Applied Optoelectronics, Inc. (AAOI) Earnings Call Transcript

[Audio Gap] 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 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 2026. 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 beliefs, forecasts, anticipates, estimates, suggest, intends, predicts, expects, plans, may, should, could, would, will, potential or things 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 its products into new markets and customer responses to its innovation as well as statements regarding the company's outlook for the fourth quarter of 2026, for the full year of 2026 and for 2027. Except as required by law, AOI assumes no obligation to update these 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 is set forth in the Risk Factors section of AOI's reports on file with the SEC including the company's annual report on Form 10-K and quarterly reports 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 the company's earnings press release that is available on AOI's website. Before moving to the financial results, I'd like to note that AOI management is attending the Raymond James TMT and Consumer Conference on December 9. This discussion will be webcast live and a link to the webcast will be available on the Investor Relations section of the AOI website. Lastly, I'd like to note that the date of AOI's Fourth Quarter and Full year 2026 Earnings Call is currently scheduled for February 25, 2027. Now I would like to turn the call over to Dr. Thompson Lin, AOI's Founder, Chairman and CEO. Thompson?

Thank you, Lindsay, and thank you for joining our call today. We are pleased to deliver strong third quarter results driven by robust demand in both our data center and CATV business. Our third quarter revenue more than doubled compared to the third quarter of last year and marks our fifth consecutive quarter of record revenue. We also returned to GAAP profitability in the quarter while continuing to grow our non-GAAP profitability. In October, we signed a multiyear long-term agreement or LTA with a Tier 1 hyperscale hyperscale data center customer. We believe this agreement provides meaningful long-term revenue and demand visibility, supporting our ability to expand capacity, allocate capital and invest in next-generation technology with greater competence. The [indiscernible] reflects our technology leadership, differentiated capabilities in advanced optics. An important note is the AI infrastructure ecosystem. This agreement helps reinforce our competence in the long-term opportunity ahead as demand for high bandwidth, energy-efficient optical connectivity products continue to grow we are well positioned to scale our manufacturing capability and support the next phase of AI data center deployment. On this front, I'm very proud of what our team have already accomplished as we have readily and deliberately scaled our manufacturing capacity to meet this unprecedented demand. Our Phase I expansion is set to begin operations in December at our new facility in [indiscernible]. However, our Phase II capacity expansion price is now expected to be delayed by several months due to anticipated longer than expected time to pain necessary electrical power among other construction-related issues. We believe our goal of revenue run rate of $471 million per month is achievable towards the end of 2027, which reflects this delay and expect our U.S.-based manufacturing capability to increase as this new facility comes online. We continue to anticipate a significant revenue ramp-up in Q4 and for the next several quarters as we continue to see the benefit of our expansion in Taiwan as well as expansion in our laser manufacturing capacity in [indiscernible]. While we are disappointed by the anticipated Phase II construction delay, demand fundamental remains strong and we remain committed to grow our revenue and profitability albeit on a slightly delayed schedule. Turning to the third quarter. We delivered record revenue of $269.9 million, in line with our expectations, and non-GAAP gross margin of 28.7% and slightly below expectation due to product mix, which Stefan will discuss in more detail. Our non-GAAP earnings per diluted share of $0.17 was also in line with our expectations. Importantly, the volume ramp of our 800 product continued in Q3 with 800 revenue nearly quadrupling sequentially to $47.5 million. Our 400G revenue also nearly doubled sequentially, building a strong Q2. Finally, demand for our 1.6 terabit product is robust and our new LTA is entirely for 1.6 terabit transceivers. With that, I will turn the call over to Stefan to review the details of our Q3 performance and outlook for Q4. Stefan?

Thank you, Thompson. We are pleased to deliver strong third quarter results. driven by robust demand in both our data center and CATV businesses. Our third quarter revenue more than doubled compared to the third quarter of last year and marked our sixth consecutive quarter of record revenue. We also returned to GAAP profitability in the quarter, while continuing to grow our non-GAAP profitability. In Q3, we delivered record revenue of $269.9 million. which was within our guidance range of $255 million to $290 million. We recorded non-GAAP gross margin of 28.7%, which was slightly below our guidance range of 29% to 30.5% due to product mix, which I'll discuss in more detail in a moment. Non-GAAP earnings per diluted share of $0.17 was within our guidance range of $0.11 to $0.26 per share. Our performance continues to be anchored by robust demand across both our data center and CATV businesses, underscoring the strength of our dual growth strategy and diversified revenue streams. As Thompson mentioned, in October, we signed a multiyear long-term agreement or LTA with a Tier 1 hyperscale data center customer. We believe this agreement provides meaningful long-term revenue and demand visibility, supporting our ability to expand capacity, allocate capital and invest in next-generation technologies with greater confidence. This agreement is entirely concerning a multiyear commitment for 1.6 terabit transceivers. We have made meaningful progress in scaling our manufacturing capabilities to address accelerating demand for AI-related optical technologies. This agreement reflects our technology leadership, differentiated capabilities in advanced optics and important role in the AI infrastructure ecosystem. I'd like to share some additional details about this agreement. The customer is an existing customer and the LTA covers 1.6-terabit transceiver products exclusively. We recently successfully qualified our first 1.6 terabit product with this customer. Subject to certain conditions, including our ability to supply, this customer has agreed to purchase a minimum of 10% of its required 1.6-terabit transceivers from AOI over the 3-year period from June 2026 through May 2029. We currently expect this LTA to result in between $1 billion and $1.5 billion in revenue during this time period, although it could vary from this amount significantly depending on the customer's actual demand for 1.6-terabit products. In turn, AOI has committed to supplying this volume and to agreed pricing, including some price reductions over the period. The customer made no commitment of capital as part of this LTA. With our automated manufacturing capabilities and in-house laser technology, we believe we are well positioned to support this customer and others as 1.6 terabit deployments accelerate. During the quarter, we also continued to make progress on our key priorities, which included: one, scaling our next-generation data center products, including our 800G and 1.6 terabit solution by expanding our production capacity in a disciplined manner; two, diversifying our revenue base; and three, strengthening operational execution to improve our margins and position us for long-term profitability. Turning to our third quarter results in more detail. Total revenue of $269.9 million increased 127.5% year-over-year and 40.6% sequentially. During the third quarter, 58% of revenue was from our data center products and 41% was from CATV products. In our data center business, Q3 revenue of $155.6 million increased 254% year-over-year and 45% sequentially. As Thompson noted, 800G revenue nearly quadrupled sequentially to $47.5 million, and 400G revenue nearly doubled sequentially to $93.4 million. We also continued to see robust demand for our 1.6 terabit product. And as I mentioned, our new LTA is entirely for 1.6 terabit transceivers. In the third quarter, 7.5% of data center revenue was from 100G products, 60.2% was from 200G and 400G tracer products, 30.5% was from 800G transceiver products and 1.4% was from 10G and 40G transceiver product. While 800G growth was strong, it was somewhat below our expectations, primarily because our LTA customer shifted its demand from 800G to 1.6 terabit more quickly than we had anticipated. We expect this shift to continue in Q4. We expect our fourth quarter data center revenue to be between $270 million and $300 million, representing 281% year-over-year growth at the midpoint. While we continue to see exceptionally strong demand for our data center products, we expect fourth quarter data center revenue to be somewhat below our earlier expectations because, as I just mentioned, our LTA customer is shifting its orders from 800G to 1.6 terabits faster than we had anticipated. We believe this shift is positive for us in the long term because 1.6 terabit carries higher pricing and margins than 800G. However, the accelerated timing has left us without sufficient 1.6 terabit raw materials in Q4 to fully meet the increased demand. As we expected, this customer returned as a greater than 10% customer in Q3, and we expect it to remain on throughout the term of the LTA. Looking ahead, we expect demand for 800G and 1.6 terabit modules to exceed our production capacity throughout 2027. We are continuing to add capacity and to secure the key components needed to meet this demand. During the quarter, as Thompson mentioned, we made significant progress on ramping our data center production capacity. As a reminder, our U.S. manufacturing footprint is anchored in Sugarland just outside of Houston. We have more than 1.6 million square feet in the Greater Houston area in various stages of development, all of which will be dedicated to expanding our production capacity for 800G and 1.6 terabit transceivers, [ ELS FP ] modules and lasers necessary to manufacture these products. The first of these major expansion projects is the 210,000 square foot facility, which is just a few hundred yards away from our headquarters facility. As a reminder, this facility is entirely dedicated to the manufacturing of 800G and 1.6 terabit transceivers. We expect to begin initial operations there in December, which is consistent with our plan to begin operations by the end of 2026. We plan to move existing transceiver production from our current headquarters facility to this new facility, which will free up space to expand our indium phosphide laser capacity at our headquarters. As we continue to expand our footprint in Texas, our in-house laser manufacturing positions us well to support both near-term customer needs and longer-term growth. We believe that in the future, CPO and related technologies will continue to drive increased demand for high-power lasers. We plan to further expand our laser manufacturing capacity in Texas to support these future growth drivers. During the quarter, we received positive preliminary testing results from several CPO customers on our laser performance and are continuing to work with these customers for a full qualification of our lasers and eventually [ ELS FP ] modules. Our total manufacturing capacity is now approaching 330,000 units per month, up from approximately 200,000 units per month at the end of Q2. By the end of this year, we now expect to be capable of producing more than 500,000 units of 800G and 1.6 terabit products per month compared with our previous expectation of 650,000 units per month due to the construction delays, which I will discuss in a moment. By the end of 2027, we now expect to be capable of producing more than 1 million units of 800G and 1.6 terabit products per month, up from our previous expectation of 930,000 units per month, reflecting additional demand from our customers. We expect nearly 30% of that production to be manufactured in Texas. These production figures are projections for our qualified production equipment capacity, actual output will vary from these figures based on factors, including customer qualification schedules, staffing levels, raw material inputs, manufacturing cycle time and other factors. These capacity expansion plans reflect measured scaling of our manufacturing footprint, aligning with strong and growing customer demand and qualification progress across both 800G and 1.6 terabit product. As a reminder, our 800G and 1.6 terabit products can be manufactured on the same production line with the same process. While our 1.6 terabit products require a different final test, our 800G automated manufacturing lines have been developed with an architecture that will allow us to support future high-speed products as customer demand materializes and evolves over time. Our automated manufacturing lines are engineered to scale efficiently from 800G to 1.6 terabit with minimal incremental investment. This structural flexibility provides a powerful dual advantage, accelerating our time to market for AI customers while expanding our long-term margin potential. Looking ahead, we expect 800G to remain the largest driver of our near-term data center ramp with 1.6 terabit on track to begin contributing to revenue in the fourth quarter and a larger ramp beginning in 2027. We also expect to see continued growth in 400G revenue driven by our manufacturing capacity addition. As we had expected and discussed on our last quarterly earnings call, we saw a decline in revenue from 100G transceiver sales during the quarter because one of our customers has been unable to source enough 100G switches to meet its initial forecast. We believe that the shortage of switches is related to the industry-wide memory shortage, and we continue to expect that 100G weakness will persist until the memory supply recovers. Even with this temporary weakness in 100G, we expect our fourth quarter data center revenue to increase materially, both sequentially and year-over-year. To summarize our expansion plans. Our Phase 1 capacity expansion in Sugarland remains largely on schedule, although we expect to fall somewhat below our earlier expectation for production readiness at year-end, as we mentioned earlier. We continue to expect to begin operations at this facility by the end of 2026. As Thompson mentioned, we now anticipate that Phase 2 will be delayed by several months and we believe our goal of a monthly revenue run rate of $471 million is achievable towards the end of 2027. In the meantime, we expect a significant revenue ramp in Q4 and over the next several quarters as we benefit from our expansion in Taiwan and our Phase I U.S. expansion. We continue to believe our revenue level is limited by our production capacity and supply chain, not market demand. Turning to our CATV business. We saw record CATV revenue in Q3 of $110.9 million, which was up 57% year-over-year and 37.6% sequentially, slightly above our guidance range of $100 million to $110 million. As in recent quarters, we shipped a significant quantity of 1.8 gigahertz amplifiers to our largest CATV customer in Q3. At the [ FCTE ] Tech Expo in Atlanta at the end of September, we celebrated an important milestone, the shipment of our 1 millionth 1.8 gigahertz amplifier. Furthermore, we showcased our vision for the future of connectivity with a live 3 gigahertz network demonstration alongside the successful debut of our dual-mode Quantum Wave 25G tunable module and new AI-driven autonomous capabilities within our Quantum Link software. Customer response has been very positive, and we are excited about the potential of these new technologies. Looking ahead to Q4, we expect our CATV revenue to be between $105 million and $115 million. While amplifiers will account for the vast majority of our Q4 CATV revenue. We anticipate generating some revenue from our software solutions beginning next year. For the third quarter, our top 10 customers represented 99% of revenue compared to 97% of revenue in Q3 of last year. We had 3 greater-than-10% customers, one in the CATV market, which contributed 41% of total revenue; and two, in the data center market, which contributed 28% and 23% of total revenue, respectively. As I mentioned, one of these data center customers, a large U.S.-based hyperscale customer returned as a 10% customer this quarter. In Q3, we generated non-GAAP gross margin of 28.7%, which was slightly below our guidance range of 29% to 30.5% compared with 29.8% in Q2 of 2026 and 31% in Q3 of 2025. The shortfall versus our guidance reflects a higher mix of 400G within our data center business, which in turn resulted from the customer demand shift from 800G to 1.6 terabit that I discussed earlier. We remain committed to our long-term objective of returning non-GAAP gross margins to around 40% and believe that this goal is achievable as our revenue mix shifts towards higher-margin products and as we capture additional efficiencies across our operations. The revenue figures I have discussed are net of contra revenue related to the accounting for warrants issued to certain customers. As a reminder, this amounts to approximately 2.5% of revenue from the customers to whom AOI has issued warrants. In Q3, this contra revenue amount was $1.93 million. Total non-GAAP operating expenses in the third quarter were $70.3 million or 26% of revenue compared with $47.1 million or 39.7% of revenue in Q3 of the prior year. Looking ahead, we expect non-GAAP operating expenses to be in the range of $68 million to $75 million per quarter. Non-GAAP operating income in the third quarter was $7.2 million compared to an operating loss of $10.3 million in Q3 of the prior year. GAAP net income for Q3 was $6.3 million or $0.07 per diluted share, which compared with a GAAP net loss of $17.9 million or a loss of $0.28 per basic share in Q3 of the prior year. On a non-GAAP basis, net income for Q3 was $14.8 million or $0.17 per diluted share, which was within our guidance range for non-GAAP net income of $10.1 million to $24 million or non-GAAP income per share in the range of $0.11 to $0.26. This compares with a non-GAAP net loss of $5.4 million or $0.09 per share in Q3 of the prior year. The weighted average fully diluted shares outstanding used for computing the earnings per share in Q3 were 87.8 million. Turning now to the balance sheet. We ended the third quarter with $621.5 million in total cash, cash equivalents, short-term investments and restricted cash. This compares with $508.8 million at the end of the second quarter of 2026. We ended the third quarter with total debt, excluding convertible debt, of $148.1 million which compared to $92.8 million at the end of last quarter. As of September 30, we had $378 million of inventory which compares to $278.8 million at the end of Q2. The increase primarily reflects purchases of additional raw materials and higher work in process to support our expected revenue growth. We announced in early October that we completed our previously disclosed $600 million at-the-market equity offering program. This marks the successful completion of our third ATM program this year. We intend to use these proceeds to continue to make strategic investments in the business, including new equipment and machinery for production and research and development use as we continue to scale our advanced manufacturing capacity. We made a total of $501 million in capital investments in the third quarter, including $142.8 million in prepayments on equipment we have on order. These expenditures are mainly for manufacturing capacity expansion for our 400G, 800G and 1.6 terabit transceiver product. We expect capital expenditures to increase in Q4 compared with Q3 and to increase further in 2027. Our capital investments are guided by customer demand and supported by purchase orders and long-term agreements. We are directing capital towards investments to scale our advanced manufacturing footprint and enable our path towards sustained profitability. We continue to expect to finance these investments through a combination of cash on hand cash generated from operations, equity issuance and additional debt. Moving now to our Q4 outlook. We expect Q4 revenue to be between $385 million and $420 million, representing approximately 200% year-over-year growth at the midpoint. We expect non-GAAP gross margin to be in the range of 29.5% to 31%. Non-GAAP net income is expected to be in the range of $45.9 million to $60.4 million and non-GAAP earnings per share between $0.48 and $0.63 per share using a weighted average diluted share count of approximately 96 million shares. With that, I will turn it back over to the operator for the Q&A session. Operator?

[Operator Instructions] We'll take our first question today from Simon Leopold from Raymond James.

Appreciate you taking the question. The first thing I wanted to check on was to really get an update of sort of what's built into that 4Q 800 gig and 1.6T, given the customer transition you talked about as well as the delays in the manufacturing capacity. I know this is something we talked about last quarter. I just want to get refreshed on what's built into your expectations for 4Q. And then I've got a follow-up.

Right. So as we mentioned, we expect to see continued growth in 800G, continuing that trend that we've seen in the last several quarters. And we do expect meaningful contribution from 1.6T. The commentary that we talked about with the 1.6T was simply that we have a lot more orders for 1.6T than we can supply in this quarter due to material limitations. I mean when the customer switched from 800G to 1.6T faster than we expected, we couldn't turn on a dime and just create those additional materials we had what we had and maybe a little bit more, but that's the revenue shortfall that we were discussing in the prepared remarks.

And then I understand the delay from construction issues. I'm looking for a better sense of maybe the linearity of capacity because we were previously thinking that roughly $471 million of capacity would be midyear, now sounds like end of the year. Could you give us an update of what you think you'll be at the midyear point.

I would sort of linearize that growth throughout the year. Basically, we're going to be adding additional capacity throughout the year. We do anticipate being able to bring some of that capacity online even with the construction delays. I mean it's not a linear -- not a binary on on-off type of thing. So I would kind of linearize that revenue throughout the year, perhaps.

So basically, if you take in Q4, data center revenue close to about $100 million per month of revenue to $470 million monthly revenue by end of next year. So roughly, you can say the expansion of capacity will be the linear function because as we keep emphasize, the customer demand is really strong. The really limitation is all the manufacturer capacity and the key material supply 1.6 -- right now, I think we already got, I don't know, much more than $400 million order in hand. So -- but right now, I think due to the manufacturing cycle time and I think the key material supply. So I think that's why we can deliver maybe, I don't know, less than $100 million revenue in 1.6T in Q4. So we're still working with the supplier to work on the supply issue.

I appreciate that. And then maybe just one last kind of open-ended is, obviously, the whole AI ecosystem trade has been ugly, and fears about the election and fears about data centers. I know it hasn't been a lot of time, but just wondering your take on this as well as any conversations, discussions with your customers that would suggest they're having any second thoughts about their own investments?

Right. So I'll take that second question first. I mean, no, we haven't had any conversations with customers that would indicate that they have any second guessing going on of their investment plans. If anything, we're continuing to hear that they just can't get enough material fast enough, right? Now some of the -- there are shifts in that demand, like we talked about from 800G to 1.6T and things like that. So there's there's movement under the hood, but the overall demand, as we emphasized several times in our prepared remarks, remains really strong. As far as the election itself and the aftermath, if you will, I mean, it's really early to say and I can't really comment too much on that. I think taking a hard look at what makes sense in terms of data center build makes sense. But I think the ultimate conclusion is that data centers still need to get built. AI is a fantastic tool to facilitate more efficiencies in the workplace and all sorts of scientific and engineering advancements. So I think those investments are going to get made. Certainly, our customers will make them. Whether they'll get built in the same locales as they had originally planned or how much of that will be -- it remains to be seen. I think it's also significant to note that our customers are exclusively the large hyperscale operators. We're not dealing with the Tier 2 operators in the data center space, for example. And I think those large guys pretty much have their projects over the next several years already in play. And they obviously have the capital to make those investments. So I tend to think that the hyperscalers, the largest hyperscalers that we're dealing with will probably be less affected or not affected at all by these changes politically, but that's just a guess at this point, it's very early.

Let me say that, okay, even really there be some kind of delay or reduction due to some on the government issues. But on that -- even by end of next year, now in [indiscernible] and other key suppliers, okay. We can only meet in less than 80% of customer demand. So even really in case there is some kind of reduction, that demands they're bigger than our future capacity. Even we are expanding as fast as possible in the next, I think with 12 months or 18 months. So that is I don't see the effect to our revenue at least in the next 18 months.

The next question comes from George Notter, Wolfe Research.

Stefan, I was just curious about your perspective on financing the business? I mean, I heard what you said in the monologue about using both equity and debt. But obviously, these ATMs [indiscernible] a great effect. I'm just curious, like with the share price where it is now if this persists? I mean that change your view on how to finance the business going forward? Any sort of contingency plans?

I mean I think we're always looking, as we've said repeatedly at the most efficient way to finance the investments that we plan to make. So obviously, the share price is one of those variables that we look at. And so that may affect, to some extent, our decision-making process there. We have -- post quarter, we took a debt facility, which we talked about in the subsequent events section and issued an 8-K on. So you can read the details there. So we are -- as we've discussed repeatedly, we are leaning more on debt than equity than as we have in the past. And we're going to take a continued look at what mix of debt and equity makes sense moving forward.

As you can see, we just signed a $1,200 million of the bank loan in the last week. And actually, if necessary, I think we increase the U.S. bank loan to even bigger like $400 million or $500 million in the next 12 months. At the same time, I think in this year, we increased the bank loan in our Asia operation to support our capacity expansion. And don't forget, we start to be profitable. Based on this next year, I think the revenue projection, we should have quite a lot of profit. calculate really the data center will go from, I think, less than $100 million in this quarter to $470 million by end of next year and higher gross margin. So that means the profit margin will be almost like, what, 20% by end of next year. So we can -- I think we can produce quite a lot of profit by ourselves. So they will support our operation, too.

Any opportunity to go back to customers and get prepayments. I know that you didn't do that on this most recent LTA, but is there an opportunity to kind of push some of this on your customers? And then the other question was just on CapEx for next year. You mentioned it's going to be higher, but any sense of the magnitude would be great.

Next year will not be higher. We said Q4 will be higher than Q3. But we never said next year will be higher. The next year, CapEx will based on customer demand. And as we said, between the U.S., there are several months of delay due to the electricity issues. So for sure, we delay payment, too. So we never said the CapEx will be much higher next year. Actually, I think it could be lower.

And as far as your question on customer financing, I mean that's always a part of the discussions that we have with the customers. So I won't ever say that it's [indiscernible] I would say, as customers balance sheet themselves come under question. I mean that's been a huge part of the sort of commentary around the data center trade recently. They're also looking hard at how they deploy that capital. So I think it's probably less likely than it would have been in the past, but it's certainly not off the table. And I think it's probably more likely around some of the newer technologies like [ CPO ] and NPO type of technologies than around 800G or 1.6 transceivers.

[Operator Instructions] Next up is Ryan Koontz, Needham & Co.

Wanted to ask you, Stefan, about supply and how you're feeling there as far as any phosphide substrates and DSDs, I imagine the 1.6 DSPs, which you mentioned previously are challenging? Are those kind of at the top of your list as far as supply concerns and focus goes for the company or anything else you'd point out?

Yes. I mean as we've said before, indium phosphide, we're fine through 2027 on the new phosphide. So that's not really current limitation -- we're obviously doing what we can to secure supply downstream, especially when we start to focus on CTO and NPO and ramping that, that uses a lot more indium phosphide than what we're using today. So indium phosphide is not a current issue. It's just something on our radar screen for the future. The DSP constraints that we have are real, especially at 1.6T. However, it has more to do with the shifting of priorities and changing customer demand expectations then than an absolute shortage. In other words, we would have had a few months of notice with some of these customer shifts, we probably would have been able to secure additional DSPs. So it's tight. We do expect it to resolve or at least improve dramatically in the first quarter of next year. But for now, the DSP is a significant limitation on 1.6T.

So for the 1.6T DSP, I think we qualify supplier. I think we are working with the supplier right now because DSP will be one of the risk factor for the next years, in the next few months. So I think we understand the issue. That's why we are qualifying more supply right now. And good news is our customers accept the qualification. That's very important because as I have said many times, the problem sometimes it is not up to AOI is the customer need to approve and we need to do a qualification for the new supplier, okay?

Makes sense. On the power issue with the new facility, anything we can glean from that with regards to Texas and ERCOT and just political shifts. I mean, what's the environment there like? Is it just -- is this more of a logistics challenge? Or is this kind of macro challenge with regards to the power...