Q4 2023 Applied Optoelectronics Inc Earnings Call
Participants
Lindsay Savarese; Investor Relations; Applied Optoelectronics Inc
Thompson Lin; Founder, Chairman, President & Chief Executive Officer; Applied Optoelectronics Inc
Stefan Murry; Chief Financial Officer & Chief Strategy Officer; Applied Optoelectronics Inc
Simon Leopold; Analyst; Raymond James
Michael Genovese; Analyst; Rosenblatt Securities
Tim Savageaux; Analyst; Northland Securities
Dave Kang; Analyst; B. Riley Securities
Presentation
Operator
Good afternoon, I will be your conference operator. At this time, I would like to welcome everyone to Applied Optoelectronics' fourth quarter and full-year 2023 earnings conference call. (Operator Instructions)
Please note this call is being recorded. I would now like to turn the call over to Lindsay Savarese, Investor Relations for AOI. Ms. Savarese, please, you may begin.
Lindsay Savarese
Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics. I'm pleased to welcome you to AOI's fourth quarter and full-year 2023 financial results conference call. After the market closed today, AOI issued a press release announcing its fourth quarter and full-year 2023 financial results and provided its outlook for the first quarter of 2024. 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 AOI website and will be archived for one year.
Joining us on today's call is Dr. Thompson Lin, AOI's Founder, Chairman, and CEO; and Dr. Stefan Murry, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q4 results, and Stefan will provide financial details and outlook for the first quarter of 2024. 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 statements. On today's call, management will make forward-looking statements. This forward 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, forecast, anticipates, estimates, suggests, intends, predicts, expects, plans, may, should, could, would, will, potential or thinks, or by the negative of those terms or other similar expressions that convey uncertainty for future events or outcomes.
The company has based these forward-looking statements on its current expectations, assumption, estimates, and projection. 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 first quarter of 2024. 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 the 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 reports on file with the SEC, including the company's annual report on Form 10-K and the company's quarterly report on Form 10-Q.
Also, all financial results and other financial measures discussed today are on a non-GAAP basis unless specifically noted otherwise. Non-GAAP financial measures are not intended to be considered in isolation 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 first-quarter 2024 earnings call is currently scheduled for May 9, 2024.
Now, I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics' Founder, Chairman, and CEO. Thompson?
Thompson Lin
Thank you, Lindsay, and thank you for joining our call today. While our fourth-quarter revenue came in below our expectations, our gross margins outperformed our projections. leading to non-GAAP EPS at a high end of our expectations. We are pleased by the continued progress we have made in improving our gross margins, which combined with our expense management, allowed us to generate a smaller GAAP net income in the fourth quarter. For the first time in many years. Further, we generated positive adjusted EBITDA of $4.8 million in Q4. During the fourth quarter, we delivered revenue of $60.5 million, which was below our guidance range of $63 million to $67 million primary due to somewhat lower than expected data center revenue as we began to see some softness in demand led in the quarter, we delivered non-GAAP gross margin of 36.4%, which is the highest quarterly gross margin that we had generated in the last five years was above our guidance range of 34.5% to 36%, mainly driven by improved product mix and some contribution from nonrecurring engineering projects. We generated a small non-cash net income of $0.04 per share, which was a high end of our guidance range of a loss of $0.02 to earnings of $0.04. Palo Verde mill floor death in the production of $44.5 million, more than double year-over-year, but was down 9% sequentially. The revenue for our 100G products more than doubled year over year and revenue for our 400 g per dose increased more than eight times in the same period. Total revenue in our CATV segment was $12.6 million, which was down 67% year-over-year and up 22% sequentially, largely driven by January store sales of processed 3.1 equipment as the industry prepares for transition to 34.0.
With that, I will turn the call over to Stefan to review the details of our Q4 performance and outlook for Q1. Stefan?
Stefan Murry
Thank you, Thompson. As Thompson mentioned, while our fourth quarter revenue came in below our expectations. Our gross margin outperformed our projections, leading to a non-GAAP EPS at the high end of our expectations. We were pleased by the continued progress we have made on improving our gross margin, which combined with our expense management, allowed us to generate a small non-GAAP net income in the fourth quarter for the first time in many years. Further, we generated positive adjusted EBITDA of 4.8 million in Q4. While we do see some softness in Q1 due to the combined effects of the Lunar New Year holiday in our Asian factories, along with some price reductions which are scheduled to take effect. We expect a strong recovery in Q2 and are currently anticipating a markedly improved second half of 2024. Despite the softness we are seeing in Q1, we have been experiencing significant traction with several new datacenter customers recently for both 400G and 800G products. And we expect one or more of these customers to begin to contribute meaningfully to revenue starting in Q2, which gives us a basis for the optimistic outlook despite the slow start to the year, while not likely to contribute meaningfully to revenue in 2024. We also are very optimistic about our 1.6 terabit products as we move into 2025. With the improvement we expect in the second half. We currently expect our first full year of non-GAAP profitability since 2018.
Turning to the quarter, our total revenue for the fourth quarter decreased by 2% year over year to $60.5 million, which was below our guidance range of $63 million to $67 million As Thompson mentioned, this was largely due to somewhat lower than expected data center revenue as we began to see some softness in demand late in the quarter, which we attribute to timing of orders. During the fourth quarter, 74% of our revenue was from our datacenter products. 21% was from our CATV products with the remaining 5% from FTTH telecom and other in line with our expectations.
CATV revenue in the fourth quarter was $12.6 million, which was down 67% year over year and up 22%, sequentially. We are encouraged by the sequential growth that we saw in our CATV business in Q4. 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 sometime in mid 2024 and are optimistic about the second half of the year. We shipped initial test samples of our 1.8 gigahertz amplifier products to two major MSOs in Q4. Although these are early samples, the feedback we received on their performance and pricing is extremely encouraging. We currently anticipate shipping final qualification units of various amplifier products between April and June this year and expect revenue to begin shortly after the sample qualification is complete.
As we stated last quarter, we continue to carefully monitor MSOs plans to upgrade to Docsis 4.0 networks, and we continue to believe AOI is a leader in technologies that will enable Docsis 4.0. Further. We are confident that our products are aptly designed for the deployment of amplifiers and other network elements required for DOCSIS 4.0.
Turning to our data center business, our Q4 data center revenue came in at $44.5 million, which more than doubled year over year and was down 9% sequentially. As noted above, in the fourth quarter of 56% of our datacenter revenue was from our 100G products, 36% was from our 200 G. and 400G products, and 4% was from our 40G transceiver products. As we had anticipated revenue for our 100G products decreased 31% sequentially. Revenue for our 200 G. and 400G products increased 79% sequentially, which we believe is largely driven by a high demand for compute infrastructure.
As a reminder, as we have discussed on our prior few earnings calls, we signed two agreements with Microsoft in 2023, including a development program to make next-generation lasers for its data center for 400G and beyond and for the development of its 400 G. and next-generation active optical cables. While not guaranteed, we continue to believe that the revenue opportunity for our 400 G. and 800 G. 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 build-outs during Q three. And as we had discussed on our prior earnings call, we received requests from Microsoft to expedite our production ramp for these products, which I'm pleased to report we were able to accommodate. We began shipments during December and expect to continue to ship in Q1, although at a slower rate than we earlier earlier expected, as the data centers work to install the optics, we shipped in Q4. We expect demand to resume later in the quarter with additional capacity coming online then for Q2 and beyond.
Another item to note, we 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 800 G. products. We shipped samples to three different data center customers in 2023 and have received initial positive feedback on our 800 G. products. We expect shipments of 800 G. to begin in Q3 this year.
Now turning to our telecom segment. Revenue from our telecom products of $2.8 million was down 56% year over year and down 8% sequentially, largely driven by ongoing softness in 5G demand, particularly in China.
Looking ahead, we expect telecom sales to fluctuate around current levels for the fourth quarter our top 10 customers represented 95% of revenue, up from 90%. In Q4 of last year, we had two greater than 10% customers, one in the data center market and one in the CATV market, which contributed 51% and 28% of our total revenue, respectively. In Q4, we generated non-GAAP gross margin of 36.4%, which was above our guidance range of 34.5% to 36% and was up from 32.5% in Q3 of 2023 and up from 21.4% in Q4 of 2022. The increase in gross margin was driven mainly by our favorable product mix shift. Our transition to a direct sales model in our CATV business and the impact of nonrecurring engineering sales during the quarter. We remain committed to the long-term goal of returning gross margin to around 40% and believe that this goal is achievable. As a reminder, with the direct to MSO sales model we implemented late last year, we expect margins in our CATV business to be meaningfully higher than our historical average.
Total non-GAAP operating expenses in the fourth quarter were $21.6 million or 35.7% of revenue, which were in line with our expectations and compared to $21 million or 34.2% of revenue in Q4 of the prior year.
Looking ahead, we expect non-GAAP operating expenses to range from $22.5 million to $24 million per quarter, reflecting some acceleration of R&D expenses to improve time to market for our 800G and 1.6 terabit data center products.
Non-GAAP operating income in the fourth quarter was $0.4 million compared to an operating loss of $7.9 million in Q4 in the prior year. GAAP net loss for Q4 was $13.9 million, or a loss of $0.38 per basic share, compared with a GAAP net loss of $20.3 million, or a loss of $0.71 per basic share, in Q4 of 2022.
On a non-GAAP basis, net income for Q4 was $1.6 million or $0.04 per share, which was above our guidance range of a loss of $0.9 million to a profit of $1.2 million. And at the high end of our guidance range of a loss per share in the range of $0.02 to earnings of $0.04 per basic share. This compares to a net loss of $5.4 million, or a loss of $0.19 per basic share in Q4 of the prior year. The fully diluted shares outstanding used for computing, the earnings per share in Q4 were $44.8 million.
Turning now to the balance sheet. We ended the fourth quarter with $55.1 million in total cash, cash equivalents, short-term investments and restricted cash. This compares with $31.2 million at the end of the third quarter of this year. We ended the quarter with total debt excluding convertible debt of $38.7 million compared to $46.6 million at the end of last quarter.
Notably, during the fourth quarter, we successfully issued $80.2 million of convertible senior notes due 2026. The notes will bear an interest rate of 5.25% per year. Concurrently with the offering we exchanged or repurchased approximately all of our 2024 notes as of December 31st, we had $63.9 million in inventory compared to $67.5 million at the end of Q3. We made a total of $8.7 million in capital investments in the fourth quarter, which was mainly used for production and R&D equipment.
Moving now to our Q1 outlook. We expect Q1 revenue to be between $41 million $46 million and non-GAAP gross margin to be in the range of 21% to 23%. Non-GAAP net loss is expected to be in the range of $10.9 million to $12.6 million and non-GAAP loss per share between $0.28 per basic share and $0.33 per basic share using a weighted average basic share count of approximately 38.4 million shares.
With that, I will turn it back over to the operator for the Q&A session. Operator?
Question and Answer Session
Operator
Simon Leopold, Raymond James.
Simon Leopold
Great. Thank you for taking the question.
A couple of things I wanted to unpack one of which is you've given us, I think some insight as to the total value of the opportunity from Microsoft. And I understand it's spread over years. Is there some sort of element you could offer to help folks understand or level set as to how that may ramp through 2024, how to size the expected contribution from the Microsoft Project this calendar year?
Stefan Murry
Yeah. I mean, we haven't really given out the details on that project. Obviously, a lot of it is Nino customer sensitive. But at this point, I mean, it started to ramp, as I noted in our prepared remarks, I mean, we shipped product in December, which was ahead of schedule on the data center that the individual data centers where those are getting installed are taking a little bit longer than expected to we actually deploy those transceivers in the data center. So there's a bit of a lull right now while that goes on and then we expect the ramp to resume later in this quarter and ramp throughout the year. We'll probably have more to say in terms of longer-term forecast after we start to see the results of this first tranche being adopted in the data centers.
Simon Leopold
Yes, I guess what I'm trying to get at is I have the impression that there are some folks that have envision this is sort of $100 million this year, $100 million next year and $100 million a year after that. And I think what you're describing is something that gradually ramps to that kind of run rate, but we're not getting $100 million in 2024. I want to verify that my understanding is reasonable.
Stefan Murry
When I have known that that's accurate. What I have said is that it would be I think we said this on the last earnings call, but it just seems that same thought process now that we think it will be ramping to exit the year on a run rate that would support that $100 million per year. But it's clearly not starting off the year. So it will you will not integrate out or four quarters of the year to be $100 million.
Simon Leopold
That's helpful. That's exactly what I --
Stefan Murry
You're sort of more. Yes, which would imply of course, that in the out years, it will be more than 100 million per year in those other years.
Simon Leopold
Yeah. No, that's what I was trying to trying to pull out there.
And then in terms of what's going on in the overall industry and applications, it seems as if a lot of the AI related use cases are calling for 800 gig connections. And so I'm wondering, are you seeing your 400 gig products being used in back-end AI use cases? Or are there other applications? And if so, what are that.
Stefan Murry
And yes, it's supporting a I am not quite sure what you mean by back end use cases, but it's supporting a eye and the connections between the the GPU cluster and the switch primarily. And now I mean, I think it's also likely being used in other non AI applications as well. I mean, there are other money compute applications out there it's not clear to me precisely the extent to which is being used in AI. versus non-high applications. That isn't really information that we're privy to. But certainly a I is what Microsoft and others other large data center operators are primarily building the infrastructure around AI right now. So I would I think it would be reasonable to expect that the vast majority of it is being deployed in AI infrastructure.
Simon Leopold
And then just the last maybe a little bit more color on how you see the cadence of your cable TV business in that this quarter was actually a bit better, a bit stronger than what we expected. But it seems as if you're suggesting or my interpretation of your suggestion is sort of a step function in the second half of the year. Anything you could do to give us some sort of Bowne's on what that implies.
Stefan Murry
And yes, I mean, I think you're more or less correct. And what you're seeing in terms of the step function in the middle of the year, what's going on right now is that we're continuing to sell Docsis 3.1 products which are on their way out. They're not obsolete yet. It's what's currently deployed in the networks, but those products that are being shipped now are being used in you know, new new new builds upgrades, but just new areas that need to be built out or repairs, things like that is kind of a steady-state business. What we expect to happen in the middle part of the year is that we'll layer on the new 1.8 gigahertz products which are going to be used in new network upgrades, which is which is really where the excitement is, frankly. And that's why we tried to call out some specific dates in our prepared remarks earlier that we expect to have those amplifiers in for qualification between April and June.
There are several different models there, so they'll ship at various times within that timeframe. And then we do expect revenue to begin pretty quickly thereafter. Because I think the there are several MSOs that are really up. We appear to be very interested in starting those upgrades quickly as soon as the products become available.
Simon Leopold
Great. Thank you for taking my question.
Operator
Michael Genovese, Rosenblatt Securities.
Michael Genovese
Please go ahead. I'm going to Thanks a lot. And so it sounds like I mean, the narrative over the last quarter or so has been that that the cost, the bigger big customer here ask you to hurry up and expedite the development of the product and it seems like you've executed extremely well. Could do that and then sort of like a hurry up and now we situation. So could you provide I mean, is that kind of assuming a successful.
Yes, but sorry to Minister up there at the end, of course, you go to I don't know that.
So I mean I was I guess I was just going to also ask for more and more color on that. But also if that if that is if that's the case, why I think we reiterated a $300 million number that hasn't changed, but what else can give us confidence that this is just a timing delay and not not any other kind fundamental change here?
Stefan Murry
Sure.
So first of all, I guess you'd have some commentary on the slower start to the year that we're seeing, specifically with the data center deployment that I mentioned earlier. So you know, these things are difficult to predict. What happens is that the product is qualified and put into use and data centers order an initial quantity of it to begin putting product in there and then they start to deploy. And I'm sure you can probably understand, you know, just based on prudence that don't always deploy the new technology as fast as they will when since it at scale, right? They want to take it slow and make sure there's no issues. And I believe that's probably the most likely explanation for what's going on. And then once that once that initial phase of deployments proves that it's going well, then they'll order larger quantities to continue the deployments as far as what we expect to see throughout the rest of the year. I mean, at the same time, by the way, we're still continuing to build our manufacturing capability and capacity for the ramp that we see through the rest of the year. So far as what can give you the confidence there?
I think probably the only thing that I can really point to is the fact that we continue to invest pretty heavily in CapEx. If you look at our CapEx in the fourth quarter, it's ramped significantly from what it was earlier in the year. Clearly, not all of that investment came online and produce products in Q1. And so I think that, along with our commentary about a markedly improved Q2, would hopefully give you guys some level of confidence that this is a temporary condition downfall got squeezed.
Thompson Lin
We have said we are eager to have their G central two three new hyperscale data center customer in U.S., and we believe we the body was started went up by, say, end of Q2 or early Q3 since the 19, though would be the Q2 the the may be based or.
Michael Genovese
Yes, I would like to follow up on that point? Because I mean, we hear you saying I'm delivering sample, but then also expectation of revenue in 2Q accelerating into Q3. So kind of the missing step between those two is, call it qualification customer win. But given your confidence into Q2, Q3, it sounds like you're already must already be past that is that you must have already passed that milestone is that correct understanding?
Stefan Murry
Well, for certainly for the the opportunity that we were talking about earlier that we've been referring to on most of the questions, obviously, that has passed the qualification standpoint at a qualification point at this juncture on other opportunities, I mean, we have various opportunities that are either past qualification or qualification. We expect to finish up in time to be able to grow revenue in Q2 are great.
Michael Genovese
And then just finally for me, just to help sort of help understand that the business mix a little bit better.
Yes, could you give a sense of data center right now of the revenue mix roughly between your transceivers and lasers? And then if we look ahead to say the fourth quarter this year first quarter of next year, is that going to remain constant? Or will we see I see it see some kind of change in that mix.
Stefan Murry
So right now, the revenue mix in the data centers, almost entirely transceivers and active optical cables, probably 95% of it is transceivers and optical cables. I don't expect that to change too much in fact, it will probably get closer to 100% because the new opportunities that we're talking about are all for either transceivers and active optical cables. So I think the thing that might be giving you a little bit of you know, that might be behind that question, if I can kind of read into it this question of what we had two different projects with Microsoft, one for lasers and one for active optical cables, right? And that is true. But what I think you may be not completely understanding is that most of the lasers and tech right now, all of the lasers are used in our own active optical cable. So the revenue, while we are making lasers and working on making lasers on the revenue will be for the active optical cables that ultimately utilize those lasers.
Michael Genovese
That actually was my understanding that I do get a lot of questions on that. And I wanted to make sure that I understood it correctly. So I thanks so much for the answers. I'm glad to be on the conference calls now and I'm getting in here on a good time.
Thank you.
Stefan Murry
We're excited to have you. Thanks.
Operator
Tim Savageaux, Northland Capital Markets.
Tim Savageaux
Hey, good afternoon. A couple of questions. First, on, I guess, some elements of guidance that you provided for the year. Sorry, I think you're talking or expecting to be profitable on a non-GAAP basis. Some of that's net income or operating profit or both, but I just wanted to confirm that for the year.
Stefan Murry
Yes, there will be net income and non-GAAP net income profitable for the year.
Tim Savageaux
Okay. Well, I guess you've you've given us a range for OpEx. So I know you're starting the year pretty low from a gross margin perspective. But you know, saying if you're able to get that say up to 30% for the year, which may or may not be reasonable means that we can take a revenue range out of that 16 on solidly over 300 million, I mean, obviously weighted toward the back half of the year.
And am I doing that math, right?
Stefan Murry
Yes. Yes.
Tim Savageaux
Excellent. Okay. And then I'm going to follow up on some details on the 400 gig category, where you saw that increase about 10 million in the quarter. We've seen some pretty healthy declines on the 100 gig side I assume that's where the weakness is from a demand standpoint. But I mean, is it fair to attribute most or all of that increase to the active optical cable shipments and to the extent we expect it to turn back on, let's say in Q2, is that the type of order of magnitude we should be expecting as you move your way toward exiting the year. So you had a 25 million a quarter run rate.
Stefan Murry
Let's see, a couple of questions embedded in there. The first one was, is was the active optical cables responsible for most of the increase in 400G revenue?
The answer to that is yes. The second part of that question was I wasn't quite clear exactly how you're asking that, as I said earlier, that we would expect that to be kind of on a run rate of 100 million a year or 25 million a quarter by the end of the year.
Are you just trying to confirm that or was there another question that I kind of know?
Tim Savageaux
There's another little question there, and that is given that you're expecting a bounce back or improved Q2, which you referenced in the release. Should we say think that most or all of that improvement is returning to that Q4 level, or above from an IOC perspective? And I'd have to have it probably close to it.
Stefan Murry
I'd have to kind of do the math to answer that question precisely. We do expect some other new 400 gig business to start ramping in Q2 as well? Some little I'm a little hesitant to say it. That's absolutely the dominant factor, but most likely would be close to that.
Tim Savageaux
Yes. Okay, great. And then last one for me. I think at least you stepped through this before, but I want to make sure I understand last quarter you talked about sampling 800 gig products to four customers, including three hyperscalers. I think I got that right is what you're saying when you expected 800 gig to be able to start to contribute midyear end of Q2 into Q three is that one of those that you have sampled has turned into was a production customer? And is there any update to the kind of customer engagement met metrics, sampling, whatnot, on either 400 or 800 G. in Q4 or Q4 and year to date 24?
Stefan Murry
Sure. So I mean to be clear, we have not completed final qualification on any of those 800 G. products at this point. And so we did have three customers that we sampled last year at the end of the year.
And in addition to that, just within the last and on a month or so, we've had some significant new interest from other new customers besides the three that we shipped last year, some so, you know, without trying to tip our hat too much here, I think it's likely that one or more of either the customers we ship to last year or one of these newer customers will be will be a customer generating revenue for us in the Q3 timeframe for 800 G. on as far, as you know, the kind of the demand, I guess you could say, you know, the kind of the feeling that we have around demand, I would say that you know the need for 800 gig right now, it seems to be particularly acute. I think there's a lot of demand for that. And that typically means the qualification and revenue generation can can go rather quickly on. It's when it's when demand may be somewhat low, that you start to see the qualification cycle stretch out and things like that. And we're definitely not in that situation in my estimation for energy at this point.
Well, got it.
Tim Savageaux
Let me sneak one more in here. I'm sorry about that. But along those lines, I guess you spent a fair bit of time over the last couple, three quarters sizing the active optical cable optical cable opportunity at Microsoft. But as you look at your 800 gig pipeline in some of the customer engagements you have. I guess how would you size that opportunity relative to what we've been talking about with them and Microsoft 400 gig?
Stefan Murry
I mean the opportunity there is several times larger, many times larger, and it remains to be seen how much of that market we can get. I don't want to create too much no irrational exuberance at this point. But the market size, the market opportunity there is huge and it's being driven by a I mean, there's nothing that should be mysterious about the demand profile, right? I mean, we've heard and video talking today or yesterday on their earnings call about the amount of our compute infrastructure that's being built. All of that needs to be interconnected and a lot of it is being interconnected at 800 G. and frankly will be probably moving to 1.6 terabits for some applications early next year. So the opportunity is huge.
You know, I think we're well positioned for that. Like I mentioned earlier, we've seen a lot of new customer inbound interest just recently, and there's a lot of work to be done. And I'm not predicting we're going to get what percentage of that market will ultimately be able to get. It's a little early to say, but the market opportunity there is huge.
Tim Savageaux
Okay. Thanks very much.
Operator
(Operator Instructions) Dave Kang, B. Riley Securities.
Dave Kang
Thank you. Good afternoon. And my first question is regarding your first quarter outlook. Can you just provide more color in terms of each product segments? How are they going to decline sequentially?
Well, we don't really give guidance by product segment, but clearly the the cable TV business, a matter of kind of what happens there is not big enough insights are going to collapse to zero. So whatever happens, there is not likely to account for the majority of the decline. So that's going to come primarily from the data center business, as we noted in our prepared remarks earlier, that it's a combination of factors there that the on the Lunar New Year, a lot of these products are in our China facility. And so the mix of those products shifted a little bit unexpectedly on us towards the end of last year, which resulted in the are they having to make new products essentially that we hadn't necessarily planned for in advance, and that's why the Lunar New Year caught us a little bit unprepared this year.
Stefan Murry
In addition to that, we did have some pricing reductions. And again, most of that you can assume is in the data center side that kicked in towards the end of last year. And both of those three factors account for the bulk of the decline.
Dave Kang
And so that the second part of our pricing reductions was mainly 100 gig also or involve them 400 gig as well.
Stefan Murry
No it's mainly 100 gig. And I don't believe we had any price reductions on 400 gig in the quarter.
Dave Kang
Got it. And then on when you talked about when you talk about second quarter a snapback or you just talked about 400 gig or will 100 gig recover as well?
Stefan Murry
We expect it will be mostly 400 gig. There may be some recovery, 100 gig. It's a little bit unclear, but that technology is clearly in the weaning phase of its of its lifecycle, 400 gig is clearly going to be picking up more in the near future. And again, as we've talked about earlier later in the year, 800 gig will start to contribute as well.
Dave Kang
Right. And then on the Microsoft on. Do you have any kind of the like backlog to speak of that gives us confidence that you'll that they'll ramp throughout this year? Or is it still based on they're forecast.
Stefan Murry
I mean, we have small backlog. What we always do, but it's consistent with what we've seen over the years is nothing it's nothing that would guarantee a ramp throughout the year.
Dave Kang
No. Got it. And my last question is on you talked about Microsoft to add another supplier. You know what the latest on that.
Stefan Murry
I'm sorry, I didn't quite understand your question. You said Microsoft adding another supplier for the? Yes, you can say it's a clear.
Dave Kang
Yes, day IOC. Yes, IOC, not possibly adding another supplier in addition to you any latest update on that?
Stefan Murry
Right. I mean, yes, I get your question now. So I mean, I'm not aware that there's any other supplier that's shipping at this point, but I really wouldn't really be able to share that information even if I were. But as a matter of fact, at this point, I'm not aware of it.
Dave Kang
So I got it all right. Thank you.
Operator
This concludes our question and answer session. I would like to turn the conference back over to Thompson Lin for any closing remarks.
Thompson Lin
Again, thank you for joining our call today. As always, we wanted to extend a thank you to our investors, customers and employees for your convenience, the poll. We do fall to see many of you at Argosy and to updating you on our next burning coal.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
