Applied Optoelectronics (AAOI) signed a five-year supply deal with Yunnan Xinyao, a unit of Chinese indium phosphide (InP) substrate maker Yunnan Germanium (002428.SZ), according to a Nov. 3 evening filing from Yunnan Germanium. The deal says AAOI will buy 180,000 4-inch N-type InP wafers a year from 2027 through 2031, or 900,000 wafers across the five years. Yunnan Germanium put the 2027 contract value at $194.4 million.
Annual purchases set at 180,000 wafers from 2027 to 2031
Yunnan Germanium said the two sides signed a Long-Term Supply Agreement. Per the filing, AAOI is set to purchase 180,000 4-inch N-type InP wafers annually for five years, taking the total to 900,000 wafers. The company said the 2027 contract value of $194.4 million works out to 122.46% of Yunnan Germanium’s audited 2025 revenue.
That implies a price of about $1,080 per wafer, or around RMB 7,250. Pretty close. The article said market data showed the average domestic Chinese price for a 4-inch InP wafer was RMB 7,100 on Oct. 23, so the contract price sits near that mark.
As for capacity, Yunnan Germanium said an expansion project that started in April this year is expected to take 18 months and lift annual capacity by 300,000 4-inch wafers. Once that expansion is finished, total yearly capacity is expected to hit 450,000 wafers. On that math, AAOI’s yearly purchase volume would make up about 40% of the total.
Rosenblatt says InP remains a key bottleneck in optical communications
Rosenblatt said in a Nov. 3 report that InP wafers are among the tightest constraints in the optical communications supply chain. And the firm said AAOI’s decision to lock in a five-year purchase plan for 180,000 wafers a year signals expectations for heavy laser and optical transceiver shipments in the next few years.
The report said dependable wafer supply removes one major constraint on AAOI’s internal laser production. Rosenblatt called in-house lasers a base for ramping 800G and then faster optical transceiver modules. Shortages of InP, it said, have held back output across the industry, and a multi-year supply deal gives AAOI more confidence when it commits capacity to customers.
Rosenblatt said it is now watching a few details: payment terms, whether customer prepayments help fund the arrangement, and whether some of the laser output could be sold to other module makers.
Rosenblatt estimates $1 of wafers can support $30 of module revenue
Rosenblatt also sketched out the economics of the deal. Its view: every $1 of InP wafers can support about $30 of optical transceiver module sales. Using that ratio, the $194.4 million contract value for 2027 could back about $5.8 billion in annual module revenue.
Using an implied blended average selling price of about $500, based on AAOI’s 2027 revenue and capacity targets, that comes to roughly 12 million modules. If that same pricing holds across the full five-year term, the module revenue supported would be about $29 billion.
Rosenblatt said that number matches up with AAOI’s own targets. The article pointed to AAOI’s mid-2027 goal of about $471 million in monthly data-center optical transceiver revenue, or roughly $5.7 billion annualized. The firm also said wafers make up only about 3% of module revenue, meaning higher wafer prices would have a limited effect on gross margin. It added that the full-term deal could also back growth beyond 2027, including high-power lasers used in ELSFP and CPO (co-packaged optics).
Firm points to a still-strong optical cycle
Rosenblatt said the AAOI-Yunnan Xinyao agreement is its third sign that the optical communications cycle is still strong.
- Fabrinet (FN) lifted its capacity targets, aiming for about $10 billion in revenue scale before January 2027, about $13 billion by the end of fiscal 2028, and a short- to mid-term target of about $16 billion. Management also said customer demand remains sustainable.
- Rosenblatt’s channel checks pointed to about two years of visibility for transceiver, OCS, NPO and CPO projects.
On Lumentum (LITE) agreeing to be acquired by Marvell (MRVL), Rosenblatt said the move is strategic, not a sign of weak demand. The report said LITE had just posted strong fiscal 1Q27 results, guided for about 27% quarter-over-quarter revenue growth in fiscal 2Q27, and signed a new three-year NPO long-term agreement beginning at the end of 2027. Rosenblatt said Marvell is getting into position to combine electronics and photonics ahead of the coming NPO and CPO shift.
Based on that view, Rosenblatt reiterated its Buy ratings on AAOI, VIAV and FN.
Export licensing, supplier concentration and annual repricing remain risks
Yunnan Germanium said in its filing that the Long-Term Supply Agreement is a framework arrangement. Whether each annual contract is performed depends on securing and keeping dual-use export licenses in China. If those approvals do not arrive as expected, the contracts may not be carried out and could even be canceled. And because the agreement is settled in U.S. dollars, it also carries foreign-exchange risk.
Rosenblatt also flagged reliance on a Chinese supplier as a major risk. The report said, "With U.S.-China tensions running high, export licenses could be delayed or denied, some customers may prefer non-Chinese sources of supply, and because pricing is renegotiated every year, substrate costs could still rise further."
The report added that if Yunnan Xinyao does not obtain or keep the required licenses, AAOI can cancel the affected orders and seek refunds. So yes, Rosenblatt said the contract may involve prepayments. Even so, the firm said it still views AAOI’s push to close its InP supply gap and move forward with in-house laser production and module volume growth in a positive light.
