祥茂光電 (AAOI) 2014 Q4 法說會逐字稿

Good day and welcome to the Applied Optoelectronics Fourth Quarter 2014 Financial Results Conference Call.

Today's conference is being recorded.

(Operator Instructions)

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

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 2014 and Year Financial Results Conference Call.

After the market closed today, AOI issued a press release announcing its Q4 and year 2014 financial results.

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 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 Murray, AOI's Chief Financial Officer and Chief Strategy Officer.

Thompson will give an overview of AOI's Q4 and year 2014 results, and Stefan will provide financial details and an update on AOI's strategy and 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 such as may, expect, plan, or believe and by similar expressions.

Except as required by law we assume no obligation to provide an update on 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 the company's prospectus and 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 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 present at 3 investor conferences in March, including the Raymond James Institutional Investors Conference in Orlando on March 3; the ROTH Conference in Laguna Niguel on March 9; and Piper Jaffray's Telecom, Media and Technology Conference in New York on March 11.

We hope to have the opportunity to see many of you there.

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

Thank you, Maria.

Thank you for joining us today.

For 2014, AOI achieved revenue of $130.4 million, representing growth of 66%, which far outpaced the competition.

I'm proud to say that we delivered this growth profitably, reporting a non-GAAP net income of $10.4 million or $0.68 per diluted share for the full year.

While the growth is impressive, the end of the year had its challenges.

Fourth quarter revenue came in at $36.4 million.

While up 53% year-over-year, it was below our initial guidance of $39.5 million to $41.5 million.

As we previously reported, our fourth quarter result was impacted by a supply issue with an externally sourced optical sub-assembly, therefore, we are unable to ramp production levels for our new 40G data center transceivers as planned.

Demand for our data center product remained very strong, and outside of these supply issues, sales for our data center product were within our expectations.

We reported data center revenue of $14.9 million, up 153% year-over-year.

Our cable TV revenue was up 21% sequentially and in line with Q4 of last year.

Our sequential growth in cable TV was mostly driven by continued shipment of recent design wins.

Revenue for our fiber-to-the-home product was above our expectations and came in at $5.7 million, as our foundational WDM-PON customer took final delivery under the contractual obligation.

Overall, in 2014, AOI made significant headway, and we would like to thank our employees for their dedication and hard work.

In 2014, AOI shipped over 1.9 million lasers compared with only 0.7 million in 2013.

Our data center business experienced phenomenal growth, with annual revenue reached $64.5 million, 232% increase over the $19.4 million reported in 2013.

Revenue from cable TV product totaled $47.4 million in 2014, in line with prior year, as cable broadband providers prepared to upgrade their network with DOCSIS 3.1 technology and worked through major consolidation activities.

Last September, we introduced a family of transmitter and receiver products that are fully compliant with the new DOCSIS 3.1 standard.

As the largest cable TV ODM equipment supplier, we believe we are well positioned to benefit from this expected rollout.

AOI achieved a record 34.6% gross margin in 2014 compared to the 29.4% gross margin we delivered in 2013.

The significant 516 basis points increase in the margin is primarily attributable to an increasing mix of higher-margin product, driven by the sales of our data center transceivers and new design wins in cable, along with increased production volume.

On the operations side, we've moved to a larger factory in Taiwan, with nearly 3 times the production floor space of our previous facility, and we're also prepared to break ground on our new facility in Sugar Land to expand our R&D and laser manufacturing capabilities.

We remain confident in our outlook for strong growth in our data center and cable TV business in this year.

Our pipeline is very strong, and we're excited by our prospective and overall revenue opportunity.

We will also continue to focus on pursuing new opportunities with customers across all of our markets, while making timely investments in capacity and R&D to further solidify our position as the leading supplier of advanced optical products.

With that, I will turn the call over to Stefan to present the detail of our Q4 performance and outlook for Q1.

Stefan?

Thank you, Thompson.

Total fourth quarter revenue was $36.4 million, up 53% year-over-year and in line with third quarter revenue of $36.5 million.

Our data center revenue in the fourth quarter totaled $14.9 million, representing a 26% decrease from Q3.

39% of our data center revenue was derived from our 40-gigabit-per-second data center product, below our estimate of over 50%.

As Thompson mentioned, 40-gigabit-per-second data center shipments were delayed due to a supply and quality issue with certain optical sub-assembly components sourced from an external supplier.

This issue was isolated to one product, a new 40-gigabit-per-second data center transceiver design win that we expected to ship in the fourth quarter.

As a result of the supplier issue, we were not able to ship the quantities of this product we had expected.

We have been working very closely with our supplier to resolve this matter so that we can increase shipments of this product to our customer.

On the positive side, the transition from 10 gigabits per second to 40 gigabits per second in the data center is rapidly accelerating, and to our knowledge, demand is outpacing capacity worldwide.

Given our vertical integration and manufacturing capabilities, we are working to ramp development of key 40-gigabit-per-second components to help alleviate shortages.

Additionally, as you may recall, the advanced light engines used for these products to combine the outputs of multiple-laser transmitters is based upon technology we internally developed for our WDM-PON OLT transceivers.

Given the use of the advanced light engines in our vertical integration model, we believe that AOI has a very strong competitive position to continue its above-market growth as the transition to 40 gigabits per second, and ultimately, the transition to 100 gigabits per second, progresses.

Looking into 2015, we have already built our first 100-gigabit-per-second qualification units, and these are under testing now.

We expect to deliver them to customers soon.

While these initial units are only several of the types that will ultimately be needed by our customers, the testing of these first units is a significant milestone.

Based upon the strong 40-gigabits-per-second demand and initial experience with our 100-gigabit-per-second product, we maintain our expectation that data center revenue will grow by more than 45% over our 2014 level.

Turning to our cable TV market.

Revenue from cable TV products in the fourth quarter was $14.7 million, up 20% from Q3 and in line with the $14.0 million that we reported in Q4 of last year.

The sequential increase in CATV revenue was driven by continued shipments of recent design wins.

We continued to make progress on our DOCSIS 3.1 development efforts and have already shipped customer samples of several DOCSIS 3.1 products.

We are beginning to see initial orders for these products in the first quarter, as we expected.

Demand for DOCSIS 3.1 products should ramp modestly in the first half of the year, which is ahead of MSO's announced deployment schedule.

Sales are expected to increase in the second half, as all of our required DOCSIS 3.1 products become available.

In total, we continue to expect our CATV revenue to grow more than 20% in 2015 compared with 2014.

In the fourth quarter, we had three customers that contributed more than 10% to our total revenue: A data center customer at 36%; a CATV customer at 11%; and an FTTH customer at 11%.

For the full 2014 year, one data center customer contributed 46% to our total revenue, and this was our only greater-than-10% customer for the year.

As we mentioned to you last quarter, while AOI will continue to focus on a small group of very large customers, diversifying our customer base, especially within the data center market, is a key objective for the company.

We are pleased to announce that in Q4, we completed the qualification process and achieved two new design wins with a large, new data center OEM customer.

We have already begun initial shipments to this customer and expect them to ramp throughout the year, however, at a relatively conservative ramp rate, as we work to prove ourselves to them and we become more closely integrated into their supply chain.

Moving down the income statement.

Q4 total gross margin was a record 36.0%, an increase of 270 basis points from Q3, primarily due to CATV product mix and a higher percentage of FTTH revenue.

Turning now to operating expenses, which totaled $9.5 million compared with $8.9 million in Q3.

In Q4, OpEx, as a percent of revenue, was 26.2% compared with 24.4% in the prior quarter.

On an annual basis, operating expense were 27% of revenue, slight improvement from last year's 28%.

R&D expense was $4.2 million or 12% of revenue, relatively flat on a dollar basis compared with Q3.

Consistent with our plan, we continued our investments in 100-gigabit-per-second data center products and DOCSIS 3.1 technology.

For the full year, R&D expense was $15.9 million or 12% of revenue compared with 11% in 2013.

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

Sales and marketing expense was $1.6 million or 4% of revenue, in line with the previous quarter.

For the full year, sales and marketing expense totaled $5.9 million or 5% of revenue compared with 5% in 2013.

G&A expense was $3.8 million or 10% of total revenue, up $0.6 million when compared to the previous quarter.

For the full year, G&A expense was $13.4 million or 10% of total revenue compared with 12% in 2013.

Non-GAAP operating income in Q4 was $3.6 million or an operating margin of 9.8%, an improvement of 97 basis points when compared with the prior quarter operating margin of 8.8%.

And in Q4, we achieved adjusted EBITDA of $5.7 million or 15.8% of revenue, up from 13.0% in Q3.

For the full year 2014, we generated adjusted EBITDA of $16.3 million.

Non-GAAP net income after tax for the fourth quarter was $4.0 million or 11.1% of revenue compared with $3.1 million or 8.6% of revenue in the previous quarter and $0.3 million in Q4 of last year.

We generated non-GAAP net income of $0.27 per share, up from $0.20 last quarter.

GAAP net income for Q4 was $0.7 million or $0.05 per share compared with $0.10 in the prior quarter.

The Q4 weighted average fully diluted share count was approximately 15.2 million shares.

Turning now to the balance sheet.

We ended Q4 with $40.9 million in total cash, cash equivalents, and short-term investments compared with $45.8 million at the end of the previous quarter.

Cash flow provided by operations was $6.1 million.

We made a total of $16.4 million in capital investments in the quarter, bringing our full year CapEx to $41.1 million, above our previously announced outlook of approximately $35 million.

The spending that was in excess of our plan was mainly directed at additional production equipment needed in Taiwan for production of our 40-gigabit-per-second data center products.

As we noted, the strong book-to-bill ratio in the fourth quarter and the supply constraint globally both support this investment.

Also, most of the equipment purchased can be repurposed to 100-gigabit-per-second production when this technology begins production later this year.

As of December 31, we had $33.8 million in inventory, an increase of $0.7 million from Q3.

Accounts receivable increased to $31.6 million compared with $24.2 million last quarter.

This increase is mainly due to the timing of orders shipped within the quarter, along with the payment terms of customers involved.

Moving to our outlook.

For Q1 of 2015, we are entering the quarter with very strong bookings and forecasted demand, and a book-to-bill of 1.7.

However, we are moderating our expectations to reflect supply constraints for 40-gigabit-per-second data center components.

We expect Q1 revenue to be between $35.0 million to $36.5 million, representing 41% to 47% year-over-year growth.

We expect Q1 non-GAAP gross margin to be in the range of 34.0% to 35.0%.

Non-GAAP net income is expected to be in the range of $2.0 million to $3.2 million, and non-GAAP earnings per share between $0.13 per share and $0.21 per share, using a weighted average fully diluted share count of approximately 15.3 million shares.

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

Operator?

(Operator Instructions) We'll first go to Troy Jensen from Piper Jaffray.

Hey, congrats on the nice year, gentlemen.

Okay.

So can you guys give us more detail on -- well, a couple of things on the 40G stuff.

What was the revenue shortfall in the fourth quarter?

And you can give us any color on what does the Q1 guidance imply for the 40G contribution?

So as we noted, the 40G contribution was about 39% of our overall data center revenue, whereas we had earlier said we thought it could be 50%.

And the shortfall was due to this supplier quality issue that we disclosed.

So, Stefan, on the supplier issue, is it a volume problem from the supplier?

Or is it a quality problem with the parts you're receiving?

Yes.

So that's a great question, Troy.

I know we tried to message that correctly.

In the fourth quarter, we identified a quality issue with parts that we were receiving from a particular supplier.

I want to emphasize, we identified that problem internally, and we stopped any shipments prior to those going out to the customer.

So we don't believe there's any customer affecting impact or potential of products that got out to the customer with any defect in them.

So it took us some time, as you can imagine, to understand the nature of the problem, work with our supplier to identify the root cause of that problem, put in place a fix and verify that that fix was effective.

During that time, production had stopped because we didn't want to be producing any more products that could potentially have a defect.

So once we've identified that problem and instituted the fix, production has restarted and we're ramping production very quickly.

We're in daily contact with the supplier, and production is ramping up quickly.

But because of the delay there, I mean, we're not yet meeting the production goals that we had set out at this point.

Yes, sure, I understand that.

So there was no change in the supplier, just to be able to work through the problem, so there's no recertification or qualification that's needed, correct?

That's correct.

Okay, perfect.

As then as far as the DOCSIS 3.1 stuff, do you feel like that is ramping to your expectations?

Yes, DOCSIS 3.1 is basically on our expectations.

As we noted, we've started shipping samples of a couple of products there.

We have a number of additional products in the queue.

We do expect to start shipping, I would say, initial volumes of products very soon, which is ahead of the MSO's deployment schedule.

And we've talked about this a little bit in the past, but basically, the DOCSIS 3.1 products are backwards compatible with DOCSIS 3.0.

So in a lot of cases, we expect to see DOCSIS 3.1 revenue coming before the MSO's announced schedules for DOCSIS 3.1 field trials and things like that, just because it's backwards compatible and they might as well go ahead and order the 3.1 compatible products rather than the older 3.0 stuff, if they can.

Great.

Okay, makes sense.

And the last question and obviously (inaudible).

Can you tell us what does the Q1 guidance imply for a tax rate?

And when do you expect to be a full tax-paying corporation?

Yes.

So the tax rate in Q1 is very low, just a 2% tax rate, basically.

And we haven't given out forward guidance to say when we expect specifically to be full tax-paying because we're not -- because all of our income is not in the U.S. We have some overseas, in particular, in Taiwan, which has a lower 17% tax rate.

We don't expect our blended tax rate to be the full U.S. tax rate of 35%.

That will be -- it will be somewhat less than that, but we're not there yet.

Okay.

Well, good luck, gentlemen.

Thanks.

And we'll now move to Simon Leopold from Raymond James.

Thank you very much.

Just a couple of things I wanted to follow up on.

One is in terms of how you're thinking about the mix for this March quarter, I presume the fiber-to-the-home business is going to head to a level of maybe $1 million to $2 million a quarter.

I think that's what you had talked about previously.

I just want to check where do we see that settling.

And then rounding out the mix discussion, I'm a little bit confused because I would normally expect the cable business to be seasonally down sequentially in March, but you're talking about some issues hampering the data center.

So can you help us understand how to think about the segment contributions in March?

Sure.

So I think, directionally, on the fiber-to-the-home, I think your thinking is correct.

It's certainly -- we were winding down the last contractual obligations with our foundational WDM-PON customer in Q4.

And so that resulted in the outsized contribution, I think, that we saw in Q4.

I would not expect that to recur in Q1.

So directionally, I think on the FTTH revenue, you're in the ballpark there.

With respect to the other segments, as we noted, we have extremely strong demand.

And it's worth -- I mean it's worth emphasizing that that demand has continued beyond just the orders that we saw in Q4.

The bookings even in Q1 remain very, very strong.

So the issues that we have are really related to the supply constraint, not any lack of demand.

We have very good demand and very sustained demand.

So really, what we expect to see is the FTTH -- correction, the data center revenue will certainly come back above what it was in Q4, okay, because we're going to be able to deliver more in Q1 than we could in Q4.

The problems that we encountered in Q4, as I said, are basically resolved and now we're just ramping the production.

And so, it's a matter of how much can we deliver in Q1.

On the cable TV side of things, as you know, Q1 revenue in cable TV, in particular, is seasonally down.

You're correct about that.

I think, again, directionally, in terms of where cable TV is, that's what I would expect to see.

Okay.

And then in terms of looking out longer term for the year, I certainly appreciate you've given us full year guidance on cable TV.

I wonder if you could give us some thoughts about the consolidation or pending consolidation among the large U.S. operators, how and if that can affect your business in terms of the timing of sales.

That's a good question, Simon.

I mean, we've talked about that a little bit in the past.

I've gotten that question a lot.

I think really the first order, I don't want to say it doesn't have any effect, but both Time Warner and Comcast have individually said on numerous occasions that they do need to spend more money in the future to upgrade their networks.

The business that we're getting in DOCSIS 3.1, in particular, initially at least, is going to be for field trials and things like that that are virtually certain to go ahead regardless of any merger or lack thereof.

So, I guess, the short answer to the question is, in this year, I don't really see a big impact, one way or the other.

Longer term than that, I guess there could be some impacts depending on how the merger shakes out, whether it's one company or two going forward.

But I don't expect there to be a big impact in 2015.

And to the extent that we have any visibility into that, I mean we've already baked that into our expectations for the year.

Great.

And just one last one from me.

In the past, you've talked about securing data center wins in China.

Obviously, they didn't break into the 10% customer ranks yet.

Can we get an update of how those particular customer projects are evolving?

Thank you.

Sure, Simon.

Yes, we talked about that a little bit in the call that we did secure two design wins with this customer, and we do expect revenue for them to ramp throughout the year.

But we did also caution in the call that we expect that ramp to be somewhat muted.

It's a new customer relationship.

And as with any new customer relationship, it takes time for us -- for them to get to know us better, for us to sort of prove that we're capable of meeting their expectations, and for us to get better integrated into their supply chain.

So things are going well.

They're on pace, on schedule.

Orders will be ramping up throughout the year, but I wouldn't go too crazy on that in the short term as we kind of get integrated with them more fully.

Great.

Thank you for taking my questions.

Thanks, Simon.

We'll now go to Paul Silverstein from Cowen and Company.

Hi, guys.

I'm just curious so Simon's question, which I believe was specifically about Huawei.

I thought you all had previously identified Huawei a year or two ago.

And so the customer in question, the OEM in question, is that Huawei or are we talking about a different OEM?

And secondly -- I apologize, going back, I think it was Troy's question on the 40-gig impact.

Do we simply -- is the message that you take 50% or thereabouts, subtract 39%, that's the dollars that were forgone by virtue of the supply problem?

And the related question would be, it sounds like you don't believe, you're not concerned that that business has gone away from you, that the customer in question is waiting for your ability to ship as opposed to having reallocated the order to somebody else who could ship because they didn't have a supply constraint.

Yes.

So on the first question about the OEM that we're talking about, we haven't disclosed the name of that.

As you can imagine, we have pretty strict nondisclosure arrangements with the customer, so we can't really disclose who that name is.

We did talk about the fact that we achieved these two design wins and that we expect the revenue to ramp up throughout the year.

If and when they become a 10% customer, obviously, then we'll have to disclose them and that will be okay.

But at this time, I can't comment on the name of the customer involved.

As result -- your second question, I think, was about the magnitude of the supply problem in Q4.

So it was in the vicinity of a $5 million shortfall that we encountered in Q4 due to this issue, so that helps factoring on the magnitude of it for you.

And then your third question, I'm sorry, I forgot what it was, Paul.

Could you repeat the third question?

Yes.

It's just the -- I recognize that there's not lengthy period of time, but the customer in question, assuming AWS, they're waiting for you to ship as opposed to having reallocated that order to another vendor who could ship because --?

Okay, that's right.

Yes, thanks.

No, we don't see any indication that they've reallocated this order.

In fact, I mean, we've continued to see new orders flowing in from them.

So I don't think there's any problem there.

I believe, as we mentioned in the call, that there is a global supply -- a lack of supply globally for this type of product.

And so, from that standpoint, I think while the customer clearly would love to have had more delivery than they got, I think we're still well positioned to be their first supplier, basically.

In other words, we're supplying more than I believe anybody else is, even with our relatively limited supply capability in the fourth quarter.

Got it.

And going back to the OEM, the two design wins.

You did make clear, this is with an OEM.

I assume, that means they switched equipment supplier as opposed to an end customer like an AWS or Microsoft or Alibaba, is that correct?

That's correct.

All right.

And just to be clear, if I may, had you -- am I mistaken that once upon a time, sometime in the past that you all had referenced Huawei or maybe I'm confusing you with someone else?

To be honest, Paul, I don't know what we've said about Huawei.

We have had discussions with Huawei in the past, I don't know specifically.

I'd have to research what we may or may not have said about it in the past.

But --.

Because the only point, where I'm going with this, Stefan, is just if you have referenced Huawei in the past and you're now talking about a new OEM, it wouldn't be Huawei, it would be somebody else as opposed to -- I recognize you can't tell us; you have to be discreet.

So it's possible it could be Huawei, it may not be Huawei.

Let me put it this way, we may have talked at some point about potential Huawei business, but we have not counted them as a customer in that sense at this point.

All right.

So at the risk of being dense again, I understand you have to be respectful -- (multiple speakers)

-- customer in the fourth quarter, we would characterize them as a new customer in the fourth quarter.

Got it.

That's all I need.

I will pass it on.

Thank you.

No problem, Paul.

We'll now go to Krishna Shankar from ROTH Capital.

Yes, congratulations on good results.

So can we assume that you will catch up with some of the constraints on 40-gig optical transceivers in the second quarter?

Do you feel comfortable with the supplier ramping up production of the corrected parts and lead demand sometime in Q2?

Yes, so that's a good question.

I want to try to characterize this correctly.

We definitely are going to ship more of that product in the fourth quarter than -- correction in the first quarter than we did in the fourth quarter.

So from that standpoint, we're going to be ramping up.

We have a very, very strong backlog of orders for that product and others, as I mentioned.

So the limitation to our guidance really is about our ability to secure enough supply of raw materials and to be able to turn that raw material supply into finished goods and ship it during this quarter.

So I think, look to our guidance.

The upside to our guidance is we get more components, more raw materials earlier and can actually ship more.

And of course, the flip side to that is, the risk to the guidance is we get less raw materials than we think we are going to at this point, and that would result in a shortfall.

But it's purely based on our ability to secure the raw materials and to produce those products from the raw materials.

This is Thompson.

So at the same time, we are ramping up our internal capacity, too.

So we're going to make sure we have a stable source to increase our overall capacity and minimize the risk for the future supply.

Great.

Okay.

And then in terms of gross margins, very good progress in Q4.

Can you talk about the trajectory of gross margins for the year given the growth metrics you laid out for the data center and the cable business?

Yes.

So we had, obviously, very strong gross margins in the fourth quarter.

There were a couple of things, unique things that happened in the fourth quarter.

Some of them related to the FTTH revenue, the influx of FTTH revenue, and other things.

So we're not going to give specific guidance exactly on the gross margin for the rest of the year.

But I think the guidance that we gave in the first quarter is what we should look at.

And most likely, it's going to be in that kind of realm.

But what is going to be at play in the first quarter is really some increase in costs related to pushing the production of these data center products and counterbalancing that, of course, with cable TV increased, or relatively higher level of cable TV revenue relative to what we got in the first quarter of last year, and more of that being in higher-end sort of DOCSIS 3.1 or new design win type products.

So those are going to be the 2 balancing factors for the gross margin.

Okay.

And then my final question, any updates on other customers for your FTTH products that you can talk about?

That's a good question.

We have had some ongoing discussions with different customers.

I think those discussions continue along.

We don't have anything that I would consider to be substantive enough to report at this point.

But things continue to move forward with a couple of different customers, and we remain optimistic about that technology in the future.

Okay, thank you.

You're welcome.

(Operator Instructions) We'll now go to Richard Shannon from Craig-Hallum.

Hi, Thompson and Stefan.

Thank you for taking my questions.

I have a few to follow up here.

I guess maybe first in the data center.

Stefan, I didn't catch your comments, I had a little scratchy line here, but did you mention the two design wins with this fifth customer in here whether they were 10- or 40-gig?

We did not, no.

We haven't [put] an indication on that.

Okay.

Obviously, it's good that you're getting another customer lined up here and I don't want to not celebrate that.

But how about the visibility into gaining some other customers?

Any qualifications that look like they may finish in the foreseeable future?

How should we think about that?

We continue to have good discussions and good progress on sales with a lot of different customers.

I don't want to comment on anything.

Like we did with this fifth customer, I don't want to comment on anything prematurely.

So we haven't given any kind of indications about other new customers.

But as those opportunities start to gel more and start to become sort of more realistic, we'll certainly keep everybody apprised of that.

Okay, fair enough.

Talking about the component issue that affected your fourth quarter, is that something that will also potentially be something that would impact you as you get into 100-gig as well?

Or is that an entirely different product design?

No, it's a different product design.

The issue that we had, I don't really think was specifically a 40-gig problem in the sense that it couldn't have happened at some other data rate.

But it was just one of those things that happens sometimes with relatively new products.

We did ship some of those products in Q3 and into Q4, so it wasn't like it was our very first shipment.

But it was very early in the product life cycle.

We were pushing the ramp-up quickly.

And it's just one of those things, sometimes, when you push a little too hard on the supply chain, we don't always get the results that we expected.

So I think if there's a lesson to be learned here it's that we probably need to be cognizant about pushing our supply chain harder than we perhaps ought to.

But I don't see that -- certainly, this particular problem, I don't see any chance of it repeating at 100-gig.

Okay, that's fair enough.

A couple more questions from me, I guess, again, on 100-gig.

I just want to clarify that you're not including 100-gig in your data center revenue growth number.

I think you said 45% this year, is that correct?

That's correct.

Okay, good.

I just want to make sure.

Actually, two more questions from me.

Any thoughts on how we can think about CapEx spending for this year?

Yes.

We haven't given any guidance on CapEx for the year.

We did, obviously, spend a little more than we expected on CapEx, especially in the fourth quarter.

And I think that, as Thompson mentioned, we are working very hard to ramp up our internal production capacity to be a viable second source for some of these components, and I think that represents a lot of the spending that we did in the fourth quarter.

We will continue to invest in R&D, in particular, and production equipment as the orders come in and as we see visibility into those.

So I would expect that we're going to continue to spend there.

I would also remind you that we are building the new building here, so it's going to be a CapEx-intensive year.

But I wouldn't expect, if you take out the building expenses and other things, that it's going to be vastly more expensive in terms of equipment and machinery than it was last year.

Okay.

That's a good sense.

Thanks for that.

Just last quick question, again, on data center.

Obviously, you're going to have or expect to have a good year in 40-gig, but how about 10-gig this year, is that something that's going to be a growth driver for you?

Or how should we think about that?

Well, I wouldn't say it's going to be a growth driver.

It's also not going to fall off a cliff either.

I think there's a lot of demand for the 10-gig --

Stefan, can I rephrase?

Sure, go ahead.

Do you expect 10-gig to grow this year?

Overall, in the data center, I would say no.

We do have some other applications for 10-gig that perhaps could offset that.

But to be honest, I'd have to go back and add those two together to see if it's representing an overall growth or not.

Okay.

That's a fair way to characterize that.

I appreciate that.

I think that's all questions for me.

Thanks a lot, guys.

Okay, thank you.

And that is all the time we have for questions today.

I'll turn the conference over to Thompson Lin for any additional or closing remarks.

Okay.

Thank you for joining us today.

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

As always, we thank our investors, customers, and employees for your strong support.

This concludes today's presentation.

Thank you for your participation.