Q3 2023 Applied Optoelectronics Inc Earnings Call
Participants
Chih-Hsiang Lin; Founder, Chairman of the Board, President & CEO; Applied Optoelectronics, Inc.
Lindsay Grant Savarese; IR; Applied Optoelectronics, Inc.
Stefan J. Murry; CFO & Chief Strategy Officer; Applied Optoelectronics, Inc.
Jeffrey Robert Koche; Senior Research Associate; Raymond James & Associates, Inc., Research Division
Ku Kang; Senior Research Analyst of Optical Components; B. Riley Securities, Inc., Research Division
Timothy Paul Savageaux; MD & Senior Research Analyst; Northland Capital Markets, Research Division
Presentation
Operator
Good afternoon. I will be your conference operator. At this time, I would like to welcome everyone to Applied Optoelectronics' Third Quarter 2023 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.
I will now turn the call over to Lindsay Savarese, Investor Relations for AOI. Ms. Savarese, you may begin.
Lindsay Grant Savarese
Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics. I am pleased to welcome you to AOI's Third Quarter 2023 Financial Results Conference Call.
After the market closed today, AOI issued a press release announcing its third quarter 2023 financial results and provided its outlook for the fourth quarter of 2023. 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 1 year.
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 the outlook for the fourth quarter of 2023. 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 terminologies such as believes, forecasts, anticipates, estimates, suggest, intends, predicts, expects, plans, may, should, could, would, will, potential or think 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 our products into new markets and customer responses to our innovation as well as statements regarding the company's outlook for the fourth quarter of 2023. Except as required by 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 it 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 reports on file with the SEC, including the company's annual report on Form 10-K for the year ended December 31, 2022, and the company's quarterly report on Form 10-Q for the quarter ended September 30, 2023.
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 or 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 are included in our earnings press release that is available on our website.
I'd like to note the date of our fourth quarter and full year earnings call is currently scheduled for February 22, 2024.
Now I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics' Founder, Chairman and CEO. Thompson?
Chih-Hsiang Lin
Thank you, Lindsay, and thank you for joining our call today. Our third quarter revenue and non-GAAP EPS were in line with our expectations, while our non-GAAP gross margin was better than our expectations. We are pleased by the continued progress we have made on improving our gross margin and by the continued strong growth we saw for our 100G and 400G products in our datacenter business during Q3. The combination of revenue growth and improving gross margins allow us to generate $3 million in adjusted EBITDA during the quarter.
During the third quarter, we delivered revenue of $62.5 million which was within our guidance range of $60 million to $66 million. We delivered non-GAAP gross margin of 32.5%, above our guidance range of 29.5% to 31%, mainly driven by a favorable product mix shift and contribution from revenue recognized as part of our nonrecurring revenue from Microsoft.
Our non-GAAP loss per share was $0.05 which was within our guidance range of a loss of $0.06 to earnings of $0.01. Our revenue in our CATV segment was $10.3 million, down 67% year-over-year and up 10% sequentially, in line with our expectations. Total revenue for our datacenter products of $48.8 million more than doubled year-over-year and increased 77% sequentially, largely due to increased demand for our 100G and 400G products as we continue to see the run-up of our 400G products.
Revenue for our 100G products nearly tripled year-over-year while revenue for our 400G products increased more than 10x in the same period.
With that, I will turn the call over to Stefan to review the details of our Q3 performance and outlook for Q4. Stefan?
Stefan J. Murry
Thank you, Thompson. As Thompson mentioned, our third quarter revenue and non-GAAP EPS were in line with our expectations while our non-GAAP gross margin was better than our expectations. We are pleased by the continued progress we have made on improving our gross margin and by the continued strong demand we saw for our 100G and 400G products in our datacenter business during Q3. The combination of revenue growth and improving gross margin, allowed us to generate $3 million in adjusted EBITDA during the quarter.
Before turning to discuss our detailed results and outlook, I want to provide an update on the sale of our manufacturing facilities located in the People's Republic of China and certain assets related to our transceiver business and multichannel optical subassembly products for the Internet datacenter, fiber-to-the-home and telecom markets.
On September 12, 2023, we announced the termination of our purchase agreement with Yuhan Optoelectronic Technology. This decision was based on Yuhan's failure to meet agreed upon deadlines, and we lost confidence in their ability to complete the transaction. We are exploring additional options with new potential buyers.
Turning to the quarter. Our total revenue for the third quarter increased 10% year-over-year to $62.5 million, which was in line with our guidance range of $60 million to $66 million. As Thompson mentioned, the increase in revenue was largely due to growth of our 100G and 400G datacenter business.
During the third quarter, 78% of our revenue was from our datacenter products, 16% was from our CATV products with the remaining 6% from FTTH, telecom and other. In line with our expectations, CATV revenue in the third quarter was $10.3 million, which was down 67% year-over-year and up 10% sequentially. We are encouraged by the sequential growth that we saw in our CATV business in Q3.
Looking forward, we continue to expect that our near-term CATV business will be down compared to the historic highs we saw in 2021 and 2022 as the MSOs transition to next-generation architecture. We anticipate this transition will begin to take place in 2024.
Looking further ahead, we continue to carefully monitor MSO plans to move to DOCSIS 4.0 networks. And we continue to believe AOI is a leader in technologies that will enable DOCSIS 4.0 and that our products are well suited for when the push to install amplifiers and other network elements for DOCSIS 4.0 begins.
In line with our new strategy of directly selling to the MSOs, we have continued to expand our product portfolio. Just last month, we announced the launch of QuantumLink, the latest solution within our Quantum Bandwidth line of products, designed to provide remote management and monitoring of cable amplifiers that we believe will reshape the cable broadband market. Operators using QuantumLink will now have the ability to remotely manage cable broadband amplifiers, ushering in a new era of efficiency, convenience and enhanced service quality for our customers.
Last month, we attended the Society of Cable Telecommunications Engineering Expo, or SCTE, where we demonstrated our complete line of Quantum Bandwidth products, including various amplifiers and the QuantumLink control solution I mentioned above. We've received very positive reactions from many of our customers. They are particularly interested in our QuantumLink solution, which several customers have asked to become a standard for the CATV industry. We are pursuing the standardization with CableLabs and anticipate that this technology may be chosen by MSOs as their preferred control architecture for their upcoming deployments.
Lastly, and in line with our new strategy, we are pleased to have secured a distribution relationship with Digicomm, a stocking distributor. Digicomm will be an exclusive go-to-market supplier of our Quantum12, high-gain balanced triple and high-gain dual system amplifiers and line extenders. This relationship enables customers to receive the latest network equipment with the same quality and performance they expect while providing the industry's best product delivery lead times.
Turning to our datacenter business. Our Q3 datacenter revenue came in at $48.8 million, which more than doubled year-over-year and was up 77% sequentially, largely due to increased demand for our 100G and 400G products as our customers continue to purchase our existing products. In the third quarter, 74% of our datacenter revenue was from our 100G products, 13% was from our 200G and 400G transceiver products and 7% was from our 40G transceiver products.
Notably, revenue for our 100G products increased 75% sequentially while revenue for our 400G products increased 74% sequentially and accounted for just under 11% of our total datacenter revenue in Q3. Looking ahead, we're encouraged by the strong demand we have been seeing and we expect Q4 to be similar to Q3.
As a reminder, as we have discussed on our prior couple of earnings calls, we signed 2 agreements with Microsoft earlier this year, including a development program to make next-generation lasers for its datacenter, both for 400G and beyond and for the development of their 400G and next-generation active optical cables. While not guaranteed, we continue to believe that the revenue opportunity for our 400G and 800G products could be greater and a longer duration than the revenue contribution we saw from this customer during the peak of the 40G product cycle, which suggests that revenue from these products may exceed $300 million over the several years of these buildouts.
During the quarter, we received a request from Microsoft to expedite our production ramp for these products, which we are attempting to accommodate. Based on these expedite requests, we believe demand for these products remain strong and our production teams are working very hard to add capacity for this production, which we now expect will allow us to begin shipments later this month rather than in late December as originally planned.
Notably, the revenue increase we saw from Microsoft this quarter is for mostly existing products. As I just mentioned, we still expect to begin shipping initial quantities of the products related to these new agreements to Microsoft by the end of this month for their testing, and believe that production will begin to ramp in December. We also believe that the value proposition that we offer to Microsoft is just as strong with other datacenter operators, and we are working with several of them to evaluate our technology and qualify our products.
This includes our 800G products. During the quarter, we shipped samples of our 800G datacenter products to 2 different customers. By the end of the year, we expect to ship samples of 800G products to 2 additional datacenter customers. This would bring our total to 4 different datacenter customers who would be evaluating our 800G products by year-end.
Now turning to our telecom segment. Revenue from our telecom products of $3 million was down 55% year-over-year and down 27% sequentially, largely driven by softness in 5G demand, particularly in China. Looking ahead, we expect telecom sales to fluctuate around current levels.
For the third quarter, our top 10 customers represented 96% of revenue, up from 86% in Q3 of last year. We had 2 greater than 10% customers, 1 in the datacenter market and 1 in the CATV market, which contributed 64% and 12% of our total revenue, respectively.
In Q3, we generated non-GAAP gross margin of 32.5%, which was above our guidance range of 29.5% to 31% and was up from 24.8% in Q2 of 2023 and up from 18% in Q3 of 2022. The increase in gross margin was driven mainly by our favorable product mix shift and contribution from revenue recognized as part of our nonrecurring revenue from Microsoft. We remain committed to the long-term goal of returning gross margin to around 40% and believe that this goal is achievable.
Total non-GAAP operating expenses in the third quarter were $21.4 million or 34.2% of revenue, which compared to $19.4 million or 34.3% of revenue in Q3 of the prior year, largely driven by increasing legal costs, increased shipping costs commensurate with our increased revenue and increased marketing spend to promote our CATV products. Looking ahead, we expect non-GAAP operating expenses to range from $21 million to $23 million per quarter.
Non-GAAP operating loss in the third quarter was $1 million compared to an operating loss of $9.3 million in Q3 in the prior year. GAAP net loss for Q3 was $9 million or a loss of $0.27 per basic share compared with a GAAP net loss of $15.6 million or a loss of $0.56 per basic share in Q3 of 2022.
On a non-GAAP basis, net loss for Q3 was $1.7 million, or a loss of $0.05 per basic share, which was in line with our guidance range of a loss of $1.9 million to a profit of $0.2 million or a loss per share in the range of $0.06 to earnings of $0.01 per basic share and compares to a net loss of $7.1 million or a loss of $0.26 per basic share in Q3 of the prior year. The basic shares outstanding used for computing the net loss in Q3 were 32.8 million.
Turning now to the balance sheet. We ended the third quarter with $31.2 million in total cash, cash equivalents, short-term investments and restricted cash. This compares with $28.6 million at the end of the second quarter of this year. We ended the quarter with total debt, excluding convertible debt of $46.6 million, down slightly from $46.9 million at the end of last quarter.
As of September 30, we had $67.5 million in inventory compared to $66.3 million at the end of Q2. We made a total of $2.1 million in capital investments in the third quarter, which was mainly used for production and R&D equipment. As we disclosed in March, we initiated a new at-the-market offering. To date, we have raised $43.1 million net of commissions and fees under this new program, including $22 million raised in Q3 and $11.2 million raised after the end of the quarter.
Moving now to our Q4 outlook. We expect Q4 revenue to be between $63 million and $67 million, and non-GAAP gross margin to be in the range of 34.5% to 36%. Non-GAAP net income is expected to be in the range of a loss of $0.9 million to income of $1.2 million and non-GAAP income between a loss of $0.02 per basic share and income of $0.04 per basic share, using a weighted average basic share count of approximately 35.1 million shares.
With that, I will turn it back over to the operator for the Q&A session. Operator?
Question and Answer Session
Operator
(Operator Instructions) The first question comes from Jeff Koche with Raymond James.
Jeffrey Robert Koche
Yes. In for Simon. Just really quickly on the Microsoft income that's nonrecurring. Can you talk about -- maybe quantify it for the quarter and like what's built in for guidance and how we should think about that relative to the ramp would be helpful.
Stefan J. Murry
Yes. Well, I can't comment on the exact amount of nonrecurring engineering costs that would be covered under our nondisclosure agreement with Microsoft. So it was not the primary contributor to the increase in gross margin, however. It wasn't noted.
Jeffrey Robert Koche
Okay. Great. And then maybe you can just give some color on the segments, like kind of how you're thinking about some of the other segments going into December? Yes, just start there.
Stefan J. Murry
Well, as we noted there -- sure. Yes. So as we noted, we're pretty excited about the progress that we're making on the datacenter business. As we mentioned, Microsoft is accelerating their demand for the new products that we've been discussing based on the new contracts that we have. And that's really positive for us. I mean there's a limit to how fast we can speed up the production, of course. So it's not going to dramatically change our revenue picture in the fourth quarter, but we're encouraged by the increase in demand that we're seeing.
We're also really encouraged by the progress that we've made on 800G. As we noted, we've sampled that already to several customers, and we expect to sample it to several more customers before year-end. So we're really excited about both of those, the progress that we're making on that front.
On the cable TV side of things, we did have -- as you've seen from the other companies that have reported already, the situation in cable right now across the board is muted compared to where it was a year or 2 ago, for sure. But we're encouraged by the sequential uptick in revenue there. And the progress that we've made in terms of our new model of selling directly to the MSOs and the acceptance that the MSOs have had of our new technologies like QuantumLink, which we talked about in the prepared remarks earlier, has been really phenomenal. And we're really, really excited about the progress that we've made there as well.
So those 2 segments, I think, obviously account for the vast majority of our business. The telecom market will be somewhat muted. As we noted, the 5G business in China has been relatively slow, and I don't necessarily see a recovery of that in the short term, at least. But certainly, the 2 business segments that account for the vast majority of our revenue are both heading in the right direction.
Jeffrey Robert Koche
So could you see cable TV -- sequentially into December? Or do you think that we continue to see sequential growth? And then is it -- when do you see an inflection there from -- like you were saying, is that for DOCSIS 4.0, is that more '24?
Stefan J. Murry
Right. So you're cutting in and out there a little bit, but I think I understood your question to be on cable TV. Do we expect to see some sequential growth into Q4. And I think you could tell from the guide, we don't expect like dramatic growth in cable, but there's probably some opportunity for some growth there. As we discussed, the cable market will recover -- or we expect the cable market to recover substantially during the DOCSIS 4.0 introduction, which will happen in the middle part of next year.
In the meantime, we are seeing some customers that are finally starting to burn through their inventory of DOCSIS 3.1 products, the 1.2 gigahertz. So I expect to see some sort of modest improvement there, but the dramatic uptick that we expect to see will be with DOCSIS 4.0 in the middle part of next year.
Chih-Hsiang Lin
Yes. So basically -- this is Thompson. We believe CATV, we can see very, very strong growth in next year from, I would say, the end of Q2 or sometime in Q3 next year. And more important, the gross margin will be much better. That's the key. It's not (inaudible), it's gross margin improvement.
Operator
(Operator Instructions) The next question comes from Tim Savageaux with Northland Capital Markets.
Timothy Paul Savageaux
Congrats on the results and the positive EBITDA in particular. I have a question about the kind of pull in that we're seeing from Microsoft in terms of 400 gig AOC type demands. And I guess one would be, to what extent is that a factor in your guidance for Q4? And I assume, given you're ramping up production this month and through December, that looks like to set you up for a full quarter of production, perhaps in Q1. And I'd love if you can give us a sense of what that looks like for you guys from a revenue standpoint? Or what might that look like.
Stefan J. Murry
Sure. So your question about Q4, I think, is -- the answer to that is that we're just beginning the production in Q4. So we don't expect it to meaningfully contribute to revenue in Q4. The reason for the commentary that we've been giving is just to illustrate the fact that the demand is still very strong for Microsoft. And in fact, I believe from other datacenter operators as well as we talked about.
However, our ability to increase the production capacity is -- we're doing the best that we can, but it's going to take us a little bit of time to get there, right? So we're not going to be fully ramped right at the beginning of Q1 either. There'll be some continued ramp during Q1. And in fact, based on the production targets that they've asked us to meet, there will be some increasing production capacity pretty much throughout next year. It's not going to be done in a month or even a quarter. So there'll be some improvement throughout the year in terms of our capacity there. The encouraging thing for us really is, again, that Microsoft is really looking for us to make these products in greater quantities faster and that's an exciting thing for us.
With respect to exactly how much will be in Q1, we haven't given guidance for Q1 yet. A lot will depend on the progress that we make over the next month or 2. But certainly, we believe this is incrementally positive in terms of timing and our overall production rate into Q1, and we're excited about that.
Timothy Paul Savageaux
Great. Wanted to follow up on the 800 gig front where you noticed some progress in terms of customer samples, and realizing you're probably in pretty early stages, but are you at a point -- or when do you think, pending customer evaluation of these products, is this something that could start to ship in calendar '24?
Stefan J. Murry
Yes.
Timothy Paul Savageaux
Okay. That was pretty clear. And then I'll try again then, which is -- or further, which is any sense of timing on that within calendar '24?
Stefan J. Murry
That, I think is a little too early to say right now. As you pointed out, I mean, we're in early stages on it. I would say the demand picture for 800G looks pretty strong, and we're certainly having very constructive discussions with the customers. But how long it will take and the qualification process and that is a little too early to say, but I do expect it to be in 2024.
Chih-Hsiang Lin
Yes. So maybe sometime in Q2 or Q3 next year. [But we will require] cash and it will take easily 4 to 6 months or longer. But the other thing that I want to emphasize is we are working very close with several big customer about 1.6T with 200 gig per lambda, and I believe we are the technology leader. And I think the demand will be very strong to maybe from Q3, Q4 next year. So it's only 800G. There's a lot of thing going on for the datacenter, the high-speed transceiver technology because of AI. The AI [theme] is really, really strong. So that's why we are jumping right now, not only from the 100G to 400G, in [volume] and we say hardly, we can do the volume sometime next year, Q2, Q3, but even 1.6T, we would -- would be we start to see some volume, too, in Q4 next year.
Timothy Paul Savageaux
Got it. And let's stay on this topic for a second. And Stefan, you described 4 customers evaluating the products. Can you give us any indications of the type of customers those might be, large cloud operators, networking OEMs, what have you?
Stefan J. Murry
Mostly large cloud operators with at least 1 OEM that supplies some of the large cloud operators. So it's all cloud -- it's all hyperscale cloud related, whether it's directly or through an OEM that would supply.
Chih-Hsiang Lin
And 1 big AI company. You know what I'm talking about. But I don't identify it. It's not the core operator, but it's really -- maybe they will become their #1 customer in the world (inaudible) transceiver.
Timothy Paul Savageaux
Okay. Great. And last one for me and maybe kind of related to that, I mean, can you give us a sense of kind of -- I don't know whether it's unit volumes or revenue dollars, but how do you assess the kind of total opportunity for AI-related, we would call it transceivers or AOCs? And how has that assessment of market opportunity evolve for you guys over the past quarter or so?
Chih-Hsiang Lin
The number sounds crazy, okay? What we heard is the way under the -- I think we are talking about maybe at minimum 6 to 8 million volume with very good ASP, more than $600 or $700, so you can see opportunity next year. But that will be in that process next year. And some people even come up to me, they don't (inaudible). That's why I see -- I'll be very happy if this is true, that's why we are putting our resource into 800G and the 1.6T business. 400G have been we are very [committed]. That's the value we exist in. The volume is coming up for sure, but really the big jump is 800G and 1.6T for AI-related business. And that's what we heard from the customers.
Operator
The next question is from Dave Kang with B. Riley FBR.
Ku Kang
First question is on cable TV. So you said by middle of next year, we should be expecting very strong recovery. So are we talking about like prior peak of, like, say, $30 million or so per quarter? Is that what we should be expecting or not quite there yet?
Stefan J. Murry
I mean without putting a specific quarter on it, yes, certainly, the expectation is that we can exceed the prior peak levels because at that point, we weren't really in even an upgrade cycle, right? It was just a sort of a business as usual case. As we move into an upgrade cycle, which is what we think will happen that portends the growth in DOCSIS 4.0, I would say the opportunity there is significantly larger than the previous peak for sure.
Not to mention the fact that because of the business model change, our ASPs are going to be higher because we're not selling through a middleman essentially. And so not only we'll have higher unit demand, but ASPs will be higher as well.
Chih-Hsiang Lin
Let me say that -- I will say by Q4 next year, our CATV business should be, I would say more than $40 million in Q4 next year, which -- very good gross margin. I would say, around 40%.
Ku Kang
Okay. And then just on the datacenter, 100 gig, a little surprised why that was so strong because others are saying it's really 800 gig that's enjoying strong demand, whereas 100 gig, which is not really considered to be a part of AI, 100 gig is weak. So are you just gaining market share? And how should we think about going forward, should we be expecting 100 gig to be flat and eventually -- say, can you just talk about the next -- what you expect over the next couple of years?
Stefan J. Murry
Sure. So I think in 100 gig, we're taking market share. I think there's been some increase in purchasing with maybe a couple of customers, but I think we're gaining market share there. We've talked about some of the dynamics, for example, that being a U.S.-based manufacturer gives us some advantages there in terms of being able to attract, I would say, more interest maybe than in the past relative to some of our competition in China. And that's helpful for us in gaining this market share.
As far as how that plays out in the future, I mean -- I think, look, what we saw at 40 gig is that the older technology has a very long tail. I mean it's -- it lasts a long time, and that's what I expect with 100 gig as well. I mean I think that eventually, 100 gig will decline as 400 gig begins to grow but I don't think it's going to be dramatic. I mean I kind of feel like we tell the same story every time there's a technology transition, right? Wall Street tends to think, well, one technology comes on and the other one goes away immediately. And we always try to caution that, no, that's not what happens, right? It's a gradual shift.
The new technology tends to come on relatively quickly, but the old one tends to last a long time because there's already a number of switches, for example, that are out there that haven't been fully populated yet. They're going to fill out those ports and those switches. And that portends a long period of, I would say, relatively flattish, maybe down slightly, but relatively flattish demand. So I would caution not to remove 100 gig from the picture as quickly as you might be tempted to.
Ku Kang
Got it. And just wanted to clarify, did you say that for -- regarding fourth quarter, expect similar revenue mix with third quarter? Did I hear that right?
Stefan J. Murry
We're just saying that the datacenter portion of it will be consistent with Q3, right?
Chih-Hsiang Lin
No, but -- yes. We can see some growth but the mix will be different, because we can see in much more 400G than 100G. But actually, they're not the same. It's that one G will grow a lot, but one G will go down.
Ku Kang
Got it. And my last question is regarding the termination, the fee of $3 million, who is responsible for that?
Stefan J. Murry
We believe that Yuhan is responsible for the breakup fee. We're pursuing them for the payment of that.
Operator
Next, we have a follow-up question from Jeff Koche with Raymond James.
Jeffrey Robert Koche
Yes. Just really quickly, I just want to talk about your thoughts on datacenter going into March. Is it ridiculous to think that you could be up sequentially again? I know historically, that's not the strongest seasonally?
Stefan J. Murry
I mean I think it's not ridiculous to think because, again, the 400-gig business that we're talking about, the new programs with Microsoft will be ramping during the quarter. So you're correct historically that ordinarily Q1 is sort of a challenging quarter, just seasonally. A large part of that is because historically, most of our datacenter products have been made in China, and we do have Chinese New Year, both in China and Taiwan. In this case, we're producing more of these products in Taiwan and even in the U.S. And so the impact of Lunar New Year should be less for us. That, in combination with the fact that the 400 gig will be ramping in terms of production capacity, paints a pretty good picture in the March quarter for us, I think.
Operator
At this time, we have no further questions. And I will turn the call over to Dr. Thompson Lin, AOI's Founder, Chairman and CEO, for closing remarks.
Chih-Hsiang Lin
Again, thank you for joining us today. As always, we want to extend a thank you to our investors, customers and employees for their continuous support. We look forward to updating you on our next earnings call.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
