Applied Optoelectronics, Inc. (AAOI) Q4 2015 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Applied Optoelectronics Inc. Fourth Quarter and Year 2015 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please also note today’s event is being recorded. This time I would like to turn conference call over to Ms. Maria Riley, Investor Relations. Ma’am, please go ahead.

Thank you. I'm Maria Riley, Applied Optoelectronics’ Investor Relations, and I'm pleased to welcome you to AOI's fourth quarter and year 2015 financial results conference call. After the market closed today, AOI issued a press release announcing its Q4 and year 2015 financial results. The release is also available on the company's website at ao-inc.com. This call is also 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 Q4 results, and Stefan will provide financial details and an outlook for the first quarter. A question-and-answer session will follow today’s 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 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 our GAAP and non-GAAP financial 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 Raymond James Institutional Investors Conference in Orlando on March 7, the Northland Conference in New York City on March 9 and the ROTH Conference March 14 in Laguna Niguel. We hope to have the opportunity to see many of you there. Now, I would like to turn the call over to Thompson Lin, Applied Optoelectronics' President, Founder and CEO.

Thank you, Maria. Thank you for joining us today. 2015 was another record year for AOI as we continue to affirm our leadership position in advanced optical technology and gain market share. Our results this year included, we grew revenue 46% over last year to reach $190 million. We grew earnings 50% to reach $70 million or $1.03 per diluted share. We grew our data center [ph] revenue 91% to reach $123 million. We look forward to providing shipment of 100G datacenter long reach transceivers. We also achieved five 100G design wins and we are one of few companies with the ability to delivery 25V edge emitting laser diodes in high volume and we made progress in reducing our customer concentration ending the year with three customers which contributed more than 10% of four revenue compared to only one such customer last year. Looking at our fourth quarter results, AOI delivered revenue of $53 million above our guidance of $49 million to $52 million. Fourth quarter revenue grew 46% year-over-year and the upside was driven by higher than expected 100G datacenter transceiver sales, offset by a sequential decrease in cable TV revenue. However, Q4 non-GAAP EPS was below our guidance at $0.22 as product mix continued to negatively impact our gross margin which Stefan will discuss in more detail. AOI is at the epic front of developing and manufacturing advanced optical technology for the cable TV and datacenter markets. We believe our growth this year and recent 100G datacenter design wins are a testament to our market leadership position. When we look into 2016, we are excited about our growth prospects and believe we are well positioned in the datacenter and cable TV markets. We remain focused on building our momentum to drive growth, expanding our customer base and achieving AOI’s financial objectives. And lastly, I would like to invite you to attend our both Analyst and Investor Day in our new building and fab in Sugar Land, Texas on June 9. With that, I will turn the call over to Stefan to review the details of our Q4 performance and outlook for Q1. Stefan.

Thank you, Thompson. Total revenue for the fourth quarter grew 46% year-over-year to reach $53 million, above our guidance of $49 million to $52 million. Datacenter revenue in the fourth quarter was above our guidance and reached a new record. Datacenter revenue grew to $38.8 million, representing a 160% year-over-year growth and slightly ahead of Q3. Our datacenter growth this quarter was driven by strong 40G sales to our two largest datacenter customers and higher than expected 100G shipments as we began volume production on the 100G design wins we secured in the quarter. As Thompson mentioned, in addition to the two 100G datacenter design wins we announced in November, AOI was awarded three additional design wins for 100G products from our hyperscale datacenter customers. In total, we have won five design wins for our 100G products. We remain in various stages of qualification with existing and new hyperscale datacenter customers for other 100G products and we continue to expect decisions to be made sometime in the first half of the year. Overall, we are very pleased with our momentum in this market and datacenter revenue growth which is up 91% for the full year, more than double our baseline expectation of 45% that we set in August of 2014. Turning to our cable TV market, revenue from CATV products in the fourth quarter was $11 million compared with $14.8 million in Q4 of last year and $14.2 million in the prior quarter. While we had expected a sequential decline in CATV, revenue for these products was lower than expected due to lower international sales, especially in Latin America and consolidation among our CATV customers in the US. As a result, our full year CATV revenue grew 13% which was below our baseline expectation of 20% growth. We continue to believe DOCSIS 3.1 will be a significant growth catalyst for our CATV business and we continue to invest in new DOCSIS 3.1 products. The MSOs have recently made public initial details of their DOCSIS 3.1 deployments. Based on publicly announced plans, we believe that initial DOCSIS 3.1 field trials are ongoing and that widespread deployment will begin in mid-2016. As the CATV market leader, we believe AOI remains very well positioned to capture a significant portion of the DOCSIS 3.1 infrastructure spend directed towards node and head-end replacements. Revenue for our FTTH segment came in at approximately $87,000. Revenue in this segment is expected to continue to fluctuate quarterly in the $0.1 million to $2 million range in the near term. Our telecom segment delivered revenue of $2.8 million, up 193% year-over-year driven by recent design wins with several of our telecom customers. For the full year, 65% of our revenue was from datacenter products, 28% from cable TV products, with the remaining 7% from FTTH, telecom and other. In the fourth quarter we had two 10% or greater customers in the datacenter business that contributed 48% and 25% of total revenue. For the full year, these two customers were 53% and 12% of total revenue, respectively. Additionally, sales to a CATV customer amounted to 10% of total full year 2015 revenue. Moving down the income statement, Q4 total gross margin was 29.5%, a decline of 220 basis points when compared with the 31.7% reported in Q3 of 2015 and a decrease of 650 basis points from the 36% reported in Q4 of last year. Our consolidated Q4 gross margin was negatively impacted by a shift in our product mix within the datacenter segment. Similar to the mix shift we saw in the prior quarter, in the fourth quarter we had higher than expected sales for our older 40G shorter reach products which carried lower margins. We expect gross margins to improve in Q1 and beyond as sales of these older 40G products decline and sales increase for our 100G products which currently carry higher gross margins than the 40G shorter reach products. In addition, we continue to make progress in cost reduction on these 40G products, mainly by improving process efficiency and utilizing a greater proportion of the internally sourced materials. As a reminder, our gross margin can fluctuate from quarter-to-quarter due to the product mix as well as the initial ramping for new products. For the full year, our gross margin was 31.9% compared with 34.6% in 2014. Total operating expenses were $12 million or 22.6% of revenue, up approximately $800,000 when compared with $11.2 million or 19.6% of revenue in the prior quarter with the majority of the increase in R&D. On a year-over-year basis, total operating expenses as a percent of revenue improved 360 basis points in the fourth quarter and 400 basis points for the full year. R&D expense was $5.9 million or 11.1% of revenue compared with $5.3 million or 9% of revenue in the prior quarter. Continued investments in 100G datacenter technologies and DOCSIS 3.1 cable TV products contributed to the increase in R&D. Sales and marketing expense was $1.6 million or 3% of revenue, up from $1.5 million or 3% of revenue in the prior quarter. G&A expense was $4.5 million or 8.5% of total revenue and in line with our expectations, was slightly up from Q3 mostly associated with year-end audit fees. Non-GAAP operating income in Q4 was $3.6 million compared with operating income of $6.9 million in the prior quarter and operating income of $3.6 million in Q4 of last year. Non-GAAP net income after tax for the fourth quarter was $3.9 million compared with $6.7 million in the prior quarter and $4 million in Q4 of last year. We reported non-GAAP net income of $0.22 per diluted share compared with $0.40 in the prior quarter and $0.27 in Q4 of last year. GAAP net income for Q4 was $2.7 million or $0.15 per diluted share compared with GAAP net income of $2.7 million or $0.16 per diluted share in the prior quarter. The Q4 weighted average fully diluted share count was approximately 17.7 million shares. Turning now to the balance sheet. We ended Q4 with $40.7 million in total cash, cash equivalents, short-term investments and restricted cash compared with $49.1 million at the end of the previous quarter. We generated $2.3 million in cash from operating activities during the quarter. Accounts receivable decreased to $38.8 million compared with $41.1 million last quarter and accounts payables decreased approximately $3.9 million over Q3. We made a total of $25.1 million in capital investments in the quarter, including $15.6 million in production equipment and machinery and $8.9 million on construction and building improvements, mostly for our new production facility in Sugar Land. As of December 31, we had $66.2 million in inventory, an increase of $6 million from Q3 that was primarily driven by an increase in raw materials as we prepared to ramp production for 100G, while still supporting 40G and as we continued to stock finished goods in our VOI warehouse with our largest data center customer and largest CATV customer. Before we move to our guidance for the first quarter, I'd like to first make a few comments on our tax rate assumptions for 2016. As we begin to pay income tax internationally as well as US AMT and income taxes in various states where we have Nexus, we expect our full year 2016 average tax rate to be in the range of 10% to 13%. Moving to our outlook, we expect Q1 revenue to be between $50 million and $54 million, representing 65% to 79% year-over-year growth. We expect Q1 non-GAAP gross margin to be in the range of 31% to 32.5%. Non-GAAP net income is expected to be in the range of $3.8 million to $5 million and non-GAAP EPS between $0.21 per share and $0.28 per share using a weighted average fully diluted share count of approximately 17.8 million shares. Our first quarter non-GAAP net income guidance assumes an expected $0.3 million tax expense. With that, I'll turn it back over to the operator for the Q&A session. Operator?

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] And our first question comes from Simon Leopold from Raymond James. Please go ahead with your question.

Hi, guys. This is Victor Chiu in for Simon Leopold. I just wanted to dig into the gross margin a little bit. Can you just give us a little more color around what happened there this quarter and what specifically in the mix drove that and how do you expect that to revert trend in 2016?

Yeah. So as we mentioned in this call, we had sort of two different reach links that are utilized among our 40-gig product line. So, we have some products that are designed for relatively longer distance links and some that are designed for relative shorter distance links. Going into the quarter, we expected a certain mix between those two reaches. And what we ended up seeing was that the shorter reach really predominated. There was a marked difference between what we thought in terms of the ratio if you will of the shorter reach to longer reach products. Because of the assumptions that we made going into the quarter in terms of the number of shorter reach that we were going to use or off, we did not have enough production capacity to utilize some cost down products that we're using in that shorter reach products. In other words, we had some products that we could produce, some light engines that we could produce that had a lower cost structure and we were -- but we weren't able to produce enough of those within the quarter to meet the demand. So we had to go back and use some of the higher cost light engines, which negatively impacted the gross margin. So, basically there was a mix shift or a shift to relatively shorter reach product and because we didn't have enough production capacity for the lower cost light engines that we used in those, we had to use some of the higher cost products and that's what impacted gross margin.

Do the shorter distance products used pixels that you guys buy?

No. These are all what we would classify as LR, it's a little bit -- sorry, the terminology here is a little bit tough, but these are all considered LR type products or long reach type products but within that product designation, there are some that are relatively longer distance and some that are relatively shorter distance. So it's not, but they're all using edge emulation system [ph].

Or we call it long reach light.

Okay. So there was no -- competitive pricing wasn't really an issue?

No. The pricing was consistent with what we expected.

And I guess, just can you provide us with an update around that 100G data center wins that you mentioned and kind of how you're looking for this ramp this year and just kind of maybe what your visibility into that is and how margins should be backed as we go throughout the year from that?

Yeah. So we don't really give forward guidance in terms of sales, especially by product line like that, but I could say, in the quarter, we were very, very excited and pleased, both about the number of design wins that we had as well as and particularly the number of units that we actually shipped. We shipped several times more units than what we expected to going into the quarter and those units carried a higher gross margin than -- certainly than the older 40-gig products. So I think from a gross margin perspective, the 100-gig should be accretive. The number of design wins that we have and the quality of those design wins and our ability to produce as we demonstrated in the quarter I think really sets us apart from the competition and we're very excited to see that tractions in the 100-gig market.

Okay. So maybe your competitors have talked of that as more of a second, 100G would be more of a second half of the year event that you guys have started shipping already, so is this a question of volume, kind of does it imply that your second half 100G shipments will be much higher maybe, just speaking on a relative basis?

Well again, we're not going to give that kind of specific forward guidance, but I think the 100-gig is obviously just getting started in the data center, I mean, this was the first -- the fourth quarter was the first quarter that we shipped any units at all, we shipped about 10,000 of them. I think it's reasonable to expect as with previous technology shifts in the data center that as it starts to gain traction, the rate of adoption will increase and we'll be able to ship more, but specifically how much, we won't give that guidance.

Okay, great. Thank you.

Welcome.

[Operator Instructions] And our next question comes from Krishna Shankar from ROTH Capital. Please go ahead with your question.

Yes. Congratulations on the 100G design win momentum and ramping that. Would you expect 100G to ramp pretty steadily through the year and 40G to come down quite sharply as you go through 2016 or do you sort of anticipate a pretty good contribution from 40G throughout 2016? And relative to that, would you expect steady improvement in gross margins beyond Q1 also?

Yeah. So I think what we'll see -- I do believe 100-gig will continue to ramp throughout the year. As I said earlier, it's really just in the very early stages of adoption right now. So I think there's a significant runway to see that continue to grow. As far as the 40-gig, I don't see that dropping off a cliff, so to speak or falling very sharply. I think it will fall throughout the year, but not precipitously, I think it will be a gradual decline, while the 100-gig gradually picks up.

And gross margin trends beyond Q1?

Well as I said, right now, the gross margin on the 100-gig is higher, we're not really going to give forward guidance on the gross margin beyond what we said in the script, but I think the one thing that's been consistent about AOI is our ability to really drive out costs from products as we continue to ramp as we get more mature on the manufacturing of products. We tend to have a great deal of success in costs, reducing that. That's a consequence of our vertically integrated model and sort of the way that we scale up our manufacturing. So while we're not going to give guidance, I'm certainly, we're certainly going to be working very hard to continue to drive out costs and improve efficiency on the production there.

And my final question on the cable infrastructure market, do you see a pickup in orders there beyond the seasonally weak Q1 and are you starting to see orders for DOCSIS 3.1 infrastructure equipment?

So I've said on the last couple of calls, we've been shipping DOCSIS 3.1 products for some time now, so we do see orders and we do continue to see orders for those. I think what's going to change most likely in the back half of the year is that the MSOs themselves will start utilizing those products in actual DOCSIS 3.1 wide scale deployment. That is right now the products that they're buying are primarily being used in applications where they could have used the DOCSIS 3.0 product, but they'd rather have a 3.1 capable product. Towards the back half of the year, I think the MSOs will actually start doing real upgrade to DOCSIS 3.1 and I think that should accelerate the ordering trends for the DOCSIS 3.1 products. So we're excited about that. As far as what we're seeing right now, as we mentioned, Q1 is seasonally a low quarter in the cable business and we're also impacted by the merger activity that has been consummated this quarter between, mostly between Arris and Pace. There are immediate customers and because, as they consummate that merger and they actually work through the logistics of combining those two companies, we're waiting for word from them on what the future looks like for us. But the market itself I think should continue to pick up after this quarter probably and specially into the back half of the year.

Thank you.

Our next question comes from Paul Silverstein from Cowen & Company. Please go ahead with your questions.

Stefan, I've got a slew of questions for you and Thompson I hope you guys don’t indulge me. First of all, can you just repeat the 10% customers for the quarter and the year, what you said before? My apologies.

Yeah. So we had three 10% customers for the year, two of them were data center customers and one was a cable TV customer that was for the year. The two 10% datacenter customers contributed -- for the quarter, they contributed 48% and 25% of revenue in the quarter, and for the full year, those two customers, the same two customers were 53% and 12% of revenue for the year. And then we had a cable TV customer that was a 10% customer for the year and they were –

What were them for the full year?

10%.

They were say, exactly 10%?

Correct.

All right. And presumably these are all existing customers in terms of the ones for the quarter?

Yes.

And presumably they are previous 10% customers; you didn’t have any new 10% customers who haven’t been 10% before, that’s the question.

Yes, that’s correct.

All right. Let move on. On the 100G design wins, relative to your gross margin accretive comments, is that accretive to the depressed fourth quarter level or would that be accretive to the 33-ish level you were doing previously prior to the step-down?

It would be accretive to the 33% level as well.

So it’s actually high, it’s greater – the simple, it’s greater than 33%, somewhat greater than 33%, so it’s meaningfully better than what you just did.

Right.

All right. Let me move on. Of the five wins of 100G, are all existing customers?

Yes.

All right. You also mentioned that there were a number of additional 100G opportunities, I may have the exact wording wrong, but my direct question is, how many additional opportunities are we talking about and do you have any visibility at this point in time to when the awards will be made whether in your favor or against?

So, I don’t really want to comment on the number of opportunities that we have, but as far as the timing goes, as we said in the call, we expect them – we expect those decisions to be coming down this quarter or next quarter, better for us.

Presumably, it’s more than one to such decision based on the way you framed it?

Yes, just more than one.

Okay. Let me move on. And these are decisions with customers that have not been AOI customers before or are they existing customers that are making 100G decisions?

There are new customers that have not been previously 100G – previously datacenter customers for AOI.

So, these will be branded datacenter customers that never bought datacenter components from you before?

That’s correct.

All right. On the 40-gig gross margin comments, I don’t know whoever said, but I apologize, if something slow on the uptick, but I want to make sure I understand this. So they are long reach except the proportion of the shorter reach, the less more reach among them was higher than what you projected, but these are all internally – you do the manufacturing of all then apparently you have a new generation and an older generation, you had incorrectly gauged the demand, the mix of the demand and so you had to deliver some of the older generation product, which depressed the margins, is that an accurate description or a going forward, I recognize there is always a risk in forecasting both, what’s – how do you adjust for this? What’s the risk that this happens again, and again and again?

Well, clearly we have to calibrate our expectations in terms of manufacturing capacity. We don’t have a limited capacity and we don’t have a limited R&D capacity to do cost down on all of our products simultaneously. So we always have to calibrate, both our production capacity and where we are going to place our R&D resources that are needed to the cost down projects on essentially on where we think we are going to get the most bang for the buck, if you will. And by that I mean, we are looking at the products that are likely to grow significantly or ones where we already have a gross margin profile that is not acceptable for us and we need to bring that up. So we make those decisions based on what we are seeing on the ground at the time. And to the extent that those decisions are based on forecast, they always have the potential to be wrong. So I can’t really quantify for you the possibility that we could have more gross margin misses in the future. I mean, it’s always a possibility. We are working very hard to try to make sure that the forecast that we get are as accurate as we can and that we are aligning those R&D and production capacity resources appropriately. But all we can do is do our best on that front.

Understood. So let me ask you hopefully a better framed question. In terms of anticipating in the future, what insight do you have as to what drove the shift in mix relative to what you recently expected, is there any trend here that we should be aware of?

Yes, I don’t think there is anything that you need to be terribly – I mean, it has to do with some architecture changes or architecture things that are going on that I can’t really – they are sort of customer specific, so I won’t really go on that. What I will say is that, as we saw this trend emerging, we have increased the capacity for production of these newer, lower cost light engines that are used in the 40G. So even to the extent that we continue to have say more orders for these shorter reach products, the gross margin there is – the profile there will be improved because of the additional capacity for the newer lower cost light engine. So it won’t be as that in any case even if we did continue to see an unanticipated product mix, but clearly there is a limit to what we can do and if the volume continues to exceed what we can produce, then we might have to consider going back to the older design there as well, but hopefully that won’t be the case in the first quarter.

But Stefan, it sounds like, if it’s an architectural change by one or two or more customers, it sounds like this is not a one-off in terms of the ongoing demand for the shorter version of the long reach 40-gig, is that accurate, I mean it’s not a one-off as such.

Yes, I think that’s an accurate statement. I think this is a shift in demand. There may be some fluctuation around the current demand ratios, if you will, between the shorter and longer, but I wouldn’t expect there to be a major shift back towards the predominantly longer reach type of thing. So that is true.

All right. And then in terms of trying to project, anticipate gross margin on a quarterly and longer-term basis, it sounds like the key variables are 100G versus 40G in general? And then secondly, the proportion of – the extent to which mix surprises you and you have to go back and shift the older, lower more – higher cost, lower margin version of the 40G, is that accurate?

Yes, I think that’s right. And then as we get further into the year, I think the impact of DOCSIS 3.1 and the cable market starts to come into play. But for now, on the datacenter side, I think your characterization is accurate.

And can you remind us on the cable TV side, if and when that 3.1 ramps, how does that impact gross margin?

Well, cable TV is – it’s not far – as we said in the past, when we had margins that were 33%, 34%, as we said, it’s kind of in that range historically. We’ve also said those at newer products like DOCSIS 3.1 tend to have higher gross margin profile, because they are newer generation products, so we can generally get some better pricing from our customers on those newer generation products. So I mean, I don’t expect it to be – if we were sitting at 34%, 35% margin, it might not make -- the cable TV might not make that much difference, but where we are now I think cable TV could certainly be meaningful -- meaningfully improve the gross margin.

But at a minimum, it’s not going to hurt you when that happens?

I don’t think that will happen, no. Particularly since we have seen -- as we called out in the script, we have seen some weakness is order patterns in cable from Latin America, in particular because of the currency concerns down there. And those products like a lot of our emerging market products and cable TV tend to have lower gross margin profile. So that also helps kind of improve the margin situation on cable TV, although clearly we’re losing some revenue there from not having those orders from Latin America.

Our next question comes from Richard Shannon with Craig-Hallum. Please go ahead with your question.

Great. Thompson and Stefan, thanks for taking my questions. I guess, a few from me. Really just kind of hypothetical question, Stefan, but in terms of the gross margins for the fourth quarter, if you had been able to produce the lower cost products based on the mix shift that you saw, would you been able to have gross margins at or near what your guidance was starting the quarter.

Yes, that was – I mean, clearly the assumption going into the quarter that we were – was that we were going to be able to use almost entirely the lower cost product, so that was what our guidance was based on, and yes, if we had been able to use all of those products then we would have had gross margins that was in that range.

Second question on the 100-gig sales, you mentioned roughly the number of units you’re selling, anyway you can give us quantification of revenues or percentage of datacenter something along those lines?

No, I don’t really want to give too much data there that could be used to sort of triangulate ASPs and things like that that sort of competitive information. But I think the significant part about it is that the roughly 10,000 units that we sold, if you look around it, what other companies are saying, I think that number is higher than just about anybody and certainly represents a very good proportion of what we think the very large hyperscale datacenter operators are actually consuming in the quarter.

Based on the ASP number that I had in my head, now, I certainly agree that, but I can understand why you don’t want to give that up. So just thought I try that one, but thank you. Couple more questions for me. How do you size these initial 100-gig datacenter wins that you have, when you were selling in the fourth quarter, you said you have three more [indiscernible] I assume in this quarter, how do you get a sense of how big these individually can be? Can these next three be much bigger or much – are they smaller, how do we think about this?

Yes, I mean, that’s the problem with sort of quantifying design wins, there certainly not all created equal, I mean, there are some products that are selling more than the other products and we would expect that that would always be the case. I mean, there is various different applications for these things and different customers and they aren’t all going to be equal. So I think it’s fair to say that relative to the current design wins, we have several opportunities that are out there that could be larger than the design wins that we have seen so far. But we also have some that are likely to be smaller and there is no real way to sort of calibrate those opportunities. But some could be meaningfully larger, some could be smaller.

Okay. All right. Kind of what I thought you’d say, but appreciate the feedback anyway Stefan. Maybe two last quick questions for me. How many customers could you have from 100-gig products exiting this year or in the second half of the year? It sounds like you got opportunities beyond your kind of your two larger ones with some new ones here. I mean, what’s the – I mean, do you expect to get a minimum one more, could you get – maybe have a total of five or how would you think about this when we ask you in about three quarters?

Well, as I have said before, our goal is to expand our customer base to include as many of the hyperscale datacenter operators as we possibly can. So if you look at the top five or six datacenter operator customers, we would love to have all of them at some point. Now I clearly would not predict that we are going to have that by the end of the year, I don’t know what the timeframe for that is likely to be. But we are in active discussion with most or all of those customers and a number of them have samples and things that are undergoing qualification. And as we continue to get feedback on those opportunities when it looks like we've won those opportunities we'll certainly report it back. I mean, our style has always been to kind of not announce things until we know that the result is going to be and so stand by and we'll keep you posted as we get - made progress on that regard.

My last quick question, for the revenue guidance for the first quarter, this is assuming cable TV being kind of seasonally normal which would be down or would be more kind of flattish after maybe a tough end to last year?

Cable TV is seasonally down I haven’t given any indication that we think that seasonality is going to change this year. I think our hope and our what the industry is thinking based on the reports that we’ve seen and the announcements from some of the large MSOs in the US is that as DOCSIS 3.1 starts to come in the middle part of the year that will be the real start of an improving North American market in cable TV.

Our next question comes from Troy Jensen from Piper Jaffray. Please go ahead with your question.

Hi gentlemen, thank you for taking my question, this is actually Austin Bohlig on for Troy. I just first question is regarding your two biggest datacenter customers. Can you clarify, was the 48% and 25% a percentage of the datacenter business or total revenue?

Total revenue.

And the next question just digging a little bit more into the QS SFP28 [ph] laser production. With that starting to ramp a little bit earlier than what other people are saying for you guys, could you quantify how much laser production you guys plan on adding?

No, we haven’t really given any kind of quantification on that. I think as you know I mean we are in the process of starting up our new fab here in Houston. So clearly we have designs on significant increases in capacity but as far as quantifying that for you we haven't done that.

And then just next question is on, so do you guys expect your larger customer or customers to order similar to like what they did last year where you might have one big quarter will a book-to-bill above one or do you think it might be more linear this year?

Gosh, again we don't really give that level of granularity in our forward-looking statements. I think the datacenter business especially has the potential to grow very fast in 100 Gig and particularly if we get some of other design wins we may see a period of time where we have a significant influx in orders. But a lot of that will depend on kind of the dynamics of the market and how these new design wins or new design win opportunities that we’re being qualified for right now kind of play out. So I can't really comment on that but we’ve certainly seen periods that we have book-to-bill greater than one in the past and it wouldn't be unthinkable for that to happen again.

Okay, well thank you for taking my question and congrats on a nice quarter.

Our next question comes from Simon Leopold from Raymond James. Please go ahead with your follow-up.

Hey guys it’s Victor, I just had a one quick follow-up. What was the Capex in the quarter and then just what are you expecting for capital expenditures for the full-year of 2016?

So Capex for the quarter was $25.1 million total, $15.6 million of that was for production equipment and machinery and $8.9 million of it was for construction and building improvements. Mostly here in Sugar Land. And as far as forward guidance we don't really give forward Capex guidance. What we said in the past is that you know and it continues to be true that we basically invest when we see opportunities, so for example I mean on these other 100 Gig design opportunities that we have, if all of those or a significant portion of those where to come to fruition it's likely that we have to invest some additional capital to make sure that we were able to produce enough capacity for those opportunities. And same thing with the DOCSIS 3.1 products, if it were to take off faster than we expect, we could very well have to add capacity there. So we don't want to give kind of Capex numbers that would be sort of constrained to our ability to capture these new opportunities. The market right now from our perspective is very dynamic, very vibrant and there is a lot of opportunities out there and we want to make sure that we have the ability to move quickly when we see those opportunities that’s kind of our strength.

And our final question today is a follow-up from Paul Silverstein from Cowen & Company. Please go ahead with your follow-up.

I'm sure to ask a couple fewer than I did the last time, my apologies. First off, Stef did I hear you correctly that gross margin for the quarter would have been consistent with recent history book for the 40 Gig mix this year or did I miss to hear that?

It would have been consistent with our prior guidance.

Prior guidance, all right. So one quick question on this just to make sure I understand here. The first quarter of the year the guidance you’re giving 31.0 to 32.5 it’s still somewhat light of what you've done in recent history. And so if the issue is solely a function of having miss gauged the mix on the 40 Gig and you think you got a handle on it. If the mix comes in with what you’d expect why wouldn't the margins revert to 33ish, 34 range, where they have been?

Well, because 40 Gig is an older, it’ an older technology, I wouldn't say it’s on its way out but it’s certainly in the tail-end of the product life cycle there. And just like any other product I mean it becomes more competitive, pricing and things like that become more competitive and it's difficult to maintain exactly the same margin that you had when it was a newer, younger more thought after the product. So we won’t expect the 40 Gig to really be as high margin as it has been in the past. At the same time, the 100 Gig will continue to ramp and I think that's the effect that I think will eventually perform sort of a crossover to get back to those margins that we've seen historically and the ones that are modeled in our long-term model.

Are the price step down still a function, correct if I’m wrong but in the past like almost all other optical component companies once a year you have a negotiation typically at the end of the fiscal year for our customer and it's typically shows up mostly in the first quarter and as you go throughout the year it improves is that still the case?

They’re typically done once a year, but it's not necessarily in the first quarter, typically for us in the past it's been in sort of Q3 or Q4 timeframe. Although I will say especially on the 40 Gig side, customers are becoming opportunistic and looking at opportunities for price reductions throughout the year. So I'm not necessarily saying that it's going to continue to be a once a year kind of phenomenon.

And that's new and different in terms of the on ongoing price degradation?

Yeah, I think that’s something that a little different from what we've seen in prior years. But again, AOI's big strength here is our ability to manage our costs, we can't necessarily do it as we see in this quarter, we can’t necessarily do it in all products simultaneously and particularly when we have unexpected perturbations in the demand but I think the vertical integration and our ability to manufacture the light engine and things in house gives us the capability to adapt to those pricing dynamics and so I still think we are in a very good position. Although this quarter clearly we got caught a little behind the 8-ball so to speak on the gross margin.

Two last questions I promise. One, your telecom segment which I know is I don't know why but you’ve had over 100% growth followed by decline now for four years. It looks like there is a very nice step up in that business which has been kind of been off the radar screen. Can you provide any incremental insight in terms of the number of customers what's going on and should we expect ongoing 100% plus growth like you had in calendar ‘15 is that becoming a third growth driver, is it still going to be a relatively sleepy business, any insight and then I've got one last question on PAM 4 if I may?

Sure, so the telecom business we haven’t -- it's still very, very small for us relative to our overall revenue. So we haven’t really given a lot of detail or a lot of granularity on it. It’s really still comprised of a sort of basket of different products. I would say overall the biggest opportunity that I think is that we see right now for our types of products in telecom probably have to do with LTE upgrades, the backhaul and front-haul links. But again we’re talking about a very small amount of revenue there. We are optimistic that will continue to grow but I can't go on record and saying that we expect to see 100% growth every year it's starting from a very small base and I imagine that percentage will decline somewhat.

Alright, and then on PAM-4, can you give us any insight where you’re at?

Well, always said on PAM-4 is that we see opportunities for PAM-4 particularly in the datacenter interconnect space and I know that there is a number of other companies that have you know I talk a lot about the opportunities that they see in the datacenter space for PAM-4. We think that the PAM-4 market in datacenter interconnect which is basically just to kind of refresh, I mean AOI is primarily making optical modules that are used in connections within a single datacenter building and then typically these large datacenter operators have a datacenter buildings, discreet buildings that are connected together to form sort of the cluster of datacenters. The interconnections between those large datacenters are very high capacity links and as they build more datacenters they need more of the optical modules that AOI builds that go within the datacenter but they also need the modules that interconnect those datacenters. So to the extent that those two markets kind of grow together, we think that there is good opportunities in the datacenter interconnect for PAM-4 or even older generation of telecom optics which is kind of what’s been currently used for those applications. But that's not really the market that AOI is focusing on, our focus is on the intra-datacenter links and we think we’ve got the right technology suite and the right manufacturing and vertical integration capability to really continue to dominate in that intra-datacenter space.

So we shouldn't expect PAM-4 to have much of an impact for you? Is that the message?

Yeah, I think that's certainly right. I think that you know I guess there is two ways of looking at your question, one is, do we see meaningful growth in a PAM-4 product that AOI manufactures. The answer to that is certainly in the near term that’s not our plan. And then the second way to look at is, do we see our existing intra-datacenter transceivers being sort of cannibalized by PAM-4 and I think also that’s not what we see. We see those two – we see growth in PAM-4 for the interconnects and growth in our intra-datacenter links and they go hand-in-hand together.

And ladies and gentlemen at this time, we will conclude today's question-and-answer session. I’d like to turn the conference call back over to Dr. Thompson Lin for any final remarks.

Okay, and thank you for joining us today. As always we thank our investors, customers and employees for your continued support and look forward to seeing you at one of the conference in March and our Investors Day in June.

Ladies and gentlemen that does conclude today’s conference call. We do thank you for attending, you may now disconnect your telephone lines.