Goody day, and welcome to the Applied Optoelectronics Q2 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of the presentation we will conduct a question-and-answer session. [Operator Instructions] Today's conference is being recorded and at this time, I'd like to turn the conference over to Maria Riley. Please go ahead.

Thank you. I'm Maria Riley, Applied Optoelectronics Investor Relations, and I'm pleased to welcome you to AOI's second quarter 2015 financial results conference call. After the market closed today, AOI issued a press release announcing its Q2 2015 financial results. 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 that recording can be found on the Investor Relations page of the AOI website and will be archived for 90 days. 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 an update on AOI's strategy and market. 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 to differ materially from those anticipated in such forward-looking statements. You can identify forward-looking statements by terminologies such as may, expect, plan or believe, and by similar expressions. 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 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 factor section of the Company's prospectus and reports on file with the SEC. Also with the exception of revenue, all financial numbers 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 GAAP and our non-GAAP measures as well as a discussion of why we present non-GAAP financial measures are included in our earnings press release that is available on our website. Before moving on to the financial results, I'd like to announce that AOI management will attend the ROTH datacenter Corporate Access Day in San Francisco, on September 9, and the Craig-Hallum Alpha Select Conference on September 17, in New York City. We hope to have opportunity to see many of you there. Now, I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics' President, Founder and CEO. Thompson?

Thank you, Maria. Thank you for joining us today. AOI delivered a very strong second quarter and we achieved record top and bottom line results. We are above our initial expectations. Revenue grew to $49.6 million up 52% year-over-year and up 64% from Q1. We delivered return on capital earning per share of $0.38 up above 150% from Q2 of last year demonstrating the substantial operating leverage of our business model. Our exciting jump [ph] in this quarter were driven by an increase in demand for our cable TV products and our ability to [indiscernible] for our 40G datacenter transceiver products. In our cable TV market we achieved total revenue of $16.4 million representing 54% year-over-year growth fueled by new products and design wins. Looking ahead we see continued opportunity for growth as cable providers prepare to upgrade their newer to DOCSIS 3.1 technology likely staring early next year. As the market share leader in cable TV and given our history in working with the top cable [indiscernible]. We continue to expect this large scale rollout will represent a growth catalyst for AOI spanning several years. In our datacenter market revenue grew 65% year-over-year to a record $29.6 million driven by strong demand for 40G transceiver products and our ability to ship ahead of our plan for the quarter with an increase in light engine supply. AOI remains well positioned to benefit from continue goals in the datacenter. Leading Internet content providers continue to spend heavily to upgrade and expand their datacenter infrastructure to handle this positive growth in light of Internet traffic and cross services. The industry is transitioning to higher speed and more advanced optics. Clearly AOI has created a competitive advantage given our vertically integrated manufacture including internal development of advanced laser and light engine. We believe the transition to 100G will be a key growth driver for AOI and will provide an opportunity to diversify and expand our customer base. After a strained start to the year AOI delivered an outstanding second quarter by achieving both greater revenue and profit. Our strong performance is a testament to hard work and dedication by our key members and I would like to especially thank our operation teams that put in tremendous amounts of hours to accelerate our schedule. And going forward we see a strong and growing market with opportunity for continued [ph] long-term growth fueled by the DOCSIS 3.1 upgrade and the growing transition to high speed optics in our datacenter. We are very confident about our growth prospects and remain focused on making our competitive position by investing in R&D, driving continued growth across our market segments, diversifying our customer base and executing our overall business strategy. 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. Second quarter revenue grew to $49.6 million up 52% year-over-year from $32.7 million and up 64% sequentially when compared to $30.2 million in Q1 of 2015. Our datacenter revenue in the second quarter grew to a record $29.6 million up 65% year-over-year and up 81% from Q1. This quarter 77% of our datacenter revenue was derived from our 40G datacenter products. We have been receiving an adequate supply of shipments from external supplier and continue to further ramp our internal 40G light engine production capacity to help satisfy customer demand and work through our customer orders. As Thompson mentioned, we believe that the transition from 10G to higher speed optics including 100G presents a growing opportunity for AOI which is just getting underway. Our 100G product development remains on schedule with the first 100G transceivers expected to begin volume shipments in the fourth quarter. Additionally, last month we announced the availability of our new 25G laser diodes designed for next-generation datacenters. Based on our progress to date and forecast in hand we are maintaining our goal to grow our annual datacenter revenue by more than 45% over 2014. Turning to our cable TV market, revenue from CATV products in the second quarter grew to $16.4 million up 54% from Q2 of last year and 37% sequentially. CATV revenue came in above our expectations and was driven by new product and design wins for node and head-end replacements in North America and cable builds in emerging markets. We remain on track with our growth initiatives in this segment continue to be confident in our ability to meet our previously announced target for CATV annual revenue to grow more than 20% over 2014. Revenue for our FTTH segment came in at approximately $1.3 million. We expect revenue in this segment…

Thank you. [Operator Instructions] And we will take our first question from Simon Leopold with Raymond James.

Great, thanks for taking my question. So I'm pretty surprised that the strength of the guidance that you are offering, so it's a good surprise and I'm trying to understand if there is any kind of movement in the mix here in terms of the guidance in part because lat quarter, your June quarter we thought the datacenter reflected some catch-up spending and that does not seem evident in this guidance. You could help us understand maybe mix expectations for September?

Well, I mean we don’t comment on the individual sector breakout, but I think what you're seeing is strength in both of our datacenter markets and our cable TV market, in particular I think cable TV came in well ahead of expectations and that's absent even the secular growth that we expect to see coming from DOCSIS 3.1. So, I think healthy growth in those markets is what's kind of driving things and in terms of the exact distribution we don’t really break it out.

Well and maybe back up and if we look at the June quarter one of the up side elements was the fiber-to-the-home business after almost nothing in March. How should we think about that business trending forward?

The fiber-to-the-home business?

Yes, because you, I've got, entered the numbers incorrectly in the June quarter?

No, as we've said, I mean, the fiber-to-the-home business continues to be, we have some legacy business there that it alternates based on projects and things like that that are happening with some of our customers. It is not something that I would expect to see large growth in and as I said in the scrip, I mean we expect it to be over a pretty wide range between $0.2 and 2 million. So, on average maybe close to $1, $1.1 million and that's more or less what we would expect to continue to see. The growth is really coming from cable and datacenter of course.

Okay, and certainly there was nothing to be embarrassed on the annual forecast for 20% or better for cable TV or 45% or better for datacenter, but given the fact that we've got two actual quarters in guidance for September, those numbers now will seem pretty low relative to the trending. So can we have some kind of assurance that you are not anticipating a sharp decline in December which would be implied if we just assume that the growth rates were 20% and 45% respectively?

Yes, so I mean, we guidance and have always guided for 20% or better and 45% or better and we're clearly on the, or better side. The fundamental demand that we're seeing, both in the datacenter and CATV markets, in particular, as well as some of the telecom and other revenue continues to be very strong. So I don’t think there is any change in our outlook. We just haven’t guided for a specific number other than a base number of 20% in cable and 45% in datacenter and that's what we continue to see.

Okay and one last one that I know is kind of challenging in terms of not getting too far into the technical weeds, but we've been getting a lot of questions about different approaches to delivering 100G some of which require fewer lasers, some of which require more particularly for datacenter optics. Is there something you can offer to help more the layperson understand the puts and takes and opportunities for AOI?

Well I think what you are experiencing or the questions that people are asking really come down to what is the most economical way to meet the demand, particularly in the datacenter that we're seeing. So at 100 gigabits per second as you know, I mean we could transmit data over four lanes for example with four different lasers, each operating at around 25 gigabits per second, that's the approach that AOI and many others are pursuing. We could use a smaller number of lasers by using some signal processing techniques let's say to enhance the ability of lasers to carry more data without necessarily enhancing the frequency response of the individual lasers significantly. So there'll be a sort of a silicon based approach that could potentially decrease the number of lasers that would be required. A real detailed discussion as you've kind of alluded to of all those technologies is sort of beyond the scope of the call, but I think that what we're -- the technologies that we're pursuing are the ones that we have been in very detailed, long technical discussions and now evaluation with our customers and we know that those are the technologies that they are looking for at least for the foreseeable future and to the extent that market preferences or changes in technology in the future happened and I certainly think will be on top of those and evaluating them as we move forward. But at the moment we are developing and indeed qualifying with our customers exactly what the customers have said that they need and we're very confident that that is the right approach for the short term.

Great, that's very helpful. Thank you for taking my questions.

Thanks Simon.

And we will now go to Paul Silverstein with Cowen and Company.

Hey guys, I just want to check my math for a second. I did the math right, it looks like your south [ph] customer was $13.7 million out of $19.4 million of the sequential growth and was, I apologize, I think it was similar in terms of magnitude on the annual. So the real question I have is, if you are looking to balance the customer base in terms of growth, it sounds like your largest cable operator was also a significant piece of the growth sequentially and year-over-year. I'm interested in rest of the customer base, if we ex-ed out the top two, the cable operator and the largest customer, I think we all know to be on this side, what would the rest of the growth look like from a customer basis?

Most of our customers are ahead of our expectations at this point obviously to varying degrees as you mentioned. I would say in particular that the cable TV we're seeing fairly broad increases in business across multiple different customers and so I would say that the upside surprise or the upside potential there is a little more broad based in terms of multiple customers compared with the datacenter side.

And Stefan what would, two related questions, do you have visibility as to one or more of the balance of the customer base getting into that side? I recognize I'd really like to have 1000 10% customers, I understand the math does not work, but do you have any visibility as to one or more of the other customers today becoming a 10% customer at some point in the next or two? And related to that, on your larges two customers I've heard the comment and I've seen the numbers in terms of that it continues to exceed expectations obviously for the good. But how much in terms of your visibility, how is the upside or down side risk especially from that largest customer any comments that you can share with us in terms of that gives you confidence or that will maybe be a concern?

Sure, so I think I heard sort of two questions in there. The first one is what's the potential for other 10% customers? And I think the potential is quite good. We have several customers that are currently below 10% that are edging up and I think it's likely that we'll see some other 10% customers certainly over the next few quarters or year. As far as your second question which is, what's our visibility like with our largest customer? I think the visibility has been very good and I think it continues to be very good. I haven’t seen any changes in invisibility in the sense of our confidence level has gone up or down. The 100 gig transition is a big transition for everybody in the industry and so any time you see a technology transition like that it always leads to some degree of uncertainty, but also some degree of opportunity. So I think that recently we've got a lot more detailed discussions with all of our datacenter customers about 100 gig and I think that our confidence level in the 100 gig and specifically AOI's role in the hundred gig is probably increasing, which we would expect to see as we move forward. I mean, we're getting further along in the qualifications and other things are going on and the discussions are getting deeper. Their plans are firming up, so as expected I think we're getting stronger visibility into the 100 gig which gives us confidence in the future.

I appreciate that. If I may I'm going to pause as to my peers on the call, but two last quick questions, one the - I believe it was the Asian customer who represents relatively a new customer, any update you can give us on that particular customer and why don’t I leave it at that and then I'll come back to you later?

Sure, so the other customer that we've talked about continues to track, I've guided over the last couple of quarters that I think the revenue growth there is and it is going to be growing in revenue and it did grow in revenue, but it is going to be a slow and steady march upwards in revenue and so that's exactly what we're seeing. I don’t have anything, nothing in this period would be worth of particular note, but they continue to grow as we expected.

In answer, apologies, one last quick one, how much of the growth overall is a function of your growing with your customers, Amazon et cetera and how much of share gain from other players?

That’s a good question. I would say in the cable TV space in particular where as you know what we're doing essentially is more and more contract manufacturing of products that in many cases were made by our customers themselves. So I don’t know if you would necessarily call that a share gain, but I think you could credibly call it that that is we're taking share away from their internal production. So in that sense, we are seeing a share shift, but beyond that, I mean I think overall we're seeing increased demand across the customer base more so than necessarily taken market share from anybody.

I appreciate, thanks guys.

Paul, thank you.

And we will now go to Richard Shannon with Craig-Hallum.

Yes, thank you for taking my questions. Congratulations on a great quarter and guide here. I guess just a couple of questions from me on 100 gig serious I think you talked about three different variations of your 100 gig product, so I think introduced several months ago. Well one of those will be coming out much earlier than the other. When should we see products use your internal laser coming out specifically?

So, certainly not all the product variations will come out at the same time, so some will come out earlier than others. I would not expect a variation in the timeframe between their earlier products Inc. could be more than a quarter or two. And we would expect the products that utilize our lasers to be coming out certainly within the next six to nine months.

Six to nine months, okay, perfect. And then as the 100 gig products come out, how should we think about incremental variations in gross margins, obviously new products that sometimes have yields that are lower. They also have some new CapEx. We are just rolling in depreciation. What are the puts and takes over the next, as you start to roll out the 100 gigs projects how should we see that impact gross margins?

Yes, I mean we don’t really give sort of near term guidance in the gross margins. I really cannot comment on the specific numbers, but basically I think, you've directly really characterized we do typically see in the early stages we could have some, there is a period of time where the yield is, it may be not where we ultimately would expect it to be or production costs over time or what have you might be incurred. So there is some potential for slightly lower gross margin in the early stages. On the other hand the demand for the 100 gig products is likely to be very strong and all indications are that the supply of some critical components may not always be adequate in the sense that there may be some supply constraints in certain areas like the lasers perhaps or chipsets and things. And so if the demand is exceeding the supply obviously we might see reduced pricing pressure which would lead to higher gross margins initially. So those are kind of the puts and takes and how the balance of those things comes out is anybody's guess I think at this point.

Okay, I appreciate those thoughts. Maybe the last question from me, if you could followup on I'm not sure if it is yours or Thompson's comments about seeing expanded customer breadths in datacenters move to 100 gig, can you give us a sense of how we'll see that relative size of your expectations with that customer and how big of a customer they could be, anything along those lines will be very helpful to understand please?

Sure, I mean we weren’t necessarily trying to imply that there is a particular customer that is necessarily going to buy a lot more 100 gig versus 40, but in aggregate the number of customers that are going to be utilizing 100 gig technology compared to the number of customers that are using 40 gig will be higher. So we would expect 100 gig to have more widespread acceptance than 40 gig and therefore the customer, potential customer base for us will be more diversified than 40 gig.

Okay, perfect, great to see, I'll jump out of line right now. Thanks a lot guys.

Thank you.

And we will now go to Krishna Shankar with ROTH Capital.

Yes, congratulations on the great results and guidance. Is your lead customer fairly advanced in terms of their transition to 100 gig, can you sort of talk about the visibility on your lead customer and how quickly they are moving to 100 gig?

Well, I can't give any specific guidance on that, I mean other than that we plan to be shifting in volume in Q4 as we said. So, I mean that gives you some idea roughly on the timeframe. I think where we're at right now is we're in the midst of qualification. We haven’t experienced any problems or setbacks in the qualification at this point. So we think it seems to be going fairly smoothly and I would anticipate we will have more to talk obviously between Q3 and Q4.

And these 100 gig products are based on your new 25 gig laser diodes?

Yes, in part, I mean as Richard mentioned there are a number of product variations and not all of them utilize those 25 gig lasers that are internally produced, but many of them do and those will be based on our internally produces lasers.

Okay, and in terms of the CATV market you folks have been saying that we are still very in the sub rate cycle, so you have good visibility on both DOCSIS 3 and DOCSIS 3.0 over the next 12 to 18 months?

Yes, I think that, I would argue that really the upgrade to DOCSIS 3.1 has not even started yet and so what we're seeing right now is basically demand for DOCSIS 3.1 enabled products, but they are not necessarily being purchased for a DOCSIS 3.1 upgrade, because they are backwards compatible at 3.0 networks there is no reason why an MSO could not buy a DOCSIS 3.1 compatible part and use it in the 3.0 network upgrades begin. So our contention is that as we are continuing to see more growth in the DOCSIS 3.1 product sales, the real growth, the secular growth I think is going to happen around the 3.1 upgrade which we think will be starting in early 2016.

Okay, and finally on gross margins after you go through the manufacturing ramp and learning curve here, which kept gross margins down a bit in Q2 would you anticipate them to recover by Q4, what is kind of the position for gross margins going into Q4 you think we'll see a significant step up as you ramp up manufacturing and get efficiencies?

We've had a target model of 33% to 35% gross margin in the first half of 2016. That's been our target model since the IPO and I think what you're seeing right now is that we're tracking very effectively towards that target model. So there will be some variation in gross margin up or down from quarter-to-quarter because of product mix and other things. But I would expect a gradual settling in on that target model of 33% to 35% and 17% operating margin.

Okay, thank you.

And we will now go to Gus Richard with Northland Capital Markets.

Yes, thanks for taking my question. Actually most of them are asked and answered. Can you talk a little bit about your plans for 56 gig laser for 400 is that on your roadmap and what's the planning there?

We haven't talked about; we haven’t disclosed any technology roadmap beyond 100 gig at this point. There are multiple technology options that the other the industry is looking out for 480 gig and we haven’t commented really on what we're doing in that respect at this point.

All right and then in the transition to 100 gig you are in the midst of qualification, have you completed that process, the potential datacenter customers or any color and where you are in that processes?

We have not completed the process yet. I don’t think that really with any of the major customers anyway that there has been any qualification completed yet. So we're in a group with others in that respect. And as far as I said earlier there hasn’t been any complication or anything that's come up in the qualification. It is going very smoothly, but they just haven’t made any final qualification.

Any commentary on how many people you are engaged with in terms of qualification?

No we don’t we won't make any comment on that.

Okay and then inventory stepped up, a lot of that was from VMI. Can you just sort of characterize that inventory increase how much was driven by VMI and other factors?

Yes, I won't break out the VMI inventory specifically. I mean I'm sure as you could imagine there is some competitive information in there and some customer information they probably would not like to know exactly how much we have in our VMI program. But in general I think that the inventory is going up partly because of the VMI, partly because of just increased revenue and the sort of timing dynamics of how long it takes for us to parts in and turn them into products and ship them out. So I would not read too much into the increase in inventory. It is sort of commensurate without business growth basically.

And then just a last one from me, in terms of how do you expect to transition your revenue from 40 to 100 can you sort of just give me your thoughts on how that mix in the datacenter business will progress by the end of let's say 16D [ph] is expected to be a 50-50 mix or will one continue to dominate or will it just hard transition to 100?

Well I don’t think, there a couple of ways to look at it. Obviously right now we have one large customer who is buying a lot of 40 gig. Our expectation is that that customer will continue to buy 40 gig in sort of a gradual decline in 40 gig as 100 gig comes up, but it won't be sort of hard stop. The other way to look at it is as I've mentioned a couple of times that we have other customer opportunities which are at 100 gig but they are not at 40 so if we were successful say in getting another large customer at 100 gig, then that could conceivably rapidly shift the dynamics from 40 gig to 100 gig in terms of percent, but not necessarily because the 40 gig is dropping a lot because we're additional 100 gig customers.

Okay, so you expect the 40 gig [indiscernible] and not have a sharp cut off when 100 gig is available?

That's correct.

Okay, all right, very good, thank you so much.

Thank you.

[Operator Instructions] And we'll take our next question from Paul Silverstein with Cowen and Company.

Thanks, hey Stefan, can you tell us I think you typically quarter-to-quarter give us the total percentage of top 10 customers? And also can you remind us in the year ago quarter I don’t think you had any cable TV customers over 10% is that correct?

So the first question was the total percentage of top 10 customers, I don’t have that figure right in front of me. It will be in our Q. It was somewhere around 90%, 91%, but it will be in our Q and I can get you the exact number.

I appreciate that and then the year ago quarter did other than your top customer was there a second 10% customer there was?

I have to look it up exactly. I don’t have that data for the year ago quarter in terms of customer breakdown in front of me. We'll get it for you. But we have had cable TV customer that's bounced around between sometimes they area a 10% customer sometimes they are not, but I cannot recall exactly the second quarter of last year.

All right, I'll bother you after the call. Thank you.

Thanks Paul.

And we will take our last question from Richard Shannon with Craig-Hallum.

Hello Richard, are you there?

And it looks like Richard if you have a question please re-prompt at star, one. And you may go ahead.

Guys can you hear me now.

Yes, Richard, sure.

Okay, good. Just two questions from me. You've had in a bit adding a fair amount of capacity I'm not sure if you added a big chunks are not precisely, but obviously you are trying to get a bit of headwind here for some of your major customers and potential ones coming in. But did you give us a sense of any way to characterize or quantify what's your revenue potential with what the capacity you have in place or currently building toward right now?

Yes, we've been adding equipment. It is difficult to precisely quantify because as you know the equipment that we've added can be much of it can be utilized for both 40 gig hundred gig production. And so the relative price differential of those things means that the revenue contribution at 100 gig for example would be higher than 40 gig. So we are adding equipment on sort of an incremental basis as we see the demand increasing and you can get an idea from the CapEx numbers that is the kind of work we're adding but we don’t really – I don’t even have the data in front of me right on exactly how much capacity we've added or plan to add in the next quarter in terms of dollar figures.

Okay, I though I'll give it a try, but thanks for that. My last quick question is your guide for the third quarter up a fair amount from the second quarter. Is there any implied sales of stocks to your ATM facility in that or is that all just purely coming from more stock options embedded in there?

Now that's a great question Richard, I'm glad you brought that out. So we do have this ATM transaction going. What we've done in share count guidance is we've assumed, we've kind of taken the accounting approach or we just assumed that, we were, we sold the entire $40 million that we put in the first chunk of the ATM or the chunk of the ATM offering that we've announced and I assume that that all was sold in this quarter. It may or may not come to fruition obviously if we don’t sell all of it or if we're able to sell it at a price higher than what we've assume and the number of shares that we sell will be less and that would imply higher stock price. But basically what we want to do is be the most dilutive we're trying to present the most dilutive numbers we've go.

Okay, I appreciate that clarification. That’s all from me guys, thank you.

And this does conclude today's question-and-answer session. At this time I'd like to turn the conference back over to Dr. Thompson Lin for any additional or closing remarks.

Okay and thank you for joining us today. We did a very strong performance in this quarter and we look forward to executing in our positive strategy given our near term growth prospects and compelling long-term opportunities. As always we thank our investors, customers, and employees for your support.

That does conclude today's conference call and we thank you for your participation. You may now disconnect.