Q1 2025 Lumentum Holdings Inc Earnings Call
Speaker Change: Good day, everyone, and welcome to Limit Them Holding's first quarter fiscal of the year 2025 earnings call.
All participants will be in listen-only mode.
Speaker Change: Please also note today's event is being recorded for replay purposes.
Speaker Change: At this time, I would like to turn the conference over to Kathy Ta, Vice President of Investment Relations. Ms. Ta, please go ahead. Thank you. Thank you.
Speaker Change: Thank you and welcome to Lamentum's fiscal first quarter 2025 earnings call. This is Kathy Ta, Lamentum's Vice President of Investor Relations.
Speaker Change: Joining me today are Alan Lowe, President and Chief Executive Officer, Wajid Ali, Executive Vice President and Chief Financial Officer, and Chris Cauldron, Senior Vice President and Chief Strategy and Corporate Development Officer.
Speaker Change: Our expectations and beliefs regarding recent acquisitions, including Cloudlight, macroeconomic trends, and our expected financial and operating performance, including our guidance, as well as statements regarding our future revenues, financial model, and margin targets.
Speaker Change: These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations.
Speaker Change: particularly the risk factors described in our SEC filings. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our most recent 10-K and in our 10-Q that will be filed soon.
Speaker Change: Forward-looking statements provided during this call are based on Momentum's reasonable beliefs and expectations as of today. Momentum undertakes no obligation to update these statements except as required by applicable law.
Speaker Change: Please also note that unless otherwise stated, all financial results and projections discussed in this call are non-GAAP. Non-GAAP financials are not to be considered as the substitute for or superior to financials prepared in accordance with GAAP.
Speaker Change: Lamentum's press release with the fiscal first quarter results and accompanying supplemental slides are available on our website at www.lamentum.com under the investors section. With that I'll turn the call over to Alan.
Thank you, Kathy. Good afternoon, everyone.
Alan Lowe: In the first quarter, we exceeded the high-end of our guidance for both revenue and earnings per share. We set a new record for Datacom LaserChip orders, including 200-gig EML chips, reflecting strong demand from multiple customers, including an AI infrastructure customer.
Alan Lowe: Based on expanding cloud demand and improving trends in the broader networking market, we expect double-digit sequential revenue growth in the second quarter.
Alan Lowe: During the first quarter, we advanced our strategy to expand and diversify our cloud and AI opportunities.
Alan Lowe: We secured an additional hyperscale transceiver customer with a new qualification and initial volume orders.
This is beyond the new award we highlighted last quarter.
Alan Lowe: We expect to start shipping volume production against these new customer awards in the first half of calendar 2025, and they will ramp through the year, consistent with the revenue targets we set out previously.
Alan Lowe: Over the past few quarters, I outlined a three-pronged strategy to grow our cloud data center business.
Alan Lowe: As a reminder, the first prong is to expand our cloud and AI customer opportunities at the component and transceiver levels as customers migrate to higher speeds.
Alan Lowe: The second is to scale significant production capacity for components and transceivers outside of China.
Alan Lowe: And the third is to advance our differentiated technology roadmaps, enabling customers to scale future generations of cloud and AI data center architectures to higher compute capacities in a more cost effective and power efficient manner.
Alan Lowe: I would like to share more details on recent progress in each of these areas.
Alan Lowe: Regarding the expansion of our customer opportunities, as the industry transitions to higher speeds, our differentiated technology becomes increasingly valuable, especially to market and technology leading customers.
Alan Lowe: For example, in the coming year, the transition to 200G lane speeds will drive growth and increase the importance of single-mode optics and indium phosphide laser transmitters. This shift aligns well with our market and technology leadership.
Alan Lowe: Our indium phosphide EML transmitters have established a strong reputation for high performance, high quality, and reliability.
Alan Lowe: Underscoring this, our 100G EMLs are currently shipping in high volumes to a wide range of optical transceiver suppliers for use in leading-edge single-mode 400G and more importantly 800G optical transceivers.
Alan Lowe: These customers are now designing our 200G EMLs into their next generation of transceivers, positioning us well for the upcoming transition to 200G per lane.
Alan Lowe: We've also made significant progress in expanding our opportunities on the high-speed Datacom transceiver side of our business.
Alan Lowe: As we previously forecasted, our Datacom transceiver shipments are expected to increase sequentially this December quarter, and we expect our transceiver production to continue growing throughout calendar year 2025, driven by demand from multiple hyperscale cloud and AI customers.
Alan Lowe: As I mentioned earlier, we received an initial set of orders from new Hyperscale customers and expect to start shipping production transceiver volumes for these new customers in the first half of calendar 2025.
Alan Lowe: In addition, we are actively working to finalize additional awards for multiple other opportunities.
Alan Lowe: The second prong of our cloud and AI data center strategy is to expand our manufacturing capacity at established momentum facilities outside of China.
Alan Lowe: This expansion is essential to ensuring a secure and reliable supply chain for our cloud and AI customers. Our indium phosphide laser chips are critical to data center infrastructure.
Alan Lowe: As discussed in our last earnings call, to meet the growing demand, we are on track to increase EML production capacity by 40% in Q4 of fiscal 2025 compared to our capacity in Q4 of fiscal 2024.
Alan Lowe: This expansion will help alleviate the industry-wide shortage of indium-classified capacity. However, we still expect to be on allocation throughout calendar year 2025.
Alan Lowe: Our Datacom Conceiver Capacity Expansion at our Thailand campus is progressing as planned.
Alan Lowe: The first production line is now operational, and we anticipate completing additional expansion phases over the next 18 months to meet the high volume of demand from our customers.
Alan Lowe: This includes completing construction of our new three-story clean room facility on the same campus, which remains on schedule.
Alan Lowe: The third prong of our Cloud and AI strategy focuses on delivering innovative technologies to address the escalating challenges of scaling data center compute capacity.
Alan Lowe: We are collaborating with leading-edge customers to develop breakthrough solutions to enable higher data link capacities with enhanced energy efficiency that will support their multi-year cloud and AI infrastructure roadmaps.
Speaker Change: Inside the data center, optical switching is expected to be critical for future generation cloud and AI network architectures. Lomentum's power-efficient, high-bandwidth, and low-latency optical switches are well-positioned to meet the demands of these evolving networks.
Speaker Change: We have already shipped evaluation units to customers who have provided overwhelmingly positive feedback on our performance.
Well, we are beginning to ramp our 200G laser chips.
Speaker Change: We are already working in close alignment with customers on technologies for future generations of yet higher-speed optical links, such as 400G per lane, and new architectures, including co-packaged optics, which will require unique ultra-high-power lasers.
Speaker Change: Our advanced indium phosphide and platonic integrated circuit capabilities are essential for meeting these upcoming demands.
Speaker Change: While we don't expect the deployment of these technologies to start until our fiscal 2026, we are actively collaborating with customers to shape the future of optical technology.
Speaker Change: Executing our three-pronged strategy will drive significant revenue growth fueled by new opportunities in AI and cloud data centers.
Speaker Change: This growth, combined with a recovering network business, positions us to return to a double-digit operating margin as our capacity utilization improves and we maintain strict cost discipline.
Speaker Change: As we outlined at the OFC conference last spring, we are targeting an operating margin of 17 to 20 percent once our quarterly revenue surpasses $600 million per quarter.
Thank you for watching!
Speaker Change: Now, let me move to additional fiscal first quarter revenue and product highlights.
Speaker Change: Our first quarter cloud networking segment revenue grew 11% sequentially and 23% year-over-year, driven in part by strong in-market demand from cloud hyperscale customers as they invest within and outside of AI data centers.
Speaker Change: We are also encouraged by continued growth in shipments of our newest networking products.
Speaker Change: This, combined with improving inventory levels of our products at our networking customers, is encouraging as we look to the future.
Speaker Change: We have a sequential increase in demand for our narrow-line lip-tunable lasers used in high-speed long-haul applications, as well as 400CR and higher-speed solutions in DCI applications.
Speaker Change: With our existing design wins in this area, we anticipate maintaining a leading market share in laser components for ZR and ZR Plus applications this fiscal year and beyond.
Speaker Change: Customer interest in our advanced coherent transmission and next generation transport solutions is on the rise.
Speaker Change: In leading-edge coherent transmission, we are experiencing robust demand for 130 and 200 gigabaud coherent products.
Speaker Change: This demand is driven by the need for greater capacity and spectral efficiency amid continued bandwidth growth.
Speaker Change: Our differentiated technology, manufacturing capabilities, and strong design wind momentum position us to maintain leadership in these critical products as well.
Speaker Change: Complementing growing demand for our coherent transmission components, we are seeing increased demand for integrated C plus L band transport solutions, high port count RODEMs, and the emergence of demand for multi-rail RODEMs and amplifiers.
Speaker Change: Multirail is the next step in efficiently scaling the optical transport layer and offering increased flexibility in high-capacity line systems.
Speaker Change: We anticipate strong sequential growth in our cloud and networking revenue in Fiscal Q2 due to rapid growth in our products addressing cloud and AI applications and broad-based improvement in demand across our product portfolio.
Speaker Change: Now let me move to our industrial tech segment. As expected, our industrial tech segment revenue grew 2% sequentially while being down 38% from the same quarter last year. Like others in this space, demand continues to be challenged due to the weak industrial end market.
Speaker Change: In industrial tech, we are focused on developing innovative industrial laser products to meet customers' needs for higher precision with minimal heat damage.
Speaker Change: This creates opportunities for our ultrafast laser products in heat sensitive applications like semiconductors, displays, and advanced packaging.
Speaker Change: We recently delivered high and low power Femtoblade demo units for advanced display applications and we have received positive customer feedback.
Speaker Change: Looking to fiscal Q2, we expect industrial tech to be approximately flat sequentially due to an uptick in industrial lasers led by our ultrafast lasers, offset by a sequential decline in 3D sensing revenue.
Speaker Change: To summarize, we have made significant progress in executing our strategy to grow our cloud business.
Speaker Change: We set a new record for Datacom chip orders and are working diligently to fulfill this demand over the next several quarters.
Speaker Change: We also made excellent strides with multiple high-speed optical transceiver customer engagements, including securing meaningful transceiver orders from a third hyperscale customer.
Speaker Change: Additionally, we are actively working to secure more awards from more new customers.
Speaker Change: Our robust pipeline of cloud customer engagements, combined with improving trends in the traditional networking market, reinforces our confidence in achieving our previously stated target of growing quarterly revenue to $500 million per quarter by the end of calendar year 2025.
Speaker Change: We anticipate continued significant growth into 2026 and 2027 as we capitalize on new cloud and AI opportunities, positioning our cloud business for a multi-billion dollar annual run rate in the coming years.
Speaker Change: Before I turn the call over to Wajid, I want to express my sincere gratitude to our employees for their unwavering focus and dedication.
and to our customers worldwide for their partnership and collaboration.
With that, Wajid.
Thank you, Alan. Before I outline our Q1 financial results,
Speaker Change: Please note that, consistent with our discussion last quarter, we have changed our presentation to include certain charges that were previously excluded, primarily related to abnormal excess capacity in our non-GAAP results, starting in the first quarter of fiscal 2025.
Speaker Change: Comparable historical periods have been recast to align with this presentation for consistency.
Thank you.
Speaker Change: First quarter revenue of $336.9 million and non-GAAP EPS of $0.18 were above the high end of our guidance ranges.
Speaker Change: GAP gross margin for the first quarter was 23.1%, GAP operating loss was 24.5%, and GAP net loss per share was $1.21.
Speaker Change: Turning to our non-GAAP results, first quarter non-GAAP gross margin was 32.8%, which was up sequentially and flat year-on-year on higher revenue.
Speaker Change: In future quarters, we anticipate company gross margins will sequentially increase as manufacturing utilization improves due to an improving telecom outlook, as well as an increase in datacom laser shipments.
Speaker Change: First quarter non-GAAP operating margin was 3%, which was up sequentially and year-on-year. First quarter non-GAAP operating profit was $10 million and adjusted EBITDA was $37 million.
Speaker Change: First quarter non-GAAP operating expenses totaled $100.4 million, or 29.8% of revenue, a decrease of $1 million from the fourth quarter and down $1.9 million from the year-ago quarter.
Speaker Change: Despite increased investment in our expanding cloud opportunities, Q1 operating expenses were lower due to restructuring actions that were taken during fiscal 2024, as well as overall stringent cost controls across the company.
Q1 non-GAAP SG&A expense was $37.7 million.
Non-GAAP R&D expense was $62.7 million.
Speaker Change: Interest and other income was $4.6 million on a non-GAAP basis, driven by interest earned on our cash and investments.
Speaker Change: First quarter non-GAAP net income was $12.2 million and non-GAAP diluted net income per share was 18 cents. Our fully diluted share count for the first quarter was 69.1 million shares on a non-GAAP basis.
Speaker Change: During the first quarter, our cash and short-term investments increased by $29 million to $916 million. Our working capital came in as expected, with inventory levels increasing sequentially to support the expected growth in revenue across our cloud modules business.
Speaker Change: In Q1, we invested $74 million in CapEx, primarily driven by investments in high-speed transceiver capacity additions at our Thailand manufacturing site, as well as indium-phosphide wafer production capacity.
Turning to segment details.
Speaker Change: First quarter cloud and networking segment revenue at $282.3 million increased 11% sequentially and 23% year-on-year. Cloud and networking segment profit at 13% increased sequentially and year-on-year.
Speaker Change: Our first quarter industrial tech segment revenue at $54.6 million was up 2% sequentially and down 38% year-on-year.
Speaker Change: First quarter industrial tech segment profit of 4% increased sequentially and decreased year on year.
Speaker Change: Now, let me move to our guidance for the second quarter of Fiscal 25, which is on a non-GAAP basis and is based on our assumptions as of today.
Speaker Change: We expect net revenue for the second quarter of fiscal 25 to be in the range of $380 million to $400 million.
This Q2 revenue forecast includes the following assumptions.
Speaker Change: Cloud and networking to be up sequentially with strong growth in products addressing cloud applications and improving networking customer demand.
Speaker Change: and industrial tech to be approximately flat sequentially with increased industrial laser shipments offset by a decline in 3D sensing.
Speaker Change: Based on this, we project second quarter non-GAAP operating margin to be in the range of 5.5% to 7.5%.
Speaker Change: Our non-GAAP EPS guidance for the second quarter is based on a non-GAAP annual effective tax rate of 16.5%. These projections also assume an approximate share count of 69.6 million shares.
Speaker Change: With that, I'll turn the call back to Kathy to start the Q&A session. Kathy?
Kathy Ta: Thank you, Wajid. To allow everyone an opportunity to ask questions, please keep to one question and one follow-up. Now, let's begin the Q&A session.
Kathy Ta: If you would like to ask a question, please press star followed by 1 on your telephone keypad. To remove your question, press star followed by 2.
Kathy Ta: And if you are using a speakerphone, please pick up your handset before asking your question.
Speaker Change: Our first question of the day comes from Sameek Chowdhury with J.P. Morgan. Your line is now open.
Speaker Change: Hi, thanks for taking my questions and congrats on the strong guide here. If I can just ask on the guide first, I think the implied increase quarter over quarter in cloud and networking is about 50-60 million quarter over quarter. Can you sort of parse that out a bit for us in relation to how much of that is?
Speaker Change: Telecom improving versus maybe Datacom chips versus Datacom modules if you can directionally sort of point us to where most of that improvement is coming from and I have a follow-up. Thank you.
Thank you.
Alan Lowe: Sure, thanks, Tameek. This is Alan. I'd say it's a mix of all of the above. I'd say data comp, chip, growth.
Alan Lowe: is not a lot until the next couple of quarters because the capacity comes in increments and chunks. And so, as I said in the script, the Q4 number will have to step up, but I think...
Not a lot of chips increased this quarter.
Alan Lowe: The telecom is modest, and I don't expect that that to be strong growth other than, you know, things that are going into DCI applications, but there's a large pickup on the Datacom modules, and we expect that to continue, as we said in the script, through calendar 2025.
Speaker Change: Got it, got it. And for my follow-up, you announced another sort of new customer win.
Speaker Change: for the original customer there when we take the two new customers together. Thank you.
Speaker Change: Yeah, I think that's hard to answer in that, you know, it's going to come down to our ability to execute and provide the kind of quality and delivery and capacity that the customers need so that new customers
Speaker Change: As I said before, we'll start ramping in the first half of next year, and it'll be ours to earn the growth of their business in the second half.
Speaker Change: You know, we're positioning ourselves very well. We're having the capacity in place, as I said, with clean rooms as well as equipment. So we're planning for success, but we still have to earn that.
Speaker Change: But that said, you know, these are all very, very large customers that consume a lot of transceivers. And so getting in the door is step one, and earning bigger share is really what we're striving to do now.
Thank you for taking my question.
Bye.
Speaker Change: Our next question comes from Simon Leopold with German Jane. Your line is now open.
Simon Leopold: Thank you very much. I wanted to dig a bit more into what's going on with the Cloudlight business. Reflecting back on when you reported your third fiscal quarter last year,
Speaker Change: You had talked about sort of the cadence of that business, where we'd see a bit of a pause in June and September, which I think we've seen and sort of the snapback in December and so.
Speaker Change: What I'm trying to get an assessment of is sort of what's changed in that December outlook versus what you thought several quarters ago. Is it above, below, and what's different in terms of informing that expectation on CloudLight? Thank you.
Speaker Change: Thanks Simon. Yeah, nothing's really changed. I think it's coming in as expected as we've talked about the transition of new products. We're ramping the new products now and so you know it's kind of come together as we had expected and as we had talked about on our previous two earnings calls. So nothing unexpected from from my perspective.
Speaker Change: And then just as a follow-up, I'd like to get your perspective on how you see the market for 1.6 terabit devices evolving and what you would anticipate your role would be in that market, really sort of timing and magnitude perspective. Thank you.
Speaker Change: You know, it's kind of 1.6T is one version of the next generation of product. There's also 800 gig.
Speaker Change: using 200 gig lanes. And so we're going to participate at the component level, as I talked about in the script, with our 200 gig EMLs. And that ramps really more towards the summer of next year. But we're in the qualification stages today and have received volume orders today, as our capacity is quite constrained.
Speaker Change: So we'll play at the component level with the EMLs mostly and then we'll play at the transceiver level. We've sampled transceivers to customers.
you know, ramping in a significant way.
Thank you.
Thanks, Simon.
Speaker Change: Our next question comes from Metta Marshall with Morgan Stanley. Your line is now open.
Speaker Change: Thank you, this is Karan Jivakar on for META. Just quickly and congrats on the quarter, I guess are there any changes to your to your timeline for vertical integration with Cloudlight? I think you mentioned sort of no shipments until the end of fiscal 25, but just sort of any updated timeline on your vertical integration there?
Speaker Change: No real change. I mean, we're building products with our lasers and EMLs and Vixels to be qualified, but I'd say, you know, the timing is really unchanged in that products that we were working on before the acquisition are coming to market now and those...
Speaker Change: mostly didn't change, but I'd say that, you know, we have certainly opportunities in calendar 2025 to have more product end feeds, and that should help margins, you know, late in the calendar year and into calendar 2026.
Speaker Change: Okay, that's helpful. And then a quick follow-up on the telecom side. Are you sort of expecting sequential growth primarily from new products or products that didn't previously had inventory buildup? I think you mentioned that last quarter. I guess how do you expect sort of traditional telecom products to track and sequentially across the year?
Thank you.
Speaker Change: Sure, I mean, I'd say that, you know, we're seeing dramatic strength in anything ZR, anything to connect data centers as data centers are being built out, and that can take the form of ZR modules, but given our share of tunable lasers that go into ZRs, that's
Speaker Change: We're going to see a dramatic pickup in the telecom side. So, you know, I'd say that the hyperscale growth is very solid outside of the data center, and that includes...
transport or open line systems.
Speaker Change: I'd say that carrier spending is still muted and inventory still needs to get burnt off there. But, you know, there are signs of light, so new products are flowing out the door, as we talked about. And I think, you know, we're...
Speaker Change: a quarter or two away from having, you know, returned to more normal inventories, but we're seeing certainly good signs of inventory reductions of our product at our customers.
Thanks for having us. Thank you.
Thank you.
Speaker Change: Our next question comes from Inata Barua with Luke Capital. Your line is now open.
Hey, yeah, guys. Good afternoon. Thanks for taking the question.
Speaker Change: We'd just love to get your thoughts, Alan, on how to think about...
Speaker Change: and Alan Lowe, who are going to talk about tariff positioning, tariff risk, hot topics kind of these days. So, get your thoughts there in the context of diversifying out of China. And then I have a quick follow-up as well. Thanks.
Alan Lowe: Yeah, I don't think our strategy is changing based on who is going to be in the White House.
Alan Lowe: to be a U.S. headquartered company with manufacturing outside of China, and that is not changing as a result of, you know,
Alan Lowe: I would say that it positions us very well as we've had an established manufacturing facility that we're growing dramatically in Thailand.
Alan Lowe: and our laser chips come out of the U.S. as well as the U.K. and Japan. So from that perspective, I think we're...
Alan Lowe: As tariff-free as you can get with respect to our future
Alan Lowe: So, I don't think any strategy change is happening, but I'd say that that resonates with a lot of our customers who want to have supply chain resilience, and we provide that for them both with vertical integration as well as, you know, a limited footprint in China and a growing footprint outside of China.
Speaker Change: That super helps the context. Thanks and then just a quick follow-up is just on on EML lasers given the this constrained position is there any I get pricing power that you guys have or that you're using?
Thank you, that's it for me.
Speaker Change: You know, I think we look at pricing on a portfolio basis and I think that as things are constrained they go down slower or go up
Speaker Change: faster. And so I think in the constrained environment as we as we look forward
Speaker Change: And as we sit here today, I think we have to pay for a lot of capital that's going into ad capacity. So I think that we're justified in looking at price optimization on EMLs as one area that we are looking at and have implemented some.
Strategic Pricing for those products.
Thanks a lot, guys. Appreciate it, Alan.
Operator? ACR, we're ready for our next question.
Speaker Change: I apologize, my line was muted. Mike Genovese from Rosenblatt, your line is now open.
Mike Genovese: Okay, thanks very much. I guess, can I ask for more color on the telecom market?
Mike Genovese: When you make comments about 26 and 27 and that kind of visibility, is that all the data com side or how far does the telecom visibility extend?
I mean I think that telecom
Mike Genovese: traditional telecom or carrier telecom, the visibility is not great, although I would say that the deployments have been below
Wajid Ta, Wajid Ali, Alan Lowe
today in China as they're rolling out new networks.
Mike Genovese: You know, visibility of telecom carrier network spending in 26 and 27, I'd be kidding you if I said I had good visibility to that.
I think more so the data.
Mike Genovese: center and the data center interconnect markets, we believe is going to
Mike Genovese: be very strong in the future, and frankly, we have a fairly small footprint and small share of data contract receivers.
Mike Genovese: With our U.S. headquarter and manufacturing outside of China, I think there's a compelling reason for customers to come our way. So we expect to not only grow our Datacom module business and EML chip business, but gain significant share through the next coming years.
Thank you for watching!
Speaker Change: Great, that's very helpful. And then finally, I guess, can you give me more color on the optical switch product in the data center? Like what it's, what's going to do in the data center? And is this kind of a completely new function or is it, you know, kind of like the next?
Speaker Change: Will it replace anything, or replace part of anything, and I'm specifically thinking about Ethernet switches, whether there's anything there.
Speaker Change: It's performing, obviously, the name, optical switching, and there are, as you know, in a data center, there's a tiering, multiple levels of optical switches to get the large scale that's needed to connectivity across a very large data center.
and so the ability to produce...
Speaker Change: high radix, so 300 by 300 kind of level switches, I guess you could argue
Speaker Change: today's switches or the switches that you would use had you scaled today's architectures then can be used for more GPUs and more networking optics etc to interconnect
Speaker Change: AI accelerators. So that's really the idea here is that to bring a lot more energy efficiency when you're talking about big pipes going across a very large data center.
The other advantage also, to be clear, is that...
Speaker Change: As you add layers of switches, the switches do have added latency and, you know, optical switching has very little latency. So that's also a big advantage as you increase the size of data centers.
Sorry, Mike, you were saying? Okay, thank you, Mike.
Mike Genovese: Oh, well, I was just going to say, so basically, it sounds like larger cluster sizes of GPU. As they get larger and larger, you need larger optical switches, basically.
to sort of summarize.
General, yes. I think there can be other...
Mike Genovese: Yeah, other uses and maybe a couple things to also point out that...
Mike Genovese: You know, for us, this is a natural extension that's leveraging the technologies that we've, you know, pioneered in the ROADM space over past several decades, and so it's really an adapting of technologies that we've had to a new data center opportunity.
Perfect, thanks so much.
Thanks Mike.
Speaker Change: Our next question comes from Tom O'Malley with Barclays. Your line is now open.
Tom O'malley: Hey guys, nice results and thanks for taking the questionnaire. So, I wanted to understand the qualification process.
Tom O'malley: So, you've now won another award and you talked last quarter about kind of qualification in the first quarter time period with that first customer. So, can you maybe refresh us here? So, 2 new customers are both of them qualified yet and when they are qualified, when do you normally get a feel for the volume you're getting?
Tom O'malley: and there's obviously, being qualified and the amount that you actually end up shipping is a different thing, but you're very confident in next year. So can you remind us when are these two customers going to be qualified? And then when will you have a feel for those volume forecasts for those two customers?
Speaker Change: Yeah, I'd say we're still on track with what we said last time with the first new customer that we talked about on the last earnings call with qualification happening in the first calendar quarter. I would say the new customer that we added this quarter is qualified now.
Speaker Change: and we received orders now that we'll be beginning to ramp in the first half of next year. So, a little bit different timing, but, you know, we're happy with both. And as I said before, we've got a lot of other qualifications going on that we'll talk about on the next earnings call, I hope.
Speaker Change: Super helpful. Just looking at the moving parts to kind of get to that $500 million a quarter.
Speaker Change: You guys have kind of expressed an increased confidence there, perhaps a little bit above that. So, you know, you're kind of in the low $300 million a quarter right now. You talked about EML setting a record. I think previously you were at $80 million or so a quarter. So let's just assume a little bit above that.
But you kind of talked about capacity being outstripped.
Speaker Change: for joining us. You're basically sold out there. So when I look at where you go from here, the low $300 million to kind of that $500 million range, is more of that incremental, the E&L lasers, or is more of that incremental, the qualifications of new transceiver customers and their ramping?
Any therapy would be really helpful. Thank you.
Speaker Change: Sure, sure, Tom. I think, you know, starting with our midpoint of our guidance for our fiscal Q2, which is the quarter we just guided, we're guiding to 390 is the midpoint.
and I'd say that there's a combination of...
what we expect to win and grow.
Speaker Change: between now and the end of next calendar year. As I talked about in the script, growing EML capacity by 40% from the June quarter of last year to the June quarter of this year.
Speaker Change: This coming fiscal year is part of that growth, but I'd say transceivers are growing. Anything regarding data center interconnect is going to grow, and we're not counting tremendously on a bounce back in the traditional telecom.
Speaker Change: business with carrier spending and if that happens then you know we'll get there sooner but I'd say that's kind of the three big prongs which is
Speaker Change: Growth in the chips starting really in the summertime, growth in transceivers that we've talked about really starting the December quarter, and then data center interconnect are really the three big drivers for getting us from 390 as a midpoint to the 500 million.
Thank you.
Thanks, Tom.
Thank you.
Speaker Change: Our next question comes from Karl Ackerman with BNP. Your line is now open.
Thank you.
Speaker Change: Yes, thank you. I wanted to double click on the hyperscale win as well as the design we spoke about last quarter.
Speaker Change: Specifically, are these transceiver opportunities being driven by hyperscalers or large customers connecting their own AI processors, or is it being driven by you being included on reference designs of maybe perhaps new GPU platforms?
Speaker Change: And as you address that question, are these initial transceivers now integrating your EMLs? If not, does that push out the ramp of these customers or hyperscalers ramping your optical products in 25? Thank you.
Speaker Change: Yeah, thanks Carl. I think we don't want to necessarily get into customer architectures and what they're deploying but you know, we can certainly comment on our transceivers and so these in general are transceivers that won't
Speaker Change: have our emails at initial launch, if you will, because these have been in development and designed over the past year or so. Obviously, these accounts...
Speaker Change: We have other opportunities, to Alan's point, as we succeed and execute with them. Not only will there be more share, but there will be more SKUs and other types of transceivers where we can introduce more of our own content.
Thank you for watching!
Okay, thank you. Carl, did you have a phone line?
For more information, visit www.fema.gov
Speaker Change: Could you discuss whether the new wins that you're receiving are driven by data center customers reallocating procurement of these Ofco transceivers to U.S. domiciled suppliers like yourself?
Speaker Change: I could just comment on that and then perhaps in addition to that
Speaker Change: Are you able to quantify maybe the expanding CAM that you see as these AI clusters that now have the option of being of disaggregating some of the components of scale-up architectures? Are you also seeing that as a new opportunity? Thank you.
So maybe add that these are new opportunities so they're
Speaker Change: So it's not a reallocation, I would say that customers are certainly
Speaker Change: like the fact that we are U.S. headquartered and non-China manufacturing.
Speaker Change: and a long roadmap of that. So I think that makes us more competitive in winning in these new opportunities.
Speaker Change: These are definitely scale-out for the time being, the introduction of optics into more of the scale-up is probably a year or year and a half out kind of time frame, and there's certainly people
Speaker Change: , , , , , , , , , , , , , ,
Speaker Change: You know, if you turn the clock back a year ago, there were really only two folks building AI gear and I think you'll have more, I think you brought up the word, to an extent, some level of disaggregated architectures as we roll forward into calendar 25 and 26.
Thanks, Carol.
Speaker Change: Our next question comes from David Vaught with UBS. Your line is now open.
Speaker Change: Hey guys, thanks for taking the question. This is Brian on for David. Can you clarify if these transceiver customers were contemplated in your 4Q25 guide and then I have a follow-up.
Thank you for watching!
Thank you.
Bye.
Speaker Change: Yeah, we talked about calendar 2025 and getting to 500 million, you know, I think we have plenty of opportunities, whether this one or that one was, you know, in our number. We don't need to win all the ones we're going after. So it's hard for me to say that. Yeah, we're right on track with these two that we had.
Speaker Change: had planned on. So I'd say that's a hard one to answer, you know, they certainly play a part in getting us there and we're really, really happy with the progress we've made with these customers as well as other customers that we expect to, you know, be talking about on future calls.
Speaker Change: Got it. That's helpful. And then for my follow up, in the qualification process, you mentioned that you have to earn more volume. Does that mean you're a secondary provider in these deals? And then if so, what type of share would be reasonable in your view?
Thank you.
Speaker Change: Well, I'd say that, you know, in any of our businesses we have to earn trust and earn share and that's done through
Speaker Change: quality execution and resilient supply chain and and doing what we say we're going to do and and you know share does shift.
Speaker Change: in all of our business as a result of performing well or not performing well. So that's what I intended to mean by that discussion.
I'd say that there are, you know...
Speaker Change: Hyperscaler demand is very big and no one relies on one supplier, so as they ramp up two or three suppliers, the ones that perform better are going to get more share in the long run, so that's what we're really working on.
Speaker Change: to make sure that we gain that trust and we gain that resilience of supply so that customers can count on us to provide more of their product that they need, and that's what we're working on.
Thanks for the color.
Speaker Change: Our next question comes from Ryan Coombs with Needham & Co. Your line is now open.
Speaker Change: Great, thanks for the question. I wanted to circle back to your comments around DCI and understand your exposure there on tunables. But can you maybe talk about what your opportunities are in the module space there? Are you present? Do you have any design wins in ZR today for ZR modules? And how should investors think about that opportunity for the company?
Speaker Change: Yeah, so DCI exposure, I would say the biggest revenue exposure for us is what I said before, which is the tunable lasers.
Speaker Change: and, to a lesser degree, other components that go into other people's ZR and ZR Plus modules.
Speaker Change: We do have exposure to our own ZR module and we're making very good progress on the 800GB ZR and ZR Plus.
both domestically as well as outside of the U.S.
So we're favorably encouraged by the progress there, I'd say.
Speaker Change: The 400 gig module, frankly, we were late to market. We have a small share, and we're doing our best to try to gain share there. But frankly, the market is very, very strong, and we're very happy in growing our
Speaker Change: our tunable laser business there and supporting our customers who are winning a significant share in a market that's growing very rapidly as data centers are moving further apart.
Speaker Change: Yeah, that makes sense. It's more of a mature market there. And then a quick question for Wajid around gross margins and kind of in lieu, kind of a lot of puts and takes going on here. How should we think about gross margins as the fiscal year unfolds here?
Yeah, thanks, Ryan.
Speaker Change: So, like we talked about in the script, we're expecting gross margins to improve.
Speaker Change: sequentially, yeah, we're even seeing it in Q2. You can see that our operating margin profile.
is significantly different than how we performed in Q1.
And so we're expecting to see that close margin improvement.
Speaker Change: move into Q3 and into Q4 as well as more of our supply comes online for EMLs.
Speaker Change: that you know customer pull is quite strong and the opportunities are quite strong as well and so because of that we're probably going to be spending ahead of revenue from an R&D standpoint and And we've already talked about some of the capacity investments. We're making so yes, we'll see gross margins tick up
Alan Lowe, CFO Alphabet and Google
Speaker Change: That's great, and just that capacity you just talked about adding.
Speaker Change: Does that capacity talk back and does that have an overhead impact? Also a little headwind there.
Speaker Change: Thank you. It does have a little bit of overhead impact because we're building out in our Thailand facility as we move more of our production of transceivers to Thailand.
Speaker Change: And so, you know, as we move that up and ramp that up, there will be a couple of quarters of overhead expenses associated with that. And so that's already contemplated in the sequential increases and margins. But then as that volume ramps up in the middle part of...
Speaker Change: next calendar year, we'll be able to see the benefit of that moving through the quarter. So we'll explain more about that as the quarter's happening, but thank you for asking about that.
Sure, that's all. Thanks a lot, guys.
Speaker Change: Thanks Ryan. Our next question comes from Christopher Rowland with SIG. Your line is now open.
Christopher Rowland: into lasers in particular, into cloud light. You said it mostly didn't change. Wanted to know what actually did change there. And then you suggested the second half of 25.
for those margin benefits, so I would assume...
Speaker Change: is that you would be more meaningfully integrating in the first half. So, I'd love to know, is this a qualification issue? Is this not a delay? Was this just my understanding that's wrong?
Speaker Change: EML constraints, what exactly, is that timetable pushing out indeed a bit for vertical integration and what's causing it?
Speaker Change: Yeah, so good question Christopher. I'd say a couple things, one of which is...
Speaker Change: Customers don't want us to change products that are already in flight, that's number one.
Number two, are...
Speaker Change: laser capacity is constrained so, you know, we have to make
Speaker Change: We use a lot of CW lasers, not EML lasers yet, in the products that we're shipping and released today.
Speaker Change: or we can use our very critical EML capacity to add those CW lasers into our products.
Speaker Change: We've done the math, there's a lot of good CW Lasers suppliers, it makes more sense for us to buy those CW Lasers and free up that email capacity to ship to our customers than it would be to convert that email capacity to CW Lasers, for example. So that's one of the things that's pushing off that integration of CW Lasers.
into our products until the second half.
Speaker Change: I'd say that we are working on EML-based designs, and those will come to market in the second half of the calendar year. We have to get qualified and go through that, but today, most of the products that we're producing are silicon photonic-based.
Speaker Change: using CW lasers from our strategic supplier partners to keep that EML capacity for our customers.
Speaker Change: Yeah, and I'd add that, you know, that the real performance advantage of EML starts to come in as we talk about 1.6T and
Speaker Change: future generations of higher performance 1.6T so our natural road map also aligns with using more vertical integration where the technologies are much more differentiated at those speeds.
Thank you. Thank you.
Speaker Change: Thank you very much guys, that actually cleans up a lot for me, clears up a lot at least. It also probably brings me to my second question, which is trying to understand more about EMLs.
Speaker Change: I mean, it just seems like the whole market is moving here. AI demands inflecting units.
Speaker Change: There's one other big EML player, as far as I've recognized, at least.
Speaker Change: It actually has pull into your transceiver units, pipeline, market share, customers, new customers, etc.
Speaker Change: So why are we talking about 40%? Like, why aren't we talking about like 100% or even more here? Why is 40% the right number here? And like, how capital intensive is this?
Speaker Change: If you wanted to, how fast could you get new lines up, and would you be leaning on over-building versus under-building, just given what seems like the importance of this part into this new cycle? Thanks.
Speaker Change: Christopher, you sound a lot like my board of directors, so that's a very good question. You know, it does take time to add capacity. One of the things that we did...
as we were working on
Speaker Change: integrating and giving synergies. We had two wafer fabs in Japan. We were going to close one of them, consolidate it. We stopped that several quarters ago and said we need that extra extra wafer fab capacity and we're ramping that up now. You know, if you go back
Speaker Change: A year and a half ago, we had idle capacity in our wafer fab. It takes a year and a half to add capacity.
Speaker Change: That's kind of what's going on. We are adding more. We're converting to larger wafer sizes. That takes time. And we're adding epi reactors. That takes time as well. So very good question. If I had the ability to add 100% between now and June, I would do it.
Speaker Change: But that's the lead time of capital equipment and bringing up and qualifying new tools is just.
Speaker Change: But you know, the good news is there's barriers to entry in that market. And so we're going to grow it as fast as we possibly can. And at the same time, we're going to introduce new products. And so that 200 gig per lane...
Speaker Change: new product, we're getting qualified, that takes time and resources and starts typically at a lower yield and we have to get through that learning curve and that yield and so I think you know, we're going to do well in the second half of the calendar year on that but we are adding capacity beyond the 40% for sure.
After the June quarter, we're not sitting idle for sure.
Speaker Change: Perhaps just one more follow-up. Why don't you use your... Oh sure. Okay, thanks Cath.
Speaker Change: Okay, I was just going to say, why don't you use your limited e...
Speaker Change: Why don't you use your limited EML capacity to bring new cloud-like customers online? It seems like that would be, you know, two birds, one stone.
Speaker Change: That's a good question. I think we have silicon photonics, we have multimode pixel-based transceivers, and we have EML-based transceivers. We are designing each of those for a given application. Some applications work better with
Speaker Change: single-mode silicon photonics. Some have a better cost structure with EMLs. And as Chris said, a lot of the new next generation of 1.60 likes EMLs better, especially as you get into multi-wavelengths, where EMLs can really play a key role there. So
Speaker Change: Yeah, we're absolutely going to do that. It probably makes more sense in the second half of the calendar year as we get into these more advanced 1.6T products. And then we have next generation 200 gig EMLs, which are really going to differentiate us from our competitors. And I think that really gives us the ability to drive.
Speaker Change: incremental differentiation at the transceiver level and drive higher gross margins.
Thank you.
Thanks guys, sorry for the third question.
Christopher Rowland: Thanks Chris. Sierra, I think we'll squeeze in one more question.
Speaker Change: Understood. Our final question today comes from Richard Shannon with Craig Hallam. Your line is now open.
Richard Shannon: Glad to get under the wire here. Thanks for taking my questions guys.
Speaker Change: I think I'll follow up on the topic of the optical circuit switching. Here's a couple earlier questions and comments. Maybe you can just kind of delineate the time frame for qualification and volume ramps here just to get a sense there. Then also your close peer who reported recently has obviously talked about a product necessary. Maybe you can
Speaker Change: Yeah, I can tell you about, you know, what we're doing. I can't really comment on what they're doing. I'm sure their technology is unique and interesting. I think our technology and our approach is different.
Speaker Change: ours is MEMS based and we have, as Chris mentioned earlier, years of experience with MEMS designs and MEMS in our WSSs. In fact, our most advanced WSSs have multiple technologies like LCOS and MEMS.
Speaker Change: So we are getting positive feedback, as we said, from our customers.
Speaker Change: there are customers that are more advanced and more ready to put optical circuit switches into their data centers and then there's customers that need to re-architect or write software to enable this optical circuit switching, and so it's really dependent upon which customers are ready when, but I would say that
Speaker Change: A deployment in calendar 2025 is realistic, and really the more meaningful growth will probably be in calendar 2026.
Speaker Change: Okay, so that's great detail. Thanks for that, Alan. My second question...
Speaker Change: I was just going to add one thing, Richard. We've already transferred the product to our Thailand operation, so we're making qualification units and beta units in Thailand today, and so, you know, we'll be ready when the customers say go.
Speaker Change: Okay great thanks for that Alan. My second question is on a topic that has been asked in a while and that's 3D sensing. Is there anything going on here either in your kind of past markets or new markets here that's going to give us any signs of growth and improvement anytime soon?
Thank you for watching!
Hey Richard, this is Chris. I would say...
Speaker Change: A little bit of yes and a little bit of no. I would say that obviously the high volume applications that we have been playing into for
Speaker Change: several years is mature and and there's not a an obvious catalyst in that specific application other than if the Android world begins to adopt in mass.
Speaker Change: No suggestion that they will in the short-term or mid-term, but that's always a possibility. I would say as we look to other opportunities in
Speaker Change: sort of metaverse augmented virtual reality and Applications like that are are helping a bit as well as the automotive space But both of those have been a little slower to adopt then than we've all hoped
Speaker Change: But, you know, there are folks continuing to invest strongly in that, and as a leader in the technology, we continue to partner with those leaders, but we'll keep things muted in terms of thoughts on that until that new application really comes along.
Speaker Change: Thanks Richard. Great, thank you guys. I think Sienna, yeah thank you. Sienna, I think we'll pass the call back over to Alan for some concluding remarks.
Alan Lowe: Great. Thank you. I'd like to leave everyone with a few thoughts as we wrap up the call.
Alan Lowe: We are excited about our growth prospects. Our comprehensive photonics portfolio built on differentiated in-house technology and proven manufacturing capabilities addresses critical challenges like connectivity bottlenecks and power consumption.
Alan Lowe: With strong progress on our three-pronged strategy, we are highly confident that we will reach $500 million in quarterly revenue by the end of calendar 2025 and in the long term expand our cloud business to a multi-billion dollar annual run rate.
Alan Lowe: Thank you for joining our call today. We look forward to seeing you again at investor conferences and upcoming meetings this quarter.
Have a great day.
Speaker Change: That will conclude our conference call today. Thank you all for your participation. You may now disconnect your line.