Financial Data and Key Metrics Changes - Q3 2025 revenue was $1,220 million, exceeding guidance and up 8% sequentially and nearly 30% year over year [9][20] - Adjusted EPS for the quarter was $0.67, up 60% sequentially and 91% year over year, indicating expanded operating leverage [9][21] - Adjusted gross margin in Q3 was 41.9%, 90 basis points above guidance, driven by sales of previously reserved material and lower net tariff impacts [21] - Adjusted operating margin was 10.7%, up 270 basis points year on year [21] - Cash from operations was $174 million, with a free cash flow margin of 11% [22] Business Line Data and Key Metrics Changes - Strong demand was noted across both cloud provider and service provider segments, with two customers contributing over 10% of revenue [9][10] - The interconnects portfolio is expected to double revenue year over year in 2025, with significant orders already in place [14] - The RLS optical products and routers and switches showed strong performance, contributing to overall revenue growth [20] Market Data and Key Metrics Changes - Cloud providers are investing in AI at an unprecedented pace, with many increasing their expected spend on AI [12] - Service providers are seeing steady and sustainable investment patterns, particularly in North America and internationally [17] - The emergence of Neo scalers, including AI compute specialists and smaller data center providers, is creating new market opportunities [16] Company Strategy and Development Direction - The company is redirecting R&D investments towards coherent optical systems, interconnects, and innovative solutions like DCOM, while limiting investments in residential broadband access [18][25] - A reduction in headcount impacting approximately 4% to 5% of the workforce is being implemented to drive operational efficiencies [26] - The company expects to achieve approximately 17% year-on-year growth in fiscal 2026, with improving gross margins and a focus on AI-driven network investments [27] Management's Comments on Operating Environment and Future Outlook - Management believes the network is critical for the growth and monetization of AI, with a multiyear investment effort required for high-speed connectivity [10][29] - The company is positioned to capitalize on the growing demand for AI workloads and the associated network infrastructure [28] - Management expressed confidence in the durability of demand over the midterm horizon, supported by a strong order backlog [26][27] Other Important Information - The company repurchased 1 million shares for $81.8 million in Q3, with plans to repurchase an additional $85 million in Q4 [22][23] - A non-cash charge of approximately $90 million is expected in Q4 due to the redirection of R&D investments [25] Q&A Session Summary Question: Industry structure and gross margin outlook - Management noted that the industry structure has improved, allowing for better pricing power and expectations of gross margin improvement over time [32][33] Question: Neoscaler opportunity and growth composition - Management indicated that Neoscalers represent a net incremental opportunity that will scale over time, contributing to overall growth [41][43] Question: Gross margin drivers and tariff impacts - Management highlighted that gross margin improvements were driven by product mix and better tariff management, with expectations for continued improvements [52][55] Question: DCOM opportunity and backlog contribution - Management confirmed that the DCOM opportunity is expected to contribute hundreds of millions in revenue, with a strong backlog supporting future growth [116][117]

Financial Data and Key Metrics Changes - Q3 2025 revenue was $1,220 million, exceeding guidance and up 8% sequentially and nearly 30% year over year [7][18] - Adjusted EPS for the quarter was $0.67, up 60% sequentially and 91% year over year, indicating expanded operating leverage [7][19] - Adjusted gross margin in Q3 was 41.9%, 90 basis points above guidance, driven by sales of previously reserved material and lower net tariff impacts [19] - Adjusted operating margin was 10.7%, up 270 basis points year on year [19] - Cash from operations was $174 million, with a free cash flow margin of 11% [20] Business Line Data and Key Metrics Changes - Strong demand was noted across both cloud provider and service provider segments, with two customers contributing over 10% of revenue [7][8] - The interconnects portfolio is expected to double revenue year over year in 2025 and likely again in FY 2026 [13] - Significant orders were received for the DCOM application, co-developed with a hyperscaler, indicating strong partnerships and demand [12][13] Market Data and Key Metrics Changes - Cloud providers are investing in AI at an unprecedented pace, with many increasing their expected spend on AI [11] - Service providers are seeing steady and sustainable investment patterns, with three of the top five customers in Q3 being service providers [15] - The emergence of Neo scalers, including AI compute specialists and smaller data center providers, is creating new market opportunities [14] Company Strategy and Development Direction - The company is redirecting R&D investments towards coherent optical systems, interconnects, and innovative solutions like DCOM, while limiting future investments in residential broadband access [16][23] - A reduction in headcount impacting approximately 4% to 5% of the workforce is being implemented to drive operational efficiencies [24] - The company expects to achieve approximately 17% year-on-year growth in fiscal 2026, with improving gross margins [25] Management's Comments on Operating Environment and Future Outlook - Management believes the network is critical for AI growth and monetization, with a multiyear investment effort required for high-speed connectivity [10][26] - The company anticipates durable demand over the midterm horizon, supported by a strong order backlog [24][25] - Management expressed confidence in achieving a 15% to 16% operating margin by 2026, accelerated by increased operating leverage and improving gross margins [25] Other Important Information - The company ended Q3 with approximately $1,400 million in cash and investments, including share repurchases totaling $245 million year to date [20] - A non-cash charge of approximately $90 million is expected in Q4 due to the redirection of R&D investments [23] Q&A Session Summary Question: Industry structure impact on gross margin - Management noted that the industry structure has improved, allowing for better pricing power and expectations for gross margin expansion [30][32] Question: Neoscaler opportunity and its contribution - Management indicated that Neoscalers represent a net incremental opportunity that will scale over time, contributing to growth in fiscal 2026 [41][42] Question: Contribution from DCOM opportunity - The DCOM application is expected to generate hundreds of millions in revenue, with initial orders already in place [118] Question: Customer additions for WaveLogic six - The company added 11 new customers for WaveLogic six, bringing the total to 60, with significant ramp-up in port shipments [98] Question: Supply chain constraints - Management acknowledged ongoing supply chain challenges but emphasized investments made to mitigate these issues and support growth [100] Question: Confidence in fiscal 2026 outlook - Confidence in fiscal 2026 is largely based on a strong backlog and sustained order growth, with expectations for continued strength in demand [121]