Good day everyone and welcome to the Lumentum Holdings First Quarter Fiscal Year 2025 Earnings Call. All participants will be in a listen-only mode. Please also note today's event is being recorded for replay purposes. At this time, I'd like to turn the conference call over to Kathy Ta, Vice President of Investor Relations. Ms. Ta, please go ahead.

Thank you and welcome to Lumentum's fiscal first quarter 2025 earnings call. This is Kathy Ta, Lumentum's Vice President of Investor Relations. Joining me today are Alan Lowe, President and Chief Executive Officer, Wajid Ali, Executive Vice President and Chief Financial Officer, and Chris Coldren, Senior Vice President and Chief Strategy and Corporate Development Officer. 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, end market opportunities, our expectations and beliefs regarding recent acquisitions, including Cloud Light, macroeconomic trends and our expected financial and operating performance, including our guidance, as well as statements regarding our future revenues, financial model, and margin targets. 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. Lumentum's press release with the fiscal second-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 Alan.

Thank you, Kathy, and good afternoon, everyone. In the first quarter, we exceeded the high end of our guidance for both revenue and earnings per share. We set a new record for Datacom laser chip orders, including 200-gig EML chips, reflecting strong demand from multiple customers, including an AI infrastructure customer. Based on expanding cloud demand and improving trends in the broader networking market, we expect double-digit sequential revenue growth in the second quarter. During the first quarter, we advanced our strategy to expand and diversify our cloud and AI opportunities. We secured an additional hyperscale transceiver customer with a new qualification and initial volume orders. This is beyond the new award we highlighted last quarter. We expect to start shipping volume production against these new customer awards in the first half of calendar 2025, and they will ramp through the year, consistent with the revenue targets we set out previously. Over the past few quarters, I outlined a three-pronged strategy to grow our cloud data center business. As a reminder, the first prong is to expand our cloud and AI customer opportunities at the component and transceiver levels as customers migrate to higher speeds. The second is to scale significant production capacity for components and transceivers outside of China. And the third is to advance our differentiated technology roadmaps, enabling customers to scale future generations of cloud and AI data center architectures to higher compute capacities in a more cost-effective and power-efficient manner. I would like to share more details on recent progress in each of these areas. Regarding the expansion of our customer opportunities, as the industry transitions to higher speeds, our differentiated technology becomes increasingly valuable, especially to market and technology-leading customers. For example, in the coming year, the transition to 200G lane speeds will drive growth and increase the importance of single-mode optics and indium phosphide laser transmitters. This shift aligns well with our market and technology leadership. Our indium phosphide EML transmitters have established a strong reputation for high performance, high quality, and reliability. Underscoring this, our 100G EMLs are currently shipping in high volumes to a wide range of optical transceiver suppliers for use in leading-edge single-mode 400G and more importantly, 800G optical transceivers. These customers are now designing our 200G EMLs into their next generation of transceivers, positioning us well for the upcoming transition to 200G per lane. We have also made significant progress in expanding our opportunities on the high-speed datacom transceiver side of our business. As we previously forecasted, our datacom transceiver shipments are expected to increase sequentially this December quarter, and we expect our transceiver production to continue growing throughout calendar year 2025, driven by demand from multiple hyperscale cloud and AI customers. As I mentioned earlier, we received an initial set of orders from new hyperscale customers and expect to start shipping production transceiver volumes for these new customers in the first half of calendar 2025. In addition, we are actively working to finalize additional awards for multiple other opportunities. The second prong of our cloud and AI data center strategy is to expand our manufacturing capacity at established Lumentum facilities outside of China. This expansion is essential to ensuring a secure and reliable supply chain for our cloud and AI customers. Our indium phosphide laser chips are critical to data center infrastructure. As discussed in our last earnings call, to meet the growing demand, we are on track to increase EML production capacity by 40% in Q4 of fiscal 2025 compared to our capacity in Q4 of fiscal 2024. This expansion will help alleviate the industry-wide shortage of indium phosphide capacity. However, we still expect to be on allocation throughout calendar year 2025. Our Datacom transceiver capacity expansion at our Thailand campus is progressing as planned. The first production line is now operational, and we anticipate completing additional expansion phases over the next 18 months to meet the high volume of demand from our customers. This includes completing construction of our new three-story clean room facility on the same campus, which remains on schedule. The third prong of our cloud and AI strategy focuses on delivering innovative technologies to address the escalating challenges of scaling data center compute capacity. We are collaborating with leading-edge customers to develop breakthrough solutions to enable higher data link capacities with enhanced energy efficiency that will support their multiyear cloud and AI infrastructure roadmaps. Inside the data center, optical switching is expected to be critical for future generation cloud and AI network architectures. Lumentum's power-efficient, high bandwidth and low latency optical switches are well positioned to meet the demands of these evolving networks. We have already shipped evaluation units to customers who have provided overwhelmingly positive feedback on our performance. While we are beginning to ramp our 200G laser chips, we are already working in close alignment with customers on technologies for future generations of yet higher speed optical links such as 400G per lane and new architectures, including co-packaged optics, which will require unique ultra-high power lasers. Our advanced indium phosphide and photonic integrated circuit capabilities are essential for meeting these upcoming demands. While we don't expect the deployment of these technologies to start until our fiscal 2026, we are actively collaborating with customers to shape the future of optical technology. Executing our three-pronged strategy will drive significant revenue growth fueled by new opportunities in AI and cloud data centers. This growth, combined with a recovering network business, positions us to return to a double-digit operating margin as our capacity utilization improves, and we maintain strict cost discipline. As we outlined at the OFC conference last spring, we are targeting an operating margin of 17% to 20% once our quarterly revenue surpasses $600 million per quarter. Now, let me move to additional fiscal first quarter revenue and product highlights. Our first quarter cloud and networking segment revenue grew 11% sequentially and 23% year-over-year, driven in part by strong end market demand from cloud hyperscale customers as they invest within and outside of AI data centers. We are also encouraged by continued growth in shipments of our newest networking products. This, combined with improving inventory levels of our products at our networking customers is encouraging as we look to the future. We had a sequential increase in demand for our narrow line with tunable lasers, used in high-speed long-haul applications, as well as 400ZR and higher-speed solutions in DCI applications. With our existing design wins in this area, we anticipate maintaining a leading market share in laser components for ZR and ZR+ applications this fiscal year and beyond. Customer interest in our advanced coherent transmission and next-generation transport solutions is on the rise. In leading-edge coherent transmission, we are experiencing robust demand for 130 and 200 gigabyte coherent products. This demand is driven by the need for greater capacity and spectral efficiency amid continued bandwidth growth. Our differentiated technology, manufacturing capabilities and strong design win momentum position us to maintain leadership in these critical products as well. Complementing growing demand for our coherent transmission components, we are seeing increased demand for integrated C+L-band transport solutions, high port count ROADMs, and the emergence of demand for multi-rail ROADMs and amplifiers. Multi-rail is the next step in efficiently scaling the optical transport layer and offering increased flexibility in high-capacity line systems. We anticipate strong sequential growth in our cloud and networking revenue in fiscal Q2 due to rapid growth in our products addressing cloud and AI applications and broad-based improvement in demand across our product portfolio. Now, let me move to our Industrial Tech segment. As expected, our Industrial Tech segment revenue grew 2% sequentially while being down 38% from the same quarter last year. Like others in this space, demand continues to be challenged due to the weak industrial end market. In Industrial Tech, we are focused on developing innovative industrial laser products to meet customers' needs for higher precision with minimal heat damage. This creates opportunities for our ultrafast laser products in heat-sensitive applications like semiconductors, displays, and advanced packaging. We are working closely with leading semiconductor equipment manufacturers in interposer and advanced semiconductor packaging applications. We recently delivered high and low-power FemtoBlade demo units for advanced display applications, and we have received positive customer feedback. Looking to fiscal Q2, we expect Industrial Tech to be approximately flat sequentially due to an uptick in industrial lasers led by our ultrafast lasers, offset by a sequential decline in 3D sensing revenue. To summarize, we have made significant progress in executing our strategy to grow our cloud business. We set a new record for Datacom chip orders and are working diligently to fulfill this demand over the next several quarters. We also made excellent strides with multiple high-speed optical transceiver customer engagements, including securing meaningful transceiver orders from a third hyperscale customer. Additionally, we are actively working to secure more awards from more new customers. Our robust pipeline of cloud customer engagements, combined with improving trends in the traditional networking market reinforces our confidence in achieving our previously stated target of growing quarterly revenue to $500 million per quarter by the end of calendar year 2025. We anticipate continued significant growth into 2026 and 2027 as we capitalize on new cloud and AI opportunities, positioning our cloud business for a multibillion-dollar annual run rate in the coming years. Before I turn the call over to Wajid, I want to express my sincere gratitude to our employees for their unwavering focus and dedication and to our customers worldwide for their partnership and collaboration. With that, Wajid?

Thank you, Alan. Before I outline our Q1 financial results, please note that consistent with our discussion last quarter, we have changed our presentation to include certain charges that were previously excluded, primarily related to abnormal excess capacity in our non-GAAP results, starting in the first quarter of fiscal 2025. Comparable historical periods have been recast to align with this presentation for consistency. First quarter revenue of $336.9 million and non-GAAP EPS of $0.18 were above the high end of our guidance ranges. GAAP gross margin for the first quarter was 23.1%, GAAP operating loss was 24.5% and GAAP net loss per share was $1.21. Turning to our non-GAAP results. First quarter non-GAAP gross margin was 32.8%, which was up sequentially and flat year-on-year on higher revenue. In future quarters, we anticipate company gross margins will sequentially increase as manufacturing utilization improves due to an improving telecom outlook as well as an increase in Datacom laser shipments. First quarter non-GAAP operating margin was 3%, which was up sequentially and year-on-year. First quarter non-GAAP operating profit was $10 million and adjusted EBITDA was $37 million. First quarter non-GAAP operating expenses totaled $100.4 million or 29.8% of revenue, a decrease of $1 million from the fourth quarter and down $1.9 million from the year ago quarter. Despite increased investment in our expanding cloud opportunities, Q1 operating expenses were lower due to restructuring actions that were taken during fiscal 2024 as well as overall stringent cost controls across the company. Q1 non-GAAP SG&A expense was $37.7 million. Non-GAAP R&D expense was $62.7 million. Interest and other income was $4.6 million on a non-GAAP basis, driven by interest earned on our cash and investments. First quarter non-GAAP net income was $12.2 million and non-GAAP diluted net income per share was $0.18. Our fully diluted share count for the first quarter was 69.1 million shares on a non-GAAP basis. During the first quarter, our cash and short-term investments increased by $29 million to $916 million. Our working capital came in as expected with inventory levels increasing sequentially to support the expected growth in revenue across our cloud modules business. In Q1, we invested $74 million in CapEx, primarily driven by investments in high-speed transceiver capacity additions at our Thailand manufacturing site as well as indium phosphide wafer production capacity. Turning to segment details. First quarter Cloud and Networking segment revenue at $282.3 million increased 11% sequentially and 23% year-on-year. Cloud and Networking segment profit at 13% increased sequentially and year-on-year. Our first quarter Industrial Tech segment revenue at $54.6 million was up 2% sequentially and down 38% year-on-year. First quarter Industrial Tech segment profit of 4% increased sequentially and decreased year-on-year. Now, let me move to our guidance for the second quarter of fiscal 2025, which is on a non-GAAP basis and is based on our assumptions as of today. We expect net revenue for the second quarter of fiscal 2025 to be in the range of $380 million to $400 million. This Q2 revenue forecast includes the following assumptions; Cloud and Networking to be up sequentially with strong growth in products addressing cloud applications and improving networking customer demand and Industrial Tech to be approximately flat sequentially with increased industrial laser shipments offset by a decline in 3D sensing. Based on this, we project second quarter non-GAAP operating margin to be in the range of 5.5% to 7.5% and diluted net income per share to be in the range of $0.30 to $0.40. Our non-GAAP EPS guidance for the second quarter is based on a non-GAAP annual effective tax rate of 16.5%. These projections also assume an approximate share count of 69.6 million shares. With that, I'll turn the call back to Kathy to start the Q&A session. Kathy?

Thank you, Wajid. To allow everyone an opportunity to ask questions, please keep to one question and one follow-up. Now, let's begin the Q&A session.

Our first question today comes from Samik Chatterjee with JPMorgan. Your line is now open.

Hi thanks for taking my questions and congrats on the strong guide here. If I can just ask on the guide first. I think the implied increase quarter-over-quarter in cloud and networking is about $50 million, $60 million quarter-over-quarter. Can you sort of parse that out a bit for us in relation to how much of that is telecom improving versus maybe Datacom chips versus datacom modules, if you can directionally sort of point us to where most of that improvement is coming from? And I have a follow-up. Thank you.

Sure. Thanks, Samik. This is Alan. I'd say it's a mix of all of the above. I'd say Datacom chip growth is not a lot until the next couple of quarters because the capacity comes in increments in chunks. And so as I said in the script, the Q4 number will have a step up, but not a lot of chips increase this quarter. The telecom is modest, and I don't expect that, that to be strong growth other than things that are going into DCI applications, but there's a large pickup on the Datacom modules, and we expect that to continue, as we said in the script through calendar 2025.

Got it. And for my follow-up, you announced another new customer win. If I consider both of the new customers you've announced in recent quarters, how should we evaluate the potential opportunity after fully ramping up with both, in comparison to the original customer for Cloud Light? How should we think about the magnitude regarding the first original customer when we look at the two new customers together? Thank you.

Yes, I think that's hard to answer in that it's going to come down to our ability to execute and provide the kind of quality and delivery and capacity that the customers need. So, the new customers, as I said before, will start ramping in the first half of next year, and it will be ours to earn their growth of their business in the second half. And I think we're positioning ourselves very well. We're having the capacity in place, as I said, with clean rooms as well as equipment. So we're planning for success, but we still have to earn that. But that said, these are all very, very large customers that consume a lot of transceivers. And so getting in the door is step one and earning bigger share is really what we're striving to do now.

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

Thank you very much. I wanted to dig a bit more into what's going on with the Cloud Light business. Reflecting back on when you reported your third fiscal quarter last year, you had talked about sort of the cadence of that business where we'd see a bit of a pause in June and September, which I think we've seen in sort of the snapback in December. And so what I'm trying to get an assessment of is sort of what's changed in that December outlook versus what you thought several quarters ago? Is it above, below? And what's different in terms of informing that expectation on Cloud Light? Thank you.

Thanks, Simon. Yes, nothing has really changed. I think it's coming in as expected. As we've talked about the transition of new products. We're ramping the new products now. And so it's kind of come together as we had expected and as we had talked about on our previous two earnings calls. So nothing unexpected from my perspective.

And then just as a follow-up, I'd like to get your perspective on how you see the market for 1.6 terabit devices evolving and what you would anticipate your role would be in that market, really sort of timing and magnitude perspective? Thank you.

Yes, the situation is challenging as there's significant interest from many customers for the 1.6 terabit products. This 1.6 terabit offering is one variant of our next generation products, alongside an 800 gig option using 200 gig lanes. We're engaging at the component level with our 200-gig EMLs, which will ramp up more towards summer next year. Currently, we are in the qualification phase and have already received volume orders, although our capacity is quite limited. We will primarily operate at the component level with EMLs and also at the transceiver level, where we've sampled transceivers to customers and received very positive feedback, as mentioned in our last call. We're actively pursuing this opportunity and need to continue with the qualification process. The timing depends on the customers, as some are ready sooner than others. However, I anticipate that by the end of next calendar year, the 1.6 terabit products should see a significant ramp-up.

Thanks Simon.

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

Thank you. This is Karan Juvekar on behalf of Meta. Congratulations on the quarter. Are there any updates to your timeline for vertical integration with Cloud Light? You mentioned previously that there would be no shipments until the end of fiscal 2025, but is there any new information on your vertical integration plans?

No real change. I mean we're building products with our lasers and EMLs and will be qualified. But I'd say the timing is really unchanged in that products that we were working on before the acquisition are coming to market now, and those mostly didn't change. But I'd say that we have certainly opportunities in calendar 2025 to have more product in feeds, and that should help margins late in the calendar year and into calendar 2026.

Okay, that's helpful. And then a quick follow-up on the telecom side. Are you sort of expecting sequential growth primarily from new products or products that didn't previously have inventory buildup? I think you mentioned that last quarter. I guess how do you expect sort of traditional telecom products to track and sequentially across the year? Thank you.

Sure. I mean I'd say that we're seeing dramatic strength in anything ZR, anything to connect data centers as data centers are being built out, and that can take the form of ZR modules. But given our share of tunable lasers that go into ZRs, that's where we're going to see a dramatic pickup in the telecom side. So, I'd say that the hyperscale growth is very solid outside of the data center, and that includes transport or open line systems. I'd say that carrier spending is still muted and inventory still needs to get burned off there. But there are signs of light. So, new products are flowing out the door, as we talked about. And I think we're a quarter or two away from having returned to more normal inventories, but we're seeing certainly good signs of inventory reductions of our product at our customers.

All right. Thank you.

Thanks Karan.

Our next question comes from Ananda Baruah with Loop Capital. Your line is open.

Hey guys. Good afternoon. Thanks for taking the questions. Would just love to get your thoughts, Alan, on how to think about tariff positioning, tariff risk, hot topic kind of these days. So, just your thoughts there in the context of diversifying out of China? And then I have a quick follow-up as well. Thanks.

Yes, I don't think our strategy is changing based on who is going to be in the White House. We've been on a strategy to be a U.S. headquartered company with manufacturing outside of China. And that is not changing as a result of potentially increased tariffs. So, I would say that it positions us very well as we've had an established manufacturing facility that we're growing dramatically in Thailand. And our laser chips come out of the U.S. as well as the U.K. and Japan. So from that perspective, I think we're as tariff-free as you can get with respect to our future. So, I don't think any strategy change is happening. But I'd say that, that resonates with a lot of our customers who want to have supply chain resilience, and we provide that for them, both with vertical integration as well as a limited footprint in China and a growing footprint outside of China.

That's super helpful context. Thank you. And then just a quick follow-up is just on EML lasers, given this constrained position, is there any, I guess, pricing power that you guys have or that you're using? Thanks and that’s it for me.

I think we look at pricing on a portfolio basis. And I think that as things are constrained, they go down slower or go up faster. And so I think in the constrained environment, as we look forward and as we sit here today, I think we have to pay for a lot of capital that's going in to add capacity. So, I think that we're justified in looking at price optimization on EMLs is one area that we are looking at and have implemented some strategic pricing for those products.

Thanks Ananda.

I apologize. My line was muted. Mike Genovese from Rosenblatt. Your line is now open.

Okay. Thanks very much. I guess can I just ask for more color on the telecom market. And when you make comments about 2026 and 2027 and that kind of visibility, is that all on the Datacom side? Or how far does the telecom visibility extend?

I believe that traditional telecom or carrier telecom has limited visibility, although deployments have not kept pace with the growing demand for bandwidth. This means there will need to be additional spending and new network deployments. We are already witnessing this in China as they introduce new networks. As for visibility regarding telecom carrier network spending in 2026 and 2027, I cannot say that I have a clear perspective on that. However, we do foresee strong growth in the data center and data center interconnect markets. Currently, we have a relatively small presence and share in the datacom transceivers market, and given our U.S. headquarters and manufacturing outside of China, we believe there are solid reasons for customers to choose us. Therefore, we expect to see growth in our datacom module and EML chip businesses, as well as a significant increase in market share over the next few years.

Great. That's very helpful. Can you provide more information on the optical switch product for the data center? What will it do in the data center? Is this a completely new function, or will it replace anything or partial elements of existing technology? I'm particularly considering Ethernet switches and whether there's any relationship there.

Yes, Mike, this is Chris. Let me take a stab at that. It's performing, obviously, the name, optical switching. And there are, as you know, in a data center, there's a tiering multiple levels of optical switches to get the large scale that's needed, the connectivity across a very large data center. And so the ability to produce high radix, so 300x 300 kind of level switches, I guess you could argue replacing some level of electronic switches, I think of it a little bit more of an NAND in that it enables the data center to scale more efficiently so that the power consumption that's in today's switches or the switches that you would use had you scaled today’s architectures, then can be used for more GPUs and more networking, optics, et cetera, to interconnect AI accelerators. So, that's really the idea here is that to bring a lot more energy efficiency when you're talking about big pipes going across a very large data center. The other advantage also to be clear is that as you add layers of switches, the switches do have added latency and optical switching has very little latency. So, that's also a big advantage as you increase the size of data centers. Sorry, Mike, you were saying.

Essentially, as GPU cluster sizes increase, larger optical switches are needed.

Thanks Mike.

Our next question comes from Tom O'Malley with Barclays. Your line is now open.

Hey guys, nice results and thanks for taking the questions here. So, I wanted to understand the qualification process on the transceiver side. So you've now won another award, and you talked last quarter about kind of qualification in the first quarter time period with that first customer. So can you maybe refresh us here? So, two new customers, are both of them qualified yet? And when they are qualified, when do you normally get a feel for the volume that you're going to get? Obviously, being qualified and the amount that you actually end up shipping is a different thing, but you're very confident to next year. So just can you remind us when are these two customers going to be qualified? And then when will you have a feel for those volume forecasts for those two customers?

Yes. I'd say we're still on track with what we said last time with the first new customer that we talked about on the last earnings call with qualification happening in the first calendar quarter. I would say the new customer that we added this quarter is qualified now, and we received orders now that we'll be beginning to ramp in the first half of next year. So, a little bit different timing, but we're happy with both. And as I said before, we've got a lot of other qualifications going on that we'll talk about on the next earnings call, I hope.

Super helpful. And then just looking at the moving parts to kind of get to that $500 million a quarter, you guys have kind of expressed an increased confidence there, perhaps a little bit above that. So, you're kind of in the low $300 million a quarter right now. You talked about EML setting a record. I think previously, you were about $80 million or so a quarter. So let's just assume a little bit above that. But you kind of talked about capacity being outstripped for 2025, so you're basically sold out there. So when I look at where you go from here, the low $300 million to kind of that $500 million range, is more of that incremental the EML lasers or is more of that incremental the qualifications of the new transceiver customers and they're ramping? Any help there would be really helpful. Thank you.

Sure, Tom. I think starting with our midpoint of our guidance for our fiscal Q2, which is the quarter we just guided, we're guiding to $390 million is the midpoint. And I'd say that there's a combination of what we expect to win and grow between now and the end of the calendar year. As I talked about in the script, growing EML capacity by 40% from the June quarter of last year to the June quarter of this year. This coming fiscal year is part of that growth, but I'd say transceivers are growing. Anything regarding data center interconnect is going to grow. And we're not counting tremendously on a bounce back in the traditional telecom business with carrier spending. And if that happens, then we'll get there sooner. But I'd say that's kind of the three big prongs, which is growth in the chips starting really in the summertime, growth in transceivers that we've talked about, really starting in the December quarter. And then data center interconnect are really the three big drivers for getting us from $390 million as a midpoint to the $500 million.

Thanks Tom.

Our next question comes from Karl Ackerman with BNP. Your line is now open.

Yes. Thank you. I wanted to double-click on the hyperscale win as well as the design win you spoke about last quarter. Specifically, are these transceiver opportunities being driven by hyperscalers or large customers connecting their own AI processors? Or is it being driven by you being included on reference designs of maybe perhaps new GPU platforms? And as you address that question, are these initial transceivers now integrating your EMLs? If not, does that push out the ramp of these customers or hyperscalers ramping your optical products in 2025? Thank you.

Yes. Thanks, Karl. I think we don't want to necessarily get into customer architectures and what they're deploying. But we can certainly comment on our transceivers. And so these, in general, are transceivers that won't have our EMLs at initial launch, if you will, because these have been in development and designed over the past year or so. Obviously, these accounts have other opportunities to Alan's point, as we succeed and execute with them, not only will there be more share, but there will be more SKUs and other types of transceivers where we can introduce more of our own content.

Hey Karl, did you have a follow-up?

Could you discuss whether the new wins you're experiencing come from data center customers shifting their procurement of optical transceivers to U.S.-based suppliers like yourself? Can you comment on that? Additionally, can you quantify the expanding total addressable market as these AI clusters begin to disaggregate some components of scale-up architectures? Are you also viewing this as a new opportunity? Thank you.

These are new opportunities, not just a reallocation. Customers appreciate that we are headquartered in the U.S. and have non-China manufacturing, along with a long roadmap. This makes us more competitive in winning these new opportunities. For now, these are primarily focused on scale-out. The introduction of optics into a larger scale-up is likely a year to a year and a half away. While some progress is being made, we are currently dealing with traditional pluggable transceivers for scale-out hyperscale deployments, especially as companies increase their AI infrastructure. A year ago, only a couple of companies were producing AI gear, but I believe we will see more players entering the market. As we move into 2025 and 2026, the concept of disaggregated architectures will become more relevant.

Our next question comes from David Vogt with UBS. Your line is now open.

Hey guys. Thanks for taking the question. This is Brian on for David. Can you clarify if these transceiver customers were contemplated in your 4Q 2025 guide? And then I have a follow-up.

Yes, we talked about calendar 2025 and getting to $500 million. I think we have plenty of opportunities, whether this one or that one was in our number. We don't need to win all the ones we're going after. So it's hard for me to say that, yes, we're right on track with these two that we had planned on. So, I'd say that's a hard one to answer. They certainly play a part in getting us there. And we're really, really happy with the progress we've made with these customers as well as other customers that we expect to be talking about on future calls.

Got it. That's helpful. For my follow-up, in the qualification process, you mentioned that you need to earn more volume. Does that imply you are a secondary provider in these deals? If so, what type of share do you think would be reasonable?

Well, I'd say that in any of our businesses, we have to earn trust and earn share, and that's done through quality execution and resilient supply chain and doing what we say we're going to do. And share does shift in all of our business as a result of performing well or not performing well. And so that's what I intended to mean by that discussion. I'd say that there are hyperscaler demand is very big and no one relies on one supplier. So, as they ramp up two or three suppliers, the ones that perform better are going to get more share in the long run. So that's what we're really working on to make sure that we gain that trust and we gain that resilience of supply so that customers can count on us to provide more of their product that they need, and that's what we're working on.

Thanks for the color.

Our next question comes from Ryan Koontz with Needham & Co. Your line is now open.

Great. Thanks for the question. I wanted to circle back to your comments around DCI and understand your exposure there on tunables. But can you maybe talk about what your opportunity is in the module space there? Are you present? Do you have any design wins in ZR today for ZR modules? And how should investors think about that opportunity for the company?

Yes. So, DCI exposure, I would say the biggest revenue exposure for us is what I said before, which is the tunable lasers and to a lesser degree, other components that go into other people's ZR and ZR+ modules. We do have exposure to our own ZR module, and we're making very good progress on the 800-gig ZR and ZR+, both domestically as well as outside of the U.S. So we're favorably encouraged by the progress there. I'd say the 400-gig module, frankly, we were late to market. We have a small share, and we're doing our best to try to gain share there. But frankly, the market is very, very strong, and we're very happy in growing our tunable laser business there and supporting our customers who are winning significant share in a market that's growing very rapidly as data centers are moving further apart.

Yes. That makes sense. It's more of a mature market there. And then a quick question for Wajid around gross margins and kind of in lieu of kind of a lot of puts and takes going on here. How should we think about gross margins as the fiscal year unfolds here?

Yes. Thanks, Ryan. As mentioned earlier, we expect gross margins to improve sequentially, and we're already seeing signs of this in Q2. Our operating margin profile is notably different from Q1, and we anticipate continued gross margin improvement into Q3 and Q4 as more of our supply comes online for EMLs. That said, we plan to increase our R&D spending in Q2 as well as Q3 and Q4. Based on Alan's comments, customer demand is quite strong, resulting in significant opportunities. Consequently, we will likely spend ahead of revenue on R&D. We've also discussed our capacity investments. So, while we expect gross margins to rise sequentially throughout the fiscal year, the increase in R&D investment will slightly constrain our operating margin due to the high level of customer demand we are experiencing.

That's great. Can you discuss the capacity you mentioned? Will there be any overhead impact or challenges until it's fully operational?

Yes, it does. Yes. Thank you. No, it does have a little bit of overhead impact because we're building out in our Thailand facility as we move more of our production of transceivers to Thailand. And so as we move that up and ramp that up, there will be a couple of quarters of overhead expenses associated with that. And so that's already contemplated in the sequential increases in margins. But then as that volume ramps up in the middle part of next calendar year, we'll be able to see the benefit of that moving through the quarter. So we'll explain more about that as the quarters happen, but thank you for asking about that.

Thanks Ryan.

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

Thank you for the question, Alan. I wanted to follow up on your previous response regarding vertical integration into lasers, specifically with Cloud Light. You mentioned that there weren't significant changes, but I'm curious about what did change. You indicated that we could expect the margin benefits in the second half of 2025, which I assumed meant we'd see more integration happening in the first half. Am I misunderstanding this? Is this a matter of qualification, or not a delay? Are there EML constraints at play? Can you clarify what is causing the timeline for vertical integration to extend?

Yes. So, good question, Christopher. I'd say a couple of things, one of which is customers don't want us to change product that's already in flight. That's number one. Number two, our laser capacity is constrained. So we have to make, make versus buy decisions around what mostly the product going through the transceiver business today is silicon photonics based. So we use a lot of CW lasers, not EML lasers yet in the products that we're shipping and released today. So we can buy those CW lasers externally or we can use our very critical EML capacity to add those CW lasers into our products. We've done the math. There's a lot of good CW laser suppliers. It makes more sense for us to buy those CW lasers and free up that EML capacity to ship to our customers than it would be to convert that EML capacity to CW lasers, for example. So that's one of the things that's pushing off that integration of CW lasers into our products until the second half. I'd say that we are working on EML-based designs, and those will come to market in the second half of the calendar year. We have to get qualified and go through that. But today, most of the products that we're producing are silicon photonic-based using CW lasers from our strategic supplier partners to keep that EML capacity for our customers.

Yes. And I'd add that the real performance advantage of EML starts to come in as we talk about 1.6T and future generations of higher performance 1.6T. So, our natural road map also aligns with using more vertical integration where the technologies are much more differentiated at those speeds.

Thank you very much guys. That actually cleans up a lot for me, clears up a lot at least. It also probably brings me to my second question, which is trying to understand more about EMLs. I mean it just seems like the whole market is moving here. AI demand is inflecting units. There's one other big EML player as far as I recognized at least. It seems like if you have this EML capacity available, it actually has pull into your transceiver units pipeline, market share, customers, new customers, et cetera. So, why are we talking about 40%? Like why aren't we talking about like 100% or even more here? Why is 40% the right number here? And like how capital intensive is this? If you wanted to, like how fast could you get new lines up? And would you be leaning on overbuilding versus underbuilding just given what seems like the importance of this part into this new cycle? Thanks.

Christopher, you sound a lot like my Board of Directors. So, that's a very good question. It does take time to add capacity. One of the things that we did as we were working on integrating and getting synergies, we had two wafer fabs in Japan. We were going to close one of them, consolidate it. We stopped that several quarters ago and said we need that extra wafer fab capacity, and we're ramping that up now. If you go back year and a half ago, we had idle capacity in our wafer fab. It takes year and a half years to add capacity. So, that's kind of what's going on. We are adding more. We're converting to larger wafer sizes. That takes time, and we're adding epi reactors that takes time as well. So a very good question. If I had the ability to add 100% between now and June, I would do it. But that's the lead time with capital equipment and bringing up and qualifying new tools is just painful. But the good news is there's barriers to entry in that market. And so we're going to grow it as fast as we possibly can. And at the same time, we're going to introduce new products. And so that 200 gig per lane is new product we're getting qualified. That takes time and resources and starts typically at a lower yield, and we have to get through that learning curve and that yield. And so I think we're going to do well in the second half of the calendar year on that. But we are adding capacity beyond the 40% for sure after the June quarter. We're not sitting idle for sure.

Perhaps just one more follow-up. I was going to say, why not use your limited EML capacity to bring new cloud-like customers online? It seems like that would be accomplishing two goals at once.

Yes, that's a good question. I think we have silicon photonics. We have multimode VCSEL-based transceivers and we have EML-based transceivers. We are designing each of those for a given application. Some applications work better with single-mode silicon photonics. Some have a better cost structure with EMLs. And as Chris said, a lot of the new next generation of 1.6T likes EMLs better, especially as you get into multi-wavelengths where EMLs can really play a key role there. So yes, we're absolutely going to do that. It probably makes more sense in the second half of the calendar year as we get into these more advanced 1.6T products. And then we have next-generation 200-gig EMLs, which are really going to differentiate us from our competitors. And I think that really gives us the ability to drive incremental differentiation at the transceiver level and drive higher gross margins.

Thanks guys. Sorry for the third question. Thank you. Sienna, I think we'll pass the call back over to Alan for some concluding remarks.

Thank you. As we conclude the call, I want to share a few final thoughts. We are optimistic about our growth potential. Our extensive photonics portfolio, which is based on unique in-house technology and established manufacturing capabilities, addresses important challenges such as connectivity issues and reducing power consumption. With solid progress on our three-pronged strategy, we are confident that we will achieve $500 million in quarterly revenue by the end of calendar 2025 and ultimately grow our cloud business to a multibillion-dollar annual run rate. Thank you for participating in our call today. We look forward to seeing you at investor conferences and upcoming meetings this quarter. Have a great day.

That will conclude our conference call today. Thank you all for your participation. You may now disconnect your line.