Greetings, welcome to the AAOI OFC Virtual Investor Tech Talk. At this time, all participants are in a listen-only mode. If you should require operator or technical assistance during the conference, press star zero on your telephone keypad. A question and answer session will begin after the presentation. You can submit your questions via the webcast by typing them in the submit question field on the left side of your screen. To ask a question on the phone, you can press star one on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce our moderator, Monica Gould, Investor Relations for AAOI. Thank you, Ms. Gould. You may begin.
Thank you, Diego. I'm Monica Gould, Applied Optoelectronics investor relations, and I'm pleased to welcome you to AOI's OFC Virtual Investor Tech Call. 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 one year. Please note that there is a presentation that accompanies today's call on the investor relations section of our website. You can find the presentation at investors.ao-inc.com under the events and presentations section directly under the webcast link. Joining us on today's call are Dr. Thompson Lin, AOI's Founder, Chairman, and CEO, and Dr. Stefan Murry, AOI's Chief Financial Officer and Chief Strategy Officer. There will be a question and answer session following our prepared remarks, where we will poll questions from the audience on the audio call as well as the webcast.
You can submit a question by entering it into the chat window on the webcast screen. 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 to differ materially from those anticipated in such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as believes, anticipates, estimates, intends, predicts, expects, plans, may, should, could, would, will, or thinks, and by other similar expressions that convey uncertainty of future events or outcomes.
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 innovations, as well as statements regarding the company's outlook for the first quarter of 2020. 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 to the statements to actual results or to 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 for the year ended December 31, 2019. With the exception of revenue, all financials 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 discussions of why we present non-GAAP financial measures, are included in the slides available on our website. With that, I'd like to turn the call over to Dr. Stefan Murry. Stefan?
Thank you, Monica, and thank you everybody for joining us today. In light of the situation with the virus, I'm really pleased that everybody can join us here virtually for this tech talk. Normally, we would have hosted this, of course, at the Optical Fiber Communication Conference, but thank you very much for joining us and allowing us to present to you today. On the slide, as we go through, I'm going to spend the majority of the presentation this morning, which should last about 30 minutes, discussing AOI's technology, specifically the technology around our 400G products and touching a little bit on the 5G products as well. Before I do that, though, I do want to try to tie all these technological discussions that we'll have during the rest of the presentation into the investment highlights that you'll see here.
Really the technology for us is a building block that enables us to have these advantages that we've highlighted here, advanced optical technology allowing us to serve these very dynamic markets. Marquee customer base, which we've added to recently with a number of the design wins that we've had, and the proprietary manufacturing that we bring to enable us to manufacture these products with the technology that we have as well. We'll talk a little bit about some of that proprietary manufacturing technology in a couple of slides. Before we start to dig in too much to the technical content in the presentation, I did want to spend just a moment to give everybody a short update on the COVID-19 situation with AOI. I anticipate this is top of mind for most everybody on the call, as we've seen a number of companies reporting various issues.
We had our earnings call a couple of weeks ago and gave you all an update on where we were at that time. I just wanted to provide a little more detail on some updates, as you'll see here on the slide. Our China manufacturing operation, of course, was the first of our operations to be affected by the virus. We are not located in Hubei, near the epicenter of the virus. We're located some distance away from there. However, like many companies in China, we were shut down for a period of time by the government following the initial discovery of the coronavirus. The shutdown lasted about two and a half weeks, mostly in the month of February. Right now, we currently have about 80% of our employees back to our Ningbo factory. I would say our manpower is slowly recovering.
Every day we get a few more people who are coming back to work. We still have no anticipated supply chain issues in Q1. As I noted on the earnings call a few weeks ago, at that time, we had built up a significant amount of inventory into Chinese New Year, which is typical for our operations. That inventory will help us too. We also have no issues so far with shipping product out of China. I know other companies, some of them have reported difficulty getting products shipped out of China. That has not been an issue for us so far.
When it comes to risks and uncertainties, I think at this point, the main things that we're managing or working to manage here are the fact that the cycle time for the production of many of our products, especially our 100G products, is really making this quarter a race to the finish. The Q1 revenue and margin are going to be difficult for us to predict until the last few days of the quarter, because, again, restarting manufacturing operations and getting that cycle time down to the point where it allows us to ship before the end of the quarter is the challenge that we have. Again, the more employees that we get back, the more production lines that we're able to bring up, the better that the situation becomes. We're working very hard to manage that at this point.
We are also giving a priority to our data center deliveries. That is the deliveries of our 400G, 100G, and other data center products. Our cable TV shipments are likely to be negatively impacted in Q1. This is somewhat expected because we do have typically a downward seasonality in the first quarter of the year. We did want to highlight that there could be some differential impact on the cable TV relative to the data center products just during this quarter. We don't think that's representative of demand. Orders are holding up more or less as we had expected. Because of the manufacturing emphasis that we're placing on the data center products, Q1, you'll probably see more decline in cable TV than we might otherwise expect. In Taiwan, not too much impact from the virus to our operations.
We've added overtime shifts, and we've moved to a 24/7 production schedule to attempt to offset some of the loss of the China capacity. However, I would note that the wage and manpower cost in Taiwan is more than it is in China. The fact that we're doing overtime and other things also will increase our wage expense. That'll probably negatively impact the gross margin in this quarter, and perhaps into Q2, depending on how fast the recovery in China goes. We also have no expected issues related to supply chain in the quarter in Taiwan as well. Sort of similar story in the U.S. Our operations here, we've added overtime shifts. We've added 24/7 production schedule, again, to partially offset the loss of capacity in China.
We've taken back some of the manufacturing for certain laser products and other things that used to have been done in China. We're doing more of that in the U.S. as well, which will have similar impact to the gross margins, as I mentioned earlier, with Taiwan. Obviously, the labor rates here in the U.S. are more than they are in China. We'll see some negative impact on gross margin because of that. Also in the U.S., no expected supply chain issues in Q1 related to the virus. That kind of gives you a snapshot of where we are with respect to the virus. Happy to take any questions on that later on as well. Before, again, we move to the technology, I want to bookend the discussion of the technology with some general demand drivers that we see across our markets.
As I mentioned earlier at the outset, we're going to spend most of the time discussing our technology related to data center products, specifically our 400G and 100G products. In the context of what's really driving the overall demand picture, data center is one of these four markets that we see. The data center demand right now, of course, is being driven primarily by 100G deployments. At this point, 100G and 40G for AOI are relatively close together, as we've noted in our last few earnings calls. We do see 100G continuing to grow, and we see the gradual decline of 40G business, as we've noted, again, in our previous remarks on the earnings call. That outlook hasn't changed. On the cable TV market, as I mentioned broadly on the market, we do see a cyclical market that's currently at a relatively low point in its cycle.
We do expect to see improvement coming later in the year around new deployments that are either aimed at deploying DOCSIS 4.0 or in getting ready for future DOCSIS 4.0 deployments. We have started to see some new orders coming in for cable TV customers related to some of those upgrade projects. We do have reasonable confidence that we'll start to see some improvement in the cable TV market in the back half of the year. On the telecommunication side of things, we have started to see some new orders related to 5G deployments for networks. Many of those are related to China customers. We believe that a lot of those are probably destined for deployment in China.
Obviously, the coronavirus situation in China will probably affect those deployment schedules, although I will note that we've started to see some new orders coming in from customers that we haven't previously had a great deal of business with, that we think are related to concerns over the supply chain of products that might be available from other suppliers. That's something where we're also working hard to meet those orders in addition to our normal order backlog, to try to make those new customers happy as well. On the fiber-to-the-home side of things, no change here from where we were in the earnings call, just continued work being done on the technical side of things to prepare new products for the fiber-to-the-home deployments that we expect to come in future periods.
The data center market, as we begin to focus in, we noted on this slide, which hasn't changed from the previous presentation, but I did want to highlight for everybody who may not have been involved in some of our previous discussions, that we are in a sort of inflection point now where we're starting to see the final stages of the qualification and the early ramp of 400G products. We expect 2020 to be a year where a lot of the decisions around 400G will get made in terms of what the supply chain for our customers is going to look like. We do not expect a huge ramp in 400G deployments this year. We think it's more likely to come at the end of the year or into 2021. This chart here from Ovum kind of indicates that trend as well.
At the same time, while we expect growth in our 400G products, and indeed in the 100G products as well, we expect to see continued sales of 40G and even 10G products. We expect those sales to diminish, as we've noted in previous remarks, and also is illustrated here on the right-hand of the slide. We do continue to expect to see those products to sell. Customers still have needs for networks that are architected around some of these older products. For that reason, we think these products are going to have a relatively long revenue tail over the next several years. With that sort of market background, I wanted to spend the next 15 minutes or so really going a little deeper on the technology. This talk was originally planned around the Optical Fiber Communication Conference.
It is one of the largest technology conferences related to fiber optic communication. I think it's appropriate for us to spend some time taking a little deeper dive into the technology. The way I want to approach this is to start by talking a little bit about 400G in general, some of the standards that apply to 400G, and then trying to really focus that down into what technologies are available to enable 400G in the various types of reaches and other standards-based approaches. Then really focus from there on the laser technology and some of the assembly technology, and how AOI is approaching this market relative to some of our competitors. Specifically, we're going to talk a little bit about AOI's discrete approach versus some of the silicon photonics approaches that are out there.
We'll spend a little bit of time trying to compare and contrast those two technical approaches. That's the direction that we're going to head the rest of this afternoon. To start out, I wanted to start out with a very simple high-level taxonomy here of when we talk about 400G, what does that really mean? First of all, it's worth noting that 400G is not one single product. Just like 100G and 40G before that, it's a family of products that differ primarily by reach, that is the distance that they're designed to go. There also can be various different form factors or physical size packages that are used in various applications. To first order, you'll see if you start to research this a little bit, you'll see mentions of things like 400G FR4, for example, which I highlighted here.
The first group of digits there indicates the data rate, 400G in this case. That's fairly obvious. The middle section there, the FR, that indicates what type of standard body promulgated that standard. In the case of 400G, there's two principal standards bodies that are meaningful today. There's the IEEE, the Institute of Electrical and Electronics Engineers, and there's a multiple source agreement group, an MSA group, that's founded by AOI and a number of other companies. I think there's about 20 or 21 companies at this point that are in this 100G Lambda MSA group. This is an industry consortium that's gotten together to write standards around 400G, and indeed 100G as well, and I'll talk about that in a minute because they are related.
Any standard that you see related to FR is coming out of this Lambda MSA, and if it says DR in the middle, that's the IEEE. The last digit there typically indicates the number of optical channels in either the transmit or receive side. In this case, a four-channel transmitter. A 400G FR4 would be a 400G transceiver that is meeting the Lambda MSA standards and has four optical channels, each of which is at a rate of 100 gigabits per second. Okay? That's just to level set to give everybody an idea of some of the various different types of standards that are out there. I'll talk about what those specific standards are in just a second, but I think it's illustrative to go through just a moment here why there are two standards. Why do we have DR and FR?
For those of you who've been around this industry for a while, you'll remember that at 100G and even 40G we had parallel single mode type optics and CWDM or coarse wavelength division multiplex optics. The main difference there, of course, is that parallel single mode means that you have however many optical channels you have, typically four optical channels at 100G. Those four optical channels would be carried on four separate optical fibers. There'd be an additional four fibers for the receive. You'd have a total of eight optical fibers for the parallel single mode implementations. In the context of 400G, that same parallel single mode type optic would apply to the DR module. The DR modules contain eight fibers total, four for the transmit, four for the receive, and they're designed to operate over the same type of fiber plant as the 100G PSM.
To first order, if you're a customer, a data center operator that's deployed a lot of 100G PSM, all things being equal, the easiest path for you to upgrade to 400G would be to go with a DR type transmitter or transceiver. If you, on the other hand, have a lot of CWDM deployed in your network for whatever reason, typically that would be because you have a larger physical data center size. If your 100G and 40G infrastructure has been deployed largely over CWDM, you might choose an FR module because the FR modules are, like the CWDM modules before them, are four different optical channels, four different wavelengths, that are multiplexed together and carried on a single optical fiber. And again, one fiber for the transmit and one fiber for the receive.
The FR is two fibers total for the 400G, and it's designed to operate on the same fiber plant as the 100G CWDM. Again, that's the primary difference between the DR and FR in terms of the implementation. DR is analogous to PSM, and FR is analogous to CWDM. Okay? As we go through some of the standards on the next few pages, just keep that in mind that that's the principal difference and the principal reason why these standards exist. The next slide, I tried to break down this issue of the various different transceiver types in a couple of different ways.
The first way I looked at it is to map out for you the various different reaches or distances that the transceivers are designed, and then try to map that onto either an IEEE standard, a Lambda MSA standard, or a data center unique type of standard. There are some standards out there that are not necessarily standardized by an existing standards body, but customers have gotten together and said, "Well, this will be useful for us. Even though it's not standardized by a standards body, we think we can use it." For example, the 400G DR4+ is not a, at this time, it's not a recognized standard that's been published by a body, but there are customers that are interested in it. It's a non-MSA type of application there.
The ones with the asterisks, by the way, in this slide are ones that AOI is either currently producing or is sampling or intends to sample in the near future for customer use. Those are the ones that we're supporting at this point. You'll see the IEEE standards generally cover shorter distances, 500 meters or below, and the Lambda MSA standards generally cover the longer distances from two kilometers to 10 kilometers. To kind of map this out in a little more detail as we move down into more what we would call the physical layer, that is the lasers that are utilized in these modules. I tried to take those standards then that you see on the previous page and give some context for the optical wavelengths that are used, whether it's one single optical wavelength or multiple wavelengths in the case of the FR standards.
I've also indicated here the specification reference, the IEEE or Lambda MSA reference that would apply. That's mainly so that if you want to do some research offline, you have the ability to go look up these standards and see exactly what applies to these different modules. I guess the main thing to note here is, again, the DR standards, as I mentioned a couple of slides ago, the DR standards are analogous to the 100G and 40G parallel single mode. They are multiple different fibers in the case of 400G. The DR and FR standards also both have single 100G specifications that accompany them as well. For example, a 100G DR is one channel, one fiber of that 400G DR4. You can have a 400G DR4 module on one side that breaks out into four 100G DR modules.
You can do the same thing with the 400G FR4. If you'll note there's four different optical wavelengths, 1,271 nanometers, 1,291, 1,311, and 1,331. Those can be mapped to the 100G FR specification as well. You can have any one of those optical wavelengths could operate in the 100G FR mode as well. Again, the purpose of this is really to begin to map the standards that we've talked about in the previous slide into physical devices, the lasers that enable those various different standards to be the physical layer that applies to those different standards. To go one step further, I tried to break it down into the types of lasers themselves. The previous slide indicated the wavelengths that would be used.
As we talk in the next few slides, we'll talk a little bit about some of the differences between AOI's discrete approach and some of the silicon photonics approaches. In order for that to make sense, we kind of need to understand what types of lasers can be used in these various applications. The shorter distance reaches, the 70 meters and 100-meter type transmission distances, those products are going to use vertical cavity surface emitting lasers or VCSELs. Across the top of the slide, you'll see the various different laser types. The vertical cavity surface emitting laser, directly modulated laser, electroabsorption modulated laser, and then silicon photonics. The directly modulated laser can be used at distances from about 500 meters to two kilometers. AOI has demonstrated directly modulated laser technology that works all the way from below 500 meters to 2 kilometers.
You can also use, for those same applications, 500 meters to two kilometers, you can also use an electroabsorption modulated laser, and you can see the standards that could apply for the EML as well. In addition, the electroabsorption modulated laser can be used at 10-kilometer distance, where the directly modulated laser, AOI believes is not applicable to that 10-kilometer distance. Finally, on the far right column, you can see the silicon photonics approaches. You'll note here that the two single-channel, the 100G DR and 100G FR, I've not indicated that those are appropriate for silicon photonics. You can, of course, use silicon photonics approach for those applications, but it really doesn't make sense because those are single-channel applications. It wouldn't be a cost-effective way to manufacture a single-channel module in most cases. The silicon photonics approach certainly is applicable to the multiplex standards.
The multiple channel standards, the DR4, multiple 1310, and the FR4 CWDM type approach. Also, I didn't talk about this in the previous slide, but there is some work being done to come up with a standard for 400G LR4, and we think the EML and the silicon photonics approach would both be applicable for that standard when it is ultimately published. I mentioned a little bit about these three approaches then, excluding the vertical cavity surface emitting laser that's used in the short reach. If you kind of focus in on the intermediate and longer reach, which is AOI's primary market, the three approaches that I think are widely applicable across those standards are the directly modulated laser or DML, the electroabsorption modulated laser or EML, and the silicon photonics approach, which is not strictly speaking a laser. It's a laser combined with some modulation circuitry.
The way to think about these three different types of optical module designs is if you think about the transmit side of a transceiver, it has two principal functions. Number one, it has to generate light, and number two, it has to modulate or encode information on that light. Okay? Those two functions can be combined into one device, for example, the directly modulated laser, or the generation of light and the modulation of that light can be separated into different devices. For single mode fiber-optic communications, the generation of light is always done using an indium phosphide-based laser diode. Indium phosphide is a particular semiconductor. It happens to be from a class of semiconductors called III-V or compound semiconductors.
It forms the basis of pretty much all of the laser diodes that are used in single mode communication, whether it's a DML, an electroabsorption modulated laser, or the laser portion of a silicon photonics module. All those are going to have lasers that are based on this indium phosphide chemistry. Just for completeness sake, there have been some efforts to generate light using other materials, for example, silicon. These really haven't been proven to be superior to indium phosphide, and in fact, they're not really commercially viable at this point. A directly modulated laser is the simplest conceptual approach, I think. Basically, this involves modulating the light intensity by varying the electrical current that's supplied to the laser. You have your laser, and if you apply more current to the laser, you get more optical power or in some sense, a brighter light.
When you're dealing with on-off keying, where you're talking about just simple ones and zeros, the on state or one bit would be transmitted by a bright flash, if you will, from the laser, the directly modulated laser, and a zero bit would be represented by a dark or less bright time swatch. In this case, with the directly modulated laser, there's no need for an additional modulation device of any kind. You simply turn the current up and down to the laser, obviously very fast if you're doing this at 100 gigabits per second. No separate modulator is required. The information is encoded just by that increasing and decreasing of the current that's applied to the laser diode. In contrast, both the electroabsorption modulated laser or EML and the silicon photonics solution separate those functions of generation and modulation of light.
The principal difference really between the electroabsorption modulated laser and the silicon photonics modulated device really has to do with where is that modulation done. In the case of the EML, the modulator is built into the indium phosphide chip. In the case of silicon photonics, the modulation is done on the silicon chip. Okay? In a lot of ways, in the interest of time, this is kind of a gross oversimplification of things, but that's basically the difference between silicon photonics and EML approach. Both separate the generation and the modulation of light. If you do the modulation in the indium phosphide chip, right next to the laser, it's an EML. If you do it on a separate silicon photonics modulator, that would be appropriate for the silicon photonics approach. Graphically, this little cartoon is kind of what that looks like.
An electroabsorption modulator has two sections on the same indium phosphide semiconductor chip. They're grown, typically together, using the same epitaxial technique to grow both the laser section and the modulator section. On the silicon photonics approach, you have a separate laser that's manufactured, again, indium phosphide based, and that laser is bonded or somehow aligned with the silicon chip that would contain the modulator. The modulator is made using a silicon fabrication technique. The laser is made based on indium phosphide and the appropriate processing techniques for indium phosphide. The two of those are combined by somehow bonding them together or aligning them together on a separate substrate. To first order, that's really the technical difference then between the electroabsorption modulated laser and the silicon photonics approach.
The other important element that comes into play here when you're designing a transceiver, so you not only have your laser itself, but you have to modulate that laser. You have to be able to drive that modulator element, whether it's a directly modulated laser, in which case you need to have an integrated circuit that can take your incoming one and zero bit stream and translate that, if you will, into a current waveform that can be applied to the device to make the current go up and down and modulate the intensity. In the case of silicon photonics or electroabsorption modulated laser, you need some integrated circuit, some driver IC that turns that modulator on and off and actually encodes the information onto the light stream.
AOI believes that the lowest power consumption and the lowest cost can be achieved by utilizing a directly modulated laser approach. As I noted in the earlier slide, that's sort of the simplest approach. There's no separate modulator needed. There's no alignment procedures like there would be in silicon photonics. There's no separate indium phosphide section, in the case of the electroabsorption modulated laser. It's simply taking the laser and modulating the current that goes into it to encode the information on there. AOI has demonstrated DML performance suitable for 100G per channel, or 400G in aggregate, distances up to 2 km, meeting the DR4 and FR4 specifications. The current limitation, I would say, on the directly modulated approach, is that driver ICs, these high-speed PAM4 encoded directly modulated laser diode drivers, are not currently commercially available. We've demonstrated that the technology works.
The manufacturer of driver ICs for this is non-trivial. The driver ICs just aren't widely available yet. We're working with various IC vendors to develop these ICs. When those are available, we believe that this approach with directly modulated laser will provide the lowest power consumption and the lowest cost. Those are the two main drivers that customers care about when it comes to selecting a technology for their 400G optical transceivers. Because the directly modulated laser diode drivers are not widely available for these speeds, the first generation of 400G modules are likely to utilize either silicon photonics or electroabsorption modulated lasers. Both of these technologies, silicon photonics and EML, the driver electronics that work with either of these types of approaches are relatively similar. They're both commercially available. Both the silicon photonics and EML approach can utilize these drivers.
There's no limitation, I would say, on the commercial availability of the driver electronics. I would say that for Gen -1 devices, we've looked at the costs and compared the production costs, and I would say, in general, there's not a large cost difference one way or the other. The cost of the silicon photonics module and the cost of the EML type module are relatively close together. Again, it depends a little bit on the type of module, but there's not a major difference between the two production costs, and we think that scales pretty well. I would say this equation, the cost equation, is a little bit different for AOI because we can manufacture the EMLs in-house. On the silicon photonics side of things, we can also make the CW lasers that are used in silicon photonics.
For us, our cost structure probably looks a little bit different from some of our competitors. If you really go down to the base level and say, "What do all these components cost to manufacture?" There's not a big difference between the cost of silicon photonics versus EML. AOI has approaches that are based on both silicon photonics and EML for our 400G products, especially the gen one products. We do believe longer term that the directly modulated laser approach is the least expensive, least complicated way to manufacture these modules. When the driver electronics become available, we think that'll be a very interesting opportunity for us moving forward. I wanted to make one note before we move on and talk a little bit about 5G, as we're getting close to the time here.
I did want to talk a little bit about the standards that I talked about earlier, the IEEE standards and the Lambda MSA standards. Those specify optical interfaces and various higher-level performance specifications and that sort of thing. Overlaid on that is a number of physical form factors. You'll see four of them mentioned here, the SFP-DD, the QSFP-DD, the OSFP, and the COBO module. These modules can, in principle, incorporate any of the optical standards that I mentioned earlier, the Lambda MSA, the IEEE standards. You could have a 400G FR4 module in a QSFP-DD, or you could have it in OSFP, you could have it in a COBO. It probably wouldn't fit in an SFP-DD, the point is that the optical standards aren't necessarily directly related to one physical type of device. You can meet those optical standards in various different kinds of devices.
Today, I would say that the two principal contenders for 400G pluggable optical modules for most applications are the QSFP-DD and the OSFP. The major difference there, the sizes are a little bit different, but the major difference has to do with the amount of thermal capacity. The QSFP-DD dissipates somewhat less thermal energy than does the OSFP. Depending on your thermal budget and what type of device you're trying to put in there, you may need a higher thermal budget, in which case you would choose the OSFP. If you can get by with a lower thermal budget, 7-14 watts, then the QSFP-DD would likely work for you. That's the major reason why you would choose one over the other. In principle, any of these can apply to the optical standards that we talked about earlier.
Before I kind of wrap up, I wanted to spend just a moment to talk about the 5G because now that we've spent some time analyzing kind of the 400G, as I mentioned at the outset, the 400G is multiple channels, typically of 50 gigabit per second lasers that are PAM4 encoded to give you a net throughput of 100 gigabits per second per channel. Multiplexed with four channels, that gives you the 400 gigabits. If you back that off and say, okay, each of these channels is going to be a 50 gigabit per second channel, or PAM4 encoded, a 100 gigabit per second channel, then you kind of compare that to what are the needs for 5G optics.
In the fronthaul and midhaul, we're looking at data rates that are typically 25 gigabits, 50 gigabits, or 100 gigabits per second over distances that are a few kilometers in the fronthaul and many of the midhaul applications. The point I'm trying to make is to when we consider all of the advantages, all of the technology that we talked about at 400G for the data center, a lot of those same advantages in technology is being utilized for the fronthaul and midhaul optics. The main difference there, or the biggest challenge in moving from data center to 5G is really the fact that the 5G modules are typically designed to operate in harsher environmental conditions. They're going to be deployed in antennas that are mounted outside, and therefore they have to meet wider operating temperature ranges.
They have to be sort of more ruggedized, if you will. The main optical technologies, whether it be an EML, silicon photonics, or directly modulated laser, generally the advantages of those approaches to the data center optics also apply to the requirements for the fronthaul and midhaul optics. That's one of the reasons why AOI is pretty excited about the advent of 5G technology is because we do believe that a lot of the technology that we've developed for the data center really is applicable to this telecommunications generation. That hasn't always been the case in previous generations of technologies. The other thing that, again, before wrapping up, I wanted to just very quickly go over some of the automated manufacturing that we have. I mentioned earlier that AOI employs a kind of discrete approach.
That is, we're putting multiple different lasers together with optical receivers and a PCB, printed circuit board, that contains the driver ICs and what have you. One of the reasons why we think that this approach scales well, even with relatively high volume, is because we've invested a lot of money and a lot of energy over the years in developing a highly automated manufacturing process. Here you can see just a couple of snapshots of some of the automated assembly and test equipment that we have put in place. There's a lot more if you ever get a chance to come to China or Taiwan and see where a lot of this is done. We'd be happy to show off a little more of this to you live.
Suffice to say that in the old model where a lot of these modules were kind of assembled by hand some years ago, this discrete approach, it was a reasonable guess that this discrete approach might not scale very well with volumes. Because of the attention that we've paid to the manufacturing and the time and energy we put into automating this manufacturing process, we think this actually scales pretty well to high volumes. We've been able to demonstrate that during the 40G transition to 100G, where we've been able to kind of flexibly change as demand from the customers ebbs and flows for various different kinds of devices. Our automated manufacturing process was able to be efficiently utilized both for manufacture of 40G as well as 100G. We think that this same automated manufacturing approach plays pretty well at the 400G generation as well.
With that, I see we've already gone a few minutes over where I hope to end up here. I'll just go ahead and throw the floor open to questions.
Thank you. We'll now conduct our question and answer session. If you'd like to ask a question via the phone, simply press star one on your telephone keypad. That's the star key, followed by the number one key on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. You can send your questions through the webcast by typing them in the submit question field on the left side of your screen. Thank you. Our first question comes from Simon Leopold with Raymond James. Please state your question.
Thanks for taking the question. First, just a quick clarification. Stefan, in your opening comments, you talked about how you've shifted work into Taiwan and Houston facilities, and the added cost that brings. Back, I guess, the end of last month on your earnings call, you had forecast a gross margin of 23%-25% for the March quarter. Is that reflecting those shifts or would there be additional pressure on the margin? Then I've got a follow-up.
Simon, the guidance that we gave on the earnings call is our sort of best guess at this point. I did note in our prepared remarks this morning or this afternoon earlier that there's still a great deal of uncertainty around that. I wanted to give a little more information to everybody about what the nature of these additional costs are, a little more than we did during the earnings call. I'm not necessarily trying to indicate that our guidance is changing. There's just a great deal of uncertainty around it, and a lot of this is going to come down to kind of the wire, if you will, at the end of the quarter. That's all I was trying to say. We're not backing away from the guidance at this point. Just wanted to give a little more color on it.
Right. No, I appreciate that. In terms of the trending question, I wanted to see if we could get a better understanding of how you view the 5G market opportunity overall in terms of how big a market is it, and specifically for you guys, is AOI's strategy one of really selling lasers into Chinese transceiver manufacturers, or is there an opportunity to participate on the transceiver side for 10 and 25 gig fronthaul, midhaul, in that particular opportunity in 5G? Thank you.
Yeah, Simon, I appreciate the question. We're looking at both approaches. That is, we are likely to sell laser diodes to other companies to manufacture transceivers for certain applications. In other applications, we'll also be working on selling transceivers. It's not an either/or for us. We're going to look at the economics of the opportunities that we see, and we can work in either mode. One of the big advantages I think that AOI has, of course, is the fact that we have our own internal laser fabrication facility. Relative to many of our competitors, I think that facility is operating at scale. That is, we're able to make a fairly high volume of lasers. Those can be utilized on our own transceivers if it's economical to do so, or they can be sold to other transceiver manufacturers if that makes more sense.
We'll be kind of trading off margin and revenue depending on whether we sell the laser diodes as discrete components or if we sell them incorporated into an optical transceiver.
Any thoughts on the size of the market opportunity from an industry perspective?
At this point, I don't have a good number on that right now. It's certainly a very sizable opportunity. The numbers that we're hearing out of China are enormous in terms of the number of optical modules that they're going to need. It's a little difficult to flesh out the timing on that, which is why I'm reluctant to give a number at this point. It's certainly a very sizable opportunity for the optics industry in general, and I think AOI in particular.
Great. Thanks for taking the questions and thanks for hosting the call.
No problem, Simon. Thank you.
Just a reminder, you could ask a question by pressing star one on your telephone keypad, and you can submit them through the webcast by typing them in the ask a question field on the left side of your screen. We'll pause for a couple of moments to see if there are any questions. Thank you. There appears to be no questions at this time. I'll turn it back to management for closing remarks. Thank you.
Thank you everybody for joining us this afternoon. We appreciate your time and attention. I'd like to keep in mind as we go through this COVID-19 situation, everybody, our colleagues and friends, I wish everybody the best of luck in dealing with this. We'll be back in touch as soon as we can to give you all an update on how things are going with AOI. Thank you very much for your time.
Thank you. This concludes today's conference. All parties may disconnect.