Lumentum Holdings Inc.

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

Thank you, and welcome to Lamentum's fiscal first quarter 2025 earnings call. This is Kathy Ta, Lamentum'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 Cauldron, 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 and market opportunities, our expectations and beliefs regarding recent acquisitions, including Cloudlight, macroeconomic trends, and our expected financial and operating performance, including our guidance, as well as statements regarding our future revenues, financial model, and margin targets. 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. Forward-looking statements provided during this call are based on Lamentum's reasonable beliefs and expectations as of today. Lamentum 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 the substitute for or superior to financials prepared in accordance with GAAP. Lamentum's press release with the fiscal first quarter results and accompanying supplemental slides are available on our website at www.lamentum.com under the Investors section. With that, I'll turn the call over to Alan.

Thank you, Kathy, 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've 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 from 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 classified 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 multi-year 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 platonic 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 networking segment revenue grew 11% sequentially and 23% year over year, driven in part by strong in-market demand from cloud hyperscale customers as they invest within and outside of AI data centers. 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 400 ZR 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 Plus 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 gigabaud 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 wind 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 plus L band transport solutions, high port count rotums, and the emergence of demand for multi-rail rotums and amplifiers. Multirail 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 ultra-fast 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 ultra-fast 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 multi-billion 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.