Applied Optoelectronics, Inc. is a leading, vertically integrated provider
of fiber-optic networking products, primarily for four networking end-markets:
internet data center, cable television, or CATV, telecommunications, or telecom,
fiber-to-the-home, or 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 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 all four of our target 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. To address this increased bandwidth demand, CATV
and telecommunications service providers are competing directly against each
other by providing bundles of voice, video and data services to their subscribers
and investing to enhance the capacity, reliability and capability of their networks.
The trend of rising bandwidth consumption also impacts the internet data center
market, as reflected in the shift to higher speed server connections. As a result
of these trends, fiber-optic networking technology is becoming essential in
all four of our target markets, as it is often the only economic way to deliver
the desired bandwidth.
The internet data center market is our largest and fastest growing market.
Our customers in this market are generally large internet-based (“Web
2.0”) data center operators, to whom we supply optical transceivers that
plug into switches and servers within the data center and allow these network
devices to send and receive data over fiber optic cables. The majority of the
data center optical transceivers that we sell utilize our own lasers and subassemblies
(we refer to the transceivers subassemblies as “light engines”),
and we believe that our in-house technology and manufacturing capability for
these lasers and subassemblies gives us an advantage over many of our competitors
who often lack either development or manufacturing capabilities for these advanced
optical modules.
The CATV market is our most established market, for which we supply a broad
array of products, including lasers, transmitters and transceivers, and turn-key
equipment. Sales of headend, node and distribution equipment have contributed
significantly to our revenue in recent years as a result of our ability to meet
the needs of CATV equipment vendors who have continued to outsource both the
design and manufacturing of this equipment. While equipment vendors have relied
upon third parties to assemble portions of their products, within the past eight
years certain of our customers have accelerated the outsourcing of the design
and manufacturing of both headend equipment and node equipment to third parties.
The shift is due in part to the sophisticated engineering expertise needed to
perform this work. We believe that our extensive high-speed optical, mixed-signal
semiconductor and mechanical engineering capabilities position us well to benefit
from these industry dynamics.
Our vertically integrated manufacturing model provides us several advantages,
including rapid product development, fast response times to customer requests
and control over product quality and manufacturing costs. We design, manufacture
and integrate our own analog and digital lasers using a combination of Metal
Organic Chemical Vapor Deposition, or MOCVD, and our proprietary Molecular Beam
Epitaxy, or MBE, fabrication process, which we believe 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 proven to be reliable over
time and highly tolerant of changes in temperature and humidity, making them
well-suited to the CATV and FTTH markets where networking equipment is often
installed outdoors.
Trends in the Internet Data Center Market. To support the substantial increase
in bandwidth consumption, internet data center operators are increasing the
scale of their internet data centers and accelerating data transmission rates.
As a result, there is an ongoing transition from the use of copper cable, typically
at speeds up to 1 gigabit per second (Gbps), to optical fiber as a transport
medium, typically providing speeds from 10 Gbps to 100 Gbps. In recent years,
a number of leading internet companies have adopted more open internet data
center architectures, using a mix of systems and components from a variety of
vendors, and in some cases designing their own equipment. For these companies,
compatibility of new networking equipment with legacy infrastructure is not
as important, and consequently, these companies are more willing to work with
non-traditional equipment vendors, which we believe creates an open and growing
opportunity for optical device vendors. Moreover, transmission speeds have continued
to increase among the companies who have previously transitioned from copper-based
to fiber-based infrastructure, resulting in opportunities for optical device
vendors to supply new optical transceivers capable of operating at these higher
data rates.
Trends in the CATV Market. In recent years, CATV service providers have invested
extensively to support high speed, two-way communications and we expect that
they will continue to do so. In North America, in particular, CATV service providers
have begun to upgrade their networks with new technologies like DOCSIS 3.1,
which enables them to offer higher speed connections to their customers. In
order to increase available bandwidth for their customers beyond the bandwidth
possible with the introduction of DOCSIS 3.1, cable MSOs have been reducing
the number of customers that are connected to a single node. By reducing the
number of “homes per node,” the average bandwidth available to each
customer is increased. Other new technologies, such as Converged Cable Access
Platform (CCAP) and “Remote PHY” are under development by cable
equipment suppliers. These technologies are being developed to be a cost-effective
solution to provide higher available bandwidth to CATV customers.
While equipment vendors have historically relied upon third parties to assemble
portions of their products, within the past eight years, certain of our customers
have accelerated the outsourcing of both the design and manufacturing of both
headend equipment and node equipment to third parties. The shift is due in part
to the sophisticated engineering expertise needed to perform this work, along
with the proliferation of new equipment designs needed to support DOCSIS 3.1.
Trends in the Telecom Market. The telecom market is composed of customers who
deploy wireline optical networks, other than Passive Optical Networks, or PONs,
for telecommunications access networks, including for backhaul of cellular telephone
signals. As demand for mobile internet connectivity has increased in recent
years, reliable and high-speed optical networks have become increasingly important.
In particular, the use of wavelength division multiplexing (WDM) to expand the
capacity of mobile networks has led to increased demand for WDM components (including
lasers and transceivers) by telecom equipment manufacturers. In coming years,
we believe that the deployment of advanced 5G networks will result in increased
demand for optical components, especially those used in connecting between antennas
and base stations, as well as for backhaul as mentioned above.
Trends in the FTTH Market. The FTTH market generally refers to the PONs that
telecommunications service providers deploy. The most commonly deployed PON
technology is Gigabit PON, or GPON, which delivers up to 2.5 Gbps of data, but
due to the splitting of the bandwidth among multiple users, the actual bandwidth
delivered to an individual subscriber is far less than 2.5 Gbps. One approach
that does support true 1 Gbps service to the home is wavelength division multiplexing
PON, or WDM-PON, a technology that enables the transmission of multiple wavelengths
of data over a single fiber-optic strand.
We experience certain challenges within our target markets, including continuous
pressure to innovate and deliver highly integrated products that perform reliably
in harsh, demanding environments and to produce high-quality devices in large
volumes at competitive prices.
Our Solutions
By addressing the challenges in our target markets, we provide the following
benefits to our customers:
Enable customers to deliver innovative products. We leverage our extensive
expertise in high-speed optical, mixed-signal semiconductor and mechanical engineering,
and MOCVD and our proprietary MBE laser fabrication process to deliver technologically
advanced products to our customers.
Enhance efficiency and cost effectiveness of our customers’ supply chains.
We design and sell products at the level of integration desired by a customer,
from components to turn-key equipment, providing our customers a dependable,
cost-effective and simplified supply chain.
Deliver high quality, reliable products in high volume. As a vertically integrated
supplier, we are able to monitor and maintain quality control throughout the
production process, using our internally produced components where possible
for our final products. With manufacturing facilities in the U.S., Taiwan and
China, we can support high volume production and timely delivery for our customers
around the world.
Provide sophisticated design solutions to our customers. We believe our in-house
expertise in both analog and digital optical engineering enables us to design
comprehensive solutions that meet many of the different network architectures
and protocols used by our customers.
Our Strengths
Our key competitive strengths include the following:
Proprietary technological expertise and track record of innovation. We continue
to develop innovative products by leveraging our technological expertise, including
our proprietary MBE and MOCVD laser fabrication process.
Innovative light engine design and manufacturing. High-speed data center interconnect
transceivers increasingly rely on multiple parallel optical signals. Our expertise
in designing and manufacturing light engines, which combine lasers and photodiodes
with channel multiplexing and de-multiplexing elements, gives us the ability
to quickly develop new products for our data center customers.
Proven system design capabilities. We have extensive expertise and proven design
capabilities in high-speed optical, mixed-signal semiconductor and mechanical
engineering, which we believe position us to take advantage of the continuing
shift to outsourced design and manufacturing among CATV equipment vendors.
Highly customized products. Many of our products have some level of customization,
making it more difficult for our customers to switch rapidly to another supplier.
We believe this element of customization contributes to longer product lifecycles
and more stable product pricing.
Industry-leading position in the CATV market. We have continued to be awarded
new design and manufacturing opportunities for CATV components and equipment.
We serve a majority of the largest CATV equipment manufacturers in the world
and our knowledge of both their requirements and the needs of their customers
(the CATV network operators) allows us to access these new opportunities.
Vertically integrated, geographically distributed manufacturing model. Our
vertically integrated design and manufacturing process encompasses various steps
from laser design and fabrication to complete optical system design and assembly.
Furthermore, we have geographically distributed our manufacturing by strategically
locating our operations in the U.S., China and Taiwan to reduce development
time and production costs, to better support our customers and to help protect
our intellectual property.