Good afternoon. My name is Chris, and I will be your conference operator. At this time, I would like to welcome everyone to Applied Optoelectronics 2nd Quarter 2021 Earnings Conference Call. Today, all participants have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Stone Phone.
Please note that this call is being recorded. I would now like to turn the call over to Lindsey Savarese, Investor Relations for AOI. Ms. Savarese, you may begin.
Thank you. I'm Lindsey Chaverise, Investor Relations for Applied Optoelectronics, and I'm pleased to welcome you to AOI's 2nd Quarter 2021 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its Q2 2021 financial results and provided its outlook for the Q3 of 2021. The release is also available on the company's website ata0inc.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 Doctor. Thompson Lin, AOI's Founder, Chairman and CEO and Doctor. Stefan Murray, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q2 results and Stefan will provide financial details and the outlook for the Q3 of 2021.
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 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 think 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 innovation as well as statements regarding the company's outlook for the Q3 of 2021. Except as required by law, we assume no obligation to update forward looking statements for any reason after the date of this earnings call to conform these statements to actual results or to 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 ks for the year ended December 31, 2020. Also, with the exception of revenue, all financials discussed today on a non GAAP basis unless specifically noted otherwise. Non GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.
A reconciliation between our GAAP and non GAAP measures as well as a discussion of why we present non GAAP financial measures are included in our earnings press release that is available on our website. Before moving to the financial results, I'd like to announce that AOI management will virtually participate in 1 on 1 meetings at the Jefferies Semiconductor IT Hardware and Communications Infrastructure Summit on August 31. We hope to have the opportunity to interact with many of you virtually. Additionally, I'd like to note that the date of our Q3 2021 earnings call is currently scheduled for November 4, 2021. Now I'd like to turn the call over to Doctor.
Thompson Lin, Applied Optoelectronics' Founder, Chairman and CEO. Thompson?
Thank you, Lindsey. Thank you for joining us today. We delivered revenue and non GAAP EPS in line with our expectations. However, our gross margin came in slightly below our expectations, mostly due to unfavorable product mix in our CATV segment and increased cost from the component shortage we experienced in the quarter. Total revenue for the Q2 of $54,200,000 decreased 16.9% compared to a strong second quarter in the prior years, but was up 9% sequentially.
The strong sequential growth was led by our CATV segment, which this quarter equates our data center business, accounting for 51% of total revenue. The overall CATV demand environment remains strong as MSO, particularly in North America, continue to upgrade their network. Total revenue for our CATV products increased more than 4 fold year over year in Q2 An increase 48.1 percent sequentially of a strong 4th quarter to a record $27,600,000 As we expected, we experienced generally soft Q2 conditions in the data center segment. As a result, Total revenue for our data center products of $22,400,000 decreased 57.4 percent year over year and 13.7% sequentially. We are pleased to report that we secured to new design wins with 2 customers for our 400GE products during Q2.
In addition to the design wins, We had 5 technical qualification of our 4 gs products, which Stephen will discuss in more detail. We are encouraged by the traction we are seeing with our 400 gs products as our customers start to deploy. We expect the order will continue as our customers start to realize the benefit or performance of our 400 gs solution. Based on this, we continue to expect our datacenter business to begin to increase in the second half of the year As our customer begins 400 gs upgrades and inventory issue around 100 gs normalize. Turning to our Telecom segment.
While we did see a resign of a recovery in Q1, we saw mix condition in Q2, with some customers pressing new order, while others continue to use existing inventory. Overall, we see market conditions In the China telecom market, it's continuing to be patchy as the timing and cadence of the 5 gs rollout They remain somewhat opaque. As a result, revenue from our telecom products of 3,300,000 was down 46% year over year and 25.6% sequentially. Looking ahead, We believe China will continue to make investments in both their 5 gs and fiber to a home infrastructure, And we expect high revenue in the segment in the second half of this year compared to the first half. With that, I will turn the call over to Stephen to review the details of our Q2 performance and outlook for Q3, Stephen.
Thank you, Thompson. As Thompson mentioned, we delivered revenue and non GAAP EPS in line with our expectations. However, our gross margin came in below our expectations, mostly due to unfavorable product mix in our CATV segment and increased costs associated with the component shortages we saw during the quarter. While we continue to see softness in the data center market and conditions in the China 5 gs market remained somewhat soft. We are pleased with the continued strength and record results we are seeing in the CATV market.
And looking ahead, we are encouraged by the traction we are seeing with our 400 gs products, which we believe will drive growth in our data center business as order volumes ramp later in the year. Notably, we are pleased to report that we secured 2 design wins for our 400 gs products during Q2. In total, for the Q2, we secured 3 new design wins among 3 customers, all of which are existing AOI customers. All 3 of the design wins were in our data center business and 2 of the 3 were for 400 gs, which I'll discuss in more detail shortly. Total revenue of $54,200,000 decreased 16.9% compared to a strong second quarter in the prior year And was up 9% sequentially.
Our Q2 revenue was in line with our guidance range of $51,000,000 to $56,000,000 As we expected, the headwinds we saw in Q1 continued into the 2nd quarter in the data center market related to the inventory normalization that followed the shift to working from home early last year. We believe these headwinds will begin to subside in the second half for the year, driven by several of our customers who will begin to ramp 400 gs deployments. Additionally, We believe that inventory conditions in our 100 gs business will begin to normalize later in the year. On the 400 gs front, as Thompson and I mentioned, We secured 2 new design wins with 2 customers for our 400 gs products during Q2. One of the design wins was with a data center equipment manufacturer and the other was with a hyperscale data center operator.
Both our U. S.-based companies and both our existing AOI customers. As a reminder, for AOI, a design win occurs when we have successfully completed both the technical qualification of the product as well as received an initial order from the customer. In addition to these two design wins, we also have successfully completed technical qualifications on 5 other 400 gs opportunities. We are optimistic that many of these qualifications will become design wins in the near future once we receive orders for these products from our customers.
The technical qualifications are with 2 different data center operators and a data center equipment OEM. All are U. S.-based companies. We are encouraged by the traction we are seeing and expect that 400 gs will begin its ramp with us later in Q3. In the Q2, 51% of our revenue was from CATV products, 41% was from our data center products, with the remaining 8% from FTTH Telecom and Other.
In our CATV product segment, the overall demand environment remains very strong as MSOs, particularly in North America, continue to upgrade their networks. We generated revenue of 27.6 $1,000,000 in Q2, up 48.1 percent sequentially and up 3 49% from $6,100,000 in Q2 of the prior year. We are still seeing component shortages in our CATV business and we continue to work with our suppliers to improve delivery schedules for these critical components, and in some cases, adding additional suppliers. We anticipate that these shortages will adversely affect our Q3 revenue by about $3,000,000 As we work to improve our supply chain, we may continue to have longer than usual backlog for several quarters. Our Q2 data center revenue came in at $22,400,000 compared with $52,500,000 in the Q2 of prior year.
In the Q2, 33 percent of our data center revenue was from our 40 gs transceiver products and 59% was from our 100 gs products. Turning to our Telecom segment. Revenue from our telecom products of $3,300,000 decreased 25.6% sequentially, primarily driven by continued slow demand in China for 5 gs upgrades there and 46% from $6,200,000 in Q2 of the prior year. Looking ahead, we continue to believe China will increase investments in both their 5 gs and FTTH infrastructure, and we believe we are well positioned to sell lasers into both of these markets. For the 2nd quarter, Our top 10 customers represented 86.8 percent of revenue, consistent with the 86.9% in Q2 of the prior year.
We had 4 10% or greater customers in the 2nd quarter, 2 of which were in the data center market and 2 of which were in the CATV market. These customers contributed 24.1%, 21.3%, 11.2% and 10.9 percent of total revenue respectively. In Q2, we generated non GAAP gross margin of 25%, which was below our guidance range of 25.5 percent to 27.5 percent for the reasons I mentioned previously and compared favorably to 23.1 percent in Q2 of the prior year. We expect the downward pressure on gross margin due to unfavorable product mix in CATV segment to persist through Q3 before starting to recover to a more normal mix in Q4. We are currently uncertain when the increased costs due to supply chain disruptions will subside, but we also see them persisting through Q3, which will also negatively affect gross margin.
Total non GAAP operating expenses in the 2nd quarter were $20,000,000 or 36.9 percent of revenue, compared with $20,600,000 or 31.6 percent of revenue in Q2 of the prior year. Non GAAP Operating loss in the Q2 was $6,500,000 compared to an operating loss of $5,600,000 in Q2 of the prior year. GAAP net loss for Q2 was $8,200,000 or a loss of $0.31 per basic share compared with a GAAP net loss of $18,600,000 or or a loss of $0.89 per basic share in Q2 of 2020. On a non GAAP basis, net loss for Q2 was $4,100,000 or a loss of $0.15 per basic share, which was in line with our guidance range of a loss of $3,800,000 to $5,600,000 or loss in the range of $0.14 to $0.21 per basic share and compares to a net loss of $5,000,000 or a loss of $0.24 per basic share in Q2 of the prior year. The basic shares outstanding used for computing the net loss in Q2 were 26,900,000 Turning now to the balance sheet.
We ended the 2nd quarter with $50,500,000 in total cash, cash equivalents, short term investments and restricted cash. This compares with $49,300,000 at the end of the Q1 and reflects $5,900,000 in cash used for operations. As of June 30, we had $100,400,000 in inventory compared to $106,300,000 at the end of Q1. Inventory decreased primarily due to utilization of inventory for customer orders. This inventory reduction is consistent with our long term plan as we focus on rationalizing inventory levels.
We made a total of $3,200,000 in capital investments in the 2nd quarter, including $2,900,000 in production equipment and machinery and an immaterial amount on construction and building improvements. We continue to expect 2021 CapEx will be approximately $16,000,000 Although as we have noted in prior years, there can be significant variability in this estimate as the year progresses. As we disclosed in February of this year, we initiated a new at the market offering. To date, we have raised $900,000 under this new program. We intend to use these proceeds to continue to make investments in the business, including new equipment and machinery for production and research and development use.
Moving now to our Q3 outlook. We expect Q3 revenue to be between $51,000,000 $56,000,000 and non GAAP gross margin to be in the range of 19.5 percent to 21.5%. Non GAAP net loss is expected to be in the range of $6,900,000 to $9,000,000 and non GAAP loss per basic share between $0.25 $0.33 using a weighted average basic share count of approximately 27,700,000 shares. With that, I'll turn it back over to the operator for the Q and A session. Operator?
We will now begin the question and answer session. Today's first question comes from Simon Leopold with Raymond James. Please proceed.
Thanks for taking the question. I want to start out first just If you could clarify the CATV headwind, you quantified it as $3,000,000 headwind due to supply constraints. I guess there are a couple of ways one could interpret that, but I think what I'm imagining you're suggesting is looking at this quarter's sales of roughly 27,500,000 and subtracting $3,000,000 from that. But alternatively, I could sort of think of, hey, I was imagining it would be $30,000,000 but with $3,000,000 of headwinds, it will be $27,000,000 So I guess I'm trying to understand the baseline or maybe a little bit finer detail, the impact of that headwind you highlighted.
Yes, Simon, thanks for bringing that up. So I think the answer is it's more like the latter scenario that you had, not necessarily that those numbers are what we had in mind. But What we were saying is that relative to what we could otherwise deliver, that is based on orders and requested delivery schedules and shipping schedules and all that, We could have delivered $3,000,000 more in our cable TV segment, but for the fact that those raw materials are constrained at this point.
And let me just clarify that. Is that $3,000,000 hit in the June quarter or is that $3,000,000 headwind your forecast for September?
It's forecast for the September quarter. So we're saying in the next quarter, in the Q3, the one that we're in currently, we would have been able to deliver, based on Current forecast, approximately $3,000,000 more revenue than we now believe that we can due to component shortages.
Great. And I want to see if maybe you could help us understand how to think about your opportunities in the 400 gig market and where you see essentially competing with ZR products, because I imagine there's
Yes,
your products are probably cheaper than the ZRs, but have shorter reach. And so just trying to get a better idea of how you're thinking about sizing that market opportunity in, let's say, 2022.
Sure. So
First of
all, I mean, we're pretty excited about the progress that we made in the 400 gig market. We highlighted the not only the 2 design wins that we had in the quarter, but also The fact that we have 5 technical qualifications, which as we noted is a significant milestone, I would say the technical qualification It's typically the biggest hurdle to get over in logging a design win. The remaining hurdle would be really just receiving an order, which typically Involves getting set up with proper purchasing codes and negotiating some pricing and things like that. So Those hurdles are relatively low. The technical qualification is really the key piece that I think typically takes the longest.
So we're pretty Excited about the progress that we had with those 2 design wins and the 5 technical qualifications. With respect to your question about kind of where we fit in, in the ecosystem, I think as Our products are positioned to be a lower cost version of 400 gig that can be used primarily in intra data So a distance is up to a couple of kilometers as opposed to longer distance Isn't that, which is where ZR is typically targeted. Now ZR, of course, will work at shorter distances, but at a higher price, as you noted. And as far as the market sizing for next year, I can Point you to some 3rd party estimates and things like that for the overall market size. I think what we're hearing from our particular customer base Is that they're going to begin implementing 400 gig later in the Q3 and into the Q4.
My anticipation is that, that will be a relatively slow incremental ramp throughout that time because that's typically how it goes with these customers when they try to implement a new technology like 400 gig. They don't instantly start to implement that technology. They put it in incrementally, test it, make sure everything is working as expected And then begin to ramp up after that. So this kind of 2 phase ramp is what I would expect there. And the 2nd phase, which would probably be a stronger ramp, is probably sometime in the middle part of next year.
Great. And then just maybe a quick one, if I might, is, We've seen awards coming out of China for 5 gs technology. There was a 700 megahertz award a few weeks ago and then more recently, China Unicom and Telecom made tenders for RAN. Just wondering how we can maybe look at those events in terms of helping Give us some sense of when your China business related to the 5 gs backhaul, fronthaul
should improve. Yes, that's a great question, Simon. I mean, the 5 gs market is a little bit hard to make out Right now, as we noted in our earlier remarks, some of our customers in China have begun Ordering more products from us, which implies that their inventory levels are down to whatever level they think Is comfortable and they're placing new orders. Other customers haven't yet started to place those new orders yet. So I think we're the way I'm interpreting that is that we're in a period where New orders are starting to flow from either new orders are starting to flow from the carriers like China Telecom and China Unicom Or that there's line of sight to those new orders and some of our vendors are getting ready, while other vendors We still have some buffer inventory that they want to draw down before they start to place new orders.
So it feels like that should start to turn with more of our customers in this quarter or certainly by Q4. And the data points that you gave around The new bandwidth awards and new product orders coming out of China Telecom and China Unicom. I think those are significant data points that point also in that direction of a Kind of a gradual recovery in the next quarter or 2.
Thanks for taking my questions.
My pleasure.
The next question comes from Alex Henderson with Needham.
Thanks. Stefan, can you give us a little bit of a granularity around what your thoughts are between the data center and The ATD and the guide for 3Q. What are we assuming there? Is the spike up in 2Q An abnormal spike and it's going to stabilize or decline sequentially back to a more normalized growth Revenue level or is that a new base that we'll be growing the CAPV off of? And Clearly, it's nice getting 400 gig wins, but the data center business declining sequentially into what is normally a seasonally strong quarter.
Is that now a trend line where it's you should expect The 40 gig to roll over a little bit faster going forward as people don't want a 40 gig product in their to put new into their networks, a little help there.
Sure. So I'll take your first question first, which is, what's the trajectory for cable TV? As I noted in our prepared remarks, our cable TV revenue is limited over the next quarter or perhaps beyond by component availability. And we talked about the magnitude of that in the 3rd quarter being about $3,000,000 So you can get a pretty good picture that, at least in Q3 and I would say that after that in subsequent quarters after that, depending on component availability, we should be At about that level as well. So I think we're kind of at a new level in cable TV and there's opportunities to grow From there, particularly as we overcome some of these supply constraints, which is currently the limiting factor to deliver revenue there.
At the same time then, your second question is about the trajectory in datacom. And I do think Q2 Probably represents the low point in datacom revenue for us, at least the local minimum. That is, I think we'll see some incremental improvement in Datacom. And as we noted in our prepared remarks, that's going to be driven by 2 factors. One is the 400 gs design wins and are beginning that first phase ramp that I spoke with Simon about earlier in the 400 gs business.
And at the same time, I also expect to see some recovery in our 100 gs business as some of the customers that had previously purchased inventory are finally getting that inventory back down to a level that they think is appropriate to begin placing new orders. So those two factors, I think, can drive some incremental growth in the data center business.
So it sounds like Data center up modestly a couple of $1,000,000 You're talking about the other one is probably Yes. Telecom, it sounds like it's up a little bit sequentially off of a fairly low base. So that would suggest that You do expect a little bit of a retrenchment in the CATV to get to your guide, I would assume.
Yes, That's correct. And we highlighted that that's largely due to component shortages.
Okay. I get it. That's perfect. I wanted to go back to the inventory. Your inventory carry rate is very high relative to your revenue base and Relative to industry standards, and I get it that in this environment, that's probably not a bad thing.
But do we have any concerns about Having potentially any issues of having too much of, say, older product or lower speed products that might not be applicable to the future demand picture. Do you have the right inventory in that mix?
I think we do. If you remember in some prior quarters, we've talked a lot about the fact that Our 400 gs platform and our 100 gs platform and our 40 gs platform share a lot of commonality in terms of the design and the parts. And so to that extent, there's inventory of raw materials and things that may have been applicable to even 40 gs Products that we could still continue to use in 100 gs. And certainly, cable TV wall, some of the older generation products are maybe Slower selling than the current stuff. There's still a lot of demand even for older generation products.
So we feel pretty good about the inventory that we have. I should say, We feel good about the quality of the inventory that we have. Now your point about inventory level being high is well taken. We did bulk up on inventory quite a bit, in the actually even prior to COVID, in the Chinese New Year period going back last spring. And I think that that probably we probably got a little bit ahead of In terms of the amount of inventory that we have, to your point, it's comforting to have that inventory around with all the uncertainties that we've endured in the last year.
But we do want to continue to draw that inventory level down. We've made some significant progress in that regard. I mean, we've pulled our inventory. I think it maxed out at around 100 and $13,000,000 and we're down to just about $100,000,000 at the end of the quarter. So I mean that's good progress.
I want to continue to make progress on that regard And bring that inventory level down to a number that I think would be more appropriate for the business, which is probably in the $80,000,000 vicinity.
One technical question. You said $900,000 mark to market at the market issued. Was that shared?
That's dollars. That's the amount of proceeds.
The dollar. Okay. Proceeds. Okay. Thanks.
All right, Alex. Thank you.
The next question comes from Sam Peterman with Craig Hallum.
Hi, guys. Sam on for Richard here. A couple of questions. I think I'll start with data center. I know you guys have talked about inventory burns ending in the second quarter and Starting to recover from there, which it looks like it's going to happen.
But even given that data center is down, it looks like a little bit more than Expected, I mean was there kind of worse inventory burns than expected or something else in data center that can kind of
Well, I don't think that the weakness is kind of a long term thing. It has to do with just a confluence of order patterns across a couple of different customers. And As we discussed, I think that property probably represents a local minimum in terms of data center revenue. And I think the catalyst going forward is again inventory normalization with our 100 gs customers, especially one of our large 100 gs customers As well as some headwinds or excuse me, some tailwinds from the 400 gig as that starts to ramp.
Okay. Fair enough. Second question on 400 gig, I'm curious with those 5 technical qualifications that you talked about, are those with New customers or existing customers? Can you break that down?
All of the 400 gig Technical qualifications are with the existing customers.
Okay, great. Thank you. And then last one for me on cable TV. I know I think last call you talked about having visibility in the order book out through the end of the year. I know supply constraints We're going to cap that a bit, but can you talk about where you sit in terms of visibility today and if that order book is extending out in the next year at all?
And Yes, any color there would be helpful.
Yes, the order book is extending out into next year. The component availability situation, I mean, I was listening in on CommScope's call and they're saying similar things about component availability. So I think it's kind of an industry wide trend. So we're not seeing customers sort of Pulling back on orders and shifting order patterns. I think it's quite the contrary.
What we're experiencing is that customers are Working with us to try to pull in inventory as quickly as they can rather than trying to move orders to somebody else or something.
Okay, great. Thanks. That's all for me.
On your touch tone phone. Our next question comes from Dave Kang with B. Riley.
Thank you. Good afternoon. My first question is on gross margin. Revenue is going to be Kind of flattish sequentially in Q3 and yet you are expecting gross margin to decline about 5 Point sequentially. Can you just go over some of the factors?
Sure. There's 2 factors. One is some product mix within our cable TV segment, just Different customers sort of waxing and waiting in terms of what they're buying. And then The other factor is related to the component shortages that we're experiencing. And so we are experiencing increased cost as we try to pull in those components.
So we're We're paying, for example, expedite fees to suppliers. We're in some cases, Buying new suppliers that may even be higher cost suppliers just because they have availability, things like that, that are also negatively impacting Gross margin in the quarter. So we discussed that we think that the cable TV mix is probably a 1 quarter thing. I think it will shift more back towards more favorable product mix in the Q4. The component availability is a little bit unclear how long that It's going to last.
I think it will certainly last through the Q3. It may last into the Q4, but it's not totally clear exactly how fast we're going to be able Cover from that. It's a very fluid situation. Some of those component availability situations are caused by, for COVID shutdowns in certain parts of the world where suppliers have factories and things. And those How those things play out in terms of timing is a little bit difficult to project at this point.
But I think it's fair to say it should persist through the Q3 and Hopefully, we'll find ways around it in the Q4, but it's not totally clear at this point.
And regarding component shortages, is that just mainly in cable TV? I mean, you're not experiencing a similar situation in the data center market?
Yes. And I think a lot of that has to do with the inventory that we talked about earlier. I mean, Alex had a very good point that our inventory levels are Rather elevated, and that's a point that we've made also on our last few calls. That's a double edged sword. Of course, we're tying up cash And there's always some risk of obsolescence, although as I mentioned in response to Alex's question, I don't think that's a major concern for us at this point.
But the bright side to that is that, if you do have inventory, then You're not as likely to suffer from supply shortages. So in the data center business where we have a longer history and a more A better track record in terms of order patterns. We were able to bulk up on those products ahead of Chinese New Year last year And that inventory is continuing to help us out when it comes to component shortages in the present time. The cable TV part of our business, as you can appreciate, was significantly smaller a year ago, and we didn't have The same bulk of inventory going into going from pre COVID times into the 1st or second quarter of last year. And therefore, we don't have that same cushion of inventory there and that's where we're sort of scrambling to try to find the inventory that we need to continue to grow the revenue in that
Okay. And my last question is on 400 gig. I'm trying to Kind of gauge, what kind of trajectory we should be expecting. First of all, just wanted to clarify, do you say Did you say 400 gig will ramp end of Q3 or Q4? And then like can you just talk about your expectations, maybe when does it become like 2% 20 percent of revenues.
So I think, I said that the 400 gig will start to ramp at the end of the Q3, which means it's probably not going to be a big amount of revenue in the Q3, but it should It starts to become more meaningful in the Q4. I did also highlight in answer to, I believe it Simon's question earlier that we typically see in these scenarios a sort of 2 phase ramp, right? So there's an initial phase of ramp where we go from 0 to Some relatively small number, that's associated with initial orders from customers who are trying out putting these Products into their actual live networks and making sure that they perform as well in that environment as they did in all the lab testing that they've been doing in the qualification phase. They tend to be appropriately Circumspect when it comes to ordering in that first phase. And then once they become more comfortable that everything's working correctly, then there's a second phase where the ramp becomes More substantial and we expect that phase would probably be sometime in the middle part of next year.
And And if I can just squeeze in one more regarding 400 gig. How should we think about margins between 100 gig versus 400 gig?
Broadly similar. There can be variations in gross margin among That product family, either the 100 gig or 400 gig based on the particular customers and the particular types of transceivers that are being ordered. But overall, I would expect the margins to be broadly similar between 100 gig and 400 gig.
Got it. Thank you.
The next question comes from Tim Savageaux with Northland Capital Markets.
Good afternoon. Not a lot left here, but maybe I'll follow-up On 400 gig timing and maybe kind of the magnitude of the opportunity. It seems that the one area where discussion of 400ZR would be relevant, for you guys would be at Microsoft, where they've Stated pretty plainly that they need to get that DCI rollout going before they can upgrade inside the data center. And I'm not saying that's one of your design wins, but you're free to add some color on that. But, with a scenario like that, Now explain A, why your design wins are coming kind of maybe a little late in the game and B, Kind of support the kind of small ramp and then bigger ramp in midyear type scenario that you're discussing.
Yes. I mean, I think You're right in the sense that for all of our customers and Microsoft certainly has historically been 1 of, if not our largest data center customer, it has been recently it's been our largest data center customer. And Anything that would affect the timing and magnitude of the rollout of Microsoft's 400 gs efforts Would certainly be of interest to us and could be a partial explanation for some of the ramp rates that we I have talked about earlier. That's not to say certainly not all the design wins or technical qualifications that we had are or even necessarily any of them were with Microsoft, but We have multiple customers that are involved in that, but certainly we're watching the situation with Microsoft and any of the There's the effect there rollout would likely be affecting us as well.
Got it. And in terms of The magnitude of that opportunity should things go reasonably well for you at 400 gig. I mean, can you imagine a scenario sometime next year where your 400 gig business is approaching the size of your current overall data center business on a quarterly basis.
I could imagine that scenario. I think as you pointed out, a lot of things have to go right. I would expect that 400 gig can approach, Say 10% of revenue at some point next year, which would put it at roughly the level of our current data center business. So I think that that's Achievable, clearly, we're a little ways out from seeing that actually happen and having a tremendous amount of confidence in that, but I think it's certainly possible.
Okay. Thanks very much and congrats on the design wins.
Thank you.
This concludes our question and answer session. At this time, I would like to turn the conference back over to Doctor. Thompson Lin for any closing remarks.
Okay. And thank you for joining us today. As always, thank you to our investors, customers and employees for your continued support and we look forward to see many of you virtually at our upcoming investment conference.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.