Applied Optoelectronics, Inc.

​

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying notes appearing elsewhere in this Quarterly Report on Form 10-Q for the period ended March 31, 2026 and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2025 included in our Annual Report. References to "Applied Optoelectronics," “we," "our" and "us" are to Applied Optoelectronics, Inc. and its subsidiaries unless otherwise specified or the context otherwise requires.

​

This Quarterly Report on Form 10-Q contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Terminology such as "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "could," "would," "target," "seek," "aim," "believe," "predicts," "think," "objectives," "optimistic," "new," "goal," "strategy," "potential," "is likely," "will," "expect," "plan," "project," "permit,"  or by other similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.

​

We have based these forward-looking statements largely on our current expectations and projections about future events and industry and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in "Part II —Item 1A. Risk Factors" provided below, those discussed in other documents we file with the SEC, including our Report on Form 10-K for the year ended December 31, 2025 and subsequent Quarterly Reports on Form 10-Q, and geopolitical tensions and conflicts, including with respect to international trade policies in areas such as tariffs and export controls. Furthermore, such forward-looking statements speak only as of the date of this Quarterly Report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report.

​

Overview

​

We are a leading, vertically integrated provider of fiber-optic networking products. We target four networking end-markets: internet data centers, CATV, telecom, and FTTH. We design and manufacture a range of optical communications products at varying levels of integration, from components, subassemblies and modules to complete turn-key equipment. In designing products for our customers, we typically begin with the fundamental building blocks of lasers and laser components. From these foundational products, we design and manufacture a wide range of products to meet our customers’ needs and specifications, and such products differ from each other by their end market, intended use and level of integration. We are primarily focused on the higher-performance segments within the internet data center, CATV, telecom and FTTH markets which increasingly demand faster connectivity and innovation. 

The four end markets we target are all driven by significant bandwidth demand fueled by the growth of network-connected devices, video traffic, cloud computing and online social networking. Within the internet data center market, we benefit from the increasing use of higher-capacity optical networking technology as a replacement for older, lower-speed optical interconnects, particularly as speeds reach 800 Gbps and above, as well as the movement to open internet data center architectures and the increasing use of in-house equipment design among leading internet companies. Within the CATV market, we benefit from a number of ongoing trends including the move to higher bandwidth networks among CATV service providers, especially the desire by CATV multiple system operators ("MSOs") to increase the return-path bandwidth available to offer to their customers. In the FTTH market, we benefit from continuing Passive Optical Networks ("PON") deployments and system updates among telecom service providers. In the telecom market, we benefit from deployment of new high-speed fiber-optic networks by telecom network operators, including 5G networks. 

​

Our vertically integrated manufacturing model provides us several advantages, including rapid product development, fast response times to customer requests and greater control over product quality and manufacturing costs. We design, manufacture and integrate our own analog and digital lasers using a proprietary Molecular Beam Epitaxy ("MBE"), and Metal Organic Chemical Vapor Deposition ("MOCVD") alternative processes for the fabrication of lasers. We believe the use of both processes, and our knowledge of how to combine these processes with others to fabricate lasers is unique in our industry. We manufacture the majority of the laser chips and optical components that are used in our products. The lasers we manufacture are tested extensively to enable reliable operation over time and our devices are often highly tolerant of changes in temperature and humidity, making them well-suited to the CATV, FTTH and 5G telecom markets where networking equipment is often installed outdoors. All of our laser chips are manufactured in our facility in Sugar Land, Texas. We believe that our domestic production capacity for these devices gives us a competitive advantage over many of our competitors, as we believe that many of our customers prefer to source key components from suppliers who have domestic manufacturing capacity.

We have three manufacturing sites: Sugar Land, Texas, Ningbo, China and Taipei, Taiwan. Our research and development functions are generally partnered with our manufacturing locations, and we have an additional research and development facility in Duluth, Georgia. In our Sugar Land facility, we manufacture laser chips (utilizing our MBE and MOCVD processes), transceivers for the internet data center market, subassemblies and components. The subassemblies are used in the manufacture of components by our other manufacturing facilities or sold to third parties as modules. We manufacture our laser chips only within our Sugar Land facility, where our laser design team is located. In our Taiwan location, we manufacture optical components, such as our butterfly lasers, which incorporate laser chips, subassemblies and components manufactured within our Sugar Land facility. Additionally, in our Taiwan location, we manufacture transceivers for the internet data center, telecom, FTTH and other markets. We also manufacture CATV outdoor equipment including amplifiers. In our China facility, we do certain assembly operations on various products, including some optical subassemblies and transceivers for the CATV transmitters (at the headend), some CATV outdoor equipment and transceivers for our internet data center market. The extent of the assembly operations in our China facility do not always establish the country of origin for these products as China for U.S. tariff purposes. Each manufacturing facility conducts testing on the components, modules or subsystems it manufactures and each facility is certified to ISO 9001:2015. Our facilities in Ningbo, China, Taipei, Taiwan, and Sugar Land, Texas are all certified to ISO 14001:2015.

Our business depends on winning competitive bid selection processes to develop components, systems and equipment for use in our customers’ products. These selection processes are typically lengthy, and as a result our sales cycles will vary based on the level of customization required, market served, whether the design win is with an existing or new customer and whether our solution being designed in our customers’ product is our first generation or subsequent generation product. We do not have any long-term purchase commitments (in excess of one year) with any of our customers, most of whom purchase our products on a purchase order basis. However, once one of our solutions is incorporated into a customer’s design, we believe that our solution is likely to continue to be purchased for that design throughout that product’s life cycle because of the time and expense associated with redesigning the product or substituting an alternative solution.

​

Our principal executive offices are located at 13139 Jess Pirtle Blvd., Sugar Land, TX 77478, and our telephone number is (281) 295-1800.

Trends and Other Matters Affecting Our Business

Recent developments in global trade policy, including the imposition of new and increased tariffs and export restrictions by the United States and certain foreign governments, have increased uncertainty in the global economic environment.  In particular, ongoing trade tensions between the United States and China, as well as other key markets such as Taiwan, have resulted in higher tariffs and the potential for additional restrictions affecting the semiconductor industry. 

These developments have increased our costs for materials, components, and finished goods and may continue to disrupt our supply chain and manufacturing operations.  In addition, uncertainty related to trade policies and geopolitical conditions may adversely affect customer demand, including demand from hyperscale data center customers, and could result in delays or reductions in customer orders.

In February 2026, the U.S. Supreme Court held that tariffs imposed under the International Emergency Economic Powers Act (“IEEPA”) were unlawful, and the U.S. Customs and Border Protection subsequently announced IEEPA-based tariff provisions would be terminated effective February 24, 2026.

During the quarter ended March 31, 2026, the Company entered into a Grant Agreement (the “Grant Agreement”) with the State of Texas, acting through the Office of the Governor's Texas CHIPS Office, under the Texas Semiconductor Innovation Fund. Under the Grant Agreement, the Company is eligible to receive cost-reimbursement of up to approximately $20.9 million for equipment expenditures related to the expansion of its semiconductor manufacturing and research and development capabilities in Sugar Land, Texas. The Grant Agreement terminates on December 31, 2027, or upon the earlier completion of the grant project or depletion of grant funds. The project is anticipated to create approximately 500 new full-time jobs.

Receipt of funding under the Grant Agreement is subject to the Company’s compliance with specified program requirements and approval of qualifying expenditures by the Office of the Governor.  As of March 31, 2026, no amounts have been recognized in the Company’s financial statements.  The Company expects to recognize any funding received under the program as qualifying expenditures are incurred and the related conditions are satisfied.

We continue to monitor these developments and have implemented mitigation strategies, including pricing adjustments, supply chain diversification, and operational efficiencies.  However, these efforts may not fully offset the impact of increased costs or supply disruptions.  Accordingly, these conditions could materially and adversely affect our business, results of operations, and financial condition.

Results of Operations

​

The following table sets forth our consolidated results of operations for the periods presented and as a percentage of our revenue for those periods (in thousands, except percentages):

Comparison of Financial Results

​

Revenue

​

We generate revenue through the sale of our products to equipment providers and network operators for the internet data center, CATV, telecom, FTTH and other markets. We derive a significant portion of our revenue from our top ten customers, and we anticipate that we will continue to do so for the foreseeable future. The following charts provide the revenue contribution from each of the markets we served for the three months ended March 31, 2026 and 2025 (in thousands, except percentages):

Revenues for the three months ended March 31, 2026 increased by $51.3 million, or 51.4%, compared to the three months ended March 31, 2025. The increase was primarily attributable to:

Management believes the volume increase was primarily attributable to stronger customer demand and increase purchases from large data center customers to support ongoing capacity expansion and network infrastructure upgrades.  Based on current market conditions, management expects these demand trends to continue for the foreseeable future, subject to customer deployment timing, supply chain conditions and other factors related to our industry.

For the three months ended March 31, 2026 and 2025, our top ten customers represented 98% and 97% of our revenue, respectively. We believe that diversifying our customer base is critical for our future success, since reliance on a small number of key customers makes our ability to forecast future results dependent upon the accuracy of the forecasts we receive from those key customers. We continue to prioritize new customer acquisition and growth of diverse revenue streams.

Cost of goods sold and gross margin

​

Cost of goods sold increased by $37.9 million, or 54.7%, for the three months ended March 31, 2026 compared to the three months ended March 31, 2025. The increase was primarily attributable to:

           Gross margin decreased to 29.1% for the three months ended March 31, 2026, compared to 30.6% in the three months ended March 31, 2025. Despite the decrease in gross margin percentage, gross profit increased by $13.4 million or 43.8%, driven by higher revenues. The decrease in gross margin is primarily attributable to:

The increase in gross profit was primarily attributable to:

Operating Expenses

Research and Development Expense

​

Research and development expense increased by $7.8 million, or 44.1%, for the three months ended March 31, 2026 compared to the three months ended March 31, 2025. The increases were primarily due to increased personnel-related expense and increased R&D related project costs. The increases in R&D expenses were driven by customer demand for new products as well as acceleration of previously-planned project expenditures which were necessary to accommodate accelerated demand projections for these products from certain customers.

Sales and Marketing Expense

​

Sales and marketing expense increased by $1.0 million, or 18.5%, for the three months ended March 31, 2026 compared to the three months ended March 31, 2025.  The increases were primarily attributable to:

          Management continues to monitor tariff developments and their potential impact on its cost structure and pricing strategy. Based on current conditions, management expects shipping costs and tariff-related impacts to continue in 2026, likely at a reduced level compared to 2025 due to the Supreme Court’s decision overturning the IEPPA-related tariffs.  Management cannot currently assess whether this tariff trend will continue given the Administration’s current stated goal to replace the IEPPA tariffs with tariffs under other sections of federal law (e.g. Section 301 tariffs, reciprocal tariffs, etc.).

​

General and Administrative Expense

​

General and administrative expense increased by $8.6 million, or 52.7%, for the three months ended March 31, 2026 compared to the three months ended March 31, 2025. The increases were primarily due to increased personnel-related expense and expanded corporate infrastructure to support company growth. 

Other Income (Expense), Net

​

Interest income increased by $1.5 million, or 675.4%, for the three months ended March 31, 2026 compared to the three months ended March 31, 2025. The increase was due to higher saving balances in the first quarter of 2026. 

​

Interest expense decreased by $0.1 million, or 7.6%, for the three months ended March 31, 2026 compared to the three months ended March 31, 2025. The decrease was due to the lower effective interest rate for our 2030 Notes. 

Other income (expenses) decreased by $1.6 million, or 334.7%, for the three months ended March 31, 2026 compared to the three months ended March 31, 2025. The decrease was mainly due to the negative foreign exchange impact.

Benefit (Provision) for Income Taxes 

​

The Company’s effective tax rates for the three months ended March 31, 2026 and 2025 were (7.9)% and 0%, respectively. The effective tax rate varied from the federal statutory rate of 21% primarily due to the change of the valuation allowance on federal, state, and Taiwan deferred tax assets ("DTA"), and the R&D super deduction in China.

On August 9, 2022, the Creating Helpful Incentives to Produce Semiconductors Act ("CHIPS Act") was enacted. Among its provisions, the bill provides various federal grants, tax credits, and incentives for investment in the United States. To the extent that we make investments in expanding manufacturing in our semiconductor fabrication facility in Texas, we believe that the CHIPS Act would provide a refundable tax credit for certain equipment and facilities upgrades. We made significant investments in the three months ended March 31, 2026 which we believe should qualify for these credits, but we intend to continue to evaluate these and future investments for applicability to the tax credit provisions of the CHIPS Act.

Comprehensive Loss

Comprehensive loss increased by $4.5 million, or 47.9%, for the three months ended March 31, 2026 as compared to the three months ended March 31, 2025.

The functional currency for the Company’s operations is generally the applicable local currency. Accordingly, the assets and liabilities of companies whose functional currency is other than the U.S. dollar are included in the consolidated financial statements by translating the assets and liabilities into the U.S. dollar at the exchange rates applicable at the end of the reporting period. Translation gains or losses are accumulated in other comprehensive income (loss) in the consolidated statements of shareholders’ equity and are also included in comprehensive loss.

Liquidity and Capital Resources

As of March 31, 2026, we had $61.7 million of unused borrowing capacity from all of our loan agreements. As of March 31, 2026, our cash, cash equivalents and restricted cash totaled $449.4 million. Cash and cash equivalents are held for working capital purposes and are invested primarily in money market or time deposit funds. We do not enter into investments for trading or speculative purposes.

ATM Offerings

The Agreement provided that each of the Sales Agents would be entitled to compensation of up to 2% of the gross sales price of the Shares sold through such Sales Agent from time to time. The Company also agreed to reimburse the Sales Agents for certain specified expenses in connection with the registration of Shares under state blue sky laws and any filing with, and clearance of the offering by, the Financial Industry Regulatory Authority Inc., not to exceed $10,000 in the aggregate, and any associated application fees incurred. The Company agreed to indemnify the Sales Agents against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Sales Agents could be required to make because of any of those liabilities.

On March 12, 2026, the Company entered into Amendment No. 1 to the Agreement with the Sales Agents, to increase the aggregate offering price from $250 million to $500 million. On April 2, 2026, the Company completed the ATM Offering and sold approximately 4.8 million shares at a weighted average price of $103.51 per share, providing proceeds of approximately $490 million, net of expenses and underwriting discounts and commissions.