Q2 2025 Ciena Corp Earnings Call

June 5, 2025

Good day and welcome to C. N S fiscal second quarter 2025 financial results Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.

Please note. This event is being recorded I would now like to turn the conference over to Gregg Lampf, Vice President of Investor Relations. Please go ahead.

Speaker Change: Thank you Michael Good morning, and welcome to <unk> 2025 fiscal second quarter conference call on the call today is Gary Smith, President and CEO and Jim Moylan CFO.

Speaker Change: Scott Mcfeely Executive advisor is also with us for Q&A.

Speaker Change: In addition to this call and the press release, we posted to the investors section of our website, an accompanying investor presentation that reflects this discussion as well as certain highlighted items from the quarter.

Speaker Change: Our comments today speak to our recent performance our view on current market dynamics and drivers of our business as well as a discussion of our financial outlook.

Speaker Change: Today's discussion includes certain adjusted or non-GAAP measures of <unk> results of operations of <unk>.

Speaker Change: Reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.

Speaker Change: Before turning the call over to Gary I'll remind you that during this call, we'll be making certain forward looking statements such statements, including our guidance commentary on market dynamics and discussion of our opportunities and strategy are based on current expectations forecasts and assumptions regarding the company and its markets, which include risks and uncertainties that could cause.

Speaker Change: Actual results to differ materially from the statements discussed today.

Speaker Change: Assumptions relating to our outlook, where the mentioned on this call are included in the Investor presentation that we'll post shortly after are an important part of such forward looking statements and we encourage you to consider them.

Speaker Change: All forward looking statements should also be viewed in the context of the risk factors detailed in our most recent 10-K and 10-Q, which we expect to file with the SEC by June 12.

Gary Smith: <unk> assumes no obligation to update the information discussed in this conference call, whether as a result of new information future events or otherwise as always will allow for as much Q&A as possible today they'll ask that you limit yourselves to one question and follow up with that I'll turn the call over to Gary.

Gary Smith: Thanks, Greg and today, we delivered strong fiscal second quarter results, including revenue of $1. One 3 billion, which is at the high end of our guidance and demonstrates the strength both of our strategy and our execution.

Speaker Change: This performance reflects continued strong demand across all customer segments geographic regions, and our diversified portfolio, notably revenue from cloud providers stood out as a key driver in Q2.

Speaker Change: Specifically, we achieved record direct cloud provide a revenue in Q2 that comprised 38% of total revenue growing 85% year over year, and reaching more than $400 million in a single quarter for the first time.

Speaker Change: Really highlighting the accelerating investments in AI infrastructure and our leadership in addressing this demand.

Speaker Change: Indeed, three of our top five customers this quarter were cloud providers underscoring that sustained investments in infrastructure and network expansion.

Speaker Change: Over the past quarter market dynamics of not only validated our previous assumptions about customer network infrastructure spend.

Speaker Change: But I've also reflected an accelerating demand environment that continues to ramp and exceed our expectations.

Speaker Change: And we believe this strength is differentiated for us as the market continues to evolve and our direction.

Speaker Change: Accordingly orders in the quarter were again significantly greater than revenue.

Speaker Change: And notably we are on track for cloud provider orders to double in fiscal 2025 over last year.

Speaker Change: As we benefit from the breadth and depth of our customer base in this critical segment.

Speaker Change: And I think this outstanding performance showcases our substantial market penetration in the AI driven networking space where.

Speaker Change: While we remain a very trusted partner for a wide range of network operators, who are investing to scale their infrastructure for high speed data center and cloud connectivity, including for emerging applications and use cases.

Speaker Change: To address this growing demand we are deploying the entirety of our portfolio, including optical systems, and Interconnects routing and switching solutions software and services.

Speaker Change: And as the global leader in high speed connectivity, a wave logic technology remains a cornerstone of our competitive advantage.

Speaker Change: Specifically, our wave logic six extreme 161 technology maintains at least an 18 to 24 months competitive lead in the market.

Speaker Change: As our photonic line systems continue to be the de facto industry standard demand for our Reconfigurable lines system Rls continues to increase.

Speaker Change: And our interconnect business is also ramping with tremendous activity and demand include.

Speaker Change: Including New awards with three additional major cloud providers this quarter alone.

Speaker Change: This momentum reflects the growing adoption of <unk> and our demand for our 400, ZR and 800, ZR coherent plug a hole solutions as well as our one <unk> coherent light solution, which we will be sampling by the end of calendar 2025 with commercial availability.

Speaker Change: In the first half of calendar 2026.

Speaker Change: As cloud providers expand their data center architectures with scale up and scale out AI related deployments, we are broadening and deepening our relationships with them.

Speaker Change: In fact, we are addressing new data center related applications, a strategy that we've spoken publicly about over the last few months and where we recently secured two wins.

Speaker Change: The first is a very strategic win and it's for an application involving the connection of regional GPU clusters, which is something the industry has been talking about for some time.

Speaker Change: For context to support the massive scale and power requirements of AI training and inference traffic Datacenters must become more distributed.

Speaker Change: And historically these traffic flows were primarily inside the data center, but they are now across multiple data centers over greater distances that require high capacity low latency links.

Speaker Change: With that we are excited to report that our coherent <unk> 800 gig plugging holes in Rls photonics have been selected by a global cloud provider, who is investing in geographically distributed regional GPU clusters.

Speaker Change: We will start to recognize revenue from this incremental opportunity later this fiscal year and ramping into 2026.

Speaker Change: And as one of the first vendors to address this application and with our coherent optical technology ideally suited for this type of connectivity, we expect to see more of these types of opportunities emerge as cloud providers evolve their data center network architectures to support their <unk> strategies.

Speaker Change: Okay.

Speaker Change: The second win is for a focused applications inside the datacenter for out of band Network management.

Speaker Change: These networks operate separately from the main data traffic network and provide remote access to monitor and manage data center systems.

Speaker Change: We recently worked with a global cloud provider to co develop a solution.

Speaker Change: Based on our existing technologies and this is designed to significantly reduce the complexities of these networks and streamline the management of its large scale data center operations.

Speaker Change: Now turning to service providers.

Speaker Change: It's now been several quarters of an improving trend line with service providers.

Speaker Change: As the network investments in high speed infrastructure become more durable and sustainable following a long period of Underinvestment.

Speaker Change: We are seeing growth and strength across the board with service providers in core optical transport routing and switching software and services to address the connectivity needs of their own customer base and to support cloud providers growing bandwidth demands.

Speaker Change: As a result business with tier one North American service providers gained momentum in Q2, and we also had several new customer wins in both the Americas and international regions, including Europe.

Speaker Change: This momentum is driven in part by new fiber builds as well as motion in fact, all the record performance of direct Dci in the quarter. We also achieved an all time record for Molson activity in the first half of fiscal 2025.

Speaker Change: Which further demonstrates really how we're supporting a strong nexus between service providers and cloud providers.

Speaker Change: I also want to touch on the momentum of our software business I'll start with the Navigator network control suite, which is a multilayer domain controller and this provides a comprehensive set of capabilities to help network operators plan provision monitor and troubleshoot their networks.

Speaker Change: Orders for navigator increased significantly in the first half of fiscal 2025 by more than 30% year over year.

Speaker Change: Driven by increased investment in the unique capabilities of this micro services based and differentiated platform.

Speaker Change: Similarly, Blue Planet had a record performance in Q2, achieving its highest ever quarterly revenue at just under $30 million.

Speaker Change: This milestone reflects the success of our deliberate transformation efforts over the past couple of years positioning blue planet to better serve our customers' digital transformation needs and journey.

Speaker Change: Today Blue planet is at the leading edge of several large provide our projects.

Speaker Change: Particularly as the industry incorporates the <unk> AI and data driven intelligence to drive transformation.

Speaker Change: Before I turn the call over to Jim I'd summarize by saying that we are very encouraged by the strong activity across all segments of our business and.

Speaker Change: In the context of favorable market dynamics, and an accelerating demand environment. We have strong momentum that we are confident will drive continued growth.

Speaker Change: In particular, we are very pleased with the validation from customers that we can strategically expand our market opportunity inside on around the data center, where high speed connectivity is absolutely critical.

Speaker Change: In the short term and as we've been talking about for some time, we are now seeing more AI traffic come out of the data center for training as I mentioned earlier and general monetization, that's driving cloud traffic.

Speaker Change: <unk> set of technologies is ideally positioned to address these connectivity needs at scale.

Speaker Change: With that Jim can you please provide us with updates on our financial performance in Q2 as well as our outlook.

Jim Moylan: Thank you Gary.

Jim Moylan: Good morning, everyone as Gary noted.

Jim Moylan: <unk> strong fiscal second quarter results.

Jim Moylan: Total revenue in Q2 was one $1 $3 billion.

Jim Moylan: This included 210% plus customers, one cloud provider and one service provider.

Jim Moylan: Adjusted gross margin was 41% in line with our guidance driven by product mix and to a lesser extent the cost of tariffs.

Jim Moylan: During the quarter, we navigated a new and in the early days a rapidly changing U S tariff environment.

Jim Moylan: We responded in real time with mitigation strategies to minimize the impact both on our customers and our P&L.

Jim Moylan: However, as a result of the dynamic conditions as well as the need to adjust our billing systems and our customers' systems.

Jim Moylan: We absorbed a net impact to our bottom line in the mid single digit millions of dollars in the quarter.

Jim Moylan: Adjusted operating expense in Q2 was $369 million.

Jim Moylan: This was higher than expected driven entirely by higher incentive compensation associated with very strong order performance in the quarter and our overall financial performance in the first half of the year, both trends, which are expected to continue.

Jim Moylan: Absent this higher incentive comp Opex is on our plan and our gap.

Jim Moylan: With regard to profitability measures in Q2, we delivered adjusted operating margin of eight 2% adjusted net income of $61 million and adjusted EPS of <unk> 42.

Jim Moylan: In addition, we generated $157 million in cash from operations adjusted EBITDA was $117 million.

Jim Moylan: Finally, we ended the quarter with approximately $135 billion in cash and investments.

Jim Moylan: During the quarter, we repurchased approximately one 2 million shares for $84 million.

Jim Moylan: We are on track for the repurchase of approximately $330 million total in this fiscal year.

Speaker Change: Some additional highlights from the quarter, we had an excellent quarter and optical as Gary mentioned, our wave logic technology remains a strong competitive advantage.

Jim Moylan: We added 24, new wave logic six extreme customers in Q2, bringing the total to 49 within just two quarters of general availability.

Jim Moylan: Wave logic, five extreme and nano also performed well with continued adoption among cloud customers and service providers.

Jim Moylan: We added 10, new wave logic five extreme customers in Q2 for a total of 344 customers overall.

Jim Moylan: Wave logic five nano <unk> continued ramping now shipping to 178 customers, including both cloud providers and service providers.

Jim Moylan: Overall, our momentum with coherent <unk> optics was strong in Q2 and.

Jim Moylan: And we remain on target to double our year over year revenue to at least $150 million in fiscal 2025.

Jim Moylan: Yes.

Jim Moylan: <unk> are proving to be a great complement to our optical systems business.

Jim Moylan: I also want to highlight the performance of our routing and switching business.

Jim Moylan: This is being driven by AI momentum and an improving service provider environment.

Jim Moylan: In Q2, we secured a significant win with a tier one service provider in India, where we displaced a major competitor in the access domain.

Jim Moylan: We also added eight new broadband customers in Q2.

Jim Moylan: Additionally, we introduced the first 800 gig router to our coherent routing portfolio.

Jim Moylan: And we expanded our flagship wave router family with wave logic, six extreme capabilities, making it the industry's first generally available one six terabits coherent router.

Jim Moylan: All of this performance confirms that we have the right portfolio with best in class technology for our customers.

Jim Moylan: The demand the highest performing connectivity for today's dynamic demand environment.

Jim Moylan: With that let's turn to guidance.

Jim Moylan: Given recent developments it appears that the tariff environment, we will continue to be dynamic.

Jim Moylan: For purposes of our guidance. However, we are assuming that the current tariff structure does not change.

Jim Moylan: Under this current tariff structure, we expect the total cost of tariffs to be approximately $10 million per quarter.

Jim Moylan: We expect to mitigate most of the quarterly impact as compared to Q2. Therefore, we believe the net effect to our bottom line in future quarters will be immaterial.

Jim Moylan: So for the fiscal third quarter, we expect to deliver revenue in a range of $1, one three to $1 billion to $1 billion.

Jim Moylan: We expect Q3 adjusted gross margin to be roughly in line with Q2.

Jim Moylan: And we expect adjusted operating expense to be approximately $370 million to $375 million again. This includes higher incentive comp.

Jim Moylan: Base Opex is on our plan and on our guide.

Jim Moylan: While the geopolitical environment has fluctuated quite a bit during the past few months strong demand dynamics continue to drive momentum in our business.

Jim Moylan: As a result, we have increased visibility and are in a position to update all three elements of our annual guide.

Jim Moylan: We now expect to deliver revenue growth of approximately 14% for fiscal 2025.

Jim Moylan: At the same time, given the mix of products, including a higher proportion of newly introduced solutions and the Rls.

Jim Moylan: All of which are still ramping we expect annual gross margins at the lower end of our previously.

Jim Moylan: Assumed range of 42% to 44% for fiscal 'twenty five.

Jim Moylan: And with respect to Opex, we expect to be on plan and guide for a base opex for the fiscal year. However.

Jim Moylan: However, given our strong financial performance, particularly on orders and revenue.

Jim Moylan: We expect an increase in incentive compensation of approximately $10 million per quarter.

Jim Moylan: With that we now expect operating expense to average $360 million to $370 million per quarter for the year.

Jim Moylan: Michael will now take questions from the sell side.

Speaker Change: Michael before we do that.

Speaker Change: Just like to take a moment to acknowledge and recognize jim's upcoming retirement, given today will be his last earnings call with the soul.

Speaker Change: And as you know for the past 18 years and an incredible 70 earnings calls.

Speaker Change: <unk> has been an incredible partner and member of our executive team with a lengthy list of significant contributions to the growth in the performance of our business.

Speaker Change: We will certainly Miss Jim's leadership on his wealth of knowledge, but importantly, as well and I think I speak for all of you who know him on the call as well, we will miss his which is warm and assume.

Speaker Change: That makes working with him such a joy.

Speaker Change: So while we will be sad to see him go later this summer we all wish him the very best in his well deserved retirement.

Speaker Change: Yes.

Jerry: Thank you Jerry.

Jerry: With that we really will open up for calls.

Speaker Change: From the sell side analysts. Please thank you Michael.

Speaker Change: Certainly we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.

Speaker Change: Anytime Youre question has been addressed and you would like to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

Speaker Change: Okay.

Speaker Change: And the first question comes from Cemig Chatterji with Jpmorgan.

Speaker Change: Please go ahead.

Cemig Chatterji: Hi, Thank you. Thanks for taking my question I guess.

Cemig Chatterji: Okay. If I go back in from.

Speaker Change: From the last earnings call you already had indicated that you were seeing strong stock in terms of orders to this quarter, but when I listen to the commentary. This morning. It's just so it's more like <unk> seen probably more acceleration through the quarter with the cloud customers with.

Cemig Chatterji: Just maybe if you can talk about the linearity of the orders with the cloud through the quarter because.

Cemig Chatterji: It sounded more optimistic than what we heard from you in 90 days ago.

Speaker Change: In terms of visibility how do you think about visibility beyond FY 'twenty five youre talking about doubling of autos and how do you think about sustainable deal that kind of growth.

Speaker Change: <unk> from them into fiscal 'twenty, six and then a quick quick follow up thank you.

Speaker Change: Okay.

Speaker Change: It was a pretty comprehensive question. Thank you.

Speaker Change: So I think.

Speaker Change: Direct tons into the first part of that I think we saw a strong order flows in Q1 that continued in Q2 and probably accelerated in Q2 and the activity and I would say two to two things about it one service providers nice steady increases underpinned all of that and I think that.

Speaker Change: It's very sustainable and durable and then the cloud I think we're seeing a step function here.

Speaker Change: Demand.

Speaker Change: We're seeing cloud growth in terms of traffic flows and then we're seeing these incremental opportunities as well that are emerging this regional GPU cluster, one that <unk> talked about specifically today is really incremental to our thought process for the.

Speaker Change: And I would also say, though that momentum both on service providers and on the cloud players is continuing into Q3 so.

Speaker Change: This exceeds our expectations for the year I think.

Speaker Change: Given this notion around traffic coming out of the data center to <unk>.

Speaker Change: Both do training and for monetization, we are beginning to see that for sure. In addition to these other applications. So.

Speaker Change: I think at this stage, obviously, it's early too.

Speaker Change: To predict next.

Speaker Change: Next year.

Speaker Change: The three year pace I think it's reasonable to assume that given the step function in demand I think we will revise the three year <unk>.

Speaker Change: Our guidance when we get to the end of this year, obviously not appropriate to do that now, but I think what's behind your question <unk>.

Speaker Change: Is this a long term trend and I think the answer to that is absolutely yes.

Speaker Change: Got it got it.

Speaker Change: Follow up on.

Speaker Change: On the gross margin side.

Speaker Change: I know mix is sort of impacting the field, but one of the concerns that we hear from investors is as you ramp unplug a booth.

Speaker Change: This your you also have the Coors light products that I'm being mixed use.

Speaker Change: Is that a headwind in terms of mix to the overall margin long term margins for the company.

Jim Moylan: Can you just address that concern if there is a change in terms of the longer term thinking for gross margins for the company, just given where the expansion opportunities that youre pursuing and before I pass it over to you Jim. Thank you for your help all of these days. Thank you.

Speaker Change: Thanks for the question to make.

Speaker Change: We've always said that mix is the single most important element of our gross margin number in any given quarter.

Jim Moylan: And that certainly affected us in Q2 and likely will affect us in Q3.

Jim Moylan: As we look out we really are not backing off our view that mid forty's percentages. The right gross margin for us at least as a target and we think we can get there in a couple of years. What's happened in this quarter is that we have exceedingly high demand for <unk> and our new REIT.

Speaker Change: Configurable line system.

Jim Moylan: Both of those are at lower than corporate average margins for slightly different reasons.

Jim Moylan: The Reconfigurable line system has always been there.

Jim Moylan: Based on our razor razor blade type pricing model and so when we sell a lot of <unk> without a lot of capacity adds we are going to enjoy lower margins than than our mid forty's. That's just a fact, it's becoming the industry standard. It is a good thing for future margins because we will.

Jim Moylan: Sell the capacity.

Jim Moylan: Most of the capacity to go into those line system. So that by its very nature will improve over time on the plug oil side, what I would say there is that we are in the very early stage of ramping our <unk> business.

Jim Moylan: B, we said at least $150 million. This year, it's 20% of the share of the market, it's going to grow that share is going to grow and our cost points are not as good as we'd like them to be they will those cost points will decline over time and our margins will improve we're also going to generate.

Jim Moylan: Going to introduce the next generation of plugs, the 800 gig plug and.

Jim Moylan: 800, ZR and ZR plus all of that generation will come out and those should be higher performance and better gross margins. So there is a path to getting to gross margins, it's not going to happen in Q3, and I think it will definitely start to happen in next year.

Jim Moylan: Dimension on mix as a way of logic six extreme part of our system business.

Speaker Change: You talked about the momentum that we had in that.

Jim Moylan: His prepared remarks.

Jim Moylan: That's in the early stages of ramp as well. So it has the same dynamic as the plausible lots of levers to pull on.

Jim Moylan: Operational supply chain efficiencies and design cost reduction that you do over the lifecycle of the product and that that will naturally lift the margins in those parts of the portfolio.

Jim Moylan: The other thing I would just add to add to all of that is to make were given what we're seeing around the dynamics of demand and how sustainable that is given what Jim and Scott have talked around the gross margin mix being a bit of a headwind in the short term for us we're confident we'll get through that we've done that before.

Jim Moylan: That makes us even more confident in our operating margin targets for getting into those.

Jim Moylan: Mid teens as we get to 27 and I think we will see continued improvement both in the second half of this year and also in 'twenty six on the journey.

Jim Moylan: Okay, great. Thank you thanks for all the color.

Speaker Change: And your next question comes from Simon Leopold with Raymond James. Please go ahead.

Simon Leopold: Thanks for taking the question and Jim Thank you as well for all of the service.

Speaker Change: Certainly appreciate getting a full year's heads up on your retirement, so a nice glide path without a shock to the system, so grateful for that as well.

Speaker Change: So I wanted to see if maybe we could unpack.

Speaker Change: The top customers a bit and then you mentioned $3 five were cloud.

Jim Moylan: And the 210% customers one being service prior one cloud.

Speaker Change: I guess, what I'm trying to get a better sense of is.

Speaker Change: What were the more specific percentage contributions from that to over 10% and how much of overall revenue is coming from the top five customers in the quarter. Thank you.

Speaker Change: Yes.

Speaker Change: <unk> customer was a cloud customer it was 13% to 14% I don't have the precise number right. So <unk>.

Speaker Change: <unk>.

Speaker Change: And the second one was our.

Speaker Change: Our service provider AT&T at 10, 4%.

Speaker Change: The top five that you have to quickly calculate but it would.

Speaker Change: Ill do that and get back to you in December.

Speaker Change: Okay, and then just I'll ask a follow up while youre looking at those numbers.

Speaker Change: In terms of some of the trends from these cloud customers.

Speaker Change: So comfortable that visibility has improved it sounds like a good trend.

Speaker Change: I know, we're not ready to provide guidance for fiscal 'twenty six but I guess folks are trying to look for what's sort of the sustainability of this thesis you get a better sense that you'll see a broadening base of contributions from cloud both direct and indirect that it should continue to grow next year, how should we think.

Speaker Change: About the longer term trend beyond the end of fiscal 'twenty five.

Speaker Change: As I'm sure you can appreciate obviously, we don't want to.

Simon Leopold: Get ahead of ourselves into into given sort of detailed guide for 'twenty, six, but clearly with the kind of dynamics that we're seeing Simon.

Speaker Change: I think about it you've got a broadening application base.

Speaker Change: You talked about the GPU clusters earlier on the inside the data center focused application there and you've also got a broadening amount of.

Speaker Change: Cloud providers, we've had significant new wins over the first half of the your more and more of these cloud providers not just the large four are now really leaning into the network.

Speaker Change: And so I think <unk> got a broadening set of players and you've got a deepening sets of applications, which obviously gives us confidence in the sustainability and durability of it and given.

Speaker Change: The magnitude of this scale out.

Speaker Change: <unk> got very good visibility with a number of them about their long term plans and we're also.

Speaker Change: Co, creating with them as well so that gives us increased visibility and confidence as well as we as we go forward.

Speaker Change: Two big wins that Gary spoke about earlier.

Speaker Change: Both of which have.

Speaker Change: Applicability outside of the.

Speaker Change: Original customers.

Speaker Change: The regional GPU clusters in particular is something that the industry. The industry has been talking about for.

Speaker Change: Years and now the demands for.

Speaker Change: Data flows inside the data center has brought that phenomenon of balance. So this is a big trend for US we think it will be at least considered if not adopted by other cloud providers and the <unk>.

Speaker Change: The data center.

Speaker Change: Connectivity is being looked at by other cloud customers as well so both of those have applicability outside of the original customers.

Speaker Change: Yes.

Simon Leopold: And the answer to your question Simon the top five customers were 45% of revenue.

Simon Leopold: Thank you.

Simon Leopold: Thank you Simon.

Speaker Change: And your next question comes from Amit <unk> with Evercore. Please go ahead.

Speaker Change: Thanks, a lot.

Speaker Change: Two as well maybe just to start with when I think about the 14% growth outlook for the year can you just talk about what are you sort of assuming from a growth basis in cloud versus telco for the year and then let me if I kind of look at what you're implying for October quarter specifically.

Speaker Change: Are you planning to be up low single digits sequentially on $1 2 billion. So would that imply that a lot of the autumn momentum you're seeing right now is more likely to convert to revenues in fiscal 'twenty six versus the bottom of this year.

Speaker Change: Yes quick answer.

Speaker Change: To that is yes, I mean, given the scaling demand, we're not going to be able to.

Speaker Change: A lot of it is scheduled.

Speaker Change: For out further.

Speaker Change: Because of the size and scale of it. So we're certainly going to be going into 2026 with an increased backlog I think thats, where youre going with this and that's that's absolutely a reasonable assumption we are ramping.

Speaker Change: Our supply chain pretty pretty strongly and we started that last year and we're continuing to increase that.

Speaker Change: So we can address that because we do think it's very sustainable and we've got good visibility to it so.

Speaker Change: All going to go into 2026, even with.

Speaker Change: The increase to 14% growth in the.

Speaker Change: We're still going to be leaving the year with a larger backlog than when we entered it that's for sure.

Speaker Change: Super helpful.

Speaker Change: If you could spend a little bit of time on the plug able opportunity and you've talked about you're deploying implausible optics with one of these distributed GPU clusters can you just talk about what distance at least plausible is being used for right now and I think longer term and beyond 150 million number you've talked about how big do you think this market can be.

Speaker Change: And where do you think your market share could eventually get to that space. Thank you.

Speaker Change: Okay. Let me let me take the second part of that and then I'll pass Scott to give you. Some more on this sort of architectural side I would say that we've been engaged with multiple players over this kind of.

Speaker Change: Architecture, where because of power and space constraints that cannot get all of the Gpus in a in a single.

Speaker Change: Data center. So this is the first one that we've seen and we believe we will have one of the first deployments like that and it's just.

Speaker Change: A couple of the regions and it is hundreds of millions of dollars.

Speaker Change: Both 800 gig plug of bowls and line system.

Speaker Change: In terms of sizing, it's pretty material and this is one play are just beginning to roll. This piece out. So this is a very sizable and substantial opportunity for us.

Speaker Change: Yes in terms of the overall plausible piece you need to differentiate sort of our <unk> participation in sort of the classic Metro campus Dci wishes.

Speaker Change: 80 kilometers plus kind of kind of domain with this regional GPU clustering application that we're talking about.

Speaker Change: In the latter case, what we're really talking about here is a simple way to think about it as an express over overlay network between GPU clusters.

Speaker Change: That has massive capacity.

Speaker Change: Reaches 100 to 150 kilometer type range.

Speaker Change: <unk> requires resilience latency requires WDM and is right in the sweet spot of coherent technologies. So it's what we've been talking about for a long time, which is power becomes a bigger constraint they need to distribute these GPU clusters.

Speaker Change: Capacity goes up that's going to create more opportunities for coherent and this is a instantiation of that is coming across as plug of oil opportunities at 800 gig and and it's coming across as line systems all incremental.

Speaker Change: Use cases that we've been we've been pursuing in the past.

Speaker Change: Great. Thank you very much and best of luck Tim.

Speaker Change: Thanks, David.

Speaker Change: And your next question comes from Ruben Roy with Stifel. Please go ahead.

Ruben Roy: Thank you Scott you, probably just answered this question, but just so I understand on the GPU cluster opportunity. It seems to me from the prepared remarks, and what you just said that.

Ruben Roy: That you're uniquely positioned given that you have both the line systems on the <unk>.

Ruben Roy: And Thats.

Ruben Roy: Part of this new architecture that.

Ruben Roy: Some of the folks are thinking about it is that the right way to think about it.

Ruben Roy: Yes, I think.

Ruben Roy: Over time the opportunity. We believe is big enough that there'll be multiple vendors that play, but with our leadership in coherent and as we've said rls being sort of the de facto standard for line systems.

Ruben Roy: Certainly going to get our unfair share are the bulk of it.

Ruben Roy: The early move on this piece.

Ruben Roy: We're quite excited about it we've been working on it with the lead customer for some time around looking at the feasibility and super focused on delivering to it.

Speaker Change: Great. Thank you and as a quick follow up for Gary.

Speaker Change: I wanted to talk about Blue planet.

Ruben Roy: It's.

Ruben Roy: Shown quite a bit of momentum over the last several quarters and.

Speaker Change: You talked a little bit Gary about agenda, AI and some of the things that some of your customers are thinking about I'm wondering if you could just kind of delve into that a little bit AI opportunities longer term and any.

Speaker Change: Any detail on use cases that youre talking to your customers about and how Youll look how are you thinking about that in terms of growth going forward. Thank you.

Speaker Change: If you think about the sort of software assets that we've got notice tourist strategically embedded on the service provider side.

Speaker Change: <unk> got navigator around the sort of the main pes was a complete sort of micro services based architecture and then as you know we had a kind of a.

Speaker Change: A lot of learning around Blue planet being a micro services software platform for Oss and I think we're seeing a lot of momentum now on the Blue planet side.

Speaker Change: <unk>.

Speaker Change: We're very focused on things like the inventory Confederation of inventory and you think about that strategically you basically get to have the data set within the service providers.

Speaker Change: Parties out there and really without that it's very difficult to have a gen take AI if you haven't understood.

Speaker Change: The whole inventory of your network is so we're sort of we believe uniquely placed to be able to leverage that into the future and that's what we're that's what we're focused on developing and engaging with our a number of very large service provider customers on we've got a great position and then.

Speaker Change: Number of those large service providers and we've got the right architecture that will scale up for that.

Speaker Change: It's early days.

Speaker Change: But basically we're in a tremendous position from a relationship and a trusted partner point of view and from an architecture point of view Rubin to really leverage that into.

Speaker Change: Something where we become the de facto data management for.

Speaker Change: Hours and facilitate.

Speaker Change: The other <unk>.

Speaker Change: Great. Thank you.

Speaker Change: Thank you.

Unknown Moderator: And your next question comes from meta Marshall with Morgan Stanley. Please go ahead.

Unknown Moderator: Great. Thanks.

Speaker Change: Maybe just a second kind of on the routing wins that you guys were talking about.

Unknown Moderator: Just wanted to get a sense you guys have invested a lot in that business over the past few years.

Unknown Moderator: It was kind of one of the service provider wins kind of one of the.

Unknown Moderator: Finally kind of seen some of the benefit of that investment.

Unknown Moderator: And then maybe just secondly get that question ahead of time just on installation capacity are you guys seeing kind of more requests for installation capacity.

Unknown Moderator: Kind of your increase in revenue what point do you kind of an increased need for capacity increases.

Unknown Moderator: Yes.

Unknown Moderator: So I think on the routing and switching side, Matt I think it's.

Speaker Change: One is completely aligned with the service provider.

Unknown Moderator: And I think.

Speaker Change: My own view of what's happened with service providers over the last few years, they've really underinvested in a lot of their core.

Speaker Change: Infrastructure, because they have been very focused on first of all.

Speaker Change: Covid, then supply chain whiplash and challenges around that and then five Jay.

Speaker Change: They've had to invest enormous amounts of money in capital and focus on <unk>.

Speaker Change: Largely not worked out from a.

Speaker Change: Profit generating point of view, so I think.

Speaker Change: We're at a point now where theyre returning to I think a very sustainable sort of scalable investment thesis and that includes routing and switching.

Speaker Change: And I think the two go hand in hand, and I think with the service provider uptake, we're seeing we're saying now invest maintain new routing and switching applications and a number of new wins. So that's that.

Speaker Change: That's encouraging for us and I think.

Speaker Change: I think that will absolutely continue.

Speaker Change: To your point about <unk>, which I think is is a very important point for a couple of reasons one.

Speaker Change: The increased shipments we've got really good visibility to what's happening with those shipments.

Speaker Change: And we are the F&I partner for a lot of our large customers, including the cloud customers. So we have good visibility to what's happening and I will say to you that.

Speaker Change: That's in balance and the need for re F&I is going to go up exponentially similar to the ramping of our supply chain and demand.

Speaker Change: And we've seen a lot of activity across the board for F&I, both in service providers and in the cloud obviously to help install this massive amount of investment over the next few years.

Speaker Change: Just to just to continue on the routing and switching piece I mean, we've been very encouraged by the number of logo wins that we've had over the last number of quarters logo wins, obviously are a precursor to orders or precursor to revenue.

Speaker Change: In line with the sort of service provider dynamics, the order book on routing and switching for the last number of quarters has been quite.

Speaker Change: Quite a bit in excess of the revenue piece.

Speaker Change: Put a dimension to that orders in the first half of the year in routing and switching where greater than 75% of the total orders last year for routing and switching so there's momentum there and we would expect that to flow through to revenue with a strong second half.

Speaker Change: Great. Thank you.

Speaker Change: Hello.

Speaker Change: And our next question comes from <unk> Malik with Citi. Please go ahead.

Speaker Change: Hi, It's Adrienne Colby for Geoff. Thank you for the question I was hoping we could go back to gross margin.

Speaker Change: I think last quarter, you had been expecting gross margin to trend up from Q2 levels into the second half in the back half of the year. So I just wanted to understand better.

Speaker Change: What's changed.

Speaker Change: Perhaps the production scaling of the F 100 <unk> is.

Speaker Change: It is trending differently from expectations, we've talked about.

Speaker Change: Product mix impact so I think that's well understood, but just trying to understand what shifted in that outlook.

Speaker Change: Yes, Youll recall that our original guide for the year on gross margins was 42% to 44, we're now saying that it's going to be at the low end of that range and it is essentially that demand for two products in particular have greatly exceeded our expectations, They rls systems and <unk>.

Speaker Change: Our plugs and as discussed both of those are currently below.

Speaker Change: Corporate average gross margins, we do have a path to improvement.

Speaker Change: You should see improved margins certainly next year Q3 is probably going to look more like Q2, and probably a little improvement in Q4, but again as Gary said earlier, we're committed to.

Speaker Change: Improving those gross margins and to getting our operating margins back to the 15% to 16% level by the end of the three year period.

Speaker Change: Thank you for that clarification.

Speaker Change: And then I was just hoping we could talk about the molson opportunities maybe talk a little bit more about your pipeline I know that you've said that this is one of your strongest quarters in terms of orders Theyre interested if you're seeing some expansion beyond India I know that's been an area, where you've had significant traction.

Speaker Change: Yes.

Speaker Change: We're seeing a lot of <unk> activity in India is not it has not translated to a massive amount of revenues, yet, but we've taken the orders and it will.

Speaker Change: We're seeing more of an activity.

Speaker Change: Throughout the globe and I think it's just really it goes hand in hand with the whole cloud build out.

Speaker Change: Can't build everywhere with their own network and so it's augmented by these these.

Speaker Change: <unk> opportunities, we've seen that in North America as well there's been some as you know large announcements around some of the larger carriers partnering.

Speaker Change: With the aluminum <unk> et cetera.

Speaker Change: We're seeing that reflected in pretty much all parts of the globe.

Speaker Change: Asia outside of India.

Speaker Change: We're beginning to see that on in Europe.

Speaker Change: We're seeing activity, it's the largest amount of activity that we've seen and it really just goes hand in hand with the overall strategic plans for these cloud providers.

Speaker Change: Thank you.

Speaker Change: Okay.

Unknown Moderator: And your next question comes from Tim <unk> with Northland Capital markets. Please go ahead.

Tim: Hey, good morning, and congrats on the results and increased outlook.

Speaker Change: Another question on the cloud front and Gary I think you mentioned the step function I think you were referring to demand it looks like we.

Speaker Change: We saw another major change in the quarter and Thats diversification.

Speaker Change: Your cloud business among several providers it seems like there.

Speaker Change: Top customers.

Speaker Change: The smallest percentage of that.

Speaker Change: Total bucket.

Speaker Change: Been in a while or at least in recent history and I Wonder if you could talk about.

Speaker Change: That trend of customer diversity diversification within cloud.

Speaker Change: And whether you.

Speaker Change: We expect to see that continue I know it can be kind of lumpy, but interested in your thoughts overall on that.

Speaker Change: Yes.

Speaker Change: Good point Tim.

Speaker Change: I'd say overall, we're seeing let me start with the sort of four known the Hyperscale is there we're seeing increases in all four.

Speaker Change: Step function increases in all four cloud players directly with US and also through things as I was talking just with motion as well so it's all consistent with that.

Speaker Change: And then we're seeing really I think it's just sort of high rock-eel flow is how I think about it <unk> been very focused obviously on power and Gpus and scaling all of that now it's about scaling it out.

Speaker Change: And it's now about the network and they're very focused all of them on making sure that the network does justice to all this massive investment that's gone on and compete.

Speaker Change: So I think this is the phase that we're entering now and Thats why were seeing it across all of the Hyperscale as you say, it's lumpy summer.

Speaker Change: A leaning in more than others, but they are all I think showing a step function increase in the importance of the network.

Speaker Change: And then you've got a whole other set of players as well as expand it out from a cloud point of view that are now leaning in on the network.

Speaker Change: And so you've got a broadening out its not just the large four anymore. It's a much larger group of players that are now recognizing.

Speaker Change: <unk> going to monetize and to optimize their GPU investments.

Speaker Change: It's all about the network.

Speaker Change: And that's why we think it's very diversified durable and sustainable and it is.

Speaker Change: All about high speed connectivity, that's really what it's about.

Unknown Moderator: Great. Thanks, very much and Jim Congratulations and great working with you.

Speaker Change: Okay.

Speaker Change: And your next question comes from Ryan Koontz with Needham <unk> Company. Please go ahead.

Speaker Change: Great. Thanks, I wanted to follow up on your comments around the tariff mitigation and your different levers there around supply chain customer surcharges and if you can kind of broadly characterize how negotiations are going with your with your customers. There in terms of passing those costs, along 10 million hit from <unk>.

Speaker Change: Tariff does it sound like that much relative to the big debate scheme.

Speaker Change: Yes, any discussion of tariffs is going to have to be caveat. It by the fact that we only know what the regime in place is now and it could very well change soon but under the regime in place now and given all of the exemptions that are in the current regime. We are.

Speaker Change: Likely to experience a cost of about $10 million per quarter now.

Speaker Change: Other schemes come in place and the potential for tariffs go up we do have a range of things that we could do we could move manufacturing operations, we could change some flows and our supply chain. We can do a number of things like that which would reduce it with respect to passing on to customers.

Speaker Change: It's going to be.

Speaker Change: Complicated situation because they are not in all cases are we going to actually pass a tariff along to them. Some cases that might result in some price increases general price increases et cetera, So all of those things.

Speaker Change: As far as we're willing to go today, but we think that the net cost to our bottom line is going to be immaterial going forward.

Speaker Change: Got it thanks, Thanks, gentlemen, congrats.

Speaker Change: Gary if I could follow up on your momentum in plugging holes or maybe for Scott on <unk>.

Speaker Change: Is this still dominantly driven by cloud operators are you seeing much service provider traction where are we in the service provider adoption cycle for applicable CRM products.

Speaker Change: Yes from a CR perspective in terms of that application Ryan It is dominated by the cloud in terms of the volume.

Speaker Change: <unk>.

Speaker Change: <unk> forever in terms of the service provider deployments for different reasons for modularity and and we do ship our plugs into service providers, but the volume for <unk> is dominated by the cloud.

Speaker Change: Got it thanks, so much guys.

Karl Ackerman: And your next question comes from Karl Ackerman with BNP Paribas. Please go ahead.

Karl Ackerman: Yes, good morning, gentlemen, I have two and I'll just ask them at the same time, if I may.

Karl Ackerman: You indicated that mix of plug holes in line systems are the biggest driver of margins first.

Karl Ackerman: Does the increased backlog exiting 2026 assume a higher mix of transponder blades.

Karl Ackerman: Second on <unk>, clearly volume plays a larger role here.

Karl Ackerman: But you did speak about a several hundred million dollars our opportunity.

Speaker Change: Your initial player. So could you discuss where you are on having a fully integrated coherent transceiver, giving your IP across Dsp's Certes electro-optics. Thank you.

Karl Ackerman: The short answer to your first question is yes, we will be selling more capacity next year. So that's one of the reasons why we can have.

Karl Ackerman: Confidence that our margin will go up next year.

Karl Ackerman: Gross margin and operating margin for that matter.

Karl Ackerman: Yeah and on the second one from a from a capability perspective.

Karl Ackerman: All of the major seminal ingredients, we own our own the IPR on and as we ramp it over time, a greater and greater proportion of the mix will be on our own our own components and that is part of the cost improvement plan.

Speaker Change: Thank you.

Unknown Moderator: Again, if you have a question. Please press Star then one.

Speaker Change: Your next question comes from David vote with UBS. Please go ahead.

David: Great. Thanks, guys for taking my question and Jim Congratulations good luck maybe.

Speaker Change: Maybe wanted to start with you Jim. So obviously you've spent some time talking about sort of the dynamic with rls and plug holes can.

Speaker Change: Can you kind of remind us again should we expect something similar to what we saw maybe in fiscal 18, 19, and 20% from our system then transponder capacity perspective, recognizing that obviously COVID-19 was a little bit different but is that the kind of way we should think about.

David: The trajectory of capacity additions and the impact on gross margins going forward and then I have a follow up more specifically on margin.

David: You'll recall, we had an exceptionally high margin in 2020 that was because COVID-19 did.

David: Sort of reduce the level of activity with respect to new.

David: Networks, and so in order to get the capacity that they needed all of our customers turn to adding capacity to existing line systems and so we generated I think a 48 point something percent gross margin and one or two quarters of 2020.

David: I don't we don't perceive that kind of move in the next three years, we do see though a move back to the mid Forty's just based on the fact that all of the things we've talked about wave logic six the fact that where we're coming out with a new generation of <unk>, which will be higher performance and better <unk>.

David: Margin and our cost position on.

David: The basic 400, ZR will improve so for all those reasons, we do have confidence that gross margins will improve as we move through the next year or two.

Speaker Change: Got it that's helpful and as a follow up so if I just maybe take your commentary that the gross margin guide is going to be at the low end, but you're taking the revenue guide to the high end or above the high end excuse me of 14%.

Speaker Change: Largely it sounds like driven by ILS system is applicable.

Speaker Change: Quick math, it looks like sort of the incremental profitability is I know, it's below corporate average, but it seems like it's pretty materially lower.

Speaker Change: Low double digit range can you kind of help us understand what's going on there.

Speaker Change: You are talking about anything that's adjusting for the mitigation strategies from Paris, and the impact in the quarter I'm just trying to understand the magnitude.

Speaker Change: Have a plug the holes and the rls.

Speaker Change: Revenue is impacting the gross margin for the balance of this year.

Speaker Change: Well, you've done some math I am not going to confirm it but what I will say is this we think that given the mix of products in Q3, it's going to be.

Speaker Change: Maybe a little higher than gross margin in Q2, but probably in the same range, we do see improvement in Q4.

Speaker Change: Great. Thanks, a lot guys.

Speaker Change: Thank you.

Speaker Change: Thank you everyone for listening.

Speaker Change: Okay. This is Jim.

Gary Smith: I'll be retiring from <unk> at the end of August and this is therefore my last call as Gary said as CFO I've greatly enjoyed getting to know all of you.

Gary Smith: And I wish you well and all of your future endeavors.

Gary Smith: So look forward to seeing many of you at the end of this month in New York, and Boston that'll be fun and I'm looking forward to it.

Gary Smith: For those of you who are in the enviable position of having recommended Sienna for purchase.

Gary Smith: I believe you made a good call a great call actually for.

Gary Smith: For those of you who are not yet in that position there is still time.

Gary Smith: To get in on what I believe is a very bright future for this company good luck to all.

Speaker Change: Thank you Jim.

Speaker Change: Thank you everyone. We look forward to connecting with you over the next few months.

Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Speaker Change: Okay.

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Speaker Change: Good day and welcome to <unk> fiscal second quarter 2025 financial results Conference call all participants will be in listen only mode.

Speaker Change: Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.

Speaker Change: Please note. This event is being recorded I would now like to turn the conference over to Gregg Lampf, Vice President of Investor Relations. Please go ahead.

Michael: Thank you Michael Good morning, and welcome to <unk> 2025 fiscal second quarter conference call on the call today is Gary Smith, President and CEO and Jim Moylan CFO.

Got Mcfeely: Got Mcfeely executive advisor is also with us for Q&A.

Got Mcfeely: In addition to this call and the press release, we posted to the investors section of our website, an accompanying investor presentation that reflects this discussion as well as certain highlighted items from the quarter.

Got Mcfeely: Our comments today speak to our recent performance our view on current market dynamics and drivers of our business as well as a discussion of our financial outlook.

Got Mcfeely: Today's discussion includes certain adjusted or non-GAAP measures of <unk> results of operations. A reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.

Got Mcfeely: Actual results to differ materially from the statements discussed today.

Got Mcfeely: Assumptions relating to our outlook, where the mentioned on this call are included in the Investor presentation that we'll post shortly after are an important part of such forward looking statements and we encourage you to consider them.

Got Mcfeely: Our forward looking statements should also be viewed in the context of the risk factors detailed in our most recent 10-K 10-Q, which we expect to file with the SEC by June 12.

Got Mcfeely: <unk> assumes no obligation to update the information discussed in this conference call, whether as a result of new information future events or otherwise as always will allow for as much Q&A as possible today do ask that you limit yourselves to one question and follow up with that I will turn the call over to Gary.

Gary Smith: Thanks, Craig and today, we delivered strong fiscal second quarter results, including revenue of $1. One 3 billion, which is at the high end of our guidance and demonstrates the strength both of our strategy and our execution.

Gary Smith: This performance reflects continued strong demand across all customer segments geographic regions, and our diversified portfolio, notably revenue from cloud providers stood out as a key driver in Q2.

Gary Smith: Specifically, we achieved record direct cloud provide a revenue in Q2 that comprised 38% of total revenue growing 85% year over year, and reaching more than $400 million in a single quarter for the first time.

Gary Smith: Really highlighting the accelerating investments in AI infrastructure and our leadership in addressing this demand.

Got Mcfeely: Indeed, three of our top five customers this quarter were cloud providers underscoring that sustained investments in infrastructure and network expansion.

Got Mcfeely: Over the past quarter market dynamics of not only validated our previous assumptions about customer network infrastructure spend.

Got Mcfeely: But it also reflected an accelerating demand environment that continues to ramp and exceed our expectations.

Got Mcfeely: And we believe this strength is differentiated for us as the market continues to evolve and our direction.

Got Mcfeely: Accordingly orders in the quarter were again significantly greater than revenue.

Got Mcfeely: And notably we are on track for cloud provider orders to double in fiscal 2025 over last year.

Got Mcfeely: As we benefit from the breadth and depth of our customer base in this critical segment.

Got Mcfeely: And I think this outstanding performance showcases our substantial market penetration in the AI driven networking space.

Got Mcfeely: While we remain a very trusted partner for a wide range of network operators, who are investing to scale their infrastructure for high speed data center and cloud connectivity, including for emerging applications and use cases.

Got Mcfeely: To address this growing demand we are deploying the entirety of our portfolio, including optical systems, and Interconnects routing and switching solutions software and services.

Got Mcfeely: And as the global leader in high speed connectivity wave logic technology remains a cornerstone of our competitive advantage.

Got Mcfeely: Specifically, our wave logic six extreme 161 technology maintains at least in 2018 to 24 month competitive lead in the market.

Got Mcfeely: Yeah.

Got Mcfeely: As our photonic line systems continue to be the de facto industry standard demand for our Reconfigurable line system Rls continues to increase.

Got Mcfeely: And our interconnect business is also ramping with tremendous activity and demand <unk>.

Got Mcfeely: Including New awards with three additional major cloud providers this quarter alone.

Got Mcfeely: This momentum reflects the growing adoption of and our demand for our 400, ZR and 800, ZR coherent <unk> solutions as well as a $1 60 coherent light solution, which we will be sampling by the end of calendar 2025 with commercial availability in.

Got Mcfeely: In the first half of calendar 2026.

Got Mcfeely: As cloud providers expand their data center architectures with scale up and scale out AI related deployments, we are broadening and deepening our relationships with them.

Got Mcfeely: In fact, we're addressing new data center related applications, a strategy that we've spoken publicly about over the last few months and where we recently secured two wins.

Got Mcfeely: The first is a very strategic win and it's for an application involving the connection of regional GPU clusters, which is something the industry has been talking about for some time.

Got Mcfeely: For context to support the massive scale and power requirements of AI training and inference traffic data centers must become more distributed.

Got Mcfeely: And historically these traffic flows were primarily inside the data center, but they are now across multiple data centers over greater distances that require high capacity low latency links.

Got Mcfeely: With that we are excited to report that our coherent 800 gig plugging holes in Rls photonics have been selected by a global cloud provider, who is investing in geographically distributed regional GPU clusters.

Got Mcfeely: We will start to recognize revenue from this incremental opportunity later this fiscal year and ramping into 2026.

Got Mcfeely: And as one of the first vendors to address this application and with our coherent optical technology ideally suited for this type of connectivity, we expect to see more of these types of opportunities emerge as cloud providers evolve their data center network architectures to support their <unk> strategies.

Got Mcfeely: The second win is for a focused application inside the data center for out of band Network management.

Got Mcfeely: These networks operate separately from the main data traffic network and provide remote access to monitor and manage data center systems.

Got Mcfeely: We recently worked with a global cloud provider to co develop a solution.

Got Mcfeely: Just on our existing technologies and this is designed to significantly reduce the complexities of these networks and streamline the management of its large scale data center operations.

Got Mcfeely: Now turning to service providers.

Got Mcfeely: It's now been several quarters of an improving trend line with service providers.

Got Mcfeely: As the network investments in high speed infrastructure become more durable and sustainable following a long period of Underinvestment.

Got Mcfeely: We are seeing growth and strength across the board with service providers in core optical transport routing and switching software and services to address the connectivity needs of their own customer base and to support cloud providers growing bandwidth demands.

Got Mcfeely: As a result business with tier one North American service providers gained momentum in Q2, and we also had several new customer wins in both the Americas and international regions, including Europe.

Got Mcfeely: This momentum is driven in part by new fiber builds as well as motion in fact, all the record performance of direct Dci in the quarter. We also achieved an all time record for Molson activity in the first half of fiscal 2025, which further demonstrates really how we're supporting the strong.

Got Mcfeely: Nexus between service providers and cloud providers.

Got Mcfeely: I also want to touch on the momentum of our software business I'll start with the Navigator network control suite, which is a multilayer domain controller and this provides a comprehensive set of capabilities to help network operators plan provision monitor and troubleshoot their networks.

Got Mcfeely: Orders for navigator increased significantly in the first half of fiscal 2025 by more than 30% year over year driven by increased investment in the unique capabilities of this micro services based and differentiated platform.

Got Mcfeely: Similarly, Blue Planet had a record performance in Q2, achieving its highest ever quarterly revenue of just under $30 million.

Got Mcfeely: This milestone reflects the success of our deliberate transformation efforts over the past couple of years positioning blue planet to better serve our customers' digital transformation needs and journey.

Got Mcfeely: Today Blue planet is at the leading edge of several large provider projects.

Got Mcfeely: Particularly as the industry incorporates the <unk> AI and data driven intelligence to drive transformation.

Got Mcfeely: Before I turn the call over to Jim I'd summarize by saying that we are very encouraged by the strong activity across all segments of our business.

Got Mcfeely: In the context of favorable market dynamics, and an accelerating demand environment. We have strong momentum that we are confident will drive continued growth.

Jim Moylan: In particular, we are very pleased with the validation from customers that we can strategically expand our market opportunity inside on around the data center, where high speed connectivity is absolutely critical.

Jim Moylan: In the short term and as we've been talking about for some time, we are now seeing more AI traffic come out of the data center for training as I mentioned earlier and general monetization, that's driving cloud traffic.

Jim Moylan: That set of technologies is ideally positioned to address these connectivity needs at scale.

Jim Moylan: With that Jim can you please provide us with updates on our financial performance in Q2 as well as our outlook.

Jim Moylan: Thank you Gary.

Jim Moylan: Good morning, everyone as Gary noted.

Jim Moylan: <unk> strong fiscal second quarter results.

Jim Moylan: Total revenue in Q2 was 113 billion.

Jim Moylan: This included 210% plus customers, one cloud provider and one service provider.

Jim Moylan: Adjusted gross margin was 41% in line with our guidance driven by product mix and to a lesser extent the cost of tariffs.

Jim Moylan: During the quarter, we navigated a new and in the early days a rapidly changing U S tariff environment.

Jim Moylan: We responded in real time with mitigation strategies to minimize the impact both on our customers and our P&L.

Jim Moylan: However, as a result of the dynamic conditions as well as the need to adjust our billing systems and our customers' systems, we absorbed a net impact to our bottom line in the mid single digit millions of dollars in the quarter.

Jim Moylan: Adjusted operating expense in Q2 was $369 million.

Jim Moylan: Absent this higher incentive comp Opex is on our plan and our card.

Jim Moylan: With regard to profitability measures in Q2, we delivered adjusted operating margin of eight 2% adjusted net income of $61 million and adjusted EPS of <unk> 42.

Jim Moylan: In addition, we generated $157 million in cash from operations adjusted EBITDA was $117 million.

Jim Moylan: Finally, we ended the quarter with approximately 135 billion in cash and investments.

Jim Moylan: During the quarter, we repurchased approximately one 2 million shares for $84 million.

Jim Moylan: We are on track for the repurchase of approximately $330 million total in this fiscal year.

Jim Moylan: Some additional highlights from the quarter.

Jim Moylan: We had an excellent quarter and optical as Gary mentioned, our wave logic technology remains a strong competitive advantage.

Jim Moylan: We added 24, new wave logic six extreme customers in Q2, bringing the total to 49 within just two quarters of general availability.

Jim Moylan: Wave logic, five extreme and nano also performed well with continued adoption among cloud customers and service providers.

Jim Moylan: We added 10, new wave logic five extreme customers in Q2 for a total of 344 customers overall.

Jim Moylan: Wave logic five nano <unk> continued ramping now shipping to 178 customers, including both cloud providers and service providers.

Jim Moylan: Overall, our momentum with coherent applicable optics was strong in Q2 and.