negative of those terms or other similar expressions that convey uncertainty of future events or outcomes. The company has based these forward-looking statements on its current expectations, assumptions, estimates and projections. While the company believes these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond the company's control. Forward-looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of its products into new markets and customer responses to its innovations as well as statements regarding the company's outlook for the third quarter of 2026 and for the full year of 2026. Except as required by law, AOI assumes no obligation to update these forward-looking statements for any reason after the date of this earnings call to conform these statements to actual results or to changes in the company's expectations. More information about other risks that may impact the company's business are set forth in the Risk Factors section of AOI's reports on file with the SEC, including the company's annual report on Form 10-K and quarterly reports on Form 10-Q. Also, all financial results and other financial measures discussed today are on a non-GAAP basis unless specifically noted otherwise. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation between our GAAP and non-GAAP measures as well as a discussion of why we present non-GAAP financial measures are included in the company's earnings press release that is available on AOI's website. Before moving to the financial results, I'd like to note that AOI management is attending Rosenblatt's Sixth Annual Technology Summit virtually on August 18. This discussion will be webcast live, and a link to the webcast will be available on the Investor Relations section of the AOI website. Lastly, I'd like to note that the date of AOI's third quarter 2026 earnings call is currently scheduled for November 5, 2026. Now I would like to turn the call over to Dr. Thompson Lin, AOI's Founder, Chairman and CEO. Thompson?

Thank you, Lindsay. And thank you for joining our call today. We are pleased to deliver solid second quarter results that were in line with or better than our expectations, driven by robust demand in both our data center and CATV business. We generated our fifth consecutive quarter of record revenue, and we achieved an important milestone as we return to non-GAAP profitability in the quarter. Demand to support next-generation AI infrastructure remains so robust that our near-term revenue is bounded almost entirely by production capacity and key component availability. Because of this, we continue to anticipate steady sequential revenue growth this year and continued non-GAAP profitability. During the second quarter, we delivered revenue of $191.9 million, and non-GAAP gross margin of 29.8% in line with our expected guidance range and our non-GAAP income per share of $0.06 coming above our expectations. Importantly, during the quarter, we saw continued robust customer engagement around our 800G and 1.6 terabit products. In line with our expectation, we saw a strong volume ramp of our 800G product in Q2, which more than doubled sequentially. Looking ahead, forecast demand continue to outpace our production capacity to mid-2027. We are working hard to add additional capacity to meet this demand. We continue to believe our 2026 revenue will be around $1.1 billion this year. With that, I will turn the call over to Stefan to review the details of our Q2 performance and outlook for Q3, Stefan?

Thank you, Thompson. As Thompson mentioned, we are pleased to deliver solid second quarter results that were in line with or better than our expectations. We generated our fifth consecutive quarter of record revenue and we achieved an important milestone as we returned to non-GAAP profitability in the quarter. Our performance continues to be anchored by robust demand across both our data center and CATV businesses validating the power of our dual growth strategy and diversified revenue streams. Demand to support next-generation AI infrastructure remains so robust that our near-term revenue is bounded almost entirely by our production capacity and key component availability. Because of this, we continue to anticipate steady sequential revenue growth and continued non-GAAP profitability this year as more capacity comes online. In Q2, we delivered revenue of $191.9 million, which was in line with our guidance range of $180 million to $198 million. We recorded non-GAAP gross margin of 29.8%, which was in line with our guidance range of 29% to 30%, and our non-GAAP income per share of $0.06 was above our guidance range of a loss of $0.03 to earnings of $0.03. Notably, we continued to make progress on our key priorities in the second quarter, which included: One, scaling our next-generation data center products, including both our 400G and 800G solutions by expanding our production capacity in a disciplined manner. Two, diversifying our revenue base; and three, strengthening operational execution to improve our margins and position us for long-term profitability. Today, that execution is directly translating into tangible business momentum. During Q2, we continued to see robust customer engagement around our 800G and 1.6 Terabit products, particularly as AI-driven data center investments accelerate. In line with our expectations, we saw a strong volume ramp of our 800G products in the second quarter. 800G revenue of $12.8 million or 11.9% of our total data center revenue increased more than tenfold year-over-year and more than doubled sequentially in Q2. Looking ahead, we expect revenue from our 800G products to grow by nearly 5x sequentially in the third quarter and expect continued strong growth gated by our production capacity and component supply in the fourth quarter. During the quarter, in line with our expectations, we saw continued strength in our 400G business, 400G revenue of $48.4 million or 45% of our total data center revenue increased more than fourfold year-over-year and 27.4% sequentially in the second quarter. As a reminder, in Q1, we announced that we received our first volume for our 1.6 terabit transceivers from another one of our long-term major hyperscale customers. We also announced that we have received two new volume orders from this customer for our 800G single-mode transceivers. We began delivering these 800G orders in Q2, and we expect full qualification of our first 1.6 terabit product by this customer within the next couple of weeks, followed by shipments of 1.6 terabit beginning later this quarter. We continue to expect that shipments of these orders will return this customer as a 10%-plus customer for us in Q3. Looking ahead, forecast demand for 800G and 1.6 terabit modules are projected to continue to exceed our production capacity through mid-2027. We are working to add additional capacity and secure necessary key components to meet this demand. During Q2, we continued to make solid progress on our production capacity ramp, particularly for our 800G and 1.6 terabit products. Once complete, we continue to believe that we will have the largest AI-focused data center transceiver production capacity in the United States. As a reminder, our U.S. manufacturing footprint is anchored in Sugar Land, just outside Houston. Through a combination of real estate acquisition and leases, we have expanded our Texas manufacturing footprint significantly to over 1.6 million square feet in the Greater Houston area, and which are in various stages of development. During the quarter, we made further progress building out our 210,000 square foot facility, which is just a few hundred yards away from our headquarters. We continue to expect to begin initial production in this facility late in the third quarter. As a reminder, this facility will be entirely dedicated to the manufacturing of 800G and 1.6 terabit transceivers. While this will not directly increase our indium phosphide wafer capacity, we plan to move the existing transceiver production from our current headquarters facility to this new building, which will allow expansion of our indium phosphide capacity. The facilities in Pearland and Houston will be built out to expand our production capacity for 800G and 1.6 terabit transceivers. We began construction on these facilities in Pearland recently, and we're proud to have received strong local support to meet our manufacturing needs. We are excited to expand our presence in an area with such a strong workforce, excellent infrastructure, and room to scale our operations and continue to expect these facilities to come online in early 2027. Currently, our total manufacturing capacity is approaching 200,000 units per month, up from nearly 100,000 units per month of 800G and 1.6 terabit capacity at the end of Q1. Looking ahead, we continue to expect by the end of this year that we will be capable of producing over 650,000 pieces of 800G and 1.6 terabit products per month. By the end of next year, 2027, we continue to expect to grow our production capacity to be able to produce over 930,000 pieces of 800G and 1.6 terabit products per month, with over half of that output coming from Texas. These investments reflect measured scaling of our footprint while aligning with strong and growing customer demand and qualification progress across both 800G and 1.6 terabit products. It's important to note, as a reminder, our 800G and 1.6 terabit products can be manufactured on the same production line with the same process. While our 1.6 terabit product will require a different final testing, our 800G automated manufacturing lines have been developed with an architecture that will allow us to support future high-speed products as customer demand materializes and evolves over time. Our automated manufacturing lines are engineered to scale efficiently from 800G to 1.6T with minimal incremental investment. The structural flexibility provides a powerful dual advantage. It accelerates our time to market for AI customers while expanding our long-term margin potential. Looking ahead, we continue to believe that our 800G products will drive our near-term data center ramp, followed by our 1.6 terabit products, which are on track to begin to contribute to our overall revenue later this year with the bigger ramp beginning in 2027. At OFC, we also discussed our plans to increase our manufacturing capacity for our external light source or ELSFP. That's for co-packaged optics or CPO. This utilizes the ultra narrow line with high-power laser that we announced late last year. We have very limited production of these modules now, but we anticipate ramping production later this year and into 2027, ultimately culminating at about 400,000 pieces per month in 2028. We believe our in-house laser capabilities continue to be a strategic advantage for the company. As we have mentioned before, we've been manufacturing lasers internally for many years. This has allowed us to avoid some of the shortages that have affected others in the industry. As we continue to expand our footprint in Texas, our in-house laser manufacturing positions us well to support both near-term customer needs and longer-term growth. We believe that in the future, CPO will continue to drive increased demand for high-power lasers, and we plan to continue to expand our laser manufacturing capacity in Texas in order to accommodate these future growth drivers. Notably, our expansion planning has been underway for several years. We have already secured orders for long lead equipment and are partnering closely with vendors on delivery. Crucially, our reliance on proprietary in-house developed machinery heavily insulates us from the broader equipment supply bottlenecks in the industry. There are exceptions to this, of course. But overall, we feel that our in-house developed technologies give us an edge in ensuring reliable supply of production equipment. During the quarter, direct tariffs had a $1.9 million impact on our income statement. With the overturn of the IEEPA tariffs, we have received a refund of approximately $5.7 million. We are still evaluating the potential impact of the new tariffs recently announced in the U.S., but at the present time, we don't expect any material change from tariffs as a result of this announcement. Turning to our second quarter results. Our total revenue was a record $191.9 million, which increased 86% year-over-year and increased 27% sequentially off a strong Q1 and was in line with our guidance range of $180 million to $198 million. During the second quarter, 56% of revenue was from data center products, 42% was from CATV product. And the remaining 2% was from FTTH, telecom and other. In our data center business, Q2 revenue of $107.7 million increased 140.4% year-over-year and 32.3% sequentially. Sales of our 100G products increased 31.3% year-over-year. While sales for our 400G products increased more than fourfold year-over-year and sales of our 800G products increased more than tenfold year-over-year. In the second quarter, 38.3% of data center revenue was from 100G products, 45% was from 200G and 400G transceiver products. 11.9% was from 800G transceiver products, and 4.4% was from 10G and 40G transceiver products. We currently expect to see a decline in 100G business in Q3 due to on of our customers' inability to source sufficient 100G switches to meet their initial forecast. We believe that the shortage of switches is related to memory shortage and expect that 100G weakness will persist until the memory supply recovers. Even with this temporary weakness of 100G, we continue to believe that by mid-2027, 100G and 400G revenue will be approximately $90 million. 800G revenue will be approximately $217 million and 1.6 terabit revenue will be approximately $164 million monthly. In total, this is about $471 million per month of data center transceiver revenue. In our CATV business, we saw record CATV revenue of $80.6 million, which was up 43.8% year-over-year and 20.6% sequentially and was slightly above our expectations of $75 million and $80 million. Similar to the last couple of quarters, we shipped a significant quantity of 1.8 gigahertz amplifiers to our largest CATV customer in Q2. We also continued to see momentum with a newer set of MSO customers that we have talked about on our prior few earnings calls. We continue to see a broad-based appeal of our amplifiers and QuantumLink software across our potential customer base. During the quarter, we announced that Mediacom selected AOI as the primary vendor to accelerate its DOCSIS 4.0 network upgrades, driving multi-operator commercial adoption of AOI's next-generation 1.8 gigahertz Quantum bandwidth smart amplifiers and software solutions. We're excited to partner with Mediacom to deliver more reliable service while lowering operational costs. Looking ahead to Q3, we expect our CATV revenue will be between $100 million and $110 million. Looking further ahead, we continue to expect to generate over $325 million annually in CATV. While the vast majority of our CATV revenue expectations for this year are related to our amplifiers, we do anticipate that we will generate some revenue from our software solutions this year. For the second quarter, our top 10 customers represented 99% of revenue compared to 98% of revenue in Q2 of last year. We had three greater than 10% customers, one in the CATV market, which contributed 42% of total revenue; and two in the data center market, which contributed 26% and 24% of total revenue, respectively. In Q2, we generated non-GAAP gross margin of 29.8%, which was in line with our guidance range of 29% to 30% and compared to 29.2% in Q1 2026, and 30.4% in Q2 2025. As we discussed on our last quarterly earnings call, while we do expect continued gradual improvement in gross margins, we continue to expect that the revenue mix and data center in the short term will be a slight headwind. We remain committed to our long-term objective of returning non-GAAP gross margins to around 40% and believe that this goal is achievable as our mix shifts towards higher-margin products and as we capture additional efficiencies across our operations. The revenue figures presented above are net of a contra revenue amount due to the accounting for warrants provided to customers. As a reminder, this amounts to approximately 2.5% of revenue derived from certain customers to whom AOI has provided warrants in exchange for future revenue. In Q2, the amount of this contra revenue was $1.2 million. Total non-GAAP operating expenses in the second quarter were $67.6 million or 35% of revenue, which compared to $42.1 million or 41% of revenue in Q2 of the prior year. Our OpEx this quarter was higher than expected due mainly to higher shipping costs associated with the rapid ramp in CATV revenue in the quarter, combined with higher-than-expected R&D spending as we have been asked by customers to qualify new 800G and 1.6T products in the quarter. We believe that R&D spending will continue to be elevated. However, we do not expect additional shipping costs to recur in Q3 or subsequent quarters. Looking ahead, we expect non-GAAP operating expenses to be in the range of $70 million to $80 million per quarter. Non-GAAP operating loss in the second quarter was $10.3 million compared to an operating loss of $10.8 million in Q2 of the prior year. GAAP net loss for Q2 was $22.8 million or a loss of $0.28 per basic share, compared with a GAAP net loss of $9.1 million or a loss of $0.16 per basic share in Q2 of the prior year. On a non-GAAP basis, net income for Q2 was $5.5 million or $0.06 per diluted share, which was above our guidance range of a loss of $2.5 million to income of $2.8 million or non-GAAP income per share in the range of a loss of $0.03 to earnings of $0.03. This was largely due to foreign tax benefits and modest government subsidy income, which we expect to continue in subsequent quarters. This compares to a non-GAAP net loss of $8.8 million or $0.16 per share in Q2 of the prior year. The weighted average fully diluted shares outstanding used for computing the earnings per share in Q2 were $88.1 million. Turning now to the balance sheet. We ended the second quarter with $508.8 million in total cash, cash equivalents, short-term investments and restricted cash. This compares with $449.4 million at the end of the first quarter of 2026. We ended the second quarter with total debt, excluding convertible debt of $92.8 million, which compared to $77 million at the end of last quarter. As of June 30, we had $278.8 million in inventory, which compared to $206.2 million at the end of Q1. The increase in inventory is primarily due to increased inventory of raw materials for near-term production as we ramp capacity. As we disclosed in May, we initiated a new at-the-market offering. To date, we have raised $538.8 million, net of commissions and fees 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. We made a total of $565.5 million in capital investments in the second quarter, including $280 million in prepayments on equipment we have on order. These expenditures are mainly for manufacturing capacity expansion for our 400G, 800G and 1.6 terabit transceiver product. We expect CapEx intensity in the second half of the year will be higher than in the first half as we prepare for increased 400G, 800G and 1.6 terabit data center production. We expect to finance these investments through a combination of cash on hand, cash generated from operations and some equity sales, along with additional debt. Looking ahead, we believe we are uniquely positioned to capture two distinct growth engines, the rapid AI-driven demand acceleration in our data center business. Alongside a robust runway in our CATV business. Our current capital investments are designed to scale our advanced manufacturing footprint, structurally lower our long-term production costs and enable our path towards sustained profitability. Moving now to our Q3 outlook. We expect Q3 revenue to be between $255 million and $290 million, representing 130% year-over-year growth at the midpoint. We expect non-GAAP gross margin to be in the range of 29% to 30.5%. Non-GAAP net income is expected to be in the range of $10.1 million to $24 million. And non-GAAP earnings per share between $0.11 per share and $0.26 per share using a weighted average diluted share count of approximately 92.8 million shares. Looking more broadly at 2026. We believe our 2026 revenue will be around $1.1 billion. As we have discussed previously, this revenue level is limited by our production capacity and supply chain, not market demand, which we believe is much larger. With that, I will turn it back over to the operator for the Q&A session. Operator?

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from George Notter with Wolfe Research.

I wanted to ask about all the stuff that's been in the news of late around Chinese transceivers and the potential for U.S. ban on those transceivers being shipped into the U.S. Could you just talk about your perspective on that? What are you seeing hearing? How might that affect AOI? Does that change anything in terms of your capacity planning? Does it change anything with your conversations with customers? Any insights would be great?

You know it's a little early to say that report that came out a couple of days ago was obviously somewhat speculative in terms of the fact that this ban or whatever it ultimately turns out to be isn't in place yet, and the details aren't really out there. I think AOI's U.S. manufacturing presence has been a very important, probably the most important element of our appeal to our customers. And clearly, that announcement heightens that appeal. As we said in our prepared remarks earlier, we believe that we are and expect to remain the largest manufacturer domestically of optical transceivers for AI. So certainly, anything that would heighten interest in that is good for us. But it's hard to point to any specific ramifications at this point since it's still kind of early.

I think this is really not news at all. I think this kind of discussion for quite a while. So as I mentioned, we have been working very close with three customers for a long-term agreement, especially AOI making our own laser, and we are maybe the only one company commit to really invest heavily in U.S. for U.S. manufacturer, not only laser, including the transceiver. So with some early, I would say, early feedback, I would say customers are more aggressive will give us much more share, okay, especially for U.S. manufacturer. But how serious or how big it is, we will not because, as I said, right now, our capacity can book already from now until Q2 next year. The best we can do is maybe we can more aggressive adding more capacity maybe from Q3 next year, especially for the, I would say, U.S. manufacturer.

Got it. Okay. And then just as a follow-up. I was just curious about the ramp in 800 gig. It looks like the growth in the business right now is coming from 100, 200 and 400 just based on your comments about the mix of transceivers in the quarter. It seems like at this point, the 800 gig has got to be the driver on the growth in data center. And so kind of wondering like exactly where you guys are? Is all that tooling fully installed and ready. Are those laser datacom chips built and sitting on the shelf? Do you need to get qualifications on any of this any more you can tell us on the ramp and the readiness would be great?

No. I mean as we said in our prepared remarks that our ability to deliver revenue in general and specifically when it comes to 800G products, is limited by our production capacity right now. So if we could produce more, we could ship more right now. So to answer your question directly, no, not all the manufacturing capacity that we have or expect to have is online at this point. In fact, we're going to continue to add more and more capacity really most likely through next year, but certainly into next year. We've only begun. As we mentioned in our prepared remarks, we have 1.6 million square feet of manufacturing space here in Houston. A year ago at this time, we had about 65,000 square feet. So clearly, all of that manufacturing space has not been built out, doesn't have equipment in it yet. So there's tremendous room for expansion than we plan to expand. However, over the next couple of quarters, the first increment of that manufacturing does start to come online, which will increase our manufacturing capacity from roughly 200,000 pieces a month as we mentioned earlier, to about 650,000 pieces a month by the end of the year. That's all 800G and 1.6, that's not -- and most of that is going to be 800G given the demand that we're seeing. So that's all incremental new capacity that doesn't exist today and then growing from there. So no, there's significant room for expansion, and we're only kind of getting started on the 800G ramp now.

But by the way, I think I want to emphasize one thing. Right now, the Q3, you can see compared to Q2 average, we are talking about 40% growth, okay, something like that, okay, 35% to 45% growth. But the growth is mainly from 800G. At the same time in the script, we already mentioned because of memory issue for the switch, okay, actually, the 100G will decrease by $20 million to $25 million. Otherwise, our Q3 revenue will be -- the growth should be more than 50%, as I have mentioned. So -- but this is a short-term effect, we believe that 100G demand will come back to normal within a few months, okay, either by end of this year or early next year, all right? And don't forget, and we mentioned by June, July, the overall transceiver revenue will increase from today's number to $471 million per month. There's huge growth. And our growth actually from 800G and 1.6T and 100G will go down. And all this is because the additional capacity we are building not only in Asia, most of the increased capacity will be in U.S. But even so, let me say that, like I keep emphasize, that is not good enough for the customer demand. The customer demand is 20% to 40% higher, all right? And actually, we are getting this kind of demand from several big customers almost every week, every month to speed up our delivery schedule. And we are doing everything we can. The other is working very close with our key supplier. As you know, I think the DSP, TIA, good news, they are making our laser, laser biggest bottleneck right now for the transceiver business. But this is not the only one, okay? That's why we are working with several key suppliers to increase the volume in the next few quarters to meet our demand.

And our next question will come from Simon Leopold with Raymond James.

I appreciate you've given us a lot of guidance commentary and some quick arithmetic suggests that in the fourth quarter, you're anticipating the combination of 800 gig and 1.6T revenue in the neighborhood of $330 million. I want to make sure that I'm thinking about this correctly first? And then I've got a follow-up.

Yes, that's about right, directionally.

Great. And then I recall in the spring that you were talking about the 1.6T ramp and having a commitment for $200 million through an order. And I'm trying to get a better sense of how to think about the timing of that particular project in that it sounds like it may start in the fourth quarter of this year, but maybe the majority of it is a 2027 event. How should we think about that $200 million order you had talked about for 1.6T in the past?

Actually, we'll start deliveries on that probably very late in the third quarter and then ramp into the fourth quarter. I think the bulk of it should get delivered in the fourth quarter. And then there may be a tail into the first quarter. But the important part about that is that's just the first -- the beginning of what we expect to be significant orders from this customer for 1.6T for the foreseeable future. So I wouldn't get too wrapped up on that particular order. That's just the very beginning of it.

Great. And then I want to ask a different China-related question. Apart from the potential regulatory issues, there's been -- we've been getting a lot of questions about the suggestion that there will be new manufacturing of lasers coming out of China. And just trying to get a sense of how you're thinking about that potential? And if that were to occur, if new Chinese manufacturing came online to make lasers, what could that possibly mean to your business?

Let me answer the question, okay? I think the investors maybe underestimate how big is the laser market. Let me say that. Right now, for the CPO laser, used in the ELSFP is 300-milliwatt laser compared to 70-milliwatt laser used at the 800G transceiver and 100-milliwatt use for the 1.6 terabit transceiver. But people don't understand not only the power is several times bigger. But the size, okay, the size is about 6x or even high or even more, but it is lower. So overall, you're talking about to meet the demand just for the -- I would say, the Phase 1 ELSFP is only the 1310-nanometer, okay, for wavelengths. But I think the next generation ELSFP will be using DWDM. So that means because wavelengths is so tight, I think the loss will be easily, okay, 40% to 50% compared to 1310 wavelengths, okay? So that means to meet the demand for the CPO market, the laser market needs to be 8 to 10x bigger compared to today. That's only AOI, [indiscernible], everybody, we invest huge money to meet the demand in the next 3 years because for lasers, from today, if I order the equipment, it will take minimum minimum 21 months to 24 months to start to manufacture in high volume, okay? That's how long it takes the semiconductor process, build a long lead time of the equipment and everything. So I think, yes, there will be some new supply in China. We are not surprised because that's what market need. But most of them are still working maybe 70-milliwatt or very few can really do 100-milliwatt. But for 300-milliwatt laser, especially DWDM and spec, we don't see that, but not in the next 2, 3 years, especially the demand is so big, okay? Even combined AOI, Coherent program altogether, is still very tough to meet the customer demand in the next 3 years. And we are doing everything to speed up the process to expand our capacity. So I think just for me, I think no effect at all because the demand is much bigger than the worldwide capacity, even including all the company in Taiwan, China or other countries like Japan.

[Operator Instructions] Our next question will come from Ryan Koontz with Needham & Company.

Maybe just following up on the question about laser supply and thinking about your own constraints there for indium phosphide, how are you guys feeling about substrates and other raw materials that you need to ramp? And is that a current bottleneck for your products and which products are the most challenging for you to ramp at the moment?