Lumentum Holdings Inc.

Ta, Vice President of Investor Relations. Ms. Ta, go ahead. Thank you and welcome to Lumentum's Fiscal Second 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 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 10Q 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 II 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. Before reviewing our second quarter results, I want to address the leadership transition announced earlier this week. After a decade as Lumentum CEO, I am retiring from my role effective tomorrow, and Michael Hurlston is succeeding me and joining our board of directors. Leading Lumentum over the past 18 years, first at our predecessor company and then as a standalone public company, has been a privilege. I am proud of our market-leading innovations strong customer relationships, and best-in-class manufacturing. We have transformed Lumentum and the photonics industry, positioning the company for continued growth. The board and I believe that this is the right time for a leadership transition and that Michael is the right leader for the next chapter at Lumentum. His global experience, semiconductor and optical communications background, and track record of driving sustained profitable growth make him uniquely qualified to lead Lumentum forward. He steps in at a time of financial and operational strength, and I am confident in his ability to build upon our momentum. Serving as Lumentum's CEO has been the highlight of my career, and I am deeply grateful to our talented team who has positioned us for sustained growth. I look forward to continuing my role on Lumentum's board and to serving as an advisor to the company to ensure a smooth transition. With that, I'd like to turn to the second quarter. In the second quarter, we exceeded the high end of our guidance range for both revenue and earnings per share. This level of performance was driven by robust demand from cloud customers both inside the data centers as well as interconnecting data centers along with an overall improving networking market. And we're just getting started. This is an exciting time for Lumentum as we position ourselves to capitalize on the rapidly expanding cloud market where our photonics technologies play a vital role. Our photonics innovations are clearly essential to scaling compute capacity within data centers for the AI era today and into the future. Optical links enable ultra-high speed, low latency, and energy efficient data transmission in today's scale-out networks. In the coming years, we believe transitioning to optical links will be essential to meeting the rapidly growing needs of scale-up networks where data bandwidths are significantly larger than scale-out networks. The rapid growth of compute capacity inside data centers will also drive rapid growth in data center interconnects, or DCI. Cloud operators are increasingly building and planning many more and geographically dispersed interconnected data centers to address space and power availability. These require high capacity, long distance optical links, which leverage the same core technologies we have developed over several decades for telecom networks. As we indicated on our last call, demand for our components and subsystems for data center interconnect is strengthening, and we have been ramping production to fulfill this strong demand. We are making significant progress in advancing our cloud business through our three prong strategy. First, we are successfully expanding our customer base in the cloud and AI markets. Second, We are scaling capacity for our highly differentiated laser transmitter chips in our indium phosphide wafer fabs and optical circuit switch and transceiver production capacity in our proven factories outside of China to meet the rising demand. And third, we are partnering with our cloud operator and AI infrastructure customers to develop game-changing optical solutions that shape their long-term technology roadmaps. With this focused approach, we are uniquely positioned to drive growth and deliver sustained value in the rapidly accelerating AI cloud era. Before discussing the second quarter details, I want to address the recent news related to DeepSeek. Discussions with cloud customers reinforce that advancements in software efficiency are key to the long-term viability of the AI business model. just as efficiency gains in optical data transmission are essential for enabling AI in data centers. These reports on improved efficiencies highlight a positive trend that strengthens the AI market for both our customers and our business. Now, let me move to additional fiscal second quarter revenue and product highlights, starting with cloud and networking. Our second quarter cloud networking segment revenue grew 20% sequentially and 18% year over year, primarily driven by strong in-market demand from cloud hyperscale customers. We saw sequential increases in nearly all of our cloud and networking product lines. In Q2, Datacom transceiver revenue grew sequentially as expected, driven by an increase in shipments to our largest cloud hyperscale customer, and the start of volume production shipments to one of our new customers we highlighted on prior calls. We continue qualification work with the other new customer and expect to start initial volume production during the fourth quarter, continuing to ramp through the first half of fiscal 26. Transceiver manufacturing capacity expansion is also progressing as planned, complementing our existing production lines in Thailand Construction of our large, new three-story facility and clean room on the same campus is well underway with the first floor completed and ready for tool installation. We achieved another record for EML unit shipments in Q2 and began delivering 200 G-lane speed EMLs to multiple customers. Based on the breadth of our 200G EML design lens, we expect to gain additional laser transmitter market share in the upcoming wave of 800G and 1.6T transceivers utilizing the more efficient 200G EMLs for AI applications. Complementing our EMLs are our new 200G lens integrated photo detector arrays which adds to our content opportunity in next generation 800G and 1.6T transceivers, as well as strengthens our vertical integration strategy for our own cloud modules. Our wafer fab expansion plans to enable higher volumes of EMLs and other indium phosphide lasers and photo detectors continues to be on track. We still anticipate that demand for our EMO chips will continue to exceed supply at least into calendar year 2026. We are experiencing strengthening demand for our DCI products as well as long-haul transmission and transport solutions. These product lines, historically classified as telecom products, are increasingly utilized by cloud customers, often indirectly through our network equipment manufacturing customers. Engagement with cloud customers and AI infrastructure providers on their long-term technology and product roadmap has reached an all-time high. As part of one collaboration, we began shipping pre-production volumes of our unique ultra-high power lasers to an AI infrastructure customer for a proprietary interconnect solution in Q2 and have received follow-on orders as well as excellent feedback on the product's performance. This is a very exciting opportunity. Looking ahead to Q3, we anticipate strong sequential growth in our cloud and networking revenue, primarily driven by capacity additions, ramping up new customer programs, and improving demand from network equipment manufacturers. Now, let me move to our industrial tech segment. Industrial tech segment revenue increased 15% sequentially while being down 21% from the same quarter last year. The sequential increase was driven by higher industrial laser shipments partially offset by seasonally lower 3D sensing shipments. The year-over-year revenue trend reflects that demand continues to be challenged due to the weak industrial end market. In industrial tech, we remain committed to developing innovative laser solutions that address customers growing demands for high precision and speed. Our latest generation of 26 kilowatt fiber lasers, our most powerful yet, delivers cutting speeds up to three times faster than its predecessor. We have shipped sample units to a key customer and are receiving very positive feedback. In Q2, Ultra-fast laser shipments reached a new record, driven primarily by growing demand from a leading tool supplier for high-volume solar cell manufacturing. We are also actively engaged with customers on new ultra-fast laser opportunities as this technology gains traction in advanced packaging, displays, and emerging semiconductor processes. Looking ahead to fiscal Q3, we anticipate a sequential decline in industrial tech revenue due to the challenging macroeconomic environment affecting industrial laser demand, as well as a seasonal decline in 3D sensing revenue. In summary, we have made significant progress in executing our strategy to grow our cloud business. In Q2, we began to ramp our cloud transceiver volumes to our largest customer and one of our new customers. and we set another new record for EML shipments, including new 200G lane speed variants. We are working diligently to further expand capacity for many of our products over the next several quarters and to complete qualifications on key new customer programs. A robust pipeline of cloud customer engagements coupled with improving trends with our network equipment manufacturing customers strengthens our confidence in achieving our previously stated goal of reaching $500 million in quarterly revenue by the end of calendar 2025. Looking beyond, we expect significant growth in the years ahead as we capitalize on emerging opportunities in cloud and AI. Before I hand the call over to Wajid, I want to take a moment to express my sincere gratitude to all of our employees for their unwavering focus and dedication and to our customers worldwide for their trust, partnership, and collaboration. With that, Wajid.

Thank you, Alan. Second quarter revenue of $402.2 million and non-GAAP EPS of 42 cents were above the high end of our guidance ranges. GAAP gross margin for the second quarter was 24.8%, GAAP operating loss was 12.8%, and GAAP net loss per share was 88 cents. Turning to our non-GAAP results, second quarter non-GAAP gross margin was 32.3%, which was slightly down sequentially, but up year on year due to product mix. In future quarters, we anticipate company gross margins will sequentially increase as manufacturing utilization improves as well as an increase in Datacom laser shipments. Second quarter non-GAAP operating margin was 7.9%, which was up 490 basis points sequentially and up 600 basis points year on year, primarily driven by improved cloud and networking profitability and lower SG&A expenses. Second quarter non-GAAP operating profit was $31.7 million, and adjusted EBITDA was $57.6 million. Second quarter non-GAAP operating expenses totaled $98.3 million, or 24.4% of revenue, a decrease of $2.1 million from the first quarter and a decrease of $9.9 million from the year-ago quarter. This substantial reduction in operating expenses was achieved driven by the restructuring actions that were taken during fiscal 2024, as well as overall stringent cost controls across the company, and despite increased investment in our expanding cloud opportunities. Q2 non-GAAP SG&A expense was $35.9 million. Non-GAAP R&D expense was $62.4 million. Interest and other income was $4.2 million on a non-GAAP basis. Second quarter non-GAAP net income was $30 million, and non-GAAP diluted net income per share was 42 cents. Our fully diluted share count for the second quarter was 71.6 million shares on a non-GAAP basis. During the second quarter, our cash and short-term investments decreased by $19 million to $897 million. Our inventory levels were approximately flat sequentially, despite the expected growth in our cloud and networking revenue. In Q2, we invested $65 million in CapEx, primarily focused on expanding clean room capacity at our Thailand manufacturing site and increasing equipment capacity for indium phosphide wafer production to support EML chip manufacturing. Nearly all of our CapEx investment was directed toward our cloud and networking business. Turning to segment details, second quarter cloud and networking segment revenue at $339.2 million increased 20% sequentially and 18% year-on-year. Cloud and networking segment profit at 16.2% increased 330 basis points sequentially and increased 610 basis points year-on-year on higher revenue. Our second quarter industrial tech segment revenue at $63 million was up 15% sequentially and down 21% year-on-year. Second quarter industrial tech segment profit of 6.2% increased sequentially on higher revenue and decreased year-on-year on lower revenue. Now let me move to our guidance for the third quarter of fiscal 25, which is on a non-GAAP basis and is based on our assumptions as of today. We expect net revenue for the third quarter of fiscal 25 to be in the range of $410 million to $425 million. This Q3 revenue forecast includes the following assumptions. Cloud and networking to be up sequentially, with strong growth in products addressing cloud applications and improving network customer demand, and industrial tech to be down sequentially by approximately $10 million with declines in both commercial lasers and 3D sensing. In Q3, operating expenses are expected to increase sequentially based on our typical annual fringe rate increase. Based on this, we project third quarter non-GAAP operating margin to be in the range of 9.5% to 10.5% and diluted net income per share to be in the range of 47 cents to 53 cents. Our non-GAAP EPS guidance for the third quarter is based on a non-GAAP annual effective tax rate of 16.5%. These projections also assume an approximate share count of 73 million shares. With that, I'll turn the call back to Kathy to start the Q&A session. Kathy?