Neutral ceramidase, a key enzyme of sphingolipid metabolism, hydrolyzes ceramide to sphingosine. These sphingolipids are critical structural components of cell membranes and act as second messengers in diverse signal transduction cascades. Here, we have isolated and characterized functional null mutants of Drosophila ceramidase. We show that secreted ceramidase functions in a cell-nonautonomous manner to maintain photoreceptor homeostasis. In the absence of ceramidase, photoreceptors degenerate in a light-dependent manner, are defective in normal endocytic turnover of rhodopsin, and do not respond to light stimulus. Consistent with a cell-nonautonomous function, overexpression of ceramidase in tissues distant from photoreceptors suppresses photoreceptor degeneration in an arrestin mutant and facilitates membrane turnover in a rhodopsin null mutant. Furthermore, our results show that secreted ceramidase is internalized and localizes to endosomes. Our findings establish a role for a secreted sphingolipid enzyme in the regulation of photoreceptor structure and function.