Q3 2025 Lumentum Holdings Inc Earnings Call

May 6, 2025

Operator: Good day, everyone, and welcome to the Lumentum Holdings Q3 fiscal year 2025 earnings call. All participants will be in listen mode only. Please also note today's event is being recorded for replay purposes. At this time, I would now like to turn the conference over to Cathy Ta, Vice President of Investor Relations. Ms. Ta, please go ahead.

Good day, everyone, and welcome to the Lumentum Holdings third quarter fiscal year 2025 earnings call. All participants will be in listen mode only.

Speaker Change: Please also note today's event in your report for replay purposes. At this time, I'll now like to turn the conference over to Kathy Todd by his president of the best release. Ms. Todd, let's go ahead.

Kathy Ta: Thank you, and welcome to Lumentum's fiscal third quarter 2025 earnings call. This is Kathy Ta, Lumentum's Vice President of Investor Relations. Joining me today are Michael Hurlston, President and Chief Executive Officer; Wajid Ali, Executive Vice President and Chief Financial Officer; and Wupen Yuen, President, Cloud and Networking. Today's call will include forward-looking statements, including statements regarding our strategies, trends, and expectations for our products and technologies, including demand, our customers, our end markets and market opportunities, our expectations and beliefs regarding recent acquisitions, including CloudLight, macroeconomic trends, including the impact of tariffs and other trade regulations, 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: Thank you and welcome to Lementum's fiscal third quarter 2025 earnings call. This is Kathy Ta, Lumentum's Vice President of Investor Relations. Joining me today are Michael Hurlston, President and Chief Executive Officer, Wajid Ali, Executive Vice President and Chief Financial Officer, and Wupen Yuen, President, Cloud in Networking.

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, our customers, our end markets and market opportunities.

Kathy Ta: 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 10-K and in our 10-Q that will be filed soon. The forward-looking statements provided during this call are based on Lumentum's reasonable beliefs and expectations as of today. Lumentum undertakes no obligation to update these statements except as required by applicable law. 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 a substitute for or superior to financials prepared in accordance with GAAP.

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 FCC

Speaker Change: We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our most recent 10K and in our 10Q that will be filed soon.

Momentum: The forward-looking statements provided during this call are based on the Mentum's reasonable beliefs and expectations as of today The Mentum undertakes no obligation to update these statements except as required by applicable law

Momentum: Please also note that unless otherwise stated, all financial results and projections discussed in this call are non-GAAP . non-GAAP financial s are not to be considered as the substitute for, or superior to, financials prepared in accordance with gap.

Kathy Ta: Lumentum's press release with the fiscal third quarter results and accompanying supplemental slides are available on our website at www.lumentum.com under the Investors section. With that, I'll turn the call over to Michael.

Momentum: Lumentum's press release with the fiscal third quarter results and accompanying supplemental slides are available on our website at www.lumentum.com under the investor's section.

Michael Hurlston: Thank you, Cathy, and good afternoon, everyone. Before diving into our Q3 results, I want to reflect on my first 90 days as CEO of Lumentum. I joined because of the immense cloud and AI opportunity, and the more I've seen, the more confident I am that we're poised for success. Having said that, we have opportunities to accelerate revenue growth, improve margins, and focus spending. As many of you know, part of my core philosophy is that gross margins reflect the value customers place on our products. As we indicated at OFC, we see a path to take gross margins above 40%. Meanwhile, we can and should be able to improve operating margins by cutting spending in non-core areas.

With that, I'll turn the call over to Michael.

Michael Hurlston: Thank you, Kathy, and good afternoon everyone. Before diving into our third quarter results, I want to reflect on my first 90 days of CEO , Lumentum. I joined because of the immense cloud in AI opportunity. And the more I've seen, the more confident I am that we're poised for success.

Michael Hurlston: As many of you know part of my core philosophy as the gross margins reflect the value customers place on our products as we indicated at OFC, we see a path to take gross margins above 40%.

Michael Hurlston: Meanwhile, we can and should be able to improve operating margins by cutting spending in non core areas.

Michael Hurlston: At OFC, we outlined a path to drive revenue to $750 million a quarter, gross margins above 40%, and operating margins greater than 20%. Based on my initial observations and the plan we have in place, these targets are all achievable. Our markets are growing at unprecedented rates, greater than 25% compound annual growth rate over the next 5 years, driven by an accelerating convergence of optics and electronics. Our strength in optical components is unmatched. We build for virtually every type of network. At OFC, we showcased our 400 gig lane speed lasers alongside our proven 100 gig and 200 gig solutions. We also demonstrated differential drive VMLs that boost signal integrity and power efficiency. We're building momentum in the transceiver market with 3 cloud transceiver customers already on board and more wins expected in the pipeline.

Michael Hurlston: At OFC, we outlined a path to drive revenue to $750 million, a quarter gross margins above 40% and operating margins greater than 20%.

Based on my initial observations in the plan we have in place. These targets are all achievable or.

Michael Hurlston: Our markets are growing at unprecedented rates greater than 25% compound annual growth rate over the next five years, driven by an accelerating convergence of optics and electronics.

Michael Hurlston: Our strength in Archibald components is unmatched we.

Michael Hurlston: Billed for virtually every type of network.

Michael Hurlston: At OFC, we showcased our 400 gig lane speed lasers, alongside our proven 100 gig and 200 gig solutions.

Michael Hurlston: We also demonstrated differential dry mills that boost signal integrity and power efficiency.

Michael Hurlston: We're building momentum in the transceiver market with three cloud transceiver customers already on board and more wins expected in the pipeline.

Michael Hurlston: What sets us apart is that our components are embedded across the ecosystem, even in competitors' transceivers. That means we often win regardless of who supplies the module. We're one of the few companies with true end-to-end optical capabilities, from long haul to metro to inside the data center. Our scale and breadth make us a truly differentiated optical solutions provider. Let's now turn to our third quarter results. In Q3, we exceeded the high end of our guidance for both revenue and EPS, driven by strong demand from cloud customers and a recovering networking market. Despite ongoing macroeconomic volatility, growth in cloud continues to be a key element of our financial performance. Revenue in our cloud and networking segment grew 8% sequentially and 16% year-over-year, fueled by a robust demand from hyperscale cloud customers.

Michael Hurlston: It sets us apart is that our components are embedded across the ecosystem even in competitors' transceivers.

Michael Hurlston: That means we often win regardless of who supplies the module.

Michael Hurlston: We're one of the few companies with true end to end optical capabilities from long haul to metro to inside the data center.

Michael Hurlston: Our scale and breadth make us a truly differentiated optical solutions provider.

Michael Hurlston: Let's now turn to our third quarter results.

Michael Hurlston: In Q3, we exceeded the high end of our guidance for both revenue and EPS driven by strong demand from cloud customers and recovering networking market.

Michael Hurlston: Despite ongoing macroeconomic volatility growth in cloud continues to be a key element of our financial performance.

Michael Hurlston: Revenue in our cloud and networking segment grew 8% sequentially and 16% year over year.

Michael Hurlston: As mentioned earlier, when we execute well, the opportunity ahead is significant, and our components business is performing at an exceptional level. We set another record for EML chipset shipments this quarter and remain on track to more than double this business by the end of calendar 2025, relative to our June 2024 baseline. We continue to ship 200-gig lane speed EMLs to multiple customers. With our set of design wins, we're well-positioned in the next generation of 800-gig and 1.6 T transceivers supporting AI workloads. Our wafer fab expansion remains on track, supporting higher volumes of EMLs and other Indium Phosphide lasers and photodetectors. In addition, we are ramping production in CW lasers for Silicon Photonics transceiver applications in the quarter. As our Indium Phosphide capacity grows, we expect to ship an increasing mix of CW lasers.

Michael Hurlston: In addition to supplying components into the transceiver market, we took an early lead in Co-Packaged Optics, or CPO. We have a highly differentiated, ultra-high power laser that was announced as a key component in a CPO solution at GTC last quarter. We have already shipped early production units of that product and expect meaningful revenue in the second half of calendar 2026. At OFC, we introduced the R300, a 300 by 300 port optical circuit switch, or OCS, engineered to significantly improve the scalability, performance, and efficiency of AI clusters in intra data center networks. The device replaces traditional switches, providing customers significant power benefits by keeping signaling in the optical domain. Our OCS solutions build on decades of engineering expertise and the successful deployment of high-performance MEMS technology in demanding telecom environments.

Michael Hurlston: With over 1 trillion mirror operating hours in the field and a robust patent portfolio, our optical switches are designed for high reliability and energy-efficient performance in AI-driven data centers. At present, we have beta samples being qualified by multiple hyperscaler customers and expect to see early production volumes at the end of the calendar year. We're accelerating our optical transceiver production at our Thailand manufacturing campus and remain on track to begin shipments to our second announced hyperscale data center customer in June, as previously communicated. At the same time, we continue to ship to our third announced customer, and we are expanding our product offerings and ramping in shipment volume to our largest cloud hyperscale customer. In Q4, we expect our overall cloud transceiver revenue to grow over 50% sequentially. We're also experiencing growing demand for our DCI and long-haul transmission solutions.

Michael Hurlston: <unk> by robust demand from Hyperscale cloud customers.

Michael Hurlston: We achieved another sequential increase in shipments of narrow linewidth lasers, essential to ZR and ZR+ module deployments and in transponders for cloud customers. This marks the fifth sequential quarter of shipment growth for narrow linewidth lasers. Even as we ramp additional capacity in Thailand, our shipments will not be able to satisfy demand for the balance of the calendar year. In addition, pump lasers and line subsystems were up sequentially, driven by cloud infrastructure demand. Looking ahead to Q4, we anticipate strong sequential growth in our cloud and networking segment, driven by new capacity coming online across our global operations, the continued ramp of customer programs, and strengthening demand from network equipment manufacturers. Now let me move to our industrial tech segment. Industrial tech segment revenue decreased 5% sequentially, but was up 14% from the same quarter last year.

Michael Hurlston: Industrial Laser revenue declined sequentially, but the drop was less than anticipated, while 3D Sensing revenue followed expected seasonal trends. In Q3, Ultrafast Laser shipments held steady at near record levels, driven primarily by growing demand from a leading tool supplier supporting high-volume solar cell manufacturing. We're also actively collaborating with customers on new Ultrafast Laser opportunities, as the minimal thermal impact of ultrashort pulse technology continues to gain traction in advanced packaging, display technologies, and next-generation semiconductor processes. Consistent with earlier remarks, we have taken actions to rationalize the industrial tech portfolio, closing two R&D sites and stopping development activities in three exploratory product areas. With these actions and more focus on the core business, we expect to see increasing profit in this segment over the next handful of quarters.

Michael Hurlston: Looking ahead to fiscal Q4, we expect a sequential decline in industrial tech revenue, reflecting both the ongoing macroeconomic headwinds impacting industrial laser demand and the typical seasonal decline in 3D sensing revenue. As I reflect on my first 90 days at Lumentum and look ahead, I'm energized by the momentum we're building. Our strong Q3 performance, combined with the strategic positioning we shared at OFC, reinforces that we're on the right path. We're executing on a focused strategy, investing in high growth, high impact areas, where our differentiated technologies provide a lasting competitive advantage. From delivering record EML chip shipments to partnering with AI hyperscalers on connectivity innovation, we're demonstrating that our products are essential to powering the future of cloud and AI.

Michael Hurlston: As mentioned earlier, when we execute well the opportunity ahead is significant.

Michael Hurlston: While macro uncertainty, tariff dynamics, and export controls present near-term challenges, Lumentum has taken recent actions and deliberate steps over the years to build resilience through a globally diversified manufacturing footprint, a flexible supply chain, and active engagement with customers. We remain focused on what we can control: pricing, disciplined spending, and flawless execution. These fundamentals are positioning us to succeed across a variety of market environments. Finally, strong demand for cloud and AI continues to support our confidence in achieving the medium- and long-term financial targets we outlined at OFC. We remain on track to exceed a $500 million quarterly run rate as we exit the calendar year. There's still work ahead, but the opportunity in front of us is substantial. Our ability to deliver differentiated optical solutions across our portfolio provides a strong, resilient foundation for sustainable growth. Now, I'll hand the call over to Rajit.

Michael Hurlston: And our components business is performing at an exceptional level.

Wajid Ali: Thank you, Michael. Q3 revenue of $425.2 million and non-GAAP EPS of $0.57 were both above the high end of our guidance ranges. GAAP gross margin for Q3 was 28.8%, GAAP operating loss was 8.9%, and GAAP net loss per share was $0.64. Turning to our non-GAAP results, Q3 non-GAAP gross margin was 35.2%, which was up 290 basis points sequentially and up 650 basis points year-over-year, due to better manufacturing utilization and favorable product mix due to increased datacom laser shipments. Q3 non-GAAP operating margin was 10.8%, which was up 290 basis points sequentially and up 1,100 basis points year-over-year, and driven by improved cloud and networking profitability.

Wajid Ali: Q3 non-GAAP operating profit was $46.1 million, and adjusted EBITDA was $71 million. Q3 non-GAAP operating expenses totaled $103.4 million or 24.3% of revenue, an increase of $5.1 million from the second quarter, and a decrease of $2.4 million from the year-ago quarter. This demonstrates our disciplined cost management across the organization, even as we ramp investments in our growing cloud opportunities and absorb the typical payable fringe reset that takes place each year in our Q3. Q3 non-GAAP SG&A expense was $40.1 million. Non-GAAP R&D expense was $63.3 million. Interest and other income was $2.9 million on a non-GAAP basis.

Wajid Ali: Third quarter non-GAAP net income of $40.9 million and non-GAAP diluted net income per share was $0.57. Our fully diluted share count for the third quarter was 72.2 million shares on a non-GAAP basis. Turning to the balance sheet. During the third quarter, our cash and short-term investments decreased by $30 million to $867 million. Our inventory levels increased sequentially to support the expected growth in our cloud and networking revenue. In Q3, we invested $59.5 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 EML chip manufacturing. Nearly all of our CapEx investment was directed toward our cloud and networking business. Turning to segment details.

Michael Hurlston: We set another record for AML chipset shipments this quarter and remain on track to more than double this business by the end of calendar 2025 relative to our June 2024 baseline.

Wajid Ali: Q3 Cloud and Networking segment revenue at $365.2 million increased 8% sequentially and 16% year-on-year. Cloud and Networking segment profit at 20% increased 380 basis points sequentially, and increased 540 basis points year-on-year on higher revenue and favorable product mix. Our Q3 Industrial Tech segment revenue at $60 million was down 5% sequentially and up 14% year-on-year. Q3 Industrial Tech segment profit of 4.3% decreased sequentially on lower revenue and increased year-on-year on higher revenue. Now let me move to our guidance for the Q4 of fiscal 2025, which is on a non-GAAP basis and is based on our assumptions as of today. I want to acknowledge that the impact of tariffs on our supply chain, along with broader geopolitical dynamics, remains highly uncertain.

Wajid Ali: The guidance we're providing reflects our best assessment based on the current environment. This outlook includes an estimated 100 basis point reduction in overall company gross margin, primarily driven by higher material costs and tariffs on shipments to US destinations, where we serve as the importer of record. For clarity, despite this 100 basis point headwind, we expect a sequential improvement in gross margins from Q3 to Q4. We expect net revenue for the fourth quarter of fiscal 2025 to be in the range of $440 million to $470 million. This Q4 revenue forecast includes the following assumptions: Cloud and networking to be up sequentially with strong growth in products addressing cloud and AI applications, and industrial tech to be down sequentially with declines in both industrial lasers and 3D sensing.

Wajid Ali: We project Q4 non-GAAP operating margin to be in the range of 13% to 14%, and diluted net income per share to be in the range of $0.70 to $0.80 per share. Our non-GAAP EPS guidance is based on a non-GAAP annual effective tax rate of 16.5%. These projections also assume an approximate share count of 72.7 million shares. 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. Jasson, let's begin the Q&A session.

Operator: If you'd like to ask a question, it is star one on your telephone keypad. Our first question is from Samik Chatterjee with JP Morgan. Your line is now open.

Samik Chatterjee: Hi, good evening. Thanks for the question. This is Joe Chatterjee on for Sonic. I guess first question, and maybe just a big picture question. I, you know, I noticed you guys didn't necessarily talk about the $500 million revenue target that you initially laid out, achieving by the end of the calendar year. I guess, in the recent performance in the June quarter guidance, you know, how are you thinking about achieving that target by the December quarter? You know, is there the possibility that you can achieve that a bit earlier? You know, and what are the puts and takes to your expectations there? And then I have a follow-up.

[Analyst] (JPMorgan): Hi, good evening. Thanks for the question. This is Joe Chatterjee on for Sonic. I guess first question, and maybe just a big picture question. I, you know, I noticed you guys didn't necessarily talk about the $500 million revenue target that you initially laid out, achieving by the end of the calendar year. I guess, in the recent performance in the June quarter guidance, you know, how are you thinking about achieving that target by the December quarter? You know, is there the possibility that you can achieve that a bit earlier? You know, and what are the puts and takes to your expectations there? And then I have a follow-up.

Wajid Ali: Yeah, let me take that one. This is Michael Hurlston. So we did outline that we're still very much on track for the $500 million by the end of the year. You know, we're obviously not guiding; we're guiding a quarter at a time, but we feel pretty pleased about where the company is setting up, and still, as we said in the remarks, are very much on track for the $500 million dollar quarter.

Michael Hurlston: Yeah, let me take that one. This is Michael Hurlston. So we did outline that we're still very much on track for the $500 million by the end of the year. You know, we're obviously not guiding; we're guiding a quarter at a time, but we feel pretty pleased about where the company is setting up, and still, as we said in the remarks, are very much on track for the $500 million dollar quarter.

Kathy Ta: Did you have a follow-up, Joe?

Samik Chatterjee: Yes, yes, definitely have a follow-up. So maybe just talk, maybe just touching on the Datacom chip business. You know, I think you were initially targeting a 40% increase in volumes by the June quarter. You know, I guess, just wanted to get an update there in terms of how it's tracking relative to your initial outlook and whether you're outperforming your initial expectations, both on the volume and ASP front. And similar question, but obviously more related to kind of the calendar 2025 outlook. It does look like you're kind of outperforming your initial expectation in terms of where you were going to track towards the end of the calendar year. But any kind of color in terms of how you're thinking about ASPs trending there?

[Analyst] (JPMorgan): Yes, yes, definitely have a follow-up. So maybe just talk, maybe just touching on the Datacom chip business. You know, I think you were initially targeting a 40% increase in volumes by the June quarter. You know, I guess, just wanted to get an update there in terms of how it's tracking relative to your initial outlook and whether you're outperforming your initial expectations, both on the volume and ASP front. And similar question, but obviously more related to kind of the calendar 2025 outlook. It does look like you're kind of outperforming your initial expectation in terms of where you were going to track towards the end of the calendar year. But any kind of color in terms of how you're thinking about ASPs trending there?

Samik Chatterjee: And then sorry for the long question, but, you know, just curious, like, what's the contribution that you're expecting from CW lasers now that you're talking about ramping those up, as well as EML? Thanks.

[Analyst] (JPMorgan): And then sorry for the long question, but, you know, just curious, like, what's the contribution that you're expecting from CW lasers now that you're talking about ramping those up, as well as EML? Thanks.

Wajid Ali: Yeah, I'm gonna take the first part of the call question, and then turn it over to Wupen Yuen. So what I would say, look, we're obviously tracking very well. We've increased our capacity in the Indium Phosphide fabs. We feel like demand is still outstripping supply on our EMLs. So we even as we ramp supply, we're still very much sold out. That being said, as we increase the capacity, we feel like there's room to add CW into the mix, and the reason for that is it really extends our serviceable market. So,

Michael Hurlston: We continued to ship 200 gig lane speed MLS to multiple customers.

Michael Hurlston: With our set of design wins, we are well positioned in the next generation of 800 gig and one <unk> Transceivers supporting AI workloads.

Michael Hurlston: ... We feel like we wanna do that to get a foot in that door. Our design, we think, is differentiated and gives us an opportunity to meaningfully participate in CW, but the predominant focus is and remains EMLs. From an ASP standpoint, you know, again, given the supply constraints, obviously there's opportunities there to continue to maximize our price, and we're looking at that. You know, we have opportunities as we think about now transitioning from 100 to 200 gig lasers, and obviously going up to 400 gig. But maybe, Wupen, you wanna add some color on the tech and how we think about it?

Wajid Ali: ... We feel like we wanna do that to get a foot in that door. Our design, we think, is differentiated and gives us an opportunity to meaningfully participate in CW, but the predominant focus is and remains EMLs. From an ASP standpoint, you know, again, given the supply constraints, obviously there's opportunities there to continue to maximize our price, and we're looking at that. You know, we have opportunities as we think about now transitioning from 100 to 200 gig lasers, and obviously going up to 400 gig. But maybe, Wupen, you wanna add some color on the tech and how we think about it?

Wupen Yuen: Yeah. So I'll just comment a little bit, on the, on the CPO laser ramp. We're at the very beginning, right? We just won a couple of customers at CPO lasers, as Michael pointed out. As our fab capacity continue to be ramping up, we would like to be able to play in that market, which increase our TAM. So we're at the very initial phase of the ramping. Not huge numbers yet, but we will continue to see that volume going up, as time, goes by.

Michael Hurlston: Our wafer fab expansion remains on track supporting higher volumes of <unk> and other indium phosphide lasers and photo detectors. In addition, we are ramping production and CW lasers for Silicon Photonics transceiver applications in the quarter.

Michael Hurlston: As our indium phosphide capacity grows we expect to ship, an increasing mix of CW lasers.

Kathy Ta: Thanks, Joe. Thanks, guys. Appreciate it.

Kathy Ta: Thanks, Joe.

[Analyst] (JPMorgan): Thanks, guys. Appreciate it.

Operator: Our next question is from Simon Leopold with Raymond James. Your line is now open.

Simon Leopold: Thank you very much. I wanted to see if you could maybe unpack what's in your assumptions around the tariff headwind. You quantified it around 100 basis points, which we appreciate. I guess what I'm trying to get at is trying to get a sense of how much business or manufacturing do you still have in China in that assumption? I understand you're moving more to Thailand, and what are the other underlying assumptions you've made? Then I've got a quick follow-up.

Wajid Ali: Yeah, sure, Simon. I'll, I'll start off, and then certainly Wupen and Michael can jump in. Yeah, so like you mentioned in our prepared remarks, we did talk about the 100 basis point headwind to gross margins, and therefore, operating margins during the quarter. A lot of that headwind is coming from increased component costs, so infeed costs, where we are having to pay the tariff associated with, you know, sub-mount products as well as capacitors. And so, you know, wherever we see that, we're having to pay a tariff associated with that. For most of our customers, we are trying to move our production from China into our Nava facility in Thailand.

Wajid Ali: We're starting off with our data center interconnect products, but we are eventually gonna also be moving products from our Dongguan facility for cloud modules into Nava as well. So what we've baked into the forecast right now is our current production ramp for the quarter, but we'll see improvements in that in our fiscal Q1 and Q2 as more of our Dongguan production moves to our Nava facility for cloud modules. So certainly, the impact from that perspective will diminish.

Simon Leopold: Thanks. And then just as my follow-up, longer term question is, I'd like to get your, your latest thinking on, what contributions and what role you can play in CPO. It's nice to see that you were announced within the, the ecosystem back in March. I assume you're providing, products like, CW lasers, but if we could get an idea of maybe some dollar content and, and forecasting of how you see this affecting your business over the intermediate or longer term. Thank you.

Michael Hurlston: In addition to supplying components into the transceiver market. We took an early lead in co packaged optics our CPO.

Wupen Yuen: Hey, Simon, this is Wupen speaking. I think the, you know, CPO, frankly speaking, is still sometimes away, right? We talk about, you know, ramp volume in the second half of the next calendar year, number one. So therefore, in the meantime, the module is gonna continue to be a ramping business for us. That's gonna be, you know, a foreseeable, you know, strong growing business for us and for the industry to come. On the other hand, you know, in addition to the laser being an important component in the CPO ecosystem, we're also looking at adding other components in the longer term. There'll be other optical chips that will be needed in the CPO world, in the longer term.

Michael Hurlston: We have a highly differentiated ultra high power laser that was announced as a key component in our CPO solution at GTC last quarter, we have already shipped early production units of that product and expect meaningful revenue in the second half of calendar 2026.

Michael Hurlston: At OFC, we introduced the our 300 or 300 by 300 Port optical circuit switch or ocs engineered to significantly improve the scalability performance and efficiency of AI clusters, and intra data center networks.

Michael Hurlston: The device replaces traditional switches, providing customers significant power benefits by keeping signaling in the optical domain.

Michael Hurlston: Our Ocs solutions built on decades of engineering expertise and the successful deployment of high performance Mems technology and demanding telecom environments.

Michael Hurlston: With over $1 trillion or operating hours in the field and our robust patent portfolio. Our optical switches are designed for high reliability and energy efficient performance in AI driven data centers.

Wupen Yuen: That's very much we're actually looking into, as well. But I would say that's really a multi-year prospect. In the near term, it's gonna be the laser components plus the cloud module ramping, in the cloud interconnect world.

Simon Leopold: Thank you.

Kathy Ta: Thank you so much, Simon.

Operator: Our next question is from Blain Curtis of Jefferies. Your line is now open.

[Analyst] (Jefferies): Hi, as for Weener, I'm for Blain. Thanks for taking my question. Just a quick one and then probably a follow-up. Just look at the transceiver business, 50%+ growth for next quarter is great and clearly a lot of traction. Can you talk about what you're seeing there from an EML versus CW laser perspective and the plan for insourcing versus externally sourcing there?

Ezra Weener: Hi, as for Weener, I'm for Blain. Thanks for taking my question. Just a quick one and then probably a follow-up. Just look at the transceiver business, 50%+ growth for next quarter is great and clearly a lot of traction. Can you talk about what you're seeing there from an EML versus CW laser perspective and the plan for insourcing versus externally sourcing there?

Michael Hurlston: Yeah. Near term, all of our products are using CW lasers, so we're using silicon photonics approach for all of that, including all the revenue growth that you just cited. And all of it actually is externally sourced. So we have not yet incorporated our own lasers in our transceivers, but we would expect to do that sometime early in the calendar year, next year. That's kind of the plan. We obviously have a number of big ramps in front of us with multiple customers that we talked about, but our next phase of growth will incorporate our internal lasers. Wupen Yuen, anything to add? Okay, good. Thanks for the question.

Wajid Ali: Yeah. Near term, all of our products are using CW lasers, so we're using silicon photonics approach for all of that, including all the revenue growth that you just cited. And all of it actually is externally sourced. So we have not yet incorporated our own lasers in our transceivers, but we would expect to do that sometime early in the calendar year, next year. That's kind of the plan. We obviously have a number of big ramps in front of us with multiple customers that we talked about, but our next phase of growth will incorporate our internal lasers. Wupen Yuen, anything to add? Okay, good. Thanks for the question.

Michael Hurlston: At present, we have beta samples being qualified by multiple hyperscale customers and expect to see early production volumes at the end of the calendar year.

[Analyst] (Jefferies): Just a quick follow-up in terms of-

Ezra Weener: Just a quick follow-up in terms of-

Kathy Ta: Andrew, do you have a follow-up?

[Analyst] (Jefferies): Yeah, thanks. So, that would be three customers all using CW lasers. Just kind of wondering what that means for the industry in terms of what you're seeing from people choosing CW or EML.

Ezra Weener: Yeah, thanks. So, that would be three customers all using CW lasers. Just kind of wondering what that means for the industry in terms of what you're seeing from people choosing CW or EML.

Michael Hurlston: Yeah, I mean, you know, obviously, as we talked about a second ago, our EML are very much sold out. In fact, it really is a chase for us to keep up with the demand. You know, we are basically choosing to allocate our supply toward EML, one, because of differentiation, two, because of pricing. So we've really focused our capacity as much as we possibly can on the EML product. As we said, we're really increasing the capacity quarter-over-quarter, year-over-year. And as we sort of hit a space where we think we have a bit of room, we think there's an opportunity now to reallocate just a bit towards CW, so we can start participating in that market first externally, right? We'll source those to third-party transceiver customers.

Michael Hurlston: But then strategically, to your point, we will begin insourcing those. So it'll be mostly CW that we end up insourcing, and that's why, strategically, it is important for us to develop that muscle.

[Analyst] (Jefferies): Awesome. Very helpful.

Ezra Weener: Awesome. Very helpful.

Kathy Ta: Thanks, Andrew.

[Analyst] (Jefferies): Thank you.

Ezra Weener: Thank you.

Operator: Our next question is from Meta Marshall with Morgan Stanley. Your line is now open.

Meta Marshall: Great, thanks. Wajid, maybe just some clarity on the margin improvement that you saw on the Cloud and Networking business. You know, how much of that is from some of the yield improvements on Cloud Light versus just kind of pricing mix advantages on EMLs? And then I have a second question.

Wajid Ali: Yeah, sure, Meta. I mean, we're seeing across all the product lines, you know, a nudge of improvement, I would say. You know, on our data center interconnect products, we are moving a lot of that production from CMs to our own internal manufacturing in Thailand. And so the margin dollars that used to accrue to them are now accruing to us, so that's certainly helping us, both in Q3 and more substantially in Q4. And actually, we expect to increase that capacity moving into the back half of the calendar year, so that will continue to benefit us. On the Datacom chip side, Michael and Wupen both mentioned earlier that demand is ahead of supply. And so as that production has improved year over year and sequentially, that's also providing a tailwind for us.

Michael Hurlston: We're accelerating our optical transceiver production at our Thailand manufacturing campus and remain on track to begin shipments to our second annual announced Hyperscale data center customer in June as previously communicated.

Wajid Ali: To your earlier question on modules, to the first part of your question on modules, yes, yields have improved, and so the yield issue that we had in our December quarter, which caused a bit of a headwind on our gross margin line, that situation has improved into Q3, and that certainly helped us. And into Q4, that's also helping us, especially as revenues are expected to increase 50% sequentially, the benefit of improved yields are accruing to our gross margin. So I'd say kind of across the board, we're seeing a nudge of improvement across multiple product lines, and that's helping us.

Michael Hurlston: Meta, I mean, just from a perspective, we said this in the prepared remarks, but we're. Sorry, Meta. I. We're gonna continue to focus on gross margin. I think there's opportunity on pricing and on our cost line to continue to improve that. So we'd expect a pretty nice ramp toward the 40% target that Wajid outlined at OFC.

Meta Marshall: Okay, got it. And just as a second question-

Kathy Ta: Thanks, Mita.

Meta Marshall: You know, obviously a very fluid situation with tariffs currently. But assuming kind of the, the 100 basis point headwind that you guys are talking about is within that kind of 90-day, 90-day exemption period, kind of considering current tariffs as of that. And just kind of wondering what your thinking is, you know, if there are kind of greater tariffs that come from Thailand, just, you know, or thoughts about eventually moving production out of Thailand. You know, it sounds like you're moving more production there for now, but just kind of overall thinking if there end up being tariffs on Thailand. Thanks.

Wajid Ali: Yeah, I mean, obviously, if there are tariffs on Thailand, that will have a headwind that we'll have to work through. Yes, we are moving more of our production to Thailand, whether it's from our CMs to us, or whether it's from our cloud module business in Dongguan, China, to us in Thailand. So we are making that manufacturing shift that's been in place for a number of quarters now. And so I think from an infrastructure and strategy standpoint, that certainly is there. If there's tariffs that accrue, you know, post kind of 8 July because of that, then we'll have to work through that with our customers.

Wajid Ali: You know, as you can appreciate, as there's been noise on tariffs, we've been speaking to our customers about how we work through the pricing impact to them that is associated with those tariffs. But up until now, for the large part, most of our shipments that come to the US, we are not the importer of record. And because we are not the importer of record, those conversations have been a lot simpler, I'd say. So that's really how we're thinking about it.

Meta Marshall: Great. Thanks.

Kathy Ta: Thank you, Meta.

Operator: Our next question is from Christopher Rolland with SIG. Your line is now open.

Dylan Ollivier: ... Hi, this is Dylan Ollivier on for Chris. Thanks for taking my question. So for my first question, I wanted to follow up on the 50% sequential growth in the optical transceiver business. So which of your transceiver customer programs will be responsible for that growth? And how should we expect transceiver shipments to trend for the rest of the calendar year? Do you guys think that level is sustainable, and are you guys expecting to grow from there as you add customer programs? Thank you.

Michael Hurlston: Yeah, on the transceivers, I mean, I don't want to necessarily outline specific customers that are, that are driving it, but it's predominantly the customer that we've had shipping for quite some time will be most of the contribution. We would expect this business to continue to grow. I think we're really well positioned. Obviously, generally speaking, our share is relatively modest. We think that we've put some of the issues behind us relative to some issues transferring products into manufacturing and getting those into production. And we would expect from here to continue to grow. Will we grow at this growth rate? Hard to say, but certainly, we would expect to continue to grow this business, and it'll be a major growth driver for us in 2026. Wupen Yuen, any comments from you?

Michael Hurlston: At the same time, we continue to shift towards third announced customer and we are expanding our product offerings and ramping in shipment volume to our largest cloud hyperscale customer.

Michael Hurlston: In Q4, we expect our overall cloud transceiver revenue to grow over 50% sequentially.

Wupen Yuen: Yeah. And also, as Michael said, as the more programs start ramping, we will see this to be more broader based than this one major customer ramp. Other programs will be gradually brought into the ramping phase as well. So we're going to see that going forward.

Kathy Ta: Did you have any follow-up?

Dylan Ollivier: Got it. That's great. Yes, so for my follow-up, I wanted to ask about 200-gig EMLs. So it sounds like you're getting solid traction there already. When should we expect that to ramp? And do you expect it to quickly cannibalize a 100-gig EMLs or just to layer on top initially?

Wupen Yuen: Yeah, this is Wupen Yuen speaking. I think the timing-wise, it's going to be toward the end of this calendar year. That's when 200-gig EML will start to ramp. And we don't see this being a cannibalization of 100G EMLs, because there's still a very large, growing demand at 100G EML for 800G modules. 1.6T modules or solutions will be on top of the 100G demand for quite a while to come. So this should be additional opportunity than a cannibalization opportunity.

Michael Hurlston: We're also experiencing growing demand for our Dci and long haul transmission solutions.

Kathy Ta: Great. Thank you.

Dylan Ollivier: Great. Thank you.

Operator: Our next question is from Ryan Koontz with Needham & Company. Your line is now open.

Ryan Koontz: Thanks for the question. Maybe stepping back a little bit on the Datacom transceiver market here, relative to, you know, the strong Chinese players. What are you hearing from your customers, your major, you know, cloud-oriented customers, about their interest in moving away from Chinese suppliers and interest in bringing those products in-house? Thanks.

Michael Hurlston: Yeah, no. There's definitely an interest to move away from Chinese supply. I mean, I think the problem right now is that collectively, we can't meet the demand, so they are going to continue, I think, to buy from Chinese suppliers until US suppliers can ramp to a level to meet what looks like a relatively insatiable demand. Generally speaking, there is some design insourcing going on. Some of the customers are doing their own designs, but the outsourcing is by far the dominant pull, working with third-party transceiver manufacturers. And, you know, we obviously are a small player at the moment. We expect, given the number of designs that we have in flight, to be a more meaningful participant in the market starting next quarter, but then really growing into the quarters beyond that.

Ryan Koontz: That's great. Thank you for that.

Kathy Ta: Ryan, did you have a follow-up?

Ryan Koontz: And then maybe... I do, yeah. Thanks. On the, on the telecom side of the business, what kind of mix shift are you seeing there? Obviously, DCI is driving the boat there in terms of growth. As you think about that mix shift, is it kind of in line with your expectations? How should investors think about the shift toward DCI and how it affects your business, whether, whether it's measured on gross profit or, you know, revenue per unit, these sorts of things? You know, wallet share. But if you could just step back and explain how investors should think about these shifts in telecom, it'd be helpful. Thank you.

Michael Hurlston: Yeah, I mean, I think that the traditional telecom business targeted to operators and targeted to MSOs is still obviously meaningful, but the long pole now is the hyperscalers. So DCI, very important. Even these guys are now participating in our long-haul business. So we talked in the call, in the prepared remarks about pump lasers. We've seen really an increase in that business. A lot of the backbone now is being supplied by the hyperscalers, and we're participating in that with our traditional telecom products, but now more targeted toward the hyperscalers. So that's been a surprising growth driver. I think, quite frankly, we haven't seen this business perform at these levels in quite some time, so it's really a nice surprise. I mean, technology-wise, Wupen Yuen, any other things that you're seeing from a trend line?

Wupen Yuen: Yeah, certainly, I think the overall, we should think about the AI driving force is not just about data center internal. Data has to be transmitted across data centers, so all these actually have the same driving source, right? We see the ZR being growing very strong, and therefore, tunable lasers doing really well. You know, even the long-distance transmission coherent components are doing very well because of the terrestrial long-haul requirements and also the pump lasers for fiber capacity. So all in all, we're seeing a very strong, you know, DCI kind of traffic growth, and that's driving our so-called telecom part of the portfolio as well.

Michael Hurlston: We achieved another sequential increase in shipments of narrow line width lasers essential to ZR and ZR plus module deployments and in transponders for cloud customers. This marks the fifth sequential quarter of shipment growth for narrow line width lasers, even as we.

Wajid Ali: I'll just add an additional comment, Ryan. Around your question on gross profit dollars. So, DCI products are accretive to us from a gross margin standpoint. Not only where we're currently operating from a gross margin standpoint, but also versus the 40% target that Michael laid out earlier, it's even accretive to that. And so, you know, the combination of increased demand and our increased capacity internally at Thailand is certainly a tailwind for us that, you know, is driving a lot of the confidence that you're hearing from the team around our gross margin abilities. This is coming from the secular demand, along with internal manufacturing, along with the pricing power that we believe we have on our data center interconnect products. So it's all adding up together.

Michael Hurlston: Ramp additional capacity in Thailand, our shipments will not be able to satisfy demand for the balance of the calendar year.

Kathy Ta: Thank you, Ryan. People really appreciate it. Thank you.

Kathy Ta: Thank you, Ryan.

Ryan Koontz: People really appreciate it. Thank you.

Operator: Our next question is from Karl Ackerman with BNP Paribas. Your line is now open.

Karl Ackerman: Yes, thank you. I have two. I believe you said that your cloud transceiver revenues would grow 50% sequentially on the contribution from all three of your cloud customers. I have to ask, though, is this tied to—it sounds like it's tied to a new GPU or ASIC program ramping, at least at one of them. But you know, I guess how much of this, if at all, is from customers pulling forward transceiver demand ahead of potential tariffs? And if not, how do you manage that supply and demand balance with these three customers? I have a follow-up, please.

Michael Hurlston: Yeah. Hey, Karl, Michael Hurlston. So first of all, we don't, we don't see any pull-forward. I mean, it's been a race for us to keep up. We, we kind of alluded to this in one of the previous questions. We, we definitely had an issue ramping. We went through a ramp phase and then a qualification phase, and really, this is a product that's driving a lot of the increase that was something that's been in our hopper now for a couple of quarters. So we certainly don't see a pull-forward effect. And again, with that layering in with the additional two customers beginning to ramp this quarter, we feel we, we don't, we don't see any effect on pull-ahead.

Michael Hurlston: I'm going to have Wupen talk a little bit about what those are tied to, relative to kind of the customer tack.

Wupen Yuen: Yeah, I think from the product release point of view, definitely, I think those ramps are tied to the dominant, you know, GPU ramp and also some other accelerator ramp. There's some loose association with those kind of introduction of the accelerator products. But also, though, I think the demand is pretty broad-based, is not specifically only to those two or three accelerators that are being introduced now into the market.

Kathy Ta: Karl, did you have a follow-up?

Karl Ackerman: I have one, if I may. Wajid, you spoke of moving production away from contract manufacturers to in-house solutions. I'm curious, is that for your industrial tech products, or does that relate more toward cloud and networking? And similarly, do you need to add substantial capacity to move that production in-house, please? Thank you.

Wajid Ali: Yeah, so it's revolved around our data center interconnect products, and so that those CapEx decisions were made 6 to 9 months ago, and actually, the CapEx is showing up this fiscal quarter, and it's expected to improve our capacity for data center interconnect products by 50%, exiting this calendar year. And so that is the production that instead of providing to our contract manufacturers, we're still keeping them going at full speed, but the incremental supply is coming from our Nava facility for CapEx that is being put in place this quarter, and that will fully ramp by the end of this calendar year and give us another 50% more capacity on data center interconnect products, specifically tunables.

Kathy Ta: Thanks, Karl.

Operator: Our next question is from Mike Genovese with Rosenblatt Securities. Your line is now open.

Mike Genovese: Great, thanks. I'm not sure if I missed this in the prepared remarks, but did we just get an update on telecom performance in the quarter and the sort of product issue last quarter, which is getting supply, if that has been solved yet?

Wajid Ali: Yeah, sure. So I'll, I'll start off, and I'll let Wupen also jump in. So Telecom performance came in exactly as expected. We had, you know, shortages on pumps, we had shortages on tunables, we had shortages on CDM products from our, from our classic transmission product lines. And so, you know, all of those products, we were working through supply constraints throughout the quarter. We are expected to see improvements in supply for all three product lines moving into Q4 and into the back half of the year. The earlier question was around our tunables products, where we mentioned that we have CapEx that we're putting in place in our Thailand facility to increase the production capacity by 50% over the remaining part of this calendar year.

Wajid Ali: So with that increased capacity, we're going to see the telecom part of our business improve as we move through the quarters for the rest of this calendar year. Maybe you want to talk about pumps a little bit more, Wupen?

Wupen Yuen: Yeah, I think the overall from the demand and supply perspective we don't expect that our capacity can really fulfill all the demand for the next several quarters because of the demands being really strong. Although we're doing better than we were able to. So we'll continue to run capacity, continue to get more supply into the picture, but you know, we're gonna be in a pretty tight supply situation for next at least the next couple quarters.

Kathy Ta: Did you have a follow-up, Mike?

Mike Genovese: Great. Yeah, and I, I guess I want to revisit the question whether there's, you know, any caution in the guidance for the back half of the year related to macro or tariffs. You know, if I just take the transceiver comment, up 50% sequentially, I mean, to me, that, that gets us $30 million more revenue, that, that gets us the whole growth in the guide. I know industrial is supposed to be down, but you've got EMLs growing, you've got telecom that should be up. Is there, is there an extra dose of conservatism in here, or am I overthinking this?

Wajid Ali: No, I'd say you're not overthinking it, Mike. I mean, obviously, we're in an environment where there's a lot of uncertainty. We're quite confident in the guide that we provided. But, you know, if you just listen to some of the capacity improvements that we've got, there is certainly opportunity to deal with any type of headwinds that come our way during the fiscal quarter. As far as the back half of the calendar year looks, across all of our product lines, we continue to see an uptick in demand, whether that's datacom chips, whether that's data center interconnect products, or whether that's modules.

Wajid Ali: Even our industrial lasers product line, that is expected to come down in fiscal Q4, has new ultrafast products that are ramping in the back half of the calendar year. Demand for those products is quite strong, but offsetting that, we're seeing some headwinds from customers that take kilowatt products. But overall, the trend is up and our supply plan is up, so you know, we should see improvements from here to the $500 million target that Michael spoke about. But again, I think the macro uncertainty, none of us have a great crystal ball on that.

Mike Genovese: Thanks so much.

Kathy Ta: Thanks, Mike.

Operator: Our next question is from David Vogt with UBS. Your line is now

David Vogt: Great. Thanks, guys, for taking my question. I just want to go back to the telecom business for a second. You know, I jumped on late, and I apologize. Was there anything in the quarter that was similar to last quarter? What I mean by that, there was some channel normalization last quarter and even in the quarter before. Just trying to get a sense for what's core underlying demand, particularly in the face of tariffs or the risk of tariffs or the potential tariffs. And I'll give you my follow-up. And I might have missed this because I jumped on late: Did you share with us sort of how the core transceiver business grew in the March quarter relative to either last year or last quarter? Thanks.

Michael Hurlston: Yeah, maybe. I mean, look, on the telecom business, obviously, we feel pretty good. I mean, I think there's a lot of opportunities for us to continue to grow. Wupen talked about the narrow linewidth lasers. We actually said that in the prepared remarks. So we think that business continues to grow through the balance of the calendar year and into next year. And it's not just that. I think we talked about pump lasers. That really has been a strong product area for us. So across the board on telecom, which, as Wajid said correctly, is a gross margin enhancer. It's accretive on the gross margin line. We would expect to see that continue to creep up.

Michael Hurlston: In addition, pump lasers and line subsystems were up sequentially driven by cloud infrastructure demand.

Michael Hurlston: Large portion of growth will be cloud modules, and so as you think about us across the next couple of quarters, in order to keep the gross margins up, we are gonna need to see improvements in telecom, because we think that that's an area for us that has accretive gross margins. On the datacom transceivers, the second part of your question, essentially, that was flat on quarter. We didn't see a lot of growth. I think the growth for us, we talked about it, I think in previous discussions, that we'd hit a bit of an air pocket relative to execution on some ramping some of our datacom transceivers. We're past that at this point. We would expect to see the growth in this subsequent quarter in the guide, and then we just expect to see pickup from there.

Michael Hurlston: Looking ahead to Q4, we anticipate strong sequential growth in our cloud and networking segment, driven by new capacity coming online across our global operations. The continued ramp of customer programs and strengthening demand from network equipment manufacturers.

Michael Hurlston: Now, let me move to our industrial Tech segment Industrial Tech segment revenue decreased 5% sequentially, but was up 14% from the same quarter last year industrial laser revenue declined sequentially, but the drop was less than anticipated while <unk> sensing revenue followed expect.

Michael Hurlston: So on balance, you know, look, we feel really good about the way the business is shaping up. Wajid gave correctly a right amount of prudence around tariffs and macroeconomic uncertainty, but, you know, if we don't have that, we feel really good about where all of our business is landing right now.

David Vogt: Great. Thanks, guys.

Kathy Ta: Dave, did you have a follow-up?

David Vogt: Nope, those are my two. Thank you.

Kathy Ta: Oh, okay. Excellent. Thank you. Justin, I think we have time for just one more question.

Operator: Okay, our last question is from Alek Valero with Capital. Your line is now.

Wajid Ali: Hey, guys. Thank you for taking my questions. This is Alex calling from Nanda. So I have a question on co-packaged optics. What's your view on when co-packaged optics truly have a chance to gain traction in data center and provide competition to transceivers?

Alek Valero: Hey, guys. Thank you for taking my questions. This is Alex calling from Nanda. So I have a question on co-packaged optics. What's your view on when co-packaged optics truly have a chance to gain traction in data center and provide competition to transceivers?

Michael Hurlston: Seasonal trends in.

Michael Hurlston: In Q3, ultrafast laser shipments held steady at near record levels, driven primarily by growing demand from our leading tool supplier supporting high volume solar cell manufacturing.

Michael Hurlston: We're also actively collaborating with customers on new ultrafast laser opportunities as the minimal thermal impact of ultra short pulse technology continues to gain traction in advanced packaging display technologies and next generation semiconductor processes.

Michael Hurlston: Consistent with earlier remarks, we have taken actions to rationalize the industrial tech portfolio.

Michael Hurlston: Closing, two R&D sites, and stopping development activities and three exploratory product areas.

Michael Hurlston: With these actions and more focus on the core business, we expect to see increasing profit in this segment over the next handful of quarters.

Wupen Yuen: Yeah, this is Wupen speaking. I think the co-package optics would take some more time. The technology is pretty complex. A lot of engineering challenges, I think, yet to be worked through. As the leading AI customer talk about in their conferences, this year, there will be some a first system release, and next year, 2026, there'll be another system release based on the Ethernet switch. We believe that's the timing. We're going to see some level of adoption of the CPO optics. However, though, we do believe that the pluggable optics will continue to be the dominant form factor going forward.

Michael Hurlston: As I reflect on my first 90 days that momentum and look ahead I'm energized by the momentum we are building our strong Q3 performance combined with the strategic positioning we shared at OFC reinforces that we're on the right path.

Michael Hurlston: We're executing on our focused strategy investing in high growth high impact areas, where our differentiated technologies provide a lasting competitive advantage.

Michael Hurlston: From delivering record AML chip shipments to partnering with AI Hyperscale is on connectivity innovation.

Michael Hurlston: We're demonstrating that our products are essential to powering the future of cloud and AI.

Michael Hurlston: While macro uncertainty tariff dynamics and export controls present near term challenges Lew mentioned has taken recent actions and deliberate steps over the years to build resilience through a globally diversified manufacturing footprint.

Michael Hurlston: <unk> flexible supply chain and active engagement with customers.

Michael Hurlston: We remain focused on what we can control pricing disciplined spending and flawless execution.

Michael Hurlston: These fundamentals are positioning us to succeed across a variety of market environments.

Finally strong demand for cloud and AI continues to support our confidence in achieving the medium and long term financial targets, we outlined at OFC, we remain on track to exceed a $500 million quarterly run rate as we exit the calendar year.

Michael Hurlston: There is still work ahead, but the opportunity in front of US is substantial our ability to deliver differentiated optical solutions across our portfolio provides a strong resilient foundation for sustainable growth.

Wajid Ali: Now I'll hand, the call over to Wajid. Thank.

Wajid Ali: Thank you Michael third quarter revenue of $425 $2 million and non-GAAP EPS of <unk> 57.

Speaker Change: Were both above the high end of our guidance ranges.

GAAP gross margin for the third quarter was 28, 8% GAAP operating loss was eight 9%.

Speaker Change: And GAAP net loss per share was <unk> 64.

Speaker Change: Turning to our non-GAAP results third quarter non-GAAP gross margin was 35, 2%, which was up 290 basis points sequentially and up 650 basis points year on year due to better manufacturing utilization and favorable.

Speaker Change: Product mix due to increased Datacom laser shipments.

Speaker Change: Third quarter non-GAAP operating margin was 10, 8%, which was up 290 basis points sequentially and up 1100 basis points year on year.

Speaker Change: And driven by improved cloud and networking profitability.

Speaker Change: Third quarter non-GAAP operating profit was $46 $1 million and adjusted EBITDA was $71 million.

Speaker Change: Third quarter, non-GAAP operating expenses totaled $103 $4 million or 24, 3% of revenue.

Speaker Change: Increase of $5 1 million from the second quarter, and a decrease of $2 $4 million from the year ago quarter.

Speaker Change: This demonstrates our disciplined cost management across the organization, even as we ramp investments in our growing cloud opportunities and absorb the typical payroll fringe reset that takes place each year in our third fiscal quarter.

Speaker Change: Q3, non-GAAP SG&A expense was $40 $1 million non-GAAP R&D expense was $63 3 million interest.

Speaker Change: Interest and other income was $2 9 million on a non-GAAP basis.

Speaker Change: Third quarter non-GAAP net income of $49 million and non-GAAP diluted net income per share was <unk> 57.

Speaker Change: Our fully diluted share count for the third quarter was $72 2 million shares on a non-GAAP basis.

Speaker Change: Turning to the balance sheet.

Speaker Change: During the third quarter, our cash and short term investments decreased by $30 million to $867 million, our inventory levels increased sequentially to support the expected growth in our cloud and networking revenue.

Speaker Change: In Q3, we invested $59 5 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 AML chip manufacturing.

Speaker Change: Nearly all of our Capex investment was directed toward our cloud and networking business.

Speaker Change: Turning to segment details third quarter cloud and networking segment revenue at $365 $2 million increased 8% sequentially and 16% year on year.

Speaker Change: Cloud and networking segment profit at 20% increased 380 basis points sequentially and increased 540 basis points year on year on higher revenue and favorable product mix, our third quarter Industrial Tech segment revenue at 60.

Speaker Change: <unk> was down 5% sequentially and up 14% year on year third quarter Industrial Tech segment profit of four 3% decrease sequentially on lower revenue and increased year on year on higher revenue.

Speaker Change: Now, let me move to our guidance for the fourth quarter of fiscal 25, which is on a non-GAAP basis and is based on our assumptions as of today.

Speaker Change: I want to acknowledge that the impact of tariffs on our supply chain, along with broader geopolitical dynamics remains highly uncertain.

Speaker Change: The guidance, we're providing reflects our best assessment based on the current environment.

Speaker Change: This outlook includes an estimated 100 basis point reduction in overall company gross margin, primarily driven by higher material costs and tariffs on shipments to U S destinations, where we serve as the importer of record.

Wupen Yuen: I think it will take the next several years, really, to gradually ramp the CPO optics to be a meaningful share. And the benefit of CPO is clear, but the adoption will take time for people to figure out how to use it very effectively.

Alek Valero: Got it. That's very helpful. And just as a quick follow-up, can you remind us the economic difference between transceivers and co-package optics?

Speaker Change: For clarity.

Speaker Change: Despite this 100 basis point headwind, we expect a sequential improvement in gross margins from Q3 to Q4.

Speaker Change: We expect net revenue for the fourth quarter of fiscal 'twenty five to be in the range of $440 million to $470 million. This Q4 revenue forecast includes the following assumptions.

Speaker Change: Cloud and networking to be up sequentially with strong growth in products addressing cloud and AI applications and industrial tech to be down sequentially with declines in both industrial lasers and <unk> sensing.

Speaker Change: We project fourth quarter non-GAAP operating margin to be in the range of 13% to 14% and diluted net income per share to be in the range of 70.

Wupen Yuen: The difference?

Kathy Ta: The difference between transceivers.

Michael Hurlston: The difference between transceivers.

Wupen Yuen: Oh, so basically, if you take any kind of a switch box, for example, the transceiver basically is at the front panels. So you have the connection between the DSP, sorry, the switch chip, bringing the signal all the way to the front panel of the box, which can be 20, 30 inches, actually away from the switch chip. The co-packaged optics basically remove all that, put the optics directly onto the switch chip, thereby removing all the signal losses and the complexities associated with that transition. That, in essence, is what a CPO does, and then that lowers the power consumption, reduce the cost, reduce the complexity.

Wupen Yuen: But in a sense, you actually move the complexity from optical modules onto the switch chip, which then is some engineering, you know, work to be done, right, to make sure that it's a reliable solution.

Alek Valero: Got it. And-

Kathy Ta: Thank you, Alex.

Alek Valero: Does co-package op... Thank you.

Kathy Ta: Go ahead.

Alek Valero: Yeah, no, I was going to ask, does co-packaged optics come with an ASP increase compared to transceivers?

Speaker Change: To 80 per share.

Speaker Change: Our non-GAAP EPS guidance is based on a non-GAAP annual effective tax rate of 16, 5%. These projections also assume an approximate share count of $72 7 million shares.

Wupen Yuen: Well, it's a different pricing model. You know, today, the consumption model is the switch chip is purchased separately, and the box is made by somebody else, and the modules are purchased, you know, through third-party manufacturers such as us. And, you know, it's a very different consumption model than the CPO optics, which basically means that the switch vendor will control the entire, you know, ASIC plus the optics. So it's very hard to say how they're going to price it, and therefore, how to say that which one's going to be cheaper. It really depends on the competition and benefit and so on and so forth. Very, very hard to give an estimation at this point.

Kathy Ta: Thanks, Alex.

Alek Valero: Got it. Thank you again.

Kathy Ta: Thank you, everyone, for your questions. That's all the time we have for questions. We look forward to connecting with all of you at upcoming investor conferences and meetings this quarter. With that, I'd like to thank you for joining us today.

Speaker Change: With that I'll turn the call back to Kathy to start the Q&A session Kathy.

Speaker Change: Thank you Jed to allow everyone an opportunity to ask questions. Please keep to one question and one follow up.

Michael Hurlston: That concludes the conference call. Thank you for your participation. Enjoy the rest of your day.

Operator: That concludes the conference call. Thank you for your participation. Enjoy the rest of your day.

Speaker Change: Just some let's begin the Q&A session.

Speaker Change: <unk>.

Speaker Change: If you'd like to ask a question. It is star one on your telephone keypad.

Speaker Change: Our first question is from <unk> <unk> with Jpmorgan. Your line is now open.

Speaker Change: Okay.

Jim Quick: Hi, Good evening. Thanks for the question. This is Jim quick and so on for Sonic.

Jim Quick: I guess first question, maybe just a bit extra question.

Jim Quick: I noticed you guys didnt necessary.

Jim Quick: Please talk about the 500 million revenue will toggle.

Jim Quick: Initially laid out shipping by the end of the calendar year I guess.

Jim Quick: Our recent performance in the June quarter guidance, how are you thinking about achieving that target by the December quarter.

Jim Quick: Profitability that you can achieve that earlier.

Jim Quick: And what are the puts and takes.

Jim Quick: And then I have a follow up.

Jim Quick: Yeah.

Michael Wilson: Yes, let me take that one this is Michael Wilson, So we did outline that.

Michael Wilson: Still very much on track for the $500 million by the end of the year.

Michael Wilson: We're obviously not guiding we're guiding a quarter at a time, but we feel pretty pleased about where the company is setting up and still as we said in the remarks are very much on track for the $500 million quarter.

Michael Wilson: Did you have a high level.

Michael Wilson: And then maybe just.

Speaker Change: Yes, definitely a a follow up.

Speaker Change: So maybe just talk maybe just touching on the Datacom chip business.

Speaker Change: Thank you were initially targeting a 40% increase in volumes by the June quarter.

Speaker Change: I guess just wanted to get an update there in terms of how it's tracking relative to your initial outlook and whether youre outperforming.

Speaker Change: Initial expectations, both on the volume and ASP front.

And similar question, but obviously more related to kind of the calendar 'twenty five outlook. It does look like you're kind of outperforming your initial expectation in terms of where you were going to track towards the end of the calendar year, but any kind of color in terms of how youre thinking about asps trending there and then sorry for the long question, but just can.

Speaker Change: Curious like whats the contribution that you're expecting from CW lasers, now that youre talking about wrapping those up.

Speaker Change: As well as normal.

Speaker Change: Yes.

Speaker Change: Yes, I'm going to take the first part of the call up for question and then turn it over to Wuhan.

Speaker Change: So what I would say look we are obviously tracking very well we've increased our capacity in the indium phosphide Fabs, we feel like demand is still outstripping supply on our MLS. So we even as we ramp supply.

Speaker Change: We're still very much sold out.

Speaker Change: That being said as we increase the capacity, we feel like there's room to add CW into the mix and the reason for that is it really expands extends our serviceable market. So we feel like we want to do that to get our foot in that door.

Speaker Change: Our design, we think is differentiated and gives us an opportunity to meaningfully participate in CW, but the predominant focus is remains MLS from an ASP standpoint.

Speaker Change: Again, given the supply constraints, obviously theres opportunities there to continue to maximize our price and we're looking at that.

We have opportunities as we think about now transitioning from 100 to 200 gig lasers, and obviously going up to 400 gig, but maybe we'll pay you want to add some color on the attack and how we think about it yes.

Speaker Change: So to come in a little bit on the on the CFO laser ramp.

Speaker Change: Very beginning right. We just won a couple of customers that February lasers, as Michael pointed out most of our fab capacity continue to be ramping up we would like to be able to play in that market.

Speaker Change: Which increased our Sam so we're at the very initial phase of the ramping.

Speaker Change: Not huge numbers, yet, but we will continue to see that volume going up at this time.

Speaker Change: It goes by.

Speaker Change: Thanks, Jeff.

Speaker Change: Thanks, guys I appreciate it.

Speaker Change: Our next question is from Simon Leopold with Raymond James Your line is now.

Simon Leopold: Thank you very much I wanted to see if you could maybe unpack what.

Simon Leopold: In your assumptions around the tariff headwind you quantified it ran a 100 basis points, which we appreciate I guess, what I'm trying to get at is trying to get a sense of how much business are manufacturing do you still have in China and that assumption I understand you're moving more to Thailand, and what are the other underlying it.

Simon Leopold: <unk>, you've made and then I've got a quick follow up.

Simon Leopold: Yeah sure Simon I'll start off and then certainly we'll plan and Michael can jump in yeah. So like you mentioned in our prepared remarks, we did.

Simon Leopold: Talk about the 100 basis point.

Simon Leopold: Headwind to gross margins and therefore operating margins during the quarter a lot of that headwind is coming from increased component costs.

Simon Leopold: <unk> costs.

Simon Leopold: Where we are having to pay the tariff associated with.

Simon Leopold: Sub mountain products as well as capacitors and so wherever we see that we're having to pay a tariff associated with that.

Simon Leopold: For most of our customers.

Simon Leopold: We are trying to move our production from from China into into our Nava facility in Thailand, We're starting off with our data center.

Simon Leopold: Our connect products.

Simon Leopold: But we are eventually going to also be moving our products from our Dongguan facility for cloud modules into Nava as well so what we baked into the forecast right. Now is our current production ramp for the quarter, but we will see improvements in that in our fiscal Q1 and Q2 as more of our Dongguan.

Simon Leopold: Production moves to our Nava facility for cloud modules. So certainly the impact from that perspective, we will diminish.

Speaker Change: Thanks, and then just as my follow up longer term question is I'd like to get your latest thinking on.

Speaker Change: What contributions and what role you can play in CPO.

Speaker Change: To see that you were announced within the ecosystem back in March.

Speaker Change: I assume you are providing products like CW lasers, but we could get an idea.

Speaker Change: Maybe some dollar content and forecasting of how you see this affecting your business over the intermediate or longer term. Thank you.

Speaker Change: Based on this wind speaking.

Speaker Change: Thank you.

Speaker Change: CPO frankly speaking this deal sometimes away right, we talk about ramp volume in second half of the next calendar year.

Speaker Change: Number one so therefore in the meantime, the module is going to be continue to be a ramping business for us.

Speaker Change: That's going to be.

Speaker Change: A foreseeable.

Speaker Change: Strong growing business for us and for the industry to come on the other hand in addition to the laser being important.

Speaker Change: Important component CPO ecosystem. We're also looking at adding other couple moves in the longer term.

Speaker Change: There'll be other optical chips they'll be needed in the CPO world.

Speaker Change: <unk>, let's maybe much we're actually looking into as.

Speaker Change: As well, but I will say thats really a multiyear a prospect in the near term is going to be that there is a component plus the cloud module ramping in the cloud interconnect world.

Speaker Change: Thank you.

Speaker Change: Thank you so much.

Speaker Change: Our next question is from Blayne Curtis with Jefferies. Your line is now open.

Blayne Curtis: Hi, Oscar winner on for <unk>. Thanks for taking my question.

Blayne Curtis: Just a quick one and then probably a follow up just looking at the transceiver business, 50% plus growth for next quarter is great and clearly a lot of traction can you talk about what youre seeing there from it and ml versus CW laser perspective.

Plan for in sourcing versus externally sourcing there.

Blayne Curtis: Yes near term.

Blayne Curtis: All of our products are using CW lasers, who are using silicon photonics approach for all of that including all of the revenue growth that you just cited.

Blayne Curtis: And all of it actually is externally sourced so we have not yet incorporated our own lasers in our transceivers, but we would expect to do that sometime early in the calendar year next year, that's kind of the plan.

Blayne Curtis: We obviously have a number of big ramps in front of us with multiple customers that we talked about but we are our next phase of growth will incorporate our internal lasers within any anything to add okay. Good.

Blayne Curtis: Thanks for the question.

Blayne Curtis: Alright.

Blayne Curtis: Yeah.

Blayne Curtis: So that would be three customers are using CW lasers, just kind of wondering what that means for the industry in terms of what youre seeing from people choosing CW or email.

Yes.

Blayne Curtis: Obviously as we've talked about a second ago. Our AML are very much sold out in fact I'd say it.

Blayne Curtis: Really is.

Blayne Curtis: Chase for us to keep up with the demand.

We are basically choosing to allocate our supply toward ml, one because of differentiation to because of pricing. So we've really focused our capacity as much as we possibly can on the <unk> product as.

Blayne Curtis: As we said, we're really increasing the capacity quarter on quarter year on year, and as we sort of hit a space, where we think we have a bit of room.

Blayne Curtis: We think there is an opportunity now to reallocate just a bit towards CW. So we could start participating in that market first externally right will source those two third party transceiver customers, but then strategically to your point, we will begin in sourcing those so it'll be mostly see.

Blayne Curtis: W that we ended up in sourcing and Thats why strategically it is important for us to develop that muscle.

Speaker Change: Thank you.

Meta Marshall: Our next question is from meta Marshall with Morgan Stanley. Your line is now open.

Meta Marshall: Great. Thanks, maybe just some.

Meta Marshall: Clarity on the margin improvement that you saw on the cloud and networking business how much of that is from some of the yield improvement on cloud versus just kind of pricing mix advantages on emails and then I have a second question.

Meta Marshall: Yeah sure I mean, we're seeing across all the product lines drove improvement I would say on our data center interconnect products.

Meta Marshall: We are moving a lot of that production from CMS to our own internal manufacturing in Thailand, and so the margin dollars that used to accrue to them are now accruing to us. So that's certainly helping us both in Q3 and more substantially in Q4 and actually we expect to increase that capacity moving into the back half of the calendar year.

Meta Marshall: So that will continue to benefit us on the Datacom chip side, Michael in Wuhan. Both mentioned earlier that demand is ahead of supply and so as that production has improved year over year and sequentially.

Meta Marshall: It is also providing a tailwind for us.

Meta Marshall: To your earlier question on modules to the first part of your question on modules, yes yields have improved and so the yield issue that we had in our December quarter, which caused a bit of a headwind on our gross margin line.

Meta Marshall: That that situation has improved into Q3 and that certainly helped us and the end of Q4. That's also helping us, especially as revenues are expected to increase 50% sequentially. The benefit of improved yields are accruing to our gross margin. So I would say kind of across the board, we're seeing a nudge of improvement.

Meta Marshall: Cross multiple product lines and Thats, helping us.

Meta Marshall: Immediate I mean, just from our perspective, we said this in the prepared remarks, but we're sorry.

Meta Marshall: We're going to continue to focus on gross margin I think there is opportunity on pricing and on our cost line to continue to improve that so we would expect.

Meta Marshall: A pretty nice ramp toward the 40% target that watch it outlined at OFC.

Speaker Change: Okay got it and just as a second question.

Meta Marshall: Obviously, a very fluid.

Speaker Change: Tuition with tariffs currently.

Speaker Change: But assuming kind of the 100 basis point headwind that you guys are talking about is within that kind of 90 day.

Speaker Change: 90 day exemption period kind of considering current tariffs as of that.

Speaker Change: And I'm wondering what your thinking is.

Speaker Change: There are kind of greater.

Speaker Change: Tariffs that come from Thailand, just our thoughts about eventually moving production out of Thailand, and it sounds like Youre moving more production there for now, but just kind of overall thinking if there ends up being tariffs on Thailand.

Speaker Change: Yes.

Speaker Change: Obviously, if there are tariffs on Thailand that will have a headwind that we'll have to work through.

Speaker Change: Yes, we are moving more of our production to Thailand, whether it's from our CMS to us or whether it's from our cloud module business in Dongguan, China to us in Thailand. So we are making that manufacturing shift that's been in place for a number of quarters now and so I think from an infrastructure and strategy standpoint.

Speaker Change: <unk>.

Speaker Change: That certainly is there.

Speaker Change: There's tariffs that accrue.

Speaker Change: Post kind of July 8th because of that then we will have to work through that with our customers and as you can appreciate as there has been noise on tariffs we've been speaking to our customers about.

Speaker Change: How we work through the pricing impact to them.

Speaker Change: That is associated with those tariffs, but up until now for the large part most of our shipments that come to the U S. We are not the importer of record and because we are not the importer of record those conversations have been.

Speaker Change: Lot simpler I'd say, so that's really how we're thinking about it.

Speaker Change: Great. Thank you.

Speaker Change: Our next question is from Christopher Rolland with <unk>. Your line is now open.

Speaker Change: Hi, this is filling Olivier on for Chris Thanks for taking my question.

Speaker Change: For my first question I wanted to follow up on the 50% sequential growth in the optical transceiver business, so which of your transceiver customer programs will be responsible for that growth and how should we expect transceiver shipments to trend for the rest of the calendar year. Do you guys think that level is sustainable and are you guys expect it to grow from there as you are.

Speaker Change: Customer programs. Thank you.

Speaker Change: Yeah on the Transceivers I mean, I don't want to necessarily outlines specific customers that are that are driving it but it's predominantly.

Speaker Change: Customer that we've had shipping for quite some time, we will be most of the contribution.

We would expect this business to continue to grow I think we're really well positioned obviously generally speaking our share is relatively modest we think that we've put some of the issues behind us relative to.

Speaker Change: Some some issues.

Speaker Change: Transferring products into manufacturing and getting those into production.

Speaker Change: And we would expect from here to continue to grow we grow with this growth rate hard to say, but certainly we would expect to continue to grow this business and it will be a major growth driver for us in 2026 well.

Speaker Change: <unk> any comments from you.

Michael: So as Michael said.

Speaker Change: More programs ramping and we will see this to be more broader based than this one major customer and other programs will be.

Speaker Change: Gradually be brought into the ramping phase as well, so we're going to see that going forward.

Speaker Change: Did you have any follow up got it that's great.

Speaker Change: Yes, so for my follow up I wanted to ask about 200 gig mouse.

Speaker Change: So it sounds like Youre getting solid traction there already.

Speaker Change: Should we expect that to ramp and do you expect it to quickly cannibalize, our 100 gig your mouse or just a layer on top initially.

Speaker Change: Yes.

Speaker Change: I guess speaking I think the timing wise, it's going to be towards the end of this calendar year.

Speaker Change: Thus with one of the email will start to ramp and we don't see this being a cannibalization of <unk> because there is still a very large growing demand in its 100, <unk> <unk> hundred <unk> modules.

Speaker Change: 60 modules or solutions will be on top of the 100 G demand for quite a while to come. So this should be additional opportunities than a cannibalization opportunity.

Speaker Change: Thank you. Thank you.

Ryan Koontz: Our next question is from Ryan Koontz with Needham <unk> co. Your line is now.

Thanks for the question, maybe stepping back a little bit on the Datacom transceiver market here relative to the strong Chinese players.

Ryan Koontz: Are you hearing from your customers major cloud oriented customers about.

Ryan Koontz: Their interest in moving away from Chinese suppliers and interest in bringing those products in house.

Ryan Koontz: Thanks.

Ryan Koontz: Yes no.

Speaker Change: Definitely an interest to move away from from Chinese supply I mean, I think the problem right now is that collectively we can't meet the demand. So they are going to continue I think to buy from Chinese suppliers until U S. Suppliers can can ramp to a level to meet what it looks like a relative.

Ryan Koontz: Insatiable demand.

Ryan Koontz: Generally speaking there is some design in sourcing going on some of the customers are doing their own designs, but.

Ryan Koontz: Outsourcing is by far the dominant pole working with third party transceiver manufacturers in.

Ryan Koontz: We obviously are a small player at the moment.

Ryan Koontz: We expect given the number of designs that we have in flight, we expect to be a more meaningful participant in the market starting next quarter, but then really growing into the quarters beyond that.

Ryan Koontz: That's great.

Ryan Koontz: And then maybe.

Ryan Koontz: Yeah. Thanks on the on the telecom side of the business.

Speaker Change: What kind of mix shifts you're seeing there obviously dci is driving the boat there in terms of growth as you think about that mix shift is it kind of in larger expectations, how should investors think about.

Speaker Change: The shift toward Dci and how it affects your business, whether it's measured on gross profit or revenue per unit. These sorts of things.

Speaker Change: Wallet share, but if you could just step back and explain how investors should think about these shifts and telecom would be helpful. Thank you.

Speaker Change: Yes, I mean, I think that the traditional telecom business targeted to operators and target to msos.

Speaker Change: It's still obviously meaningful but the long pole now is the hyper scalar so Dci very important even these guys are now participating in our long haul business. So we talked in the call in the prepared remarks about pump lasers, we've seen really an increase in that business.

Speaker Change: A lot of the backbone now is being supplied by the hyper scaler and we're participating in that with our traditional telecom products, but now more targeted toward towards the hyperscale or so that's been a surprising growth driver I think quite frankly, we haven't seen this business perform at these levels in quite some time.

Speaker Change: So it's.

Speaker Change: It's really a nice surprise I mean technical technology wise, we plan any other things that youre seeing from a trend line.

Speaker Change: Certainly I think the overall, we should think about.

Speaker Change: AI is driving for US is not just about data centers internal data has to be transmitted across data centers. So all of these actually have the same driving source right. We see the ZR being growing very strong and therefore tunable lasers doing really well.

Speaker Change: Even the long distance transmission coherent components are doing very well because of the terrestrial long haul requirements and also the pump lasers for fiber capacity. So all in all we're seeing a very strong.

Speaker Change: Dci kind of traffic growth and Thats driving our.

Speaker Change: So called telecom part of the portfolio as well.

Speaker Change: I'll just add an additional comment Ryan around your question on gross profit dollars.

Speaker Change: So dci products are accretive to us from a gross margin standpoint, not only where we're currently operating from a gross margin standpoint, but also versus the 40% target that.

Speaker Change: That Michael laid out earlier.

Speaker Change: Been accretive to that and so the combination of increased demand and our increased capacity internally at Thailand.

Speaker Change: Certainly a tailwind for us that.

Speaker Change: <unk> is driving a lot of the confidence that you are hearing from the team around our gross margin abilities is coming from the secular demand along with internal manufacturing along with the pricing power that we believe we have on our data center interconnect products. So it's all adding up together.

Speaker Change: Thank you Anne people really appreciate it.

Speaker Change: Yeah.

Speaker Change: Our next question is from Karl Ackerman with BNP Paribas.

Speaker Change: It is now open.

Speaker Change: Yes. Thank you I have two.

Speaker Change: <unk>.

Speaker Change: I believe you said that your cloud transceiver revenues would grow 50% sequentially on the.

Speaker Change: On the contribution from all three of your cloud customers I have to ask though is this tied to it sounds like it's tied to new <unk>.

Speaker Change: <unk> or ASIC program ramping at least at one of them but.

Speaker Change: I guess, how much of this if at all.

Speaker Change: As from customers pulling forward transceiver demand ahead of potential tariffs and if not how do you manage that supply demand balance with these three customers I have a follow up please.

Michael Halston: Yeah, Hey, Carl Michael Halston, So first of all we don't we don't see any pull forward I mean, it's been a race for us to keep up we kind of alluded to this in one of the previous questions. We definitely had an issue ramping we went through.

Michael Halston: Ramp phase and then a qualification phase and really this is a product that's driving a lot of the increase that was something that's been in our hopper now for a couple of quarters. So we certainly don't see a pull forward effect.

Michael Halston: And again with that layering in with the additional two customers beginning to ramp this quarter.

Speaker Change: We feel we don't we don't see any effect on pull ahead I don't have one.

Speaker Change: Penn talk a little bit about what those are tied to relative to kind of the customer Tac.

Speaker Change: Yes, I think the funded product release point of view.

Speaker Change: Definitely I think those reps are tied to the.

Speaker Change: The dominant.

Speaker Change: GPU rent and also some other accident due to revenue there is some.

Speaker Change: Loose association with those kinds of introduction of the absolutely the products.

Speaker Change: But also though that the I think the the demand is pretty broad based is not particularly only to those two or three accelerators that are being introduced now into the market.

Speaker Change: Do you have a firm level.

Speaker Change: I did one if I may Rajiv you spoke of moving production away from contract manufacturers to in House solutions.

Speaker Change: I'm curious is that for your industrial tech products or does that relate more towards cloud networking and similarly, do you need to add substantial capacity to move that production in house. Please. Thank you.

Speaker Change: Yes.

Speaker Change: Revolved around our data center interconnect products and so that those capex decisions were made six to nine months ago and actually the Capex is showing up this fiscal quarter and is expected to improve our capacity for data center interconnect products by 50%.

Speaker Change: Existing this calendar year and so that is the production that instead of providing to our contract manufacturers were still keeping them going at full speed, but the incremental supply.

Speaker Change: Is coming from our Nava facility for Capex that is being put in place this quarter and that will fully ramp by the end of this calendar year and give us another 50% more capacity on data center interconnect products, specifically tunable <unk>.

Speaker Change: Great. Thanks Carl.

Speaker Change: Our next question is from Mike Genovese with Rosenblatt Securities. Your line is now open.

Mike Genovese: Great. Thanks, I'm not sure if I missed this in the prepared remarks, but.

Mike Genovese: Did we just got it can we get an update on telecom performance in the quarter and the.

Mike Genovese: On a product issue last quarter with just getting supply.

Mike Genovese: It's been filed yet.

Speaker Change: Yeah sure so I'll start off and I'll, let we'll plan also jump in so telecom performance came in exactly as expected we had.

Speaker Change: Shortages on pumps, we have shortages on tunable <unk>, we have shortages on CGM products from our from our cost of transmission product lines and so all of those products. We were working through supply constraints throughout the quarter. We are expected to see improvements in supply for all three product.

Speaker Change: Clients moving into Q4 and into the back half of the year. The earlier question was around our tunable products, where we mentioned that we have capex that we're putting in place in our Thailand facility to increase the production capacity by 50% over the remaining part of this calendar year. So.

Speaker Change: With that increased capacity, we're going to see the telecom part of our business improve as we move through the quarters for the rest of this calendar year, maybe you want to talk about pumps, a little bit more of a I think the overall.

Speaker Change: On the demand and supply perspective.

Speaker Change: We don't expect that our capacity can really fulfill all the D medical next several quarters.

Speaker Change: Because of the demand has been really strong, although we're doing better than we were able to.

Speaker Change: So we'll continue to run capacity continue to get more supply into the picture but.

Speaker Change: We are going to be in a pretty tight supply situation for mis.

Speaker Change: At least in this couple of quarters.

Speaker Change: Did you have a follow up Mike Gregg.

Speaker Change: I guess I wanted to visit the question whether there is.

Speaker Change: Any caution in the guidance for the back half of the year related to macro or tariffs.

Speaker Change: If I just think the transceiver comment up 50% sequentially I mean to me that that gets US 30 million more revenue that gets us.

Speaker Change: The whole growth in the guide I know industrial is supposed to be down, but you've got emails growing you've got telecom and should be up.

Speaker Change: Is there an extra doesn't conservatism here.

Speaker Change: Thank you Ms.

Speaker Change: No.

Speaker Change: I'd say youre not overthinking it Mike I mean, obviously, we're in an environment, where there's a lot of uncertainty.

Speaker Change: Quite confident in the guide that we provided but if you just listen to some of the capacity improvements that we've got there is.

Certainly opportunity to deal with any type of headwinds that come our way during the fiscal quarter as far as the back half of the calendar year looks.

Speaker Change: Across all of our product lines, we continue to see an uptick in demand, whether that's datacom chips, whether that's data center interconnect products or whether thats modules, even our industrial lasers product line that is going to that is expected to come down in fiscal Q4 has new ultrafast products that are ramping in the back half of the.

Speaker Change: Your year demand for those products is quite strong.

Speaker Change: But offsetting that we are seeing some some headwinds from customers that take kilowatt products.

Speaker Change: But overall the trend is up and our supply plan is up so.

Speaker Change: So we should we should see improvements from here to the $500 million target that that Michael spoke about but again I think the macro uncertainty.

Speaker Change: None of us have a great crystal ball on that.

Speaker Change: Thanks, so much.

Speaker Change: Yeah.

Speaker Change: Thanks, Mike.

Speaker Change: Our next question is from David Bautz with UBS. Your line is now.

David Bautz: Great. Thanks, guys for taking my question I, just want to go back to the telecom business for a second.

David Bautz: I jumped on late and I apologize was there anything in the quarter and that was similar to last quarter. When I mean by that there was some channel normalization last quarter and even in the quarter before I'm just trying to get a sense for what's core underlying demand, particularly in the face of tariffs or the risk of towers or the potential tariffs.

David Bautz: Give me my follow ups.

David Bautz: I have missed this I jumped on late did you share with us sort of how the core transceiver business grew in the March quarter relative to either last year or last quarter. Thanks.

Speaker Change: Yes, maybe I mean look on the telecom business, obviously, we feel pretty pretty good I mean, I think there's a lot of opportunities for us to continue to grow we've had talked about the narrow line width lasers, we actually said that in the prepared remarks, so we think.

Speaker Change: That business continues to grow through the balance of the calendar year and into next year.

Speaker Change: And it's not just that I think we talked about pump lasers that really has been a strong strong product area for us so across the board on Telecom, which is what you said correctly is a gross margin enhancer. It's accretive on the gross margin line, we would expect to see that to continue.

To creep up.

Speaker Change: A large portion of the growth will be cloud modules and so as you think about us across the next couple of quarters in order to keep the gross margins up we are going to need to see improvements in telecom, because we think that thats an area for us that has accretive gross margins.

Speaker Change: On the Datacom Transceivers. The second part of your question essentially that was flat on quarter, we didn't see a lot of growth I think the growth for us.

Speaker Change: We talked about it I think in previous discussions that we would hit a bit of an air pocket relative to execution on summit ramping some of our Datacom Transceivers were past that at this point, we would expect to see the growth in this subsequent quarter and the guide and then we'd expect to see pick up from there. So.

Speaker Change: On balance look we feel really good about the way the business is shaping up <unk> gave.

Speaker Change: Correctly, a right amount of prudence around tariffs and macroeconomic uncertainty but.

Speaker Change: If we don't have that we feel really good about where all of our business is landing right now.

Speaker Change: Great. Thanks, guys. James did you have a follow up.

Speaker Change: Those are my two thank you.

Okay excellent. Thank you.

Speaker Change: Just on I think we have time for just one more question.

Speaker Change: Okay. Our last question is from Alex Valero with loop capital. Your line is now open.

Alex Valero: Hey, guys. Thank you for taking my questions as Alcon Fernand.

Alex Valero: So I have a question on co packaged opex, what's your view on when co packaged optics truly have the chance to gain traction in data center and provide competition to transceivers.

Alex Valero: Yes, this will be just speaking.

Alex Valero: I think the <unk> optics will take some more time.

Alex Valero: Phonology is pretty complex.

A lot of.

Alex Valero: Engineering challenges I think yet to be worked through.

Alex Valero: Yes.

Alex Valero: The leading AIA customer to talk about in their conferences.

Alex Valero: This year, there will be some a first assistant release and next year is 296 youll be another system disease based on the Ethernet switch, we believe thats the timing, we're going to see some.

Level of adoption of the CPO optics, however, though we do believe that the.

Alex Valero: <unk> will continue to be.

Alex Valero: The dominant of impact of going forward I think it will take in the next several years, we need to gradually ramp the CPO optics to be a meaningful share.

Alex Valero: The benefit of CPO is clear, but the adoption will take time for people to figure out how to use it effectively.

Speaker Change: Got it that's very helpful and just as a quick follow up can you remind us the economic difference.

Alex Valero: Between Transceivers and co packaged optics.

Alex Valero: The difference is difference between transient.

Alex Valero: So basically the particular any kind of a switch Fox for example.

Alex Valero: <unk>.

Alex Valero: Transceiver basically is at the phone panels. So you have the connection between the DSP sorry, the switch chip Marina signal all the way to the phone panel of the box, which can be 2030 inches.

Alex Valero: Actually away from the switch chip.

Alex Valero: The Colgate optic is basically remove all of that put the optics directly onto the switch chip, thereby removing all the cyclical losses and the complexities associated with that transition.

Alex Valero: Essence is where the CPO upticks does and then that lowers the power consumption reduce the costs reduce the complexity, but in a sense you shouldn't move the complexity from optical modules onto the switch chip, which then some.

Alex Valero: Engineering.

In the work to be done right to make sure that you're safe reliable.

Alex Valero: Our solution.

Speaker Change: Got it thank you Alec.

Alex Valero: Okay.

Alex Valero: Thank you go ahead.

Alex Valero: Yeah, No I was going to ask.

Alex Valero: Co packaged optics come with the ASP increase compared to Transceivers.

Alex Valero: Well, it's a different pricing model.

Alex Valero: Today, the cultural consumption model is the switch chip is purchased separately and the box was made by somebody else and the module is all pushes through third party manufacturers such as us and it's a very different consumption model, then the CPO optics, which basically means that the switch vendor.

Alex Valero: We will control the entire.

Alex Valero: Sure.

Alex Valero: Plus the upticks, so it's very hard to say, how they're going to price it.

Alex Valero: And therefore, how to say that which was going to be cheaper.

Alex Valero: Depends on the competition and benefit and so on so forth very very hard to given the estimation at this point.

Alec: Thanks Alec.

Alex Valero: Thank you everyone for your question.

Alex Valero: That's all the time, we have for questions. We look forward to connecting with all of you.

Alex Valero: Upcoming investor conferences, and meetings this quarter and with that I'd like to thank you for joining us today.

Alex Valero: That concludes the conference call. Thank you for your participation and enjoy the rest of your day.

Q3 2025 Lumentum Holdings Inc Earnings Call

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