During the AI infrastructure arms race, US-based optical module manufacturer Applied Optoelectronics is executing an unprecedented capacity expansion.
CFO Stefan Murry disclosed in the latest quarterly conference call that the monthly production capacity for 800G and 1.6T optical modules will expand from approximately 100,000 units at the end of the first quarter of this year to over 930,000 units by the end of 2027, representing nearly a tenfold increase, with more than half of this capacity located in Texas.
On Thursday, Applied Optoelectronics reported its second-quarter 2026 results, with revenue of $191.9 million, up 86% year-over-year, and data center revenue surpassing $100 million for the first time. The company provided third-quarter guidance in the range of $255 million to $290 million and maintained its full-year revenue target of approximately $1.1 billion.
Management repeatedly emphasized during the call that current customer demand exceeds the company's supply capacity by about 20% to 40%, indicating that demand is no longer a growth bottleneck. The key variables constraining revenue growth have shifted to the pace of capacity construction, the availability of critical component supplies, and the timeline for customer certification of 1.6T products.
Target capacity expansion nearly tenfold in two years, with Texas as the primary base. This was the core data point most anticipated by the market in the conference call.
Stefan Murry provided three specific milestones in his prepared remarks: "Currently, our total capacity is approaching 200,000 units per month, up from approximately 100,000 units per month for 800G and 1.6T products at the end of the first quarter... By the end of this year, we will be able to produce over 650,000 units of 800G and 1.6T products per month. By the end of next year, 2027, we expect capacity to continue growing to over 930,000 units of 800G and 1.6T products per month, with more than half of this output coming from Texas."
From approximately 100,000 units per month at the end of the first quarter to over 930,000 units per month by the end of 2027, capacity expansion is about 9.3 times, which management summarized as "close to ten times."
Supporting this expansion is a massive manufacturing base buildout. The company has secured over 1.6 million square feet of manufacturing space in the Greater Houston area, compared to less than 65,000 square feet just one year ago. Current construction and planned facilities include a 210,000-square-foot new plant adjacent to the headquarters, expected to begin initial production by the end of the third quarter, dedicated to 800G and 1.6T production; and expansion plants in Pearland and other Houston locations, expected to come online in early 2027.
In the Q&A session, Stefan Murry further stated: "We have tremendous room for expansion, and we plan to expand... We are just at the beginning of the 800G capacity ramp."
Management also noted that 800G and 1.6T products can share the same production lines and manufacturing processes, with differences mainly in the final testing phase. This allows the company to flexibly allocate capacity between different speed products and reduce switching costs.
Data center revenue exceeded $100 million for the first time, with 800G revenue doubling quarter-over-quarter. Applied Optoelectronics reported second-quarter revenue of $191.9 million, up 86.4% year-over-year and 27% quarter-over-quarter, above the previously guided range of $180 million. Non-GAAP gross margin was 29.8%, at the high end of the guidance range. The company achieved a non-GAAP net profit of $5.48 million, or $0.06 per share, returning to quarterly profitability.
Data center revenue was $107.7 million, up 140.4% year-over-year and 32.3% quarter-over-quarter, accounting for 56% of total revenue, surpassing CATV for the first time as the largest revenue source. Among this, 800G product revenue was $12.8 million, up more than tenfold year-over-year and more than doubled quarter-over-quarter; 400G product revenue was $48.4 million, up more than fourfold year-over-year.
CATV business achieved a record $80.58 million, up 43.8% year-over-year and 20.6% quarter-over-quarter, slightly exceeding the guidance range of $75 million to $80 million. Management expects CATV revenue to rise to between $100 million and $110 million in the third quarter, exceeding $325 million for the full year. Mediacom has selected Applied Optoelectronics as its primary supplier for the DOCSIS 4.0 network upgrade.
Notably, the 100G business faces a revenue pressure of approximately $20 million to $25 million in the third quarter due to a customer's switch shortage caused by memory supply constraints. CEO Thompson Lin characterized this issue as short-term, expected to ease once memory supply returns to normal.
1.6T certification imminent, with a Q4 target exceeding $70 million. The 1.6T product is another growth driver highly anticipated by the market. Lin confirmed on the call that Applied Optoelectronics will become the fourth supplier certified for 1.6T by a major hyperscale data center customer, with certification expected to be completed within two to three weeks, followed by shipments starting in late Q3 and volume scaling in Q4.
Lin provided a clear expectation for 1.6T revenue in Q4: "We still believe that revenue from 1.6T transceivers in the fourth quarter can exceed $70 million... The first quarter of next year should be much better. I wouldn't be surprised if it doubles."
Management also outlined a longer-term path: by mid-2027, monthly revenue from 100G and 400G products is expected to be around $90 million, 800G monthly revenue around $217 million, 1.6T monthly revenue around $164 million, with total monthly data center transceiver revenue reaching approximately $471 million.
However, this path depends on the coordinated progress of multiple factors, including equipment installation, customer certification, material supply, and manufacturing yield. Supply of key 1.6T components may still limit the pace of short-term volume scaling.
Lasers and CPO: proprietary barriers, capacity prioritized for optical modules. Proprietary lasers were once again highlighted as a core competitive advantage in the conference call. With internal laser production capability, the company holds a significant advantage in the industry-wide laser supply chain pressure.
Stefan Murry stated: "The high-power, narrow-linewidth lasers we produce are the best in the industry, and currently the best in the world. We just don't have enough capacity to produce sufficient lasers for both our transceivers and other needs, and transceivers are the priority."
Regarding CPO (co-packaged optics), the company confirmed collaborations with approximately five customers, but at this stage, laser capacity must be prioritized for its own optical module production.
Lin stated that after the expansion of the new Texas wafer fab is completed, ELSFP module capacity for CPO is expected to reach approximately 400,000 units per month by 2028.
Tariff policy provides a structural catalyst. In response to recent market discussions on US optical module export policy, management maintained a cautious stance but noted that this trend is structurally beneficial for Applied Optoelectronics.
Stefan Murry said: "AAOI's manufacturing in the US has always been a significant factor, perhaps the most important factor, in attracting customers, and this announcement has clearly enhanced that appeal."
Lin added that customer feedback has turned positive, with a tendency to increase purchases from Applied Optoelectronics, especially for US-manufactured products.
He also pointed out that the company's current order book is full through the second quarter of next year, and the short-term core task is to accelerate the commissioning of new capacity.
Expansion efforts intensify, but profit improvement still requires time. To capture the window of demand for high-end optical modules, Applied Optoelectronics is significantly increasing capital investment. Capital expenditure in the second quarter reached $565.5 million, including approximately $280 million in prepayments for equipment, primarily directed at 400G, 800G, and 1.6T transceiver manufacturing capabilities. Management indicated that capital expenditure intensity in the second half of the year is expected to be higher than in the first half.
As of the end of the second quarter, the company's cash, cash equivalents, short-term investments, and restricted cash totaled $508.8 million, up from $449.4 million at the end of the first quarter. The company has net raised $538.8 million through a new at-the-market (ATM) issuance program. Net property, plant, and equipment increased to $697.1 million, a significant rise from $419.0 million at the end of the first quarter.
Regarding gross margin, GAAP gross margin in the second quarter was 27.7%, down from 29.1% in the first quarter, reflecting cost pressures from expansion and product introduction phases. Management's long-term goal is to increase non-GAAP gross margin to approximately 40%, primarily through a higher mix of 1.6T products, volume ramp of lasers and CPO-related modules, and manufacturing efficiency improvements.
The company maintains its full-year revenue target of approximately $1.1 billion. For the market, the key risk for Applied Optoelectronics is no longer whether demand exists, but whether growth can be executed as planned—capacity construction, material assurance, customer certification, and the shipment pace of high-end products. Any delays in these areas could impact the timeline for revenue growth and profit improvement.
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