祥茂光電 (AAOI) 2014 Q3 法說會逐字稿

Goody day, and welcome to the Applied Optoelectronics Third Quarter 2014 Financial Results Conference Call.

Today's conference is being recorded.

(Operator instructions)

At this time, I would like to turn the conference over to Maria Riley.

Please go ahead, ma'am.

Thank you, operator.

I am Maria Riley of Applied Optoelectronics Investor Relations, and I am pleased to welcome you to AOI's third quarter 2014 financial results conference call.

After the market closed today, AOI issued a press release announcing it's Q3 2014 financial results.

The release is also available on the Company's Web site 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 AOI's Web site 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 Q3 results and Stefan will provide financial details and an update on AOI's strategy in market.

A question-and-answer session will follow our prepared remarks.

Before we begin, I would like to remind you to review AOI's Safe Harbor statement.

On today's call, management will make forward-looking statements.

These forward-looking statements involve risks and uncertainties, as well as assumptions and current expectations, which could cause the Company's actual results to differ materially from those anticipated in such forward-looking statements.

You can identify forward-looking statements by terminology's such as may, expect, plan or believe, and by similar expressions.

Except as required by a 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 change 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 the Company's prospectus and other 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 our non-GAAP measures as well as a discussion of why we present non-GAAP financial measures are included in our press release that is available on our Web site.

Now I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics' President, Founder and CEO.

Thompson?

Thank you, Maria.

Thank you for joining us today.

AOI delivered another record quarter in Q3 as we continued to execute according to our plan.

We achieved our sixth consecutive quarter of record revenue and a record high non-GAAP net income of $3.1 million or $0.20 per share, 33% higher than in Q2.

Our gross margin was 33.3%, which is slightly lower than we expected earlier in the quarter but inline with our long term operating model.

Looking at our performance in more detail.

Third quarter revenue grew 76% year over year and 12% sequentially to reach a record $36.5 million.

Our data center revenue grew 12% sequentially to reach $20.1 million.

This is up significantly when we compare it to the $3.2 million we reported in the third quarter of last year.

Our largest data center customers continued to exceed expectations and we are pleased with the initial results from the sales and marketing investments we made over the past few quarters.

We expect to continue those investments and are working hard to further diversify our data center customer base.

Our cable TV revenue grew 15% sequentially mostly driven by strength in emerging market products and revenue stemming from recent design wins.

Our DOCSIS 3.1 development is on track and we expect to see revenue from these developments starting Q1 2015.

The revenue growth for our data center and cable TV products was offset by $0.5 million decline in fiber to the home revenue as sales to our foundational customer decreased.

As we mentioned last quarter, this customer had pushed out it's WDM-PON plans by a couple of quarters.

However, we were recently informed that their WDM-PON deployment plans have further changed, and as a result, we are adjusting our near term fiber to the home sales expectations.

Stefan will provide you more details on the recent developments in this market.

Outside of this initial customer, we have seen increasing interest in our WDM-PON technology by other customers.

And the technology has seen some exciting public announcement recently.

For example, Transmode's October announcement of the WDM-PON deployment in North Carolina.

As a result, we are excited by the pace of customer interest in WDM-PON and we believe that we are very well positioned to take advantage of the ever increasing bandwidth growth within the optical access market.

Our vertical integration from laser chip to equipment coupled with our design and manufacture capabilities are keys to a continuation of our strong growth and success.

We are quickly ramping our production capacity in order to keep pace with the strong customer demand for our industry leading products.

It is important to note that so far in 2014, we have grown significantly faster than the market, delivering 72% revenue growth for the first nine months of the year, while growing earnings after tax to $6.3 million -- up $6.5 million over the same period last year.

We will continue to focus on delivering both top line and earnings growth while we prudently invest in new technologies to deliver long term growth, sustain our gross margin profile and grow our customer base.

We are pleased with the progress we have made towards our target model, which we continue to expect to achieve in early 2016.

With that, I will turn the call over to Stefan to present the details of our Q3 performance and outlook for Q4.

Stefan?

Thank you.

As Thomson noted, total third-quarter revenue grew 76% year-over-year and 12% sequentially to reach record revenue of $36.5 million.

Our topline growth was driven by our continued strong sales in the data center market and an increase in CATV revenue.

However the growth in these markets was offset by a $0.5 million or 16% decline in our FTTH revenue as our large FTTH customer pulled back WDM-PON spending.

As we reported last quarter, we were expecting this customer to push out it's WDM-PON deployment schedule by a couple of quarters and we were delaying our plans to build out three additional manufacturing lines in Taiwan.

However there has been a new development.

With the change in management, we believe this customer has chosen to forgo the scalability and lower cost provided by WDM-PON to focus on accelerating their near-term deployment schedule.

As a result we believe they will continue to deploy their current technology longer than previously envisioned.

Given our current lack of visibility, we are excluding them from our near-term FTTH revenue expectations and production plans for both the OLT and ONU transceivers.

We are currently forecasting annual FTTH revenue to decrease by approximately 60% in 2015, which excludes revenue from this customer and revenue from any potential new customers.

As we mentioned last quarter, we've had new inquiries about our WDM-PON technology for several potential customers and we are increasingly encouraged by these discussions.

So generating revenue from any of these new inquiries would be additive to our current FTTH forecast.

Turning to our CATV market.

Revenue from CATV products in the third quarter was within our expectations at $12.2 million, up 15% from Q2.

The sequential increase in CATV revenue was driven by recent design wins and continued modest growth in CATV networks in emerging market.

This brings CATV revenue to $32.6 million for the nine-month period, down 2% from 2013.

While we expect to deliver strong Q4 CATV revenue, for the full-year we're trending below our initial forecast for single-digit growth which included sizable growth in emerging markets.

While these markets continue to grow, the rate at which these projects have been deployed is somewhat slower than originally expected and therefore we now expect to see full-year CATV revenue slightly below 2013.

Our excitement about DOCSIS 3.1 continues to grow as our development efforts are on schedule and we expect to see first shipments of some products in Q1 2015.

We think it will be mid-2015 before all the required products are available and therefore we expect to begin to see a ramp up in sales of these products in the second half of next year.

We would like to reiterate our guidance for CATV revenue growth of more than 20% in 2015 compared to this year.

Looking now at our data center market.

We delivered another quarter of record Internet data center revenue.

Q3 data center revenue grew 12% sequentially to reach $20.1 million.

The strong Q3 data center growth was primarily driven by demand for 40 Gb per second products and we are pleased with our momentum.

37% of data center revenue was derived from our 40 Gb per second products, up from 13% in Q2.

We are on track for 40 Gb per second transceivers to grow to more than 50% of data center revenue in Q4.

This transition to 40 Gb per second is significant for several reasons.

First, the average selling price of our 40 gigabit per second products is much higher than our 10 gigabit per second products.

Therefore we can see a path to strong revenue growth without an increase in overall optical port shipment.

Second, 40 gigabit per second products use more advanced light engines, which is our term for the optical subassembly portion of the optical transceiver.

The advanced light engines for 40 Gb per second and above use technology to combine the outputs from multiple transmitter lasers that is similar to the technology we developed for our WDM-PON OLT transceivers.

We believe AOI has a strong competitive advantage when this advanced technology is combined with our in-house laser manufacturing capabilities.

This enhanced competitive advantage is even more significant in 100 Gb per second products, which we're on track to deliver for customer qualification in Q2 of 2015 and begin volume production in Q3 of 2015.

We believe this strong competitive advantage will help protect AOI's gross margin and retain our customers over time.

In the third quarter, we had one customer that contributed more than 10% to our total revenue.

During the third quarter, this customer updated their expectations for the subsequent four quarters and we expect to continue to see strong growth, particularly as they continue to increase their 40 Gb per second purchases.

While we have confidence in our customers forecast, it is important that we focus our efforts over the next few quarters to expand our data center customer base.

We are continuing the sales incentives that we initiated in Q2 and are aggressively pursuing new customers in the data center market.

In Q3 we achieved three new design wins in 40 Gb per second transceivers and delivered several new products to a new customer for qualification.

They are testing these products now and we expect them to complete the qualification process in Q4.

Overall we continue to believe data center revenue in 2015 will increase by more than 45% compared to 2014.

Moving down the income statement.

Q3 total gross margin was 33.3%, a decrease of 110 basis points from Q2 due to annual price negotiations on our 10 gigabit per second data center products and somewhat higher costs in the early stages of the ramp of our 40 Gb per second data center products.

With our tremendous data center revenue growth so far this year, our gross margin has improved over 400 basis points in the 2014 nine months period.

As our 40 Gb per second production process matures, we expect higher gross margins in this segment over the next few quarters compared with Q3.

Turning now to operating expenses which totaled $8.9 million relatively the same as Q2.

In Q3, OpEx as a percent of revenue was 24.4%, a 275 basis point improvement from 27.2% in the prior quarter.

In Q4, we expect total OpEx to again be relatively flat compared with Q3 and therefore decline as a percent of revenue.

R&D expense was $4.2 million or 11% of revenue, up $0.2 million from the previous quarter.

Consistent with our plan, we continued our investments in 100 G data center products and DOCSIS 3.1 technology.

We will continue to balance R&D investment appropriately in order to capture market share and promote growth at both the top and bottom line.

Sales and marketing expense was $1.6 million or 4% of revenue, up $0.1 million from the previous quarter.

Sales and marketing expense was slightly ahead of our expectation, primarily due to the sales initiatives aimed at data center diversification.

G&A expense was $3.2 million or 9% of total revenue, down $0.2 million when compared to the previous quarter.

The decrease in G&A expense was primarily attributed to the reallocation of certain nonrecurring expenses in Taiwan during the factory move and reduction in salary expense.

Non-GAAP operating income in Q3 was $3.2 million or an operating margin of 8.8%, an improvement of 183 basis points compared with the prior quarter.

And in Q3 we delivered EBITDA of $4.8 million or 13% of revenue, up from 11.4% in Q2.

Non-GAAP net income after tax for the third quarter was $3.1 million or 8.6% of revenue compared with $2.4 million or 7.2% of revenue in the previous quarter and $0.6 million in Q3 of last year.

We generated non-GAAP net income of $0.20 per share, up from $0.15 last quarter.

GAAP net income for Q3 was $1.6 million or $0.10 per share compared with $0.12 in the prior quarter.

The Q3 weighted average fully diluted share count was approximately 15.6 million shares.

Turning now to the balance sheet.

We ended Q3 with $45.8 million in total cash, cash equivalents and short-term investments compared with $43.0 million at the end of the previous quarter.

During the quarter we drew approximately $14 million on our debt facility to fund our capital investment to expand production capacity for our data center transceivers.

Consistent with our plan, we made a total of $11.6 million in capital investments in the quarter, including $5.6 million in equipment and $5.8 million in construction costs, mostly for the buildout of our new Taiwan factory in Ningbo.

This brings our CapEx for the nine-month period to $24.7 million.

Given the strong forecast we have from our data center customers and our current outlook for the ramp of 40 Gb per second data center products, we are pulling forward our data center capital investments and we are redirecting almost all of the FTTH capacity and equipment to support data center transceiver production.

As a result, we expect our full-year 2014 CapEx to be approximately $35 million.

In Q4 we expect to spend approximately $6.3 million on production equipment directly related to faster than expected ramp up in demand for 40 Gb per second data center transceivers.

As of September 30 we had $33.1 million in inventory, an increase of $1.9 million from Q2, primarily due to addition of inventory prior to our plant move in Taiwan.

Due to the higher revenue, though, inventory turns increased in Q3 compared with Q2.

Accounts receivable decreased to $24.2 million compared with $25.0 million last quarter.

Moving to our outlook.

For Q4 of 2014 we are entering the quarter with very strong bookings and forecasted demand and we expect to achieve our 7th consecutive quarter of record revenue and another quarter of record net income.

We expect Q4 revenue to be between $39.5 million to $41.5 million, representing an impressive 66% to 75% year-over-year growth rate and 8% to 14% sequential growth.

We expect Q4 non-GAAP gross margin be in the range of 33.5% to 34.5%.

Non-GAAP net income is expected to be in the range of $4.3 million to $4.8 million and non-GAAP earnings-per-share between $0.28 per share and $0.31 per share using a weighted average only diluted share count of approximately 15.6 million shares.

With that, I will turn it back over to the operator for the Q&A session.

Operator?

(Operator Instructions)

We'll take our first question from Simon Leopold with Raymond James.

A handful of things I'd like to ask.

One is, when you were talking about the fiber to the home business not turning out as you once expected, I think you mentioned you expected a decline in 2015 of about 60%.

I wanted to just double check that I heard you correctly.

In other words, you're looking at 2015 revenue of $4 million to $5 million from FTTH?

Simon, that's correct.

Basically what that's based on is -- as we said in the call I mean we have limited visibility into next year's revenue from that segment.

And so basically we're taking out the WDM-PON from the foundational customer and what's left is the remaining revenue in the FTTH segment.

And basically I am trying to get an understanding of what changed is did the alternatives become more cost-effective, was it that WDM-PON was considered to have too much technology risk because it was new?

What's different now than prior expectations?

Yes, first of all, I should emphasize that we have no indication that this is related to any kind of technology deficiency or anything else.

What seems to have changed is the amount of risk that the customer is willing to take relative to near-term deployments, that is we still think the WDM-PON is the most cost-effective way to deliver 1 Gb per second services and there is nothing to change in that regard.

However it seems like the customer has decided to continue to deploy it's existing technology even though we believe that's a more expensive way to get the job done preferring that primarily on the basis of the fact that it's sort of a known quantity from a deployment scenario -- large scale deployment scenario, and WDM-PON is relatively -- because of the newness of the technology is relatively unknown with respect to large deployment.

And then what do you expect in the December quarter?

Do you expect it to be down to a million in change in the December quarter or will it be more of a gradual ramp?

Well we don't -- we can't give forward guidance by segment like that.

But what I will say is that we're going to continue to deliver according to some of the open orders and contractual obligations that we have agreed to.

And so there will be some revenue in Q4 but the precise level I can't comment.

And one last one before I hand it over to somebody else.

When you're looking at your data center opportunities, the 100 gig market is certainly active but it also sounds like it's been very competitive among the participants, how are you thinking about price competitiveness and your ability to play in the 100 gig data center market?

Thanks, Simon.

That's a great question.

So the very important point to keep in mind is that because of our vertical integration particularly our in-house laser manufacturing and the advanced light engines which are in the optical subassembly for these 40 gig and 100 gig transceivers, that puts AOI relatively speaking in a better competitive position.

So whatever price declines there are we don't see that translating into margin declines.

We think we can maintain the margin because again we have a sort of built-in structural advantage based on our vertical integration and our light engine production capacity.

And so that being said I think that the history that we've had with 40 gig is that prices fall fairly in line with what we expect it going into -- there is obviously some price decline but it's in line with what we expect.

We'll take our next question from Paul Silverstein with Cowen & Company.

Was the TAM2 customer this quarter the same as last quarter?

Yes.

How many -- can you remind us how many data center customers you have right now?

We have four.

They continue reference -- am I wrong -- I thought last quarter you had reference of new as yet unnamed customer which would make five?

What we had said was that we had a new customer that was under qualification and that's the same customer that were still in qualification with right now that we talked about on the call.

I apologize, but there were another -- did I hear you say you had design wins from another three customers or --

We had three design wins with an undisclosed number of customers but they are among our existing customer rate.

So they are all among -- the design wins were all among the existing customers?

Correct, that's right.

And then on the gross margin side in terms of pricing, was their decision because of the loss of that key WDM-PON customer, was their decision to be more aggressive in price concessions in order to bulk up the data center business as one would expect?

No, no.

So there was no trade-off involved?

No, not at all.

And if I go back a quarter ago and I apologize if I don't' remember this correctly.

I think a quarter ago when pricing came up in the Q&A, you guys were pretty adamant that the price environment was pretty benign, there was nothing extraordinary and unusual, the stepped-up price concession maybe I am mischaracterizing it in terms of what the price concession was.

But let me ask the question more directly.

If we look at pricing, can you give us some sense for what historically the degree of price degradation had been and what was the --

Well it's worth mentioning really the price decline that we are talking about was specific to one particular product, that was our 10 gigabit per second transceivers and really it was specific to one product with one customer.

We don't -- I wouldn't read anything into that 40 gigabit or certainly 100 gigabit per second, as I mentioned to Simon's question earlier.

Those are different animals because they involve light engine technology and they are much more dependent on the edge emitting laser technology that AOI had.

Okay?

The price decline that we saw on the 10 gigabit per second product really, I mean it was not an enormous price decline.

On the last call, we did indicate that we were fairly confident we would see very little, if any, price decline.

Obviously, that turned out to be a little bit optimistic, but the price decline that we did see was not enormous and it is worth mentioning to you that even with that we continue to have among, if not the highest gross margin in the optical peers that we have.

So it's not like it was a disastrous thing, but it did account for that slight 1% miss in overall gross margin.

Great.

One last question if I may and I will pass it on.

The obvious question relative to what's happening with WDM-PON customer.

I recognize each customer is different, but if we were to look at the communications you have with your data center customers, the degree of visibility you have into those deployments and the confidence and the associated risks that one or more than especially the 10% plus customer there is a change going forward with the understanding that there's no guarantees in your business unfortunately.

But can you give us some better insight in terms of this degree of visibility?

Yes.

I think that's a really good question.

And I want to emphasize again the situation with the WDM-PON really had to do with perceived risk in deploying a new technology and their desire to avoid that risk.

Okay?

In the data center side of the business, that doesn't exist.

I mean 10 gig, 40 gig and even 100 gig, these are well-known technologies that are being developed or have been developed in tandem with the customers.

So there isn't that kind of unknown deployment technology risk that we see with this WDM-PON.

So we don't really see that being a factor in the 40 gig or 100 gig data center production at all.

I'm going to apologize.

There is a little -- to ask one more question if I may.

On the data center side, can you give us some sense?

I understand there are customer confidences which is the one what you'll say but can you give us some sense for the depth of penetration in the other three customers?

I think when you got 10% plus has been the 10% customer that was -- correct me if I am wrong, but that was earliest data center win.

Where are you out with the others, what's the likelihood that one or more of the other three will step up and become significantly more prominent in terms of revenue generation in the not-to-distant future?

Sure.

We're well penetrated in the other accounts.

The reality of the current data center market, especially the Web 2.0 market is that our one 10% customer is just much larger in terms of purchasing of optics compared to almost everybody else in the industry.

So I think we still have very good market share.

I don't think we've lost any market share with our other customers in that segment, but the scale of their business, the scope of their business in terms of optical transceiver is just a lot smaller than our large 10% plus customer.

And so that's why -- I mean you don't -- whatever gains we see with those other customers are kind of matched by the tremendous growth that we're seeing from our top customer.

Have the other customers all grown in dollars?

Not all of them have.

Some have and some haven't.

The ones that haven't it's been because of a change in--as they go on from 10 to 40 or 40 to 100, it's been that intervening transition period that's been causing them to decline a little bit, not anything related to market share loss.

I'll pass it on.

Thank you.

Thanks, Paul.

We'll take the next question from Troy Jensen with Piper Jaffray.

Hi, Stefan.

Just on a followup on all those questions, on the ASP erosion many lot of our your competitors do help us out and they give us a quarterly reduction or an annual price cut in the 10% to 15% range some of whom say.

Could you just quantify a little bit what you mean by not enormous?

Less than 10%.

Less than 10% annual reduction?

Yes.

It's less than 10%.

In fact, it seems to be this particular customer tends to look at pricing on an annual basis and so we believe this will be the price reduction for the year going forward and it was less than 10%.

Perfect.

And then how big is 40 G as percentage of data center?

It's about 37% of data center revenue.

Okay.

And then my last question for you, just can you help us with Q1 seasonality?

I know you've been an ace high growth company here and some people are seasonality in Q1.

Any color on that would be extremely helpful.

Well.

The seasonality that we have seen history has been basically exclusively related to the cable TV segment.

Okay?

So right away you could see as the cable TV segment has become relatively less as the percentage of our total revenue.

That would imply somewhat less seasonality compared to what we had seen in the past.

I don't expect that we're going to see that type of seasonality, for example, on the data center market, at least we have seen that historically.

The cable market itself is likely to continue to be somewhat seasonal, although this overlying impact of the DOCSIS 3.1 in the new products that we're bringing to market for that and I would expect to some extent that customers buying inventory of this new DOCSIS 3.1 products and preparing for field trials and things like that may not necessarily experience the same degree of seasonality that we would see from normal cable TV deployment in Q1.

So last year you guys were up actually almost 5% sequentially in March.

Is that possible again or did you expect it to be flat or down slightly?

Any color as we put our minds together, it would be helpful.

Yes.

We really don't give that kind of forward-looking guidance, but again I would just think a little bit about the trends in the data center relative to cable TV in terms of revenue.

So you're saying data center just not have seasonality?

We haven't seen seasonality in data center and few one now?

Right.

Thanks.

Our next question will come from Krishna Shankar with Roth Capital.

Yes.

Can you talk about the data center business?

And I think last question you mentioned that you might potentially have a couple more new customers.

Can you talk about your diversification within the data center business and any new customers coming on?

Yes.

So we still have the four customers that we had talked about before.

We mentioned that we have another fifth customer that has several products that are currently under qualification that we expect to complete qualification within this quarter that is Q4.

And so that would be a fifth data center customer.

That fifth customer we had also talked about in the past is a customer that is sizable in us that we think they could have significantly more buying power than certainly at least two out of the other four of the customers that we have right now.

That is it is a scope that is much larger than three out of the four data center customers that we currently have.

Okay.

And with regard to gross margins I know you had some pricing negotiations in Q3.

Can you talk about the trend in sort of data center gross margins?

Are you to level now where they could be stable or do we expect more pricing pressure in the data center business?

Yes.

So our large customer, the one that we have been mostly talking about, historically has lifted pricing on an annual basis and we've just undergone that pricing discussion recently as we talked about.

You can never completely see the future, but we have an experience and are wanting to have multiple price negotiations in a year and so I would expect it.

Relatively speaking, we should have the pricing pretty well set for the year.

Okay.

And my final question on fiber-to-the-home, any other customers or deployments that you are engaged with now that could diversify you away from that one lead customer?

Yes.

I mean we don't really want to talk about specific deployments or specific customers, but as we talk about we do have multiple customers that we're in discussions with.

Even prior to our interaction with this primary customer we had had several other customers that we've been shipping WDM-PON or sort of Gen 1 WDM-PON products too and we do believe that those customers will continue.

So we'll still continue to see some business from WDM-PON.

It will obviously be at a significantly reduced scale for some time until we can back to new customers in that segment.

Okay.

Thank you.

Welcome.

(Operator Instructions).

We'll go next to Richard Shannon with Craig-Hallum.

Please go ahead.

Hi, guys.

Few questions from me, maybe just a quick question on the fourth quarter sales guidance seems to be suggesting fiber-to-the-home will be down significantly within the other two segments, data center and cable TV.

Can you kind of flash out to the extent which you're able to, but the sequential trends there in the seeming data center will go faster but just want to get in more clarification there, please?

Yes.

I mean we don't really break up the forward guidance by segment.

I think that we've guided for cable TV to be sort of flat to down slightly from 2013 seeking kind of get an idea on where that revenue is going to be.

We've got three quarters there and you can kind of figure out where the fourth quarter will be based on the guidance, I think, and take a swag on the data center side of the revenue and that leaves you with the growth in the FTTH.

Okay.

It's enough.

Second question on CapEx.

You give us a number for this year, which clearly your front end loading some data center investments that may have been coming next year.

How should we think about modeling that for next year?

Clearly we won't have much of any fiber-to-the-home visibility into that.

So, how should we think about that number for next year?

Well.

We are not given forward guidance on the CapEx at this point.

What I can say is that for us we invest CapEx very strategically based on near-term customer demand trend.

So, we're not buying much of the equipment or investing in lot of things that are way out in the future.

We buy equipment of production capacity when we see a customer demand.

In this case, for example, it was heavily invested in 40 gigabit per second products because we saw our customer demand for 40 gigabit per second products increased much faster than what we had projected.

So you invested strategically in 40 gigabit per second production capacity so that we had sufficient capacity to meet the demand and so when we look at the CapEx for next year, I think what we're going to be looking to do is to invest certainly in 100 gigabit per second production.

Perhaps in 40 gigabit per second production if we see continued increase in that segment and to the extent that we get new customer interaction on WDM-PON or a resumption in interaction with our existing customer in WDM-PON, we may invest in that equipment as well.

I mean most of the time our goal is to operate very, very close to 100% capacity.

That is, we want to be fully utilizing all of our equipment and as a result when we see increases in demand, that fairly quickly translates into the need to buy new equipment which we do on a strategic basis when we see that demand come out.

Okay.

That's fair enough.

So one last question from me in this session.

In the data center segment, give us a sense of your additions in the sales and marketing.

In that sector, I think you've hired a Taiwan based VP there.

Give us a sense of what the sales fund looks like.

How broad of a customer base you're aiming towards?

It's like a dozen guys out there, two dozen or really how far and why do you spring in Windsor?

Yes.

I mean we're looking certainly at the top five or six largest data center operators for sure, but where we have opportunities to pick up business from others we're certainly very interested in doing that.

We're not limiting ourselves completely to just those top five or six and those opportunities do come up from time to time where we see opportunities to pick up business from maybe smaller players, but it's still diversification and I think that's still a useful part of our strategy.

So we'll continue to broaden even beyond some of the top names that you might hear, but our focus still clearly is on the guys that can buy the most products.

Okay.

That's fair enough.

That's all for me, guys.

Thank you very much.

And ladies and gentlemen, that does conclude our question-and-answer session.

At this session, I will turn the call back over to Thompson Lin for closing comments.

Okay.

Thank you for joining us today.

We are very pleased with our Q3 results and tremendous growth in 2014.

We believe we are very well positioned in optical access market and we will continue to focus on leveraging our technology leadership and vertical integration to drive growth on the both top and bottom line.

As always, we thank you for your support.

Ladies and gentlemen, this does conclude today's call and we thank you for your participation.