As you’ll recall last quarter, AOI (Nasdaq: AAOI) missed earnings due to orders getting pushed out to Q4. Therefore, it was quite important that AOI meet expectations following the delay. The company’s revenue grew 34% YoY and 13% QoQ and guided to grow 58% YoY and 17% QoQ for Q1. Of this, data center inflected with growth of 69% YoY and 70% QoQ. Suffice to say, AOI met the bar set for the company with momentum headed into 2026.
During the call, management focused on detailing the ramp for 800G and 1.6T with targets shared through mid-2027. The forecast implies that AOI’s optical attach per unit of compute is rising as network sizes increase to include more lanes and more links. For example, the 800G era is widely expected to require record ports, resulting in higher revenue for optical networking companies. The industry is shifting from 400G to 800G with 1.6T on the roadmap as throughput becomes more critical with the incoming inference phase.
Management also offered details on how much of their supply is internal and their customer list has increased from one major customer to now two major customers.
$1 Billion Targets for 2026 and Updated Target for Mid-2027
Management offered a forecast for mid-2027 of $378 million per month with the framework of 800G being the bulk of the revenue, 1.6T contributing and some 100G/400G content contributing yet the lowest of the mix. Importantly, management framed this discussion as being capacity-constrained rather than demand-constrained. In the more near-term, management guided for $1 billion in 2026 revenue with $120 million in adjusted operating profit.
The following was stated in the opening remarks:
“Given the recent surge in customer inquiries and apparent rising demand, we believe that by mid-2027, 100G and 400G revenue will be approximately $90 million. 800G revenue will be approximately $217 million and 1.6 terabit revenue will be approximately $71 million monthly. Altogether, this represents $378 million in monthly revenue for transceiver products.”
The company also stated they expect $1 billion in revenue this year compared to analyst estimates that are just shy of $764 million: “Looking more broadly at 2026. While it's still early in the year, we expect to generate over $1 billion in revenue this year, with a non-GAAP operating profit of over $120 million. This revenue level is limited by our production capacity and supply chain, not market demand, which we believe is much larger.”
Capacity is Expanding and Customer List Ticks Upward
At the end of 2025, the company was producing 90,000 units per month of 800G capacity with 31% of that production based in the United States. Therefore, a sizable amount of AOI’s revenue could be subject to tariffs should that surface again in the news.
The company’s U.S. footprint is cantered in Texas with an additional facility recently leased to support 2026 goals. The goal is to end the year producing 500,000+ units per month of 800G and 1.6T combined, with roughly one-quarter of output coming from Texas.
“During the fourth quarter, we announced that we signed an agreement to lease an additional building in Sugar Land. We began construction on this new facility earlier this month and are working hard to scale our production towards the middle end of this year to achieve our 2026 targets. Looking further ahead, we expect that by the end of this year, we will be capable of producing over 500,000 pieces of 800G and 1.6 terabit products per month with about 1/4 of that output coming from Texas as we expand into additional facility space and bring new production online. These investments reflect measured scaling of our footprint while aligning with strong and growing customer demand and qualification progress across both 800G and 1.6 terabit products.”
The majority of 2026 is expected to be driven by two hyperscaler customers, up from one major customer previously – with a third customer also soon contributing to revenue:
“Stefan Murry CFO & Chief Strategy Officer
So if you break down the revenue, right, if you just take a round number of $1 billion, right? So track the [ 300-ish ] that we have in cable TV, that gives you $700 million-ish left over. Right now, I would expect that's going to be dominated by — most of that is going to be 2 large hyperscale customers. And they'll probably be roughly equivalent exiting the year. We'll see how that plays out. That's — it's pretty early to say exactly how the timing on that is going to go. But I would expect at least 2 to be sort of comparable in size, let's put it that way. And then obviously, the third one that would be smaller in scale, still significant.”
Tariffs in the Background for Now
Although tariffs are in the background for now, it’s important to emphasize that AOI is impacted by tariffs. For example, the CEO disclosed that AOI paid $4.6M in tariffs last quarter and $7-$8 million in tariffs last year.
“Stefan Murry CFO & Chief Strategy Officer
I mean, sorry, if we could recoup all of it, we had about $4.6 million, I believe, just last quarter in tariffs. We probably paid last year $7 million or $8 million in tariffs overall. Again, we're still analyzing exactly how many of those are IEEPA related, not all tariffs that way. So there's a lot of nuance there, but I mean it's not going to dramatically change our picture, but — but it certainly would be a welcome cash flow development for sure.”
Any tariffs will increase as the company scales, although the company is also trying to onshore as much of its production as possible, with management stating: “[…] So the more — as time goes on, the more we can manufacture in the U.S. and the more that we can attract other supply chain partners, which we are doing to move their production to the U.S. as well. that will help us in the long term, that's going to be the solution for really minimize the tariff impact.”
Financials
By Royston Roche
2026 Revenue Guided over $1 Billion
Applied Optoelectronics (AOI) Q4 revenue grew by 33.9% YoY and 13.2% QoQ to $134.3 million, beating estimates by 4.7%. The revenue growth was primarily driven by strong data center revenue which grew by 69.2% YoY and 70.4% QoQ to $74.9 million.
During the quarter, the company also announced that they received the fourth 800G volume order from one of their major hyperscale customer to support its AI data center growth, which is likely to be Amazon. AOI has begun ramping up production of this 800G module in anticipation of a strong volume ramp starting in Q2. Management also mentioned in the earnings call that they are in discussion with a new hyperscale customer about qualifying for 800G and 1.6T products and sounded confident about the growth trajectory in both these products with multiple customers.
Management also provided a strong Q1 revenue guide of $150 million to $165 million, implying a YoY growth of 57.7% and 17.3% QoQ at the midpoint. The strong Q1 revenue growth is led by sequential revenue growth in both CATV and data center revenue.
The company’s 2025 revenue grew by a solid 82.8% YoY to $455.7 million. Management expects strong revenue growth to continue in the coming years and guided 2026 revenue of over $1 billion, implying a 119% YoY growth, beating estimates by 31%. The company’s CFO, Stefan Murry, said in the earnings call, “Looking more broadly at 2026. While it's still early in the year, we expect to generate over $1 billion in revenue this year, with a non-GAAP operating profit of over $120 million. This revenue level is limited by our production capacity and supply chain, not market demand, which we believe is much larger.”
AOI has also witnessed a surge in customer inquiries due to the strong AI datacenter demand. Management believes that by mid-2027, 100G and 400G revenue will be about $90 million. While 800G revenue of about $217 million and 1.6 terabit revenue of $71 million monthly, totalling $378 million in monthly revenue for transceiver products. Management also believes that the customer demand is even larger than this. To accommodate this expected surge in demand, AOI is planning to more than triple the laser manufacturing in Texas.
Key Segments
Data Center Revenue Growth of 69% YoY and 70% QoQ
The company’s Q4 data center revenue grew by 69.2% YoY and 70.4% QoQ to $74.9 million. The revenue growth sharply accelerated from 7.3% YoY and decline of (1.9%) QoQ in Q3. Revenue of 100G products grew by 54% YoY and 400G products grew by 141% YoY. 100G products accounted for 51% of data center revenue, 200G and 400G transceiver products accounted for 41%, and 8% was from 10G and 40G transceiver products.
CATV Revenue
The company’s Q4 CATV (Cable TV) revenue grew by 3.4% YoY and down (23.5%) QoQ to $54 million. Though there was a sharp deceleration from a record 237.1% YoY and 26.1% QoQ growth to $70.6 million in Q3, the revenue came close to the higher end range of the guidance of $50 million to $55 million. Management expects CATV revenue to be between $61 million and $67 million in Q1, implying a decline of (0.8%) YoY and 18.5% QoQ growth. While the vast majority of the CATV revenue expectations for 2026 are related to the amplifiers, management expects that they will generate some revenue from the software solutions this year. Also, the company’s QuantumLink software suite has the potential of generating $300 million in annual revenue.
Telecom/Other Revenue
Q4 telecom revenue grew by 44.6% YoY and 36.6% QoQ to $5.1 million. While the other revenue grew by 2.2% YoY and down (18.8%) QoQ to $0.29 million.
Non-GAAP Profitability expected in Q2
AOI has witnessed a turnaround in margins and expects to be sustainable profitable on an adjusted basis from Q2 driven by the shift to higher margin revenue, operational efficiencies, and leverage.
- The company’s Q4 gross profits grew by 46% YoY to $41.95 million. Gross profit margin improved by 250 basis points YoY and 320 basis points QoQ to 31.2%. Adjusted gross margins improved by 250 basis points YoY and 40 basis points sequentially to 31.4%, beating the guidance of 30%.
- The improvement in gross margins was primarily due to the favorable product mix and cost reduction efforts. Management expects gradual improvement in gross margins, although they expect data center revenue in the next few quarters to be slight headwind. They are confident to achieve the long-term adjusted gross margin target of 40% due to the shift towards higher margin products and operational efficiencies. For Q1, management has guided adjusted gross margin of 30%, down 70 basis points YoY and 140 basis points QoQ.
- Q4 operating margin was (8.6%) compared to (6.5%) in the same period last year and (15.3%) in the previous quarter. Adjusted operating margin was (5.3%) compared to (2.5%) in the same period last year and (8.7%) in the previous quarter. Management has guided adjusted operating margin of (4%) in Q1, an improvement of 80 basis points YoY and 130 basis points QoQ.
- Q4 adjusted net income was ($0.6 million) or (0.5%) of revenue compared to ($1.05 million) or (1%) of revenue in the same period last year. It was better than the guide of ($5.9 million) or (4.5%) of revenue. Management has guided Q1 adjusted net income of ($3.35 million) or (2.1%) of revenue.
- 2025 gross margin improved by 520 basis points YoY to 30%.
- Operating margin improved by 16.4 percentage points YoY to (12%). Adjusted operating margin improved by 11.9 percentage points YoY to (7.2%). Looking ahead, management guide implies adjusted operating margin to further improve by a solid 19.2 percentage points to 12%.
- Adjusted net margin showed an improvement of 960 basis points YoY to (3.5%).
Adjusted EPS beat of 91%
The company’s Q4 GAAP EPS came at ($0.03), beating estimates by $0.12. While the adjusted EPS came at ($0.01), beating estimates by 91%. Management has guided adjusted EPS of ($0.09) to break even in Q1, which is in-line with the estimates of ($0.05) at the midpoint. Analysts expect adjusted EPS to improve to $0.13 in Q2 and $0.28 in Q3.
Cash Flow and Balance Sheet
The company’s cash flows have been weak. However, with improved profitability expected in the coming quarters we could expect cash flows to improve.
- Q4 operating cash outflow was ($29.6 million) or (22%) of revenue compared to (24.6%) in the same period last year.
- Q4 free cash outflow was ($113.6 million) or (84.6%) of revenue compared to ($53.1 million) or (53%) of revenue in the same period last year. To support the strong expected growth capex grew by 227% YoY to $84 million in Q4.
- Cash and short-term investments were $216 million and debt of $197.2 million at the end of Q4 2025. The company also announced an equity offering of $250 million after the announcement of Q4 results.
- Inventories rose 7.6% QoQ to $183.1 million in Q4.
Conclusion
AOI’s report marked an important inflection that shows the company can execute following last quarter’s pushout. Management laid out visibility for 2026 and into mid-2027 as they seek to quickly increase capacity. It’s clear by the hour-long commentary in the call that the company is capacity and supply-chain constrained rather than demand constrained. Importantly, customer concentration is improving with a second major customer contributing in 2026 and a third on the way.
Risks remain – such as tariff exposure and heavy capex cadence, especially since cash flows have been pressured as the company invests ahead of demand. If AOI can execute on the additional capacity, and sustain margins, then it has a strong, credible path to scale alongside the incoming 800G and 1.6T cycle.
Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in AAOI at the time of writing and may own stocks pictured in the charts.
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