Applied Optoelectronics (NASDAQ:AAOI) is positioning its laser manufacturing and automated U.S.-based production capabilities as key differentiators as data-center customers expand AI infrastructure, according to Chief Financial Officer and Chief Strategy Officer Stefan Murry at the Rosenblatt Age of AI Tech Summit.
Murry said the company’s technology foundation is its indium phosphide laser capability, which predates its transceiver business. Customers value the company’s internal laser fabrication because it provides a differentiated supply chain and can improve supply continuity at a time when laser availability is constraining industry growth, he said.
“They’re willing to pay a premium for U.S. production,” Murry said.
Laser Capacity and CPO Opportunity
Murry said the company can produce high-power continuous-wave lasers used in silicon photonics applications, including lasers in the 300- to 400-milliwatt range for co-packaged optics, or CPO. While he said several major competitors can produce lasers that meet customer specifications, Applied Optoelectronics sees its designs as competitive, particularly in narrow-linewidth performance at higher power levels.
The company’s primary limitation is manufacturing capacity rather than technology, according to Murry. Applied Optoelectronics is shipping small quantities of high-power lasers for customer evaluation but does not yet have sufficient capacity to address all of the demand it is seeing.
The company currently uses four-inch wafers for laser production and said its recently acquired fabrication equipment is capable of supporting a future transition to six-inch wafers. Murry said the company does not have a fixed timetable for that transition, which will depend on production economics, yields and substrate availability.
Applied Optoelectronics expects its capacity additions in the latter half of 2027 to support greater participation in both traditional scale-out data-center deployments and newer scale-up architectures. Murry said scale-up systems could require roughly an order-of-magnitude more lasers, with laser die sizes also substantially larger than in current deployments.
“There is not enough capacity in the industry right now to even come close to meeting the demand from scale-up,” Murry said.
Transceiver Production Ramp
Murry said two large hyperscale customers are driving most of the company’s 800G transceiver volume, with several additional customers purchasing or preparing to purchase smaller quantities. The company’s expected increase in 800G sales during the third quarter is being supported mainly by added capacity at its Taiwan facility.
Applied Optoelectronics plans its manufacturing expansion in increments of about 100,000 units per month, Murry said. The company had more than 200,000 units of monthly capacity following the end of the prior quarter and is working toward 650,000 units per month by year-end.
The company has 1.6 million square feet of space available in the Houston area, where it is beginning to develop additional production capacity. Initial U.S. transceiver capacity is expected to begin coming online later this year, though Murry said the larger contribution from the facility is expected in 2027 and 2028. Laser production is currently located in Sugar Land, Texas, and the company intends to add further laser production capacity in the Houston area rather than overseas.
Murry said Applied Optoelectronics is effectively sold out through at least the second half of next year for certain products and must avoid overcommitting capacity to new customers. He said the company’s capacity-expansion plans could support market share of around 20%, though larger competitors would remain in the industry.
Margins, Capital Spending and Customer Agreements
The company expects gross margin to exit the year in the low- to mid-30% range, Murry said, potentially around 32% to 33%. Short-term pressures include expedited supply-chain costs, somewhat higher component and substrate prices, and an expected decline in the company’s higher-margin 100G business as one customer shifts available memory toward higher-speed deployments.
Murry said expedite costs should become less significant after the fourth quarter as suppliers adjust to higher 1.6T demand. Applied Optoelectronics continues to target gross margin of approximately 40% by the end of 2027. CPO-related laser-chip margins could exceed 60%, while module margins would fall between chip-level and current transceiver-margin levels, he said.
The company is discussing CPO opportunities with five companies, including some that are also evaluating near-packaged optics, or NPO. Murry said he expects Applied Optoelectronics to have more than one CPO customer, though capacity may limit how much demand it can serve.
Capital expenditures are expected to remain elevated in the second half of the year, at least matching first-half spending. Murry said most spending is directed toward production equipment, machinery and real estate, with anticipated returns on current investments of roughly nine to 10 months.
Applied Optoelectronics expects to use a mix of operating cash flow, customer contributions, debt structures, government subsidies and, to a lesser extent over time, equity financing to fund growth. The company also sees its cable-TV business, which it said is generating at least $350 million in annual revenue, as likely to grow for another year or two before leveling off in line with the sector’s longer investment cycles.
About Applied Optoelectronics (NASDAQ:AAOI)
Applied Optoelectronics, Inc develops and manufactures high-speed fiber-optic networking products designed to support the growing bandwidth demands of data centers, telecommunications carriers and internet content providers. The company’s core offerings include pluggable optical transceiver modules, transponders and optical components that enable data transmission at rates ranging from 1G to 400G. These products are used to facilitate long-haul, metro and intra-data center connectivity, addressing the need for scalable, low-latency and energy-efficient solutions in modern network infrastructures.
The company’s product portfolio spans small-form factor pluggable modules such as SFP+, QSFP+ and QSFP28 units, as well as more advanced form factors like CFP2 and OSFP for ultra-high-speed applications.
