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Core Viewpoint - The transition of data centers to Co-Packaged Optics (CPO) switches is inevitable, primarily driven by the power savings offered by CPO technology [1][2]. Group 1: CPO Technology and Market Trends - CPO technology is gaining traction as it significantly reduces power consumption, with potential savings of 30-50% compared to traditional optical devices [1][2]. - The industry has made substantial progress in CPO reliability over the past two years, making it a viable option for future high-speed data rates [2]. - The upcoming 400G SerDes generation may see CPO as the only feasible choice due to excessive insertion loss from traditional PCB traces and cables [2]. Group 2: Technical Integration of CPO - CPO solutions typically integrate electronic integrated circuits (EIC) and photonic integrated circuits (PIC) within the same package [3]. - Two main integration methods for optical engines within ASIC packages are the silicon interposer approach and the organic substrate approach [4][5]. - The silicon interposer method allows for high-density connections but complicates thermal management due to the proximity of high-power EICs [6]. - The organic substrate method offers better thermal isolation and modularity, allowing for independent testing of optical engines before assembly [7][8]. Group 3: Bandwidth Density and Performance - Bandwidth density, a critical metric for CPO solutions, measures the amount of data transmitted per millimeter along optical interfaces, typically expressed in Tbps/mm [9]. - Higher bandwidth density is essential to meet the explosive growth in bandwidth demand in data centers and high-performance computing systems [9]. Group 4: Competitive Landscape - Broadcom's Bailly CPO switch integrates eight 6.4 Tbps optical engines, achieving a total external bandwidth of 51.2 Tbps [12]. - NVIDIA's Quantum-X InfiniBand switch aims for higher scalability, targeting over 100 Tbps with advanced optical engine integration [17][18]. - Broadcom's next-generation switches are expected to reach 102.4 Tbps, while NVIDIA's architecture is designed for future demands of 200G SerDes and beyond [16][19]. Group 5: Power Efficiency and Thermal Management - Both Broadcom and NVIDIA report significant reductions in power consumption per bit with their CPO solutions, with Broadcom achieving approximately 5.5W per 800 Gb/s port compared to 15W for traditional modules [35]. - Effective cooling solutions, such as liquid cooling, are necessary to manage the heat generated by high-density ASIC packages [35][36]. Group 6: Future Directions and Challenges - The industry is exploring advanced coupling methods, such as vertical coupling and multi-core fibers, to enhance optical connectivity and bandwidth density [38][40]. - Challenges in deploying CPO include ecosystem disruption, operational complexity, and the need for robust reliability validation [42][43]. - CPO's prospects appear brighter in vertical scaling applications, where integrated solutions from single vendors can simplify procurement and deployment [45].

Financial Data and Key Metrics Changes - For Q1, net sales reached a record $251.1 million, up 22% year over year and above the midpoint of the outlook [21] - Adjusted gross margin was 53.5%, up 30 basis points sequentially and up 370 basis points year over year [21] - Adjusted operating income was $47.6 million, resulting in an adjusted operating margin of 19%, up 680 basis points year over year [22] - Adjusted EBITDA was $55.4 million, up 68% year over year, with an adjusted EBITDA margin of 22.1%, up 600 basis points year over year [22] - Adjusted diluted earnings per share were $0.38, up from $0.06 a year ago [23] Business Line Data and Key Metrics Changes - Infrastructure net sales were $72.8 million, up 5% sequentially and up 30% year over year [8] - Data center net sales were a record $51.6 million, up 3% sequentially and up 143% year over year [8] - High-end consumer net sales were $35.4 million, flat sequentially and up 3% year over year [12] - Industrial net sales were $142.8 million, down 3% sequentially but up 24% year over year [16] - LoRa enabled solutions within the industrial market had net sales of $38.9 million, up 5% sequentially and up 81% year over year [16] Market Data and Key Metrics Changes - The company expects short-term demand gaps in the CopperEdge segment but anticipates sustainable growth in the data center business due to capital expenditure growth by hyperscalers [9] - The IoT cellular portfolio is expected to benefit from growing 5G adoption rates, particularly in North America [18] - Connected services net sales remained stable, showcasing the deployment of AI tools for anomaly detection [19] Company Strategy and Development Direction - The company focuses on portfolio optimization, strategic investment in R&D, and driving margin expansion [7] - Management emphasizes the importance of solidifying a winning culture, accelerating innovation, and leveraging technology leadership to enhance shareholder value [20] - The company is optimistic about the second half of the fiscal year, expecting growth driven by fiber edge products and incremental opportunities from LPO and CopperEdge [90][94] Management's Comments on Operating Environment and Future Outlook - Management acknowledges macroeconomic uncertainties that may impact the timing of portfolio optimization initiatives but remains committed to strategic priorities [68] - The company is confident in its ability to navigate through dynamic tariff policies and maintain stable product flow across the semiconductor supply chain [7] - Management expects net sales for Q2 to be around $256 million, reflecting a 19% year-over-year increase at the midpoint [25] Other Important Information - The company recorded a net debt decrease of $14.8 million to $396.2 million, with a focus on debt reduction [24] - The company successfully amended its revolving credit facility to increase total borrowing capacity by $117.5 million [24] Q&A Session Summary Question: Insights on the cellular module business - Management noted that the cellular module business experienced a seasonal decline but expects revenue to accelerate in future quarters due to competitive dynamics [32][34] Question: Update on AI connectivity and CopperEdge - Management highlighted strong engagement with over 20 customers for CopperEdge, with expectations for revenue ramp-up by Q4 [41][44] Question: Trends in the core data center business - Management expressed optimism for growth in the core data center business, driven by fiber edge products and expected incremental revenue from LPO [55] Question: LoRa market outlook - Management indicated that while LoRa sales may moderate slightly, the business remains strong with a projected quarterly run rate of $30 million to $35 million [60] Question: Expectations for seasonality in the second half - Management noted that seasonality is expected in the high-end consumer segment, while other markets may not show obvious seasonal trends [80] Question: Insights on surge switch product - Management explained that surge switch provides additional protection and is being designed into various applications, enhancing dollar content compared to typical protection products [97][100]

Investment Rating - Maintain "Buy" rating for the industry [5] Core Viewpoints - The upcoming OFC 2025 conference will showcase cutting-edge optical communication technologies, focusing on 1.6T optical modules, 200G optical chips, CPO, MPO, and LPO technologies [21][22] - The collaboration between AI and optical communication technologies is creating a feedback loop that drives comprehensive computing power upgrades, enhancing data rates, reliability, and operational efficiency [24][25] - The report emphasizes the importance of low-power optical modules in meeting the demands of AI computing clusters, with advancements leading to a reduction in power consumption by 20% for new products [21][22] Summary by Sections Investment Strategy - Focus on the optical communication sector, particularly on leading companies such as Zhongji Xuchuang, Xinyi Sheng, and Tianfu Communication [7][13] - Recommendations include monitoring developments in AI infrastructure and optical modules [7][13] Market Review - The communication sector has experienced a decline, with the operator index performing relatively better than other segments [17][18] - Specific declines noted in various sub-sectors, with optical communication down by 3.5% [20] Technology Developments - CPO and MPO technologies are rapidly advancing, transitioning from theoretical solutions to scalable applications [22][23] - LPO products are undergoing continuous micro-innovations to meet the increasing demands of AI applications [22][23] Key Companies to Watch - Recommended companies include Zhongji Xuchuang, Xinyi Sheng, Tianfu Communication, and others in the optical module and AI infrastructure space [7][8]