Q2 2025 Lumentum Holdings Inc Earnings Call
Good day, everyone and welcome to momentum Holdings second quarter fiscal year 2025 earnings call.
Participants will be in a listen only mode. Please.
Please also note today's event is being recorded for replay purposes.
Kathy Tau: At this time I would like to turn the conference over to Kathy Tau Vice President of Investor Relations. Mr. <unk> go ahead.
Kathy Tau: Thank you and welcome to momentum as fiscal second quarter 2025 earnings call. This is Kathy Todd momentum as Vice President of Investor Relations. Joining me today are Alan Lowe, President and Chief Executive Officer, Wajid Ali Executive Vice President and Chief Financial Officer and Chris.
Speaker Change: <unk> senior Vice President and Chief strategy, and corporate development Officer.
Speaker Change: Today's call will include forward looking statements, including statements regarding our strategies trends and expectations for our products and technologies, including demand.
Speaker Change: Our customers, our end markets and market opportunities, our expectations and beliefs regarding recent acquisitions, including cloud light.
Speaker Change: 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, 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.
Speaker Change: <unk> 10-K, and in our 10-Q that will be filed soon.
Speaker Change: The forward looking statements provided during this call are based on momentum as reasonable beliefs and expectations as of today.
Speaker Change: <unk> 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.
Speaker Change: non-GAAP financials are not to be considered as a substitute for or superior to financials prepared in accordance with GAAP.
Speaker Change: <unk> press release with the fiscal second quarter results and the accompanying supplemental slides are available on our website at www dot momentum dot com under the investors section.
Alan Lowe: With that I'll turn the call over to Alan.
Alan Lowe: Thank you Kathy and good afternoon, everyone.
Alan Lowe: Before reviewing our second quarter results I wanted to address the leadership transition announced earlier this week.
Alan Lowe: After a decade as momentum CEO I am retiring from my role effective Tomorrow, and Michael Burleson, succeeding me and joining our board of directors.
Alan Lowe: We didnt momentum over the past 18 years first at our predecessor company and then as a Standalone public company has been a privilege I am proud of our market, leading innovations strong customer relationships and best in class manufacturing.
Alan Lowe: We have transformed momentum and the photonics industry positioning the company for continued growth.
Speaker Change: The board and I believe that this is the right time for a leadership transition and that Michael is the right leader for the next chapter at momentum.
This global experience semiconductor in optical communications background and track record of driving sustained profitable growth make him uniquely qualified to lead momentum forward.
These steps in at a time of financial and operational strength and I am confident in his ability to build upon our momentum.
Speaker Change: Giving us momentum CEO has been the highlight of my career and I am deeply grateful to our talented team who has positioned us for sustained growth.
Speaker Change: Look forward to continue in my role on momentum as board and to serving as an advisor to the company to ensure a smooth transition.
Speaker Change: With that I'd like to turn to the second quarter.
Speaker Change: In the second quarter, we exceeded the high end of our guidance range for both revenue and earnings per share.
Speaker Change: This level of performance was driven by robust demand from cloud customers both inside the data centers as well as interconnecting data centers, along with an overall improving networking market.
Speaker Change: And we're just getting started.
Speaker Change: This is an exciting time for momentum as we position ourselves to capitalize on the rapidly expanding cloud market, where our photonics technologies play a vital role.
Speaker Change: Our photonics innovations are clearly essential to scaling compute capacity within data centers for the AI era today and into the future.
Speaker Change: Optical lengths enabled ultra high speed low latency and energy efficient data transmission in today's scale out networks.
Speaker Change: In the coming years, we believe transitioning to optical links will be essential to meeting the rapidly growing needs of scale up networks, where data bandwidth are significantly larger in scale out networks.
Speaker Change: The rapid growth of compute capacity inside data centers will also drive rapid growth in data center interconnect or Dci.
Speaker Change: Cloud operators are increasingly building and planning many more and geographically dispersed interconnected data centers to address space and power availability.
Speaker Change: These require high capacity long distance optical links which leverage the same core technologies, we have developed over several decades for telecom networks.
Speaker Change: As we indicated on our last call demand for our components and subsystems for data center interconnect is strengthening and we have been ramping production to fulfill the strong demand.
Speaker Change: We are making significant progress in advancing our cloud business through our three pronged strategy.
Speaker Change: First we are successfully expanding our customer base in the cloud and AI markets.
Speaker Change: Second.
Speaker Change: We are scaling capacity for our highly differentiated laser transmitter chips, and our indium phosphide wafer fabs and optical circuit switch and transceiver production capacity and our proven factories outside of China to meet the rising demand.
Speaker Change: And third we are partnering with our cloud operator, and AI infrastructure customers to develop game changing optical solutions that shape their long term technology roadmaps.
Speaker Change: With this focused approach we are uniquely positioned to drive growth and deliver sustained value in the rapidly accelerating AI cloud era.
Speaker Change: Before discussing the second quarter details I want to address the recent news related to deep seek.
Discussions with cloud customers reinforce that advancements in software efficiency are key to the long term viability of the AI business model just as efficiency gains in optical data transmission are essential for enabling AI and data centers.
Speaker Change: These reports on improved efficiencies highlight a positive trend that strengthens the AI market for both our customers and our business.
Speaker Change: Now, let me move to additional fiscal second quarter revenue and product highlights starting with cloud and networking.
Speaker Change: Our second quarter cloud and networking segment revenue grew 20% sequentially and 18% year over year, primarily driven by strong end market demand from cloud Hyperscale customers.
Speaker Change: We saw sequential increases in nearly all of our cloud and networking product lines.
Speaker Change: In Q2, Datacom transceiver revenue grew sequentially as expected driven by an increase in shipments to our largest cloud hyperscale customer and the start of volume production shipments to one of our new customers. We highlighted on prior calls.
Speaker Change: We continue qualification work with the other new customer and expect to start initial volume production during the fourth quarter continuing to ramp through the first half of fiscal 'twenty six.
Speaker Change: Transceiver manufacturing capacity expansion is also progressing as planned.
Speaker Change: Complementing our existing production lines in Thailand construction of our large new three storey facility and clean room on the same campus is well underway with the first floor completed and ready for tool installation.
Speaker Change: We achieved another record for emo unit shipments in Q2 and began delivering 200 G lane speed emails to multiple customers.
Based on the breadth of our 200 G. Emo design wins, we expect to gain additional laser transmitter market share in the upcoming wave of 800, G and 116 transceivers utilizing the more efficient 200 G <unk> for AI applications.
Speaker Change: Complementing our emails or our new 200 G lens integrated photo detector arrays, which adds to our content opportunity in next generation 800, G and 116, transceivers as well as strengthens our vertical integration strategy for our own cloud modules.
Speaker Change: Our wafer fab expansion plans to enable higher volumes of <unk> and other indium phosphide lasers and photo detectors continues to be on track.
Speaker Change: We still anticipate that demand for our emo chips will continue to exceed supply at least into calendar year 2026.
Speaker Change: We are experiencing strengthening demand for our Dci products as well as long haul transmission and transport solutions.
Speaker Change: These product lines historically classified as telecom products are increasingly utilized by cloud customers.
Speaker Change: Often indirectly through our network equipment manufacturing customers.
Speaker Change: Engagement with cloud customers and AI infrastructure providers on their long term technology and product roadmap has reached an all time high.
Speaker Change: As part of one collaboration we began shipping preproduction volumes of our unique ultra high power lasers to an AI infrastructure customer for a proprietary interconnect solution in Q2 and have received follow on orders as well as excellent feedback on the products performance. This.
Speaker Change: Is a very exciting opportunity.
Speaker Change: Looking ahead to Q3, we anticipate strong sequential growth in our cloud and networking revenue, primarily driven by capacity additions ramping of new customer programs and improving demand from network equipment manufacturers.
Speaker Change: Now, let me move to our industrial Tech segment.
Speaker Change: Industrial Tech segment revenue increased 15% sequentially, while being down 21% from the same quarter last year.
Speaker Change: The sequential increase was driven by higher industrial laser shipments, partially offset by seasonally lower <unk> shipments.
Speaker Change: The year over year revenue trend reflects that demand continues to be challenged due to the weak industrial end market.
Speaker Change: And industrial Tech, we remain committed to developing innovative laser solutions that address customers' growing demand for high precision and speed.
Speaker Change: Our latest generation of 26 kilowatt fiber lasers, our most powerful yet delay.
Speaker Change: <unk> delivers cutting speeds up to three times faster than its predecessor.
Speaker Change: We have shipped sample units to a key customer and are receiving very positive feedback.
In Q2, ultrafast laser shipments reached a new record.
Speaker Change: Given primarily by growing demand from a leading tool supplier for high volume solar cell manufacturing.
Speaker Change: We are also actively engaged with customers on new ultrafast laser opportunities as this technology gains traction in advanced packaging displays and emerging semiconductor processes.
Speaker Change: Looking ahead to fiscal Q3, we anticipate a sequential decline in industrial tech revenue due to the challenging macroeconomic environment affecting industrial laser demand as well as a seasonal decline in <unk> sensing revenue.
Speaker Change: In summary, we have made significant progress in executing our strategy to grow our cloud business.
Speaker Change: In Q2, we began to ramp our cloud transceiver volumes to our largest customer and one of our new customers and we set another new record for <unk> shipments, including New 200 G Lane speed variance.
Speaker Change: We are working diligently to further expand capacity for many of our products over the next several quarters and to complete qualifications on key new customer programs.
Speaker Change: Our robust pipeline of cloud customer engagements, coupled with improving trends with our network equipment manufacturing customers.
Speaker Change: <unk> our confidence in achieving our previously stated goal of reaching $500 million in.
Speaker Change: And quarterly revenue by the end of calendar 2025.
Speaker Change: Looking beyond we expect significant growth in the years ahead, as we capitalize on emerging opportunities in cloud and AI.
Speaker Change: Before I hand, the call over to watch it I wanted to take a moment to express my sincere gratitude to all of our employees for their unwavering focus and dedication and to our customers worldwide for their trust partnership and collaboration.
Speaker Change: With that.
Speaker Change: <unk>.
Speaker Change: Thank you Alan.
Speaker Change: Second quarter revenue of $402 2 million and non-GAAP EPS of <unk> 42.
Speaker Change: We're above the high end of our guidance ranges.
Speaker Change: GAAP gross margin for the second quarter was 24, 8% GAAP operating loss was 12, 8% and GAAP net loss per share was <unk> 88.
Speaker Change: Turning to our non-GAAP results second quarter non-GAAP gross margin was 32, 3%, which was slightly down sequentially, but up year on year due to product mix.
Speaker Change: In future quarters, we anticipate company gross margins will sequentially increase as manufacturing utilization improves as well as an increase in datacom laser shipments second.
Speaker Change: Second quarter non-GAAP operating margin was seven 9%, which was up 490 basis points sequentially and up 600 basis points year on year, primarily driven by improved cloud and networking profitability and lower SG&A expenses.
Speaker Change: Second quarter, non-GAAP operating profit was $31 $7 million and.
Speaker Change: Adjusted EBITDA was $57 $6 million.
Speaker Change: Second quarter, non-GAAP operating expenses totaled $98 $3 million or 24, 4% of revenue.
Speaker Change: A decrease of $2 $1 million from the first quarter and a decrease of $9 $9 million from the year ago quarter.
Speaker Change: This substantial reduction in operating expenses was achieved driven by the restructuring actions that were taken during fiscal 2024 as well as overall stringent cost controls across the company and despite increased investment in our expanding cloud opportune.
Speaker Change: <unk>.
Speaker Change: Q2, non-GAAP SG&A expense was $35 $9 million non-GAAP R&D expense was $62 $4 million interest and other income was $4 $2 million on a non-GAAP basis.
Speaker Change: Second quarter non-GAAP net income was $30 million and non-GAAP diluted net income per share was <unk> 42.
Speaker Change: Our fully diluted share count for the second quarter was 71 6 million shares on a non-GAAP basis.
Speaker Change: During the second quarter, our cash and short term investments decreased by $19 million to $897 million, our inventory levels were approximately flat sequentially. Despite the expected growth in our cloud and networking revenue.
Speaker Change: In Q2, we invested $65 million in Capex, primarily focused on expanding clean room capacity at our Thailand manufacturing site and increasing equipment capacity for indium phosphide wafer production to support ml chip manufacturer.
Speaker Change: <unk>.
Speaker Change: Nearly all of our Capex investment was directed toward our cloud and networking business.
Speaker Change: Turning to segment details second quarter cloud and networking segment revenue at $339 2 million increased 20% sequentially and 18% year on year class.
Speaker Change: Cloud and networking segment profit at 16, 2% increased 330 basis points sequentially and increased 610 basis points year on year on higher revenue.
Speaker Change: Our second quarter Industrial Tech segment revenue at $63 million was up 15% sequentially and down 21% year on year.
Speaker Change: Second quarter Industrial Tech segment profit of six 2% increased sequentially on higher revenue and decreased year on year on lower revenue.
Speaker Change: Now, let me move to our guidance for the third 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 third quarter of fiscal 'twenty five to be in the range of $410 million to $425 million.
Speaker Change: This Q3 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 network customer demand.
Speaker Change: And <unk>.
Speaker Change: Industrial tech to be down sequentially by approximately $10 million with declines in both commercial lasers.
Speaker Change: And three D sensing.
Speaker Change: In Q3 operating expenses are expected to increase sequentially based on our typical annual fringe rate increase based on this we project third quarter non-GAAP operating margin to be in the range of nine 5% to 10, 5% and diluted net income.
Speaker Change: Per share to be in the range of 47.
Speaker Change: <unk> 53.
Speaker Change: Our non-GAAP EPS guidance for the third quarter is based on a non-GAAP annual effective tax rate of 16, 5%.
Speaker Change: These projections also assume an approximate share count of 73 million shares.
Kathy Tau: With that I'll turn the call back to Kathy to start the Q&A session.
Speaker Change: <unk>.
Kathy: Thank you Martin.
Speaker Change: To allow everyone an opportunity to ask questions. We ask that you keep please keep to one question and one follow up.
Speaker Change: CRM, let's begin the Q&A session.
Speaker Change: Absolutely we will now begin the Q&A session. Thank.
Speaker Change: If you would like to ask a question. Please press star followed by one on your telephone keypad.
Speaker Change: If you would like to remind that question press star followed by Tim.
Speaker Change: And if you are using a speakerphone. Please pick up your handset before asking your question.
Speaker Change: Our first question today comes from <unk> <unk> with Jpmorgan.
Speaker Change: Your line is now open.
Speaker Change: Hi, Thank you for taking my question.
Speaker Change: Maybe for the first one was you did mentioned this in your prepared remarks, but maybe I need to set up.
Speaker Change: Clarification on this in terms of the sequential revenue increase from December to March cloud networking is the segment, that's driving that by about $25 million or so quarter over quarter at the midpoint.
Speaker Change: Can you just outline the drivers there between.
Speaker Change: Loud light transceivers versus Datacom chips versus telecom just wanted to get a relatively sort of ballpark in terms of how should we rank order those three in relation to contribution to the sequential increase you're expecting I know you mentioned this in the remarks, and maybe I missed it and I have a follow up.
Speaker Change: Yeah sure <unk>. So yes. So your math is correct, we are increasing our expected to increase by $25 million and our cloud networking business and actually we have demand that far surpasses that we're actually having some.
Speaker Change: Price chain shortages on some critical components, that's that's keeping that.
Speaker Change: A little bit lower.
Speaker Change: Probably seen a double digit increase sequentially quarter over quarter had we not had some of those supply chain shortages.
Speaker Change: In terms of rank ordering.
Speaker Change: The Datacom business is really what's what's driving the growth.
Speaker Change: Quarter over quarter, both both Datacom chips and Transceivers, we've got some new products both on the chip side as well as the transceiver side that are going to be ramping through the quarter. So it's difficult to kind of split out, which one we will do more or less but both of them are growing sequentially. We are seeing some.
Speaker Change: Inventory drawdowns as well and are in the overall telecom business, so that's adding a little bit of growth.
Speaker Change: As well and then on the industrial Tech segment like we prepared and like we mentioned in our prepared remarks.
Speaker Change: We're expecting to come down by about $10 million driven by both <unk> as well as industrial lasers.
Speaker Change: Got it got it sounds like did you have a follow up on my follow up.
Speaker Change: Yes. Please.
Speaker Change: A follow up you mentioned the 200 gig <unk> you can see sort of.
Speaker Change: Demand being ahead of capacity or supply by even by end of calendar 2006. Just wondering if you can I know youre doing capacity expansion on that front can you give us a reference point.
Speaker Change: Where you expected capacity to be by the end of calendar 'twenty six maybe in reference to the end of 2020 full calendar year or like the June 2000, and for fiscal 2004, and like how should we think about the pace of capacity increase that youre planning and demand sort of still outstripping that and what do you expect to sort of seeing 100 gig <unk> in demand for 100 gig as you ramp to.
Speaker Change: 100 gig at that point. Thank you.
Speaker Change: Yeah sure. This is Alan we're still on track to what we've been saying, which was 40% or higher.
Speaker Change: Growth from the June quarter of calendar 'twenty four to the June quarter of calendar 'twenty five and then another 40% by the end of.
Speaker Change: Calendar 'twenty five so.
Speaker Change: That's for all.
Speaker Change: 102 hundred gig I think we were in our prepared remarks, we talked about being overall supply constrained not 200 gig because we can start at 200 gig wafer or 100 gig wafer.
Speaker Change: Just the same so we're just overall the demand is outstripping even that 40% compounded twice.
Speaker Change: One month period of time.
Speaker Change: We do have additional capacity expansion beyond.
Speaker Change: The end of calendar 'twenty, five obviously and those are investments that we've made over the past several quarters that come online in calendar 'twenty, six which will give us increased capacity as well so.
Speaker Change: Im not going to get into the details of that because we're going to monitor the demand outlook, but suffice it to say were.
Speaker Change: Expedite and tool deliveries, so that we can bring up tools as well as move to larger wafer sizes. So.
Speaker Change: <unk> is on track and going very well.
Speaker Change: Got it got it thanks, Alan and congrats on the retirement.
Speaker Change: Excellent.
Speaker Change: Our next question comes from Tom O'malley with Barclays. Your line is now open.
Tom O'malley: Hey, guys. Thanks for taking my question I wanted to Echo the congrats to Alan go Raters, hopefully you have a little more time in retirement to to watch hopefully a better football that you did for the last 10 years, so with that I'll kick off on the business side.
I wanted to.
Tom O'malley: Wanted to start with your comments on Q2, so you talked about shipping to our proprietary interconnect customer and an exciting opportunity I think you've hinted at this a little bit in the past, but maybe could you just explore that a bit more is that on the laser side is that on the module side any additional color there would be helpful.
Tom O'malley: Yes, I'm not going to give too much color on it Tom just because it is proprietary as we said in the prepared remarks, but suffice it to say it's a.
Tom O'malley: Ultra high power laser so you can imagine a larger indium phosphide chip and <unk>.
Tom O'malley: Based on a carrier so it's between a chip and a module and then.
Tom O'malley: Today, the product that we're shipping is a chip on carrier.
Tom O'malley: But very high power UE.
Tom O'malley: <unk> technology that we've had.
Tom O'malley: <unk> had developed.
Tom O'malley: Over the years and are now shipping I would say preproduction volume with forecast for more meaningful volume throughout calendar 'twenty five and then.
Tom O'malley: Real extremely high volume in calendar 2026, so feedback is very positive. The performance is very unique in that the line width that we.
Tom O'malley: Produced with the laser is.
Tom O'malley: Superior to anything in the market. So we're very excited to be working with a very leading edge customer and.
Tom O'malley: I think I'll just leave it at that.
Speaker Change: Helpful. And then you talked about so you have one customer that's ramping already in December you have another customer that's coming online in closer to the end of the fiscal year. This opportunity. It sounds like there's some goodness in 'twenty five but really more of a 'twenty. Six story you guys kept the commentary around the 500 billion at some point in the calendar year 'twenty five.
Speaker Change: Was that just you regurgitate that statement does it mean Q4 or could you, possibly get there earlier I was just surprised you kind of kept the same language as to do before thank you.
Speaker Change: Well, we don't want to get you guys ahead of our expectations and so we've been consistent so I don't know regurgitating, it but we've been repeating it.
Speaker Change: I think as we've shown in the December quarter, we exceeded our guidance range and I think with the pipeline of new products and the <unk>.
Speaker Change: The capacity that's coming online.
Speaker Change: Absent the.
Speaker Change: <unk> talked about which is supply constraints from our suppliers.
Speaker Change: We just wanted to reiterate that we are well on track to be able to achieve $500 million by the end of the calendar year in Michael comes in it does better than that good for Michael.
Speaker Change: I appreciate it thanks, a lot guys.
Speaker Change: Thanks, Scott Thanks, Tom.
Speaker Change: Our next question comes from Simon Leopold with Raymond James Your line is now open.
Simon Leopold: Great. Thank you very much for taking the question.
Speaker Change: I've got two first one is I wanted to see if you could speak a little bit to your.
Simon Leopold: Sure.
Simon Leopold: Thoughts and comments on the prospects for co package optics, our CPO thinking about.
Really an intermediate long term because obviously, it's not going to affect momentum in the near term and then I've got a follow up.
Simon Leopold: Sure Simon.
Simon Leopold: A stab at it and Alan can command as well.
Simon Leopold: Co packaged optics I think maybe important to highlight is.
Simon Leopold: It's really a solution to scaling.
Simon Leopold: Short distance frankly, electrical links to speeds beyond 200 gig per lane, that's really where the value comes in that.
Simon Leopold: Being able to drive.
Simon Leopold: Switch silicon or even.
Simon Leopold: GPU TPU helped from.
Simon Leopold: Where it is on the circuit board out to the edge of the circuit Board, where plausible transceivers would typically be it's.
Simon Leopold: It's very challenging at the speed. So if you can move the optics in.
Simon Leopold: In close proximity that enables.
Simon Leopold: Overcoming electrical.
Simon Leopold: Scaling in that process obviously.
Simon Leopold: Youre still not going to need lasers, you are still going to need optics. So we don't see the optical content going down.
Simon Leopold: And as to the prior question that Alan addressed our unique capabilities in high power lasers to enable CPU CPO. We believe this is actually an opportunity for us.
Speaker Change: I know folks are concerned he does that reduce our cannibalized transceiver volumes over time I think the reality is.
Simon Leopold: <unk>.
Simon Leopold: Enabling scaling from power consumption and speed standpoint, ultimately just like the comment on deep seek just like similar questions on optical circuit switches. If we can make data centers more efficient we can.
Simon Leopold: Live within power envelope Datacenters can get bigger and then theyre more optics overall, so I think it's a good thing, but I'd also highlight for momentum a little bit of a unique situation where we are.
Simon Leopold: There were more modest share on transceivers today, and sharing gaining if you will over time. So even if there is some cannibalization in the mid to long term, we don't think it impacts our transceiver opportunity and create.
Simon Leopold: An expanded opportunity for our high power lasers.
Simon Leopold: Great. Thanks, and then just sticking with <unk>.
Simon Leopold: Follow up.
Speaker Change: We've had a number of data points recently.
Speaker Change: Telco demand is recovering and you mentioned inventory drawdowns.
Speaker Change: It sounds to us like that business was probably.
Speaker Change: Over 200 million for you in the December quarter, and I guess I'm, just looking for maybe a little bit more of a drill down in that I interpreted your comment on your outlook to be more about inventory normalizing, whereas some of the others in the supply chain have sounded a little bit more upbeat, maybe that's nuance, but how.
Speaker Change: Are you thinking about that and maybe any quantification you can offer on telco. Thank you.
Speaker Change: Yes, I would say that the past two years of talking about inventory in the channel and at our customers and a third customers I think that discussion is over so I'd say, we're shipping in what they're shipping out today.
Speaker Change: That said I would say, what we have typically called telecom.
Speaker Change: Is also interconnecting data centers and so the data center interconnect and the networks that are interconnecting. These data centers is showing very very strong demand.
Speaker Change: No.
Speaker Change: <unk> in the components as well as road ons amplifiers and longer haul coherent transmission connecting further apart data centers is very strong. So I would say that we did see an uptick obviously in telecom, what we traditionally have called telecom and see strong demand going forward. It's just not.
Getting back to the peak levels that we had early in the pandemic. When I think we were over shipping at the time. So we're excited we think it is.
Speaker Change: A good opportunity for us and as more and more data centers get built.
Speaker Change: More and more of submarine cables are being laid in more and more.
Speaker Change: Data center interconnect and longer haul terrestrial networks are being deployed to connect those.
Alan Lowe: Okay. Thank you and Alan time installation.
Speaker Change: I'll Miss you.
Shannon: Thanks Shannon.
Shannon: Our next question comes from George Notter with Jefferies. Your line is now open.
George Notter: Hi, Thanks, a lot guys Alan congratulations well deserved look forward to working with Michael here also alright. So on the question I have is just on the transceiver business.
George Notter: Your largest transceiver customer are you now fully through that product transition and was that fully in the quarter.
No I would say that there is a pipeline of new products. So some are coming up in the December quarter, some are coming up.
George Notter: This quarter and next and so.
George Notter: I wouldn't say, we're done with it we're making progress and as new products get introduced into the factory and we start ramping them, we'll see revenue continue to grow at our largest.
George Notter: Transceiver customers, so still lots of work to do on new products and new developments.
George Notter: Encouraged by the progress to date.
George Notter: Got it and then.
Speaker Change: Could you just give us a sense on the milestones for the additional cloud provider customers. You guys have won I heard what you said certainly about shipping to one of those new customers, but is there.
What's gating your ability to ship to that customer and then and then the third customer win again, what do the milestones look like in terms of going from here to more significant volumes.
Speaker Change: Yes, I'd say we.
Speaker Change: <unk> started shipping in the December quarter to as we talked about in the.
Speaker Change: Earlier script.
Speaker Change: And are working on additional products with that customer and are in qualification.
Efforts there so.
Speaker Change: So we expect to grow that business with the first customer that we started shipping in December.
Speaker Change: Over the over the calendar year I'd say the other customer that we haven't started shipping that we talked about beginning to ship production in the fourth fiscal quarter is just time I mean, you do a set of qualification builds and you start testing them and you put them in chambers and really.
Speaker Change: Stress them for several several one hundreds if not thousands of hours and Thats what were waiting to get through so.
Speaker Change: Just nothing off track there customers still pulling hard.
Speaker Change: Hoping the clock goes faster than the normal but you.
Speaker Change: Make the clock go faster so I think from our perspective exciting times additional.
Speaker Change: Opportunities at those customers, but as well working with other customers that we really haven't talked about.
Speaker Change: At this stage, but I think over the calendar year, we'll talk about.
Speaker Change: Fourth customer and hopefully a fifth customer.
Speaker Change: Great. Thank you.
Okay.
Speaker Change: Thanks George.
Speaker Change: Our next question comes from meta Marshall with Morgan Stanley. Your line is now open.
Speaker Change: Great. Thanks.
Speaker Change: Maybe just a question on gross margins.
Speaker Change: Why don't you gave some detail, but just should we consider kind of the sequential downtick more mix or just.
Speaker Change: Working for yield as you expand capacity.
Speaker Change: And then just maybe as a second question building on what George just asked just how should we think about kind of the relative size of customer or two or three as they ramp up maybe in comparison to one thank you.
Speaker Change: Sure so meter so.
Speaker Change: Gross margins actually were favorable from a product mix standpoint, because of the incremental <unk> that we shipped.
Speaker Change: In fiscal Q2, and actually are as part of our guide into Q3.
Speaker Change: The increased shipments of <unk> are certainly helping us in contrast to that we were ramping up new products.
Speaker Change: Both.
Speaker Change: Thailand, and doggone related too.
Speaker Change: Current customers and future customers for the transceiver part of our business and we had initial ramp up yield issues that occurred there.
Speaker Change: We're working through and so that was a headwind to us during the quarter.
Speaker Change: We think we are behind that and so we should see a sequential increase in gross margins moving into Q3.
Speaker Change: And then as capacity improves again in our in our June quarter, we should see a tailwind related to increased CML shipments on our gross margins as well so.
Speaker Change: So generally we should be we should be moving up but during the quarter initial yield issues related to new products was a headwind for us.
Speaker Change: Yes, I'd say just to add to that I say the startup costs in Thailand, where we have large infrastructure and production lines going in are highly underutilized and so there is a tail a headwind with respect to that.
Speaker Change: And as that utilization rate of those equipment and production lines increases that should help dramatically there and so we're actually getting ready for the new products and new customers, but also putting in place infrastructure in Thailand to actually move production out of China into <unk>.
Speaker Change: Thailand.
Speaker Change: Once that happens.
Speaker Change: We'll be in a much much better position.
Speaker Change: Increased gross margins as what you said.
Speaker Change: And just on the thinking about second half sorry second question.
Speaker Change: Yes.
Speaker Change: Yes, yes relative size sorry, yes.
Speaker Change: Yes, so I would say that certainly the opportunity.
Speaker Change: The customer two and three are large.
Speaker Change: It certainly could be as big if not larger than our opportunity that we have with our first customer. So I'd say. These are these are very very large customers that are deploying very large in many many datacenters and so.
Speaker Change: I'm not so concerned about overall demand, we need to get through the qualifications and ramp them up.
Speaker Change: Throughout the calendar year.
Speaker Change: Great. Thanks.
Speaker Change: Thanks, Amit.
Speaker Change: Our next question comes from Robyn <unk> with Stifel. Your line is now open.
Robyn: Thank you congrats Alan.
Speaker Change: First question for Alan on the supply chain commentary.
Speaker Change: Well, what's your line of sight on that could you give us any more details on what it is thats. The short is it related to transceiver specifically.
Speaker Change: The ingredients that short or is it more widespread and you see that.
Speaker Change: Kind of constraint extending further into the year beyond the March quarter.
Speaker Change: Yes, so it doesn't have to do with Transceivers. It has to do with some telecom products.
Speaker Change: And the situation is over the last two plus years as we've been throttling back our production our suppliers throttled back their production and shuttered factories and so.
Speaker Change: A couple of quarter ago quarters ago, as the demand started picking up they tried to add capacity and tried to meet the demand, but it far outstripped their ability and their smaller footprint. So we're working with with our suppliers to help them get up the curve as well as qualify other alternative suppliers, but the.
Speaker Change: <unk> wide shortage of things like Hermetic package is creating a challenge for the kinds of volumes that our customers are looking for especially in coherent components and narrow line width lasers, and so if we have those packages and we could get them more readily we could grow as well.
Speaker Change: I, just said double digits quarter on quarter.
Speaker Change: It is going to is going to hamper us in both the March quarter as well as the June quarter.
Speaker Change: We're working diligently to minimize that impact in the June quarter, but the March quarter is what it is because we need those deliveries now in order to turn products for the quarter.
Speaker Change: And we have a limited supply and the ability to get that.
Speaker Change: For example.
Alan Lowe: That answer your question Okay. Thank you yeah, absolutely thanks Alan.
Speaker Change: Quick follow up just thinking through the ramp of 200 gig.
Alan Lowe: Ml.
Alan Lowe: Wages for this year and maybe beyond this year.
Alan Lowe: I would assume there is demand for those lasers in 800 gig transceivers as well as obviously one six is that the right way to think about it or is that going to be sort of more of a.
Alan Lowe: Production ramp for you.
Alan Lowe: We get to one six.
Alan Lowe: T Transceivers.
Alan Lowe: Yes, Theres designs that we're working on that have 200 gig lanes speeds at 800 gig as well as $1 60, as well as working with our module customers to provide that technology to them for the first generation of 200 gig line speeds and so I'd say.
Alan Lowe: Step one and those products are in the qualification phase today.
Alan Lowe: And should ramp up in the second half are more meaningful of the calendar year right behind that we're working on and.
Alan Lowe: Sampling customers with our differential 200 gig <unk> and the feedback has been very positive and Thats. Another avenue for our customers and the data centers to drive down power consumption and so that is really a winning product that I think we're in a leadership position there to really take.
Alan Lowe: Advantage of the years and years of technology development that we have.
Alan Lowe: In our <unk> business in Japan.
Alan Lowe: Perfect Great. Thank you al.
Alan Lowe: Yes, sorry.
Alan Lowe: Sorry, just one thing to add room and we're also in the works to create high power CW lasers.
Alan Lowe: To address the silicon photonics market and our internal consumption.
Alan Lowe: Which most all of our.
Alan Lowe: Transceivers, we build today, our silicon photonics and need those high power CW lasers, and so we're working on that as well and as we grow our wafer fabs.
Alan Lowe: In Japan will be able to continue with the 200 gig <unk>, the CW lasers, and as I talked about the photo detector arrays that will really give us a lot of content for our customers, but also for our internal vertical integration.
Alan Lowe: I guess, if you added that Alan maybe I'll sneak in.
Alan Lowe: What's your expectations for mix.
As we progress through this year on the ml versus iPhone.
Alan Lowe: Oh from a from a chip standpoint.
Alan Lowe: Very little CW lasers for CFO because of the strong demand in <unk>.
Alan Lowe: From a consumption standpoint in our Transceivers.
Alan Lowe: Majority is CW lasers photonics, but we are designing ml based transceivers, there will probably be more late calendar year than than anything before that so the vast majority of our design center.
Alan Lowe: In production and about to enter production our silicon photonic based.
Speaker Change: Got it thanks for all that detail out Thanksgiving.
Thanks, Robyn thank you.
Speaker Change: Our next question comes from David <unk> with UBS. Your line is now open.
Speaker Change: Great. Thanks, guys for taking my question and Alan We wish you well in your next endeavor.
Speaker Change: Why does it can I go back to gross margin for a second it sounds like obviously industrial is much stronger which carries a stronger gross margin I guess I'm trying to understand the mix comment on why gross margins were down sequentially does that mean, you would find that the transceiver business grew significantly faster than datacom in the quarter, just trying to figure out kind of the stack ranking of how that played out and I will.
Speaker Change: My second question because it is more thematic.
Speaker Change: We haven't heard anything about tariffs.
Speaker Change: Recently from a lot of companies I know things are paused, we'd just love to kind of get your perspective, maybe not so much from the China, Thailand dynamic on other markets that may be that may be affected like Mexico. So just kind of what your thoughts on there and how you guys are thinking about that as we move through the early part of 'twenty five.
Sure I'll just start and then I'll just welcome to chip in so yes. So during the quarter, we had some yield issues related to new product ramps within our transceiver business.
Speaker Change: That probably was a headwind of anywhere from a 100 to 150 basis points.
In addition to that as Alan mentioned, we had quite a bit of infrastructure that we're putting in inside of Thailand.
Speaker Change: <unk> also negatively impacted us because the.
Speaker Change: The utilization is not there and we're expecting that utilization to improve.
Speaker Change: In the back half of the fiscal year, So thats really what happened in Q.
Speaker Change: Q2, and had that not happened we would have actually seen gross margins improve in Q2 sequentially versus Q1.
Speaker Change: Moving into Q3 as some of those ramp issues are behind US we expect that gross margins will improve into Q3, primarily because of the increased supply.
Speaker Change: We have <unk>.
Speaker Change: No we won't be actually able to even meet all the allocation of demand throughout the calendar year. So really it's all about what our saga mojarra facility in Japan can actually produce from a supply standpoint as much as they can produce that's as much as our gross margins will improve quarter over quarter in respect that to happen both.
Speaker Change: In March and in June as far as your question on tariffs are concerned. So we've taken a look at the impact of tariffs both from a supply chain standpoint, as well as the impact to our customers, we've incorporated and very nominal impact in our operating margin guidance.
Speaker Change: We provided for Q3 and the primary reason for that is because our footprint in China is quite minimal right. We have some production that happens in China and then those those those components are integrated into a bigger components bigger products.
Speaker Change: At our Thailand facility and then most of the shipments happened from from Thailand, even if they are.
Speaker Change: To the U S or to Mexico as well.
Speaker Change: And then much of the growth that we're seeing as shipments that are coming from Japan as well as from Caswell for the transmission products that we have so because of that at least in the short to mid term unless policy changes.
Speaker Change: Happen at a government level, we're not expecting much of an impact obviously, our customers that are importers of records.
Speaker Change: We will see some impact in that may have some longer term consequences for the industry worldwide, but at least for this fiscal year, given what we know.
Speaker Change: Expect much impact from tariffs.
Speaker Change: I think thats great. Thanks, a lot.
Thanks, David and good luck.
Speaker Change: Thanks, David.
Speaker Change: Our next.
Speaker Change: <unk> comes from Ryan Koontz with Needham <unk> Company. Your line is now open.
Speaker Change: Great. Thanks for the question I wanted to follow back up on your comments around Dci, we heard some pretty <unk>.
Speaker Change: The numbers from others reporting over the last couple of months about volumes picking up there and it seems like we are well on our way to kind of see some substitution from traditional systems over to <unk> I Wonder if you can comment on your Capex exposure your bomb exposure as it relates to <unk>.
Speaker Change: Systems versus plug holes in do you feel like that can provide.
Speaker Change: Tailwind to revenue growth, even if capex numbers aren't going up as fast.
Speaker Change: Yes.
Speaker Change: I actually don't think it's cannibalizing as much as it is adding to the coherent transmission in the market and Youre right I think that the boom of.
Speaker Change: Today, 400 gig and soon to be 800 gig Z ours as.
Speaker Change: Is phenomenal and we're adding.
Speaker Change: In our factory capital to be able to meet the demand from our customers.
Speaker Change: Who make the ZR modules. So a lot of our components are critically enabling the ZR market.
Speaker Change: And we just don't have enough capacity and we are being impacted by the supplier shortages that I talked about earlier, so I would say from our perspective.
Speaker Change: It's additive we have we do have.
Speaker Change: A strong position with.
Speaker Change: What you call traditional coherent.
Speaker Change: In the very very high speed stuff that we're seeing actually strengthening of the very high gigabyte.
Speaker Change: Both modulators and tunable lasers to address that market, so I'd say across the board.
Speaker Change: New products are doing well <unk> is doing very well and we're having to add capital to our factories to be able to meet the needs of both markets that are growing.
That's great. Thanks, and a quick follow up if I could around the space industry are you seeing.
Speaker Change: What's your interest in these kind of space satellite satellite communications for free space optics.
Speaker Change: We do have some some business with the satellite customers.
Speaker Change: It's relatively small but growing.
Speaker Change: And I think we have an opportunity to expand our footprint there.
Speaker Change: I think it's relatively small though base.
Speaker Change: <unk> two data centers in fact, datacenter interconnect or any of the other.
Product lines that we have.
Speaker Change: Sure Alright, great Thanks, and congrats on the retirement.
Speaker Change: Great. Thanks, Brian Thanks, Brian.
Speaker Change: Our next question comes from Karl Ackerman.
Speaker Change: Your line is.
Speaker Change: Now open.
Speaker Change: Yes. Thank you.
Speaker Change: And Alan Congrats on the on the.
The next opportunity in front of you.
Speaker Change: No.
Speaker Change: I was hoping you can remind us whether the.
Speaker Change: Sure I was hoping you could remind us what are the new Datacom transceiver wins do you have.
Speaker Change: From two additional hyperscale or are only 800 G or could they be.
Speaker Change: Early samples of 116.
Speaker Change: Ed I was hoping as you address that question whether youre.
Speaker Change: Your Datacom opportunity is inhibited just in the March quarter from email bottlenecks like you noted rajiv or if it's a.
Speaker Change: An issue that could persist through the first half of the year. Thank you.
Rajiv: Yes, Karl I'll take the first part.
Rajiv: New customers that we're talking about are our slower speeds and $1 60. So.
Rajiv: I'd say 160 for most of the Hyperscale is really late this year if not calendar 2026, we are working on $1 60 with multiple customers.
Rajiv: But that's really not what we're talking about when we talk about customer number two and customer number three.
Rajiv: To your second question.
Rajiv: Sure.
Rajiv: We're gaining our module customers ability to grow their transceiver business by the lack of worldwide indium phosphide for <unk> and CW lasers quite frankly, we're having challenges is actually getting enough CW lasers for our own transceivers. So that is actually impacting us on the short term.
Rajiv: This quarter hope to have that resolved in the June quarter.
Rajiv: We're feeling the impact and that's why we're now working more diligently to get CW lasers up in our factory. So we can control that supply chain more effectively so.
Did that answer your question or is it a different a different question around <unk>.
Speaker Change: It did if I may sneak one in then that's tangential share that.
Speaker Change: I guess, how to think about Capex I'm wondering in the first half of this year. You spent the same amount of Capex. You spent all of last year and so as you contemplate building out the remaining area of Thailand.
Speaker Change: How should we think about the capex trajectory from here. Thank you.
Speaker Change: Yes.
Speaker Change: So great question, so probably in the back half of our fiscal year, we will spend about the same amount in capex that we did in the first part of the fiscal year.
Speaker Change: In terms of our ordering patterns, the cash out might be a little bit later.
Speaker Change: Most of those investments will be around expanding our capacity for datacom chips, so far for <unk> shipments.
Speaker Change: Sure.
Speaker Change: We're well on our way to the infrastructure builds that we need.
For for our transceiver production, we have some equipment that we need to order against that but most of that capex that we're going to buy in the back half of this fiscal year will be related to AML capacity expansion and because as you asked earlier we're <unk>.
Speaker Change: <unk> and <unk>.
Speaker Change: Allocation to our customers all the way through this calendar year.
Speaker Change: So in order to mitigate that as we move into calendar 'twenty six we're starting the purchases of Capex.
Speaker Change: Four.
Speaker Change: To expand that capacity further.
Speaker Change: Thank you thanks Carl.
Speaker Change: Yeah.
Speaker Change: Our next question comes from Ananda Baruah with loop capital. Your line is now open.
Ananda Baruah: Yes, thanks, guys for taking the questions and Alan will Miss working with you congrats on retirement.
Ananda Baruah: I guess any quick and I can ask them both at the same time, yeah, you're welcome Alan.
Ananda Baruah: I'll ask does it at the same time on the on the new ramping customer.
Ananda Baruah: Can you give us some sense of timeframe when you think that it hits run rate.
Ananda Baruah: Or any context around what run rate, yes, I know this is probably kind of somewhat project base, but when you think of its run rate what timeframe and then.
Ananda Baruah: The second one is.
Ananda Baruah: It sounds like this year calendar year, 'twenty, five youre not going to run into.
Yes sort of.
Ananda Baruah: Yes.
Speaker Change: Between your AML chess and your own Transceivers since they are largely cycled based right now, but how do you think maybe in 'twenty six calendar about balancing out.
Ananda Baruah: Now yes.
Ananda Baruah: Sort of that.
Ananda Baruah: Third party <unk> Sally Anne.
Ananda Baruah: Transceiver.
Ananda Baruah: Like <unk> mentioned cloud like branded experience.
Ananda Baruah: Sieber shipments yes.
Ananda Baruah: Patrick there would be great. Thanks.
Speaker Change: Sure as far as the new customer reaching run rate I'd say.
Speaker Change: It's going to take some time so don't.
Speaker Change: Be raising your projections for that customer.
Speaker Change: But as I said earlier.
Speaker Change: We're qualifying and second product there that should come on by the end of the calendar year, So I'd say.
Speaker Change: Around the end of the calendar year, we should be in <unk>.
Speaker Change: Full motion with that customer.
Speaker Change: And then as we've talked about in the script.
The third customer start production in fiscal Q4, and really hit run rate I'd say by the fall time. So September October that product is scheduled to ramp significantly faster. So that's that's the ramp color as far as yes, we don't have any.
Speaker Change: Any conflict of interest with respect to where do we allocate <unk>.
Speaker Change: Although between our customers there is a challenge for sure.
Speaker Change: But I'd say as we add additional capacity and we're doing that aggressively.
Speaker Change: Should be able to.
Speaker Change: Number one gets CW lasers internally produced for our new products.
Speaker Change: As well as the photo detectors, which are critical in enabling and a shortage today at 200 gig.
Speaker Change: And so that should become.
Speaker Change: Easier for Us I would say that we won't go backwards with respect to.
Speaker Change: What we are supplying externally we will continue to grow that as we bring on more capacity and that incremental capacity, we can use internally so.
Speaker Change: We've mapped it out I think we have a good plan and.
Speaker Change: We're probably not going to use too much of our own indium phosphide frankly in calendar 'twenty five at all and we will start using it more meaningful in 2006 as the 200 gig per lanes really start taking off.
Speaker Change: That's super helpful context, Thanks, a lot really appreciate it.
Speaker Change: Yes, Thanks, Amanda and unfortunately that is all the time, we have for questions. So with that I'd like to thank you for joining us today, and we look forward to connecting with you at upcoming investor conferences and meetings this quarter.
Speaker Change: May now disconnect.
Speaker Change: Yeah.