Prepared remarks
Good afternoon. I will be your conference operator. At this time, I would like to welcome everyone to Applied Optoelectronics Second Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Please note that this call is being recorded. I would now like to turn the conference over to Lindsay Grant Savarese, Investor Relations for AOI. Ms. Savarese, you may begin.
Thank you. I am Lindsay Savarese, investor relations for Applied Optoelectronics. I am pleased to welcome you to AOI's second quarter 2026 financial results conference call. After the market closed today, AOI issued a press release announcing its second quarter 2026 financial results and provided its outlook for the third quarter of 2026. The release is also available on the company's website at ao-inc.com. This call is being recorded and webcast live. A link to the recording can be found on the Investor Relations section of the AOI website and will be archived for one year. Joining us on today's call is Dr. Thompson Lin, AOI's founder, chairman, and CEO, and Dr. Stefan J. Murry, AOI's chief financial officer and chief strategy officer. Thompson will give an overview of AOI's Q2 results, and Stefan will provide financial details and the outlook for the third quarter of 2026. A question-and-answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AOI's safe harbor statement. On today's call, management will make forward-looking statements. These forward-looking statements involve risks and uncertainties, as well as assumptions and current expectations, which could cause the company's actual results, levels of activity, performance, or achievements of the company or its industry to differ materially from those expressed or implied in such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as believes, forecasts, anticipates, estimates, suggests, intends, predicts, expects, plans, may, should, could, would, will, potential, or thinks, or by the negative of those terms or other similar expressions that convey uncertainty of future events or outcomes. The company has based these forward-looking statements on its current expectations, assumptions, estimates, and projections. While the company believes these expectations, assumptions, estimates, and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond the company's control. Forward-looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of its product into new markets and customer responses to its innovation, as well as statements regarding the company's outlook for the third quarter of 2026 and for the full year of 2026. Except as required by law, AOI assumes no obligation to update these forward-looking statements for any reason after the date of this earnings call to conform these statements to actual results or to changes in the company's expectations. More information about other risks that may impact the company's business are set forth in the Risk Factors section of AOI's reports on file with the SEC, including the company's annual report on Form 10-K and quarterly reports on Form 10-Q. Also, all financial results and other financial measures discussed today are on a non-GAAP basis unless specifically noted otherwise. Non-GAAP financial measures are not intended to be considered in isolation as a substitute for results prepared in accordance with GAAP. A reconciliation between our GAAP and non-GAAP measures as well as a discussion of why we present non-GAAP financial measures is included in the company's earnings press release that is available on our website. Before moving to the financial results, I would like to note that AOI management is attending Rosenblatt's 6th Annual Technology Summit virtually on August 18. This discussion will be webcast live, and a link to the webcast will be available on the Investor Relations section of the AOI website. Lastly, I would like to note that the date of AOI's third quarter 2026 earnings call is currently scheduled for November 5, 2026. Now I would like to turn the call over to Dr. Thompson Lin, AOI's founder, chairman, and CEO. Thompson?
Thank you, Lindsay, and thank you for joining our call today. We are pleased to deliver solid second quarter results in line with or better than our expectations, driven by robust demand in both our data center and CATV businesses. We generated our fifth consecutive quarter of record revenue and we achieved an important milestone as we returned to non-GAAP profitability in the quarter. Demand to support next-generation AI infrastructure remains so robust that our near-term revenue is bounded almost entirely by production capacity and key component availability. Because of this, we continue to anticipate steady sequential revenue growth this year and continued non-GAAP profitability. During the second quarter, we delivered revenue of $191.9 million and non-GAAP gross margin of 29.8%, in line with our guidance range, and our non-GAAP income per share of $0.06 came in above our expectations. Importantly, during the quarter, we saw continued robust customer engagement around our 800G and 1.6T products. In line with our expectation, we saw a strong volume ramp of our 800G product in Q2, which more than doubled sequentially. Looking ahead, forecast demand continues to outpace our production capacity through mid-2027. We are working hard to add additional capacity to meet this demand. We continue to believe our 2026 revenue will be around $1.1 billion. With that, I will turn the call over to Stefan to review the details of our Q2 performance and our outlook for Q3, Stefan.
Thank you, Thompson. As Thompson mentioned, we are pleased to deliver solid second quarter results that were in line with or better than our expectations. We generated our fifth consecutive quarter of record revenue, and we achieved an important milestone as we returned to non-GAAP profitability in the quarter. Our performance continues to be anchored by robust demand across both our data center and CATV businesses, validating the power of our dual growth strategy and diversified revenue streams. Demand to support next-generation AI infrastructure remains so robust that our near-term revenue is bounded almost entirely by our production capacity and key component availability. Because of this, we continue to anticipate steady sequential revenue growth and continued non-GAAP profitability this year as more capacity comes online. In Q2 we delivered revenue of $191.9 million, which was in line with our guidance range of $180 million to $198 million. We recorded non-GAAP gross margin of 29.8%, in line with our guidance range of 29% to 30%, and our non-GAAP income per share of $0.06 was above our guidance range of a loss of $0.03 to earnings of $0.03. Notably, we continued to make progress on our key priorities in the second quarter, which included: one, scaling our next-generation data center products, including both our 400G and 800G solutions, by expanding our production capacity in a disciplined manner; two, diversifying our revenue base; and three, strengthening operational execution to improve our margins and position us for long-term profitability. That execution is directly translating into tangible business momentum. During Q2, we continued to see robust customer engagement around our 800G and 1.6T products, particularly as AI-driven data center investments accelerate. In line with our expectations, we saw a strong volume ramp of our 800G products in the second quarter. 800G revenue of $12.8 million, or 11.9% of our total data center revenue, increased more than 10x year over year and more than doubled sequentially in Q2. Looking ahead, we expect revenue from our 800G products to grow by nearly 5x in the third quarter and expect continued strong growth gated by our production capacity and component supply in the fourth quarter. During the quarter, we saw continued strength in our 400G business. 400G revenue of $48.4 million, or 45% of our total data center revenue, increased more than 4x year over year and 27.4% sequentially in the second quarter. In Q1 we announced that we received our first volume order for our 1.6T transceivers from one of our long-term major hyperscale customers. We also announced that we had received two new volume orders from this customer for our 800G single-mode transceivers. We began delivering these 800G orders in Q2 and we expect full qualification of our first 1.6T product by this customer within the next couple of weeks, followed by shipments of 1.6T beginning later this quarter. We continue to expect that shipments of these orders will return this customer as a 10%+ customer for us in Q3. Looking ahead, forecast demand for 800G and 1.6T modules is projected to continue to exceed our production capacity through mid-2027. We are working to add additional capacity and secure necessary key components to meet this demand. During Q2, we continued to make solid progress on our production capacity ramp, particularly for our 800G and 1.6T products. Once complete, we continue to believe that we will have the largest AI-focused data center transceiver production capacity in the United States. As a reminder, our U.S. manufacturing footprint is anchored in Sugar Land, just outside Houston. Through a combination of real estate acquisitions and leases, we have expanded our Texas manufacturing footprint significantly to over 1.6 million square feet in the greater Houston area, which are in various stages of development. During the quarter, we made further progress building out our 210,000-square-foot facility which is just a few hundred yards away from our headquarters. We continue to expect to begin initial production in this facility late in the third quarter. As a reminder, this facility will be entirely dedicated to the manufacturing of 800G and 1.6T transceivers. While this will not directly increase our indium phosphide wafer capacity, we plan to move the existing transceiver production from our current headquarters facility to this new building which will allow expansion of our indium phosphide capacity. The facilities in Pearland and Houston will be built out to expand our production capacity for 800G and 1.6T transceivers. We began construction on these facilities in Pearland recently, and we are proud to have received strong local support to meet our manufacturing needs. We are excited to expand our presence in an area with such a strong workforce, excellent infrastructure, and room to scale our operations, and continue to expect these facilities to come online in early 2027. Currently, our total manufacturing capacity is approaching 200,000 units per month, up from nearly 100,000 units per month of 800G and 1.6T capacity at the end of Q1. Looking ahead, we continue to expect by the end of this year that we will be capable of producing over 650,000 800G and 1.6T products per month. By the end of 2027, we continue to expect to grow our production capacity to be able to produce over 930,000 800G and 1.6T products per month, with over half of that output coming from Texas. These investments reflect measured scaling of our footprint while aligning with strong and growing customer demand and qualification progress across both 800G and 1.6T products. It is important to note, as a reminder, our 800G and 1.6T products can be manufactured on the same production line with the same process. While our 1.6T products will require a different final test, our 800G automated manufacturing lines have been developed with an architecture that will allow us to support future high-speed products as customer demand materializes and evolves over time. Our automated manufacturing lines are engineered to scale efficiently from 800G to 1.6T with minimal incremental investment. This structural flexibility provides a dual advantage: it accelerates our time to market for AI customers while expanding our long-term margin potential. Looking ahead, we continue to believe that our 800G products will drive our near-term data center ramp followed by our 1.6T products, which are on track to begin to contribute to our overall revenue later this year, with a bigger ramp beginning in 2027. At OFC, we also discussed our plans to increase our manufacturing capacity for our ELS, or External Laser Source pluggable form factor, that is for co-packaged optics, or CPO. This utilizes the ultra-narrow linewidth, high-power laser that we announced late last year. We have very limited production of these modules now, but we anticipate ramping production later this year and into 2027, ultimately culminating in about 400,000 pieces per month in 2028. We believe our in-house laser capabilities continue to be a strategic advantage for the company. As we have mentioned before, we have been manufacturing lasers internally for many years. This has allowed us to avoid some of the shortages that have affected others in the industry. As we continue to expand our footprint in Texas, our in-house laser manufacturing positions us well to support both near-term customer needs and longer-term growth. We believe that in the future, CPO will continue to drive increased demand for high-power lasers and we plan to continue to expand our laser manufacturing capacity in Texas in order to accommodate these future growth drivers. Notably, our expansion planning has been underway for several years. We have already secured orders for long-lead equipment and are partnering closely with vendors on delivery. Crucially, our reliance on proprietary in-house developed machinery heavily insulates us from the broader equipment supply bottlenecks in the industry. There are exceptions, of course, but overall, we feel that our in-house developed technologies give us an edge in ensuring reliable supply of production equipment. During the quarter, direct tariffs had a $1.9 million impact on our income statement. With the overturn of the previous tariffs, we have received a refund of approximately $5.7 million. We are still evaluating the potential impact of the new tariffs recently announced in the U.S., but at the present time, we do not expect any material change from tariffs as a result of this announcement. Turning to our second quarter results, our total revenue was a record $192 million which increased 86% year over year and increased 27% sequentially off a strong Q1 and was in line with our guidance range of $180 million to $198 million. During the second quarter, 56% of revenue was from data center products, 42% was from CATV products, and the remaining 2% was from FTTH, telecom, and other. In our data center business, Q2 revenue of $107.7 million increased 140.4% year over year and 32.3% sequentially. Sales of our 100G products increased 31.3% year over year, while sales for our 400G products increased more than 4x year over year, and sales of our 800G products increased more than 10x year over year. In the second quarter, 38.3% of data center revenue was from 100G products, 45% was from 200G and 400G transceiver products, 11.9% was from 800G transceiver products, and 4.4% from 10G and 40G transceiver products. We currently expect to see a decline in 100G business in Q3 due to one of our customers' inability to source sufficient 100G switches to meet their initial forecast. We believe that the shortage of switches is related to memory shortages and expect that 100G weakness will persist until memory supply recovers. Even with this temporary weakness in 100G, we continue to believe that by mid-2027, 100G and 400G revenue will be approximately $90 million monthly, 800G revenue will be approximately $217 million monthly, and 1.6T revenue will be approximately $164 million monthly. In total, this is about $471 million per month of data center transceiver revenue. In our CATV business, we saw record CATV revenue of $80.6 million, which was up 43.8% year over year and 20.6% sequentially and was slightly above our expectations of $75 million to $80 million. Similar to the last couple of quarters, we shipped a significant quantity of 1.8 GHz amplifiers to our largest CATV customer in Q2. We also continued to see momentum with the newer MSO customers that we have discussed on prior earnings calls. We continue to see broad-based appeal of our amplifiers and Quantum Link software across our potential customer base. During the quarter, we announced that Mediacom selected AOI as its primary vendor to accelerate its DOCSIS 4.0 network upgrades, driving multi-operator commercial adoption of AOI's next-generation 1.8 GHz quantum bandwidth smart amplifiers and software solutions. We are excited to partner with Mediacom to deliver more reliable service while lowering operational costs. Looking ahead to Q3, we expect our CATV revenue will be between $100 million and $110 million. Looking further ahead, we continue to expect to generate over $325 million annually in CATV. While the vast majority of our CATV revenue expectations for this year are related to our amplifiers, we do anticipate that we will generate some revenue from our software solutions this year. For the second quarter, our top 10 customers represented 99% of revenue compared to 98% of revenue in Q2 of last year. We had three greater-than-10% customers: one in the CATV market which contributed 42% of total revenue, and two in the data center market which contributed 26% and 24% of total revenue, respectively. In Q2, we generated non-GAAP gross margin of 29.8%, which was in line with our guidance range of 29% to 30% and compared to 29.2% in Q1 2026 and 30.4% in Q2 2025. As we discussed on our last quarterly earnings call, while we do expect continued gradual improvement in gross margins, we continue to expect that the revenue mix in data center in the short term will be a slight headwind. We remain committed to our long-term objective of returning non-GAAP gross margins to around 40% and believe that this goal is achievable as our mix shifts toward higher-margin products and as we capture additional efficiencies across our operation. The revenue figures presented above are net of a contra revenue amount due to the accounting for warrants provided to customers. As a reminder, this amounts to approximately 2.5% of revenue derived from certain customers to whom AOI has provided warrants in exchange for future revenue. In Q2, the amount of this contra revenue was $1.2 million. Total non-GAAP operating expenses in the second quarter were $67.6 million, or 35% of revenue, compared to $42.1 million, or 41% of revenue in Q2 of the prior year. Our OpEx this quarter was higher than expected due mainly to higher shipping costs associated with the rapid ramp in CATV revenue in the quarter combined with higher-than-expected R&D spending, as we have been asked by customers to qualify new 800G and 1.6T products in the quarter. We believe that R&D spending will continue to be elevated; however, we do not expect additional shipping costs to recur in Q3 or subsequent quarters. Looking ahead, we expect non-GAAP operating expenses to be in the range of $70 million to $80 million per quarter. Non-GAAP operating loss in the second quarter was $10.3 million compared to an operating loss of $10.8 million in Q2 of the prior year. GAAP net loss for Q2 was $22.8 million or a loss of $0.28 per basic share, compared with a GAAP net loss of $9.1 million or a loss of $0.16 per basic share in Q2 of the prior year. On a non-GAAP basis, net income for Q2 was $5.5 million or $0.06 per diluted share, which was above our guidance range of a loss of $2.5 million to income of $2.8 million, or non-GAAP income per share in the range of a loss of $0.03 to earnings of $0.03. This was largely due to foreign tax benefits and modest government subsidy income, which we expect to continue in subsequent quarters. This compares to a non-GAAP net loss of $8.8 million, or $0.06 per share in Q2 of the prior year. The weighted average fully diluted shares outstanding used for computing the earnings per share in Q2 were 88.1 million. Turning now to the balance sheet, we ended the second quarter with $508.8 million in total cash equivalents, short-term investments, and restricted cash. This compares with $449.4 million at the end of the first quarter of 2026. We ended the second quarter with total debt, excluding convertible debt, of $92.8 million, compared to $77 million at the end of last quarter. As of June 30, we had $278.8 million in inventory, which compared to $206.2 million at the end of Q1. The increase in inventory is primarily due to increased inventory of raw materials for near-term production as we ramp capacity. As we disclosed in May, we initiated a new ATM offering. To date, we have raised $538.8 million net of commissions and fees under this new program. We intend to use these proceeds to continue to make investments in the business including new equipment and machinery for production and research and development use. We made a total of $565.5 million in capital investments in the second quarter, including $280 million in prepayments on equipment we have on order. These expenditures are mainly for manufacturing capacity expansion for our 400G, 800G, and 1.6T transceiver products. We expect CapEx intensity in the second half of the year will be higher than in the first half as we prepare for increased 400G, 800G, and 1.6T data center production. We expect to finance these investments through a combination of cash on hand, cash generated from operations, and some equity sales, along with additional debt. Looking ahead, we believe we are uniquely positioned to capture two distinct growth engines: the rapid AI-driven demand acceleration in our data center business, alongside a robust runway in our CATV business. Our current capital investments are designed to scale our advanced manufacturing footprint, structurally lower our long-term production costs, and enable our path towards sustained profitability. Moving now to our Q3 outlook, we expect Q3 revenue to be between $255 million and $290 million, representing 130% year-over-year growth at the midpoint. We expect non-GAAP gross margin to be in the range of 29% to 30.5%. Non-GAAP net income is expected to be in the range of $10.1 million to $24 million and non-GAAP earnings per share between $0.11 and $0.26 per share using a weighted average diluted share count of approximately 92.8 million shares. Looking more broadly at 2026, we believe our 2026 revenue will be around $1.1 billion. As we have discussed previously, this revenue level is limited by our production capacity and supply chain, not market demand, which we believe is much larger. With that, I will turn it back over to the operator for the Q&A session.
Questions and answers
Thank you. We will now begin the question-and-answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Our first question today will come from George Notter with Wolfe Research. Please go ahead.
Hi, guys. Thanks very much. I wanted to ask about all the stuff that has been in the news of late around transceivers and the potential for a U.S. ban on certain transceivers being shipped into the U.S. Could you talk about your perspective on that? What are you seeing or hearing? How might that affect AOI? Does this change anything in terms of your capacity planning? Does it change anything with your conversations with customers? Any insights would be great. Thanks.
It is a little early to say. That report that came out a couple of days ago was somewhat speculative in terms of the fact that any ban or whatever it ultimately turns out to be is not in place yet, and the details are not really out there. I think AOI's U.S. manufacturing presence has been a very important, probably the most important, element of our appeal to our customers. Clearly, that announcement heightens that appeal. As we said in our prepared remarks earlier, we believe that we are and expect to remain a major domestic manufacturer of optical transceivers for AI, and anything that heightens interest in that is good for us. But it is hard to point to any specific ramifications at this point since it is still early.
This really is not new news to us. We have been discussing this topic for quite some time. As I mentioned earlier, we have been working very closely with customers on long-term agreements, especially given AOI's capability in making our own lasers and our commitment to invest heavily in U.S. manufacturing, not only for lasers but also for transceivers. Early feedback from customers is that they are more aggressive and willing to give us more share, particularly because we are a U.S. manufacturer. How significant that will be remains to be seen, but right now, our capacity is fully booked from now until mid-2027. The best we can do is continue to add more capacity. We may be more aggressive in adding capacity starting around Q3 next year, especially for U.S. manufacturing.
Got it. Okay. And then just as a follow-up, I was curious about the ramp in 800G. It looks like growth in the business right now is coming from 100G, 200G, and 400G based on your comments about the mix of transceivers in the quarter. It seems like at this point, 800G has to be the driver of growth in data center. Where are you in that ramp? Is all that tooling fully installed and ready? Are those laser datacom chips built and sitting on the shelf? Do you need to get qualifications on any of this? Any more you can tell us on the ramp and readiness would be great. Thanks.
Our ability to deliver revenue in general and specifically for 800G products is limited by our production capacity right now. If we could produce more, we could ship more today. Not all the manufacturing capacity that we expect to have is online at this point. We are going to continue to add more capacity through next year. A year ago we had about 65,000 square feet of manufacturing space; now we have 1.6 million square feet in planning and development, so that space has not been fully built out or equipped yet. Over the next couple of quarters, the first increment of that manufacturing does start to come online, which will increase our manufacturing capacity from roughly 200,000 pieces a month to about 650,000 pieces a month by the end of the year for 800G and 1.6T, most of which will be 800G given current demand. That is incremental new capacity that does not exist today. So there is significant room for expansion, and we are only getting started on the 800G ramp now.
I want to emphasize that for Q3, you can see strong growth compared to Q2. The growth is mainly from 800G. At the same time, due to memory issues affecting switch supply, 100G will likely decline by about $20 million to $25 million in Q3, otherwise the growth could be more than 50%. This 100G weakness is a short-term effect; we believe demand will return to normal within a few months, either by the end of this year or next year. By mid-2027, we expect total transceiver revenue to reach about $471 million per month. Customer demand is currently 20% to 40% higher than available capacity. We are seeing urgent demand from customers weekly and monthly, and we are working closely with key suppliers, such as DSP and TIA vendors, to increase volume in the next few quarters to meet demand.
Great. Thank you very much.
And our next question will come from Simon Leopold with Raymond James. Please go ahead.
I appreciate you have given us a lot of guidance commentary. Quick arithmetic suggests that in the fourth quarter you are anticipating the combination of 800G and 1.6T revenue in the neighborhood of $330 million. I want to make sure I am thinking about this correctly first, and then I have a follow-up.
That is about right, directionally.
Great. I recall in the spring you were talking about the 1.6T ramp and having a commitment for $200 million through an order, and I'm trying to get a better sense of the timing. It sounds like it may start in the fourth quarter of this year but maybe the majority is a 2027 event. How should we think about the timing of that $200 million order you talked about for 1.6T in the past?
We will start deliveries on that probably very late in the third quarter and then ramp into the fourth quarter. I think the bulk of it should get delivered in the fourth quarter, and there may be a tail into the first quarter. The important part is that this is just the beginning of what we expect to be significant orders from this customer for 1.6T for the foreseeable future, so I would not get too wrapped up on that single order; it's the start of an ongoing relationship.
Great. Then a China-related question: apart from potential regulatory issues, there has been discussion that there will be new manufacturing of lasers coming out of China. How are you thinking about that potential and if new Chinese manufacturing came online to make lasers, what could that mean to your business?
Let me answer that. For the CPO laser, using the ESFP 300 mW laser compared to the ~70 mW used in an 800G transceiver and 100 mW for a 1.6T transceiver, the CPO lasers are higher power and physically larger, and yields are lower. To meet demand for CPO, the market needs to grow many times current capacity. Even if new suppliers in China enter, most are focusing on lower-power lasers like 70 mW; very few can do 100 mW, and we do not expect 300 mW lasers with reasonable yield and performance from them in the next two to three years. Meeting CPO demand requires long lead times for equipment—typically 21 to 24 months from order to high-volume production. There will be new supply globally, and we are not surprised, but overall global capacity is insufficient for projected demand. AOI, combined with other major players, will still struggle to meet demand in the next few years. We are aggressively expanding capacity, and we expect little effect from new entrants given the scale of demand.
Okay. Thank you for taking the questions.
Thanks, Simon.
Our next question will come from Ryan Koontz with Needham and Company. Please go ahead.
Great, thanks. Maybe just following up on the question about laser supply and thinking about your own constraints there. For indium phosphide, how are you feeling about substrates and other raw materials that you need to ramp? Is that a current bottleneck, and which products are the most challenging for you to ramp at the moment?
As Thompson mentioned on our last earnings call, the situation has not changed materially. We have secured substrate supply into next year, so we are not currently limited by substrate capacity. We have had many discussions with substrate suppliers going back into last year and recently as well. We feel pretty good about substrate supply as far as we can see into the future; things are incrementally better than prior to the last call.
We have recently moved to 4-inch substrates in our manufacturing. We currently have multiple substrate suppliers: two in Europe, two in Japan, and three in China. We are aggressively pursuing partnerships with two or three suppliers and even possible joint ventures, because laser capacity needs for CPO are going to be much larger than our competitors. Right now, our inventory and supplies are sufficient through the end of next year, but we are planning for the volumes we will need in 2028 and 2029, which is why we are working aggressively with suppliers for expansion.
Great. Really helpful. Then following up on George's question about 1.6T, how are you feeling about broad market traction with that product? With Tomahawk 6 at the end of the year, we expect a big uptick in demand. How are you feeling about traction with customers besides the one order you have in hand now?
We have pretty broad-based interest among customers. We are still in the process of adding capacity. Until we have sufficient capacity to service multiple customers, we have to be careful about taking too many orders. We are trying to balance capacity additions against customer demand. Customer demand is much larger than what we can provide in the short term, so we are being appropriately circumspect to avoid overpromising what we can actually deliver.
As of today, AOI would be the fourth supplier qualified by a major hyperscale datacenter customer for 1.6T transceivers. We expect to finish most of the qualification—only late-stage items remain—and that should be complete within about three weeks so we can start to deliver by the end of this quarter. We already have more than a $200 million order in hand. Our target is to finish all that order by sometime in Q2 next year. For Q4, we believe we can deliver at least $17 million in revenue for 1.6T transceivers to just that one customer. We are doing everything to speed up. One big constraint in Q4 for 1.6T will be material supply. Our manufacturing capacity will be ready within a few weeks, but material supply and qualifying suppliers takes time. Customers are talking about volumes more than 500,000 transceivers per month by the end of next year, which equates to roughly $300 million to $350 million per month in revenue. We are working closely with customers and suppliers, and we are being careful about promises while maintaining high quality in our manufacturing expansion in the U.S.
Thanks so much.
Our next question will come from Michael Genovese with Rosenblatt. Please go ahead.
Great. Thanks so much. The guide for the full year is on track, and the model for next year seems to be on track, but some revenue has been pushed out this year into Q4. Could you give a little more color on the challenges of ramping up capacity that were different than what you expected three months ago and that will keep getting better as we go forward? Specifically, why was 800G not quite as big as you thought in Q2?
Right now, one factor is memory issues affecting switches. For Q3, we expect to lose about $20 million to $25 million of revenue for 100G single-mode transceivers. For Q4, based on our capacity, we should be able to deliver much more—Q4 should be substantially better. The big challenges are DSP and TIA supply for 800G and 1.6T transceivers, and the whole supply chain is very tight. The good news is suppliers are prioritizing AOI and treating us as a long-term partner. We work closely with key suppliers multiple times per week to secure supply.
That is very helpful. Given that 1.6T will be a lot more in the mix in Q4, do we still expect to exit the year in the mid-30s of gross margin?
Gross margin should improve, but there are some one-time costs such as fees to key suppliers and other charges. I would not be surprised to see something in the low 30s given those factors. The most important factor is how much 1.6T we deliver because it is a higher-margin product. The more 1.6T we deliver, the higher the gross margin will be. By Q3/Q4 of next year, when we start to deliver CPO lasers or ESFP modules at scale to customers, gross margins for those products should be substantially higher—ESFP gross margins could be in the 55% to 65% range. In the short term, gross margin improvement will be driven by the percentage of 1.6T transceivers we ship. We expect a meaningful ramp in 1.6T in Q4 and especially in Q1 next year. For 1.6T transceiver revenue, Q1 next year could be double Q4 or more, depending on supply and qualification timing.
On CPO, some investors may not fully appreciate AOI's position. Any additional update on the number of customers you are talking to and the status of that program would be helpful.
AOI has been a laser company since day one; laser technology is our core. We have been working closely with at least five customers for CPO and ESFP. For high-volume manufacturing, we expect significant volumes next year. We are adding more CBD, EPI, steppers, and other equipment in Houston. Our current fab capacity will increase by about 300% by Q3 next year, but that will not be enough for multi-year demand, which is why we are building a second-phase cleanroom in Houston that will be about four times the current facility. That gives a sense of how aggressive our expansion plan is, but even that may not be sufficient for the multi-year demand we expect. We are working hard to expand laser manufacturing and ESFP module production based on customer demand.
To add, we've talked to several major CPO customers and they like our laser technology. The constraint right now is capacity—we cannot make enough lasers to be included in their first-generation deployments at scale because we need to prioritize lasers for our own transceivers first. As we expand the fab, we will have more capacity to supply ELSFP for CPO. Performance and design are not issues; our high-power, narrow-linewidth laser is among the best in the industry. The challenge is adding capacity, and Thompson outlined our expansion plans.
AI and high-power laser development has been ongoing for many years. For DWDM CPO lasers, the specs are very high and challenging. Only a few companies in the U.S. can realistically meet those specs with the required performance, and I do not believe performance from many new entrants will match AOI or other leading suppliers in the near term. Capacity remains the key constraint.
One more quick question: how far away do you think the Chinese manufacturers are from producing 350 mW lasers with reasonable yield and performance? Will they ever have them, and how many years away might that be?
If we're talking about reasonable yield and performance comparable to AOI, I would say at least two to three years or longer.
I should let someone else ask a question. Thanks so much. That was great, Thompson and Stefan.
All right. Thank you.
This concludes our question-and-answer session. I would like to turn the call back over to Dr. Thompson Lin for any closing remarks.
Okay. Thank you for joining us today. As always, we want to extend a thank you to our investors, customers, and employees for your continued support. It is an exciting time for our industry and for AOI. We continue to believe the fundamental drivers of long-term demand for our business remain robust, and we are in a position to drive value from our rich opportunity set. We look forward to seeing many of you at upcoming investor conferences. Thank you.
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