Yahoo Finance Lumentum Holdings Inc. (NASDAQ:LITE) Q3 2024 Earnings Call Transcript
Lumentum Holdings Inc. (NASDAQ:LITE) Q3 2024 Earnings Call Transcript May 6, 2024
Lumentum Holdings Inc. beats earnings expectations. Reported EPS is $0.29, expectations were $0.26. Lumentum Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, everyone, and welcome to the Lumentum Holdings' Third Quarter Fiscal Year 2024 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 would now like to turn the conference call over to Kathy Ta, Vice President of Investor Relations. Ms. Ta, please go ahead.
Kathy Ta: Thank you, and welcome to Lumentum's fiscal third quarter 2024 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 expectations and beliefs regarding recent acquisitions, including Cloud Light and NeoPhotonics, macroeconomic trends, trends and expectations for our products and technologies, our end markets, market opportunities and customers, 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-Q] (ph) 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 third 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.
Alan Lowe: Thank you, Kathy, and good afternoon, everyone. This is a very exciting time for Lumentum. We are making excellent progress on the huge opportunities the long-term demand for data center photonics creates for us, driven by the exponentially increasing compute requirements of artificial intelligence, machine learning, and advanced data centers. High-performance photonics are absolutely critical to enabling networks both within and beyond the data center to keep pace with these demands. Lumentum is pursuing a three-pronged strategy to drive significant growth in our cloud data center revenue: First, we are executing on our compelling new product roadmap that expands our offerings and market opportunities. We have multiple waves of product releases beginning later this calendar year and continuing into calendar 2025.
This includes new 1.6 terabit intra-data center optical transceivers, optical switching products, and 800G coherent pluggables for data center interconnect, or DCI. This portfolio expansion is a result of our offerings spanning not only leading data center optical components at both 100G and 200G per lane speeds, but also high-speed 800G and 1.6 terabit transceivers that leverage these components across a range of customers. These transceiver product lines address a range of requirements from multiple market-leading customers from short reach to long reach within their data center optical link fabric. Our 800ZR and ZR+ coherent transceivers utilize our photonic integrated circuit technology and deliver differentiated transmission performance and power consumption, critical factors for data center applications.
We have already begun product sampling with key customers and our demos and customer discussions at the recent OFC trade show went very well. Given challenges in powering data centers, we expect to accelerate growth of our DCI products over the coming years. In the second prong of our data center strategy, we are significantly expanding our manufacturing capacity in our proven wafer fabs and back-end factories to ensure a secure high-volume supply of our differentiated products to address our cloud customers' strong demand now and into the future. Two weeks ago, I visited our state-of-the-art manufacturing facility in Thailand. I'm pleased to report that our expansion plans are progressing very well and remain on track. We expect to provide customers with qualification units, including 1.6T modules from this facility this summer, and based on current customer timelines, we expect volume production to start later this calendar year and accelerate into calendar 2025 in a meaningful way.
Further, based on progress with new customer opportunities since our last call, we have ratcheted up the magnitude of our expansion plans to prepare for continued success in winning new sockets and customers in calendar 2025 and beyond. The third prong of our strategy focuses on partnering with cloud and AI infrastructure customers on new innovative solutions to scale data center infrastructure that leverages our extensive portfolio of in-house photonics and manufacturing technologies. For example, power consumption will continue to be a key limiter in further scaling of compute power in the future. To address this, we are focused on enabling innovative photonic approaches to more energy-efficient data center networks. These include supporting optical switching to replace certain electronic packet switches and new optical transceiver and link architectures, which will reduce the amount of power needed and will move photonics even closer to the processor and the switch chips.
By implementing this three-pronged cloud strategy, Lumentum is well-positioned to capitalize on the tremendous growth potential in data center photonics as compute and data center infrastructures increasingly rely on photonics to scale. In our recent OFC Lumentum Investor Technology Event, we highlighted our current view that our cloud photonics opportunity in calendar year 2028 could be approximately $16 billion. Based on this and the progress we've made with leading customers, we believe we can expand our cloud revenue to multi-billions of dollars in the years ahead. Outside of the cloud, we continue to be focused on helping customers scale Internet optical network infrastructure. Over many years, we have solidified our market share and technology leadership positions in this important market.
We are addressing the growing bandwidth needs with our high-speed components, but physical constraints, such as the Shannon Limit are impacting, are impacting the ability to scale capacity by increasing speed alone. Further, networks will need to utilize increased parallelism with more wavelength channels and more fiber transmission bands and more fibers carrying data. These challenges create growth opportunities for Lumentum as higher volumes of leading-edge coherent components and more advanced and complex ROADMs and optical amplifiers are required to enable further network capacity scaling. For example, our high port count and MxN ROADMs are addressing the growing number of wavelength channels, fibers and degrees of connectivity. And our latest ROADM designs integrate C+L band capability enabling customers to better maximize the available bandwidth in a single fiber.
Now, let me move to our fiscal third quarter revenue and product highlights. Our Cloud & Networking revenue grew 9% sequentially and 7% year-over-year, driven by strong data center demand and the contribution from the Cloud Light acquisition. Our revenue from 100G EML laser chips nearly tripled in fiscal Q3 compared to Q2, driven by the expansion of output capacity at our Japanese wafer fab. Our earlier investments in this fab have proven to have been the right decision. As we ramp up production of 100G EMLs with market-leading customers, we are also qualifying our 200G EMLs for use in both 1.6 terabit and lower power 800G transceivers. Early customer feedback on our 200G EML is excellent, positioning this product line to be a key contributor to growth in calendar 2025.
Data center demand is also increasing for 400ZR and ZR+ modules for DCI. In addition to providing these modules, we are a market leader in the narrow linewidth tunable laser used in ZR modules. We are encouraged by a notable uptick in demand for our tunable lasers in Q3, as customer inventory of these products appears to be normalizing. We expect these strong cloud demand trends to continue based on the robust double-digit CapEx projections for calendar '24 coming from cloud data center operators. All that said, in the next few quarters, revenue will continue to be burdened by telecom customer inventory challenges. The pace of telco carrier spending has slowed more than previously anticipated. Because we continue to shift below end market demand, customer inventory of our products is decreasing, indicating that we are getting closer to the end of this lower demand phase in our industry.
We remain highly confident in our market position and the future recovery and growth of our telecom business. Network bandwidth growth continues unabated, requiring network capacity additions. As fiber transmission approaches its physical limits, network providers increasingly recognize the value proposition of our technologies, which enable continued network scaling. This reinforces our long-term optimism for our opportunities in this market. In contrast to the extended inventory correction, I'm very pleased with the adoption and early ramp up and growth potential of our newest telecom products by our customers. For example, we are ramping up shipments of our new 130 gigabaud and 200 gigabaud coherent components. These enable the next-generation of high-performance coherent transmission systems at 1.2 terabits and 1.6 terabits per second.
We've also seen increased customer activity in next-generation high port count and integrated extended C and extended L band ROADMs. Customers are not burdened with excess inventory of these products, and increasing shipments highlight growing end market needs that will drive growth on top of the eventual market recovery. Turning to Industrial Tech, fiscal Q3 revenue was down 34% sequentially and down 42% year-over-year, driven by expected seasonality and increased competition in our 3D sensing business, as well as inventory consumption at our largest industrial laser customer. This decline masks the success we are having on new industrial laser platforms for emerging applications, particularly ultrafast lasers, which experienced a more than 40% sequential growth in Q3.
These lasers serve key micromachining applications and industries like semiconductor, EV batteries, displays, PCBs and solar cell manufacturing. We anticipate an improved revenue profile for the Industrial Tech platform in the quarters to come. This is due to two factors: one, the smaller size of our 3D sensing business will have a less significant impact on our overall revenue profile; and two, we expect an uptick in industrial fiber laser shipments after the severe inventory correction experienced during Q3. To summarize, the combination of explosive growth in cloud data center and AI-driven demand, our customer traction and capacity additions for new data center products and strong early demand for our new telecom products makes me confident and bullish about calendar 2025.
We expect significant growth next calendar year as our investments in new data center products and manufacturing capacity this year translates into significant new revenues. This, combined with the telecom industry inventory correction abating, makes the outlook for calendar 2025 and beyond very promising. We have multiple cloud customer engagements which will drive meaningful revenue growth and drive total company quarterly revenue to exceed $500 million exiting calendar 2025. Additionally, we expect that significant growth will continue into 2026 and 2027. We are working on several significant opportunities today that we expect will propel our cloud business into a multi-billion dollar annual run rate business in the coming years. Given all of this, it's clear that the future is bright for Lumentum.
Before turning it over to Wajid, I would like to thank our employees and our customers around the world for their focus and dedication as they continue to collaborate and partner with Lumentum. With that, Wajid?
Wajid Ali: Thank you, Alan. Third quarter revenue and non-GAAP EPS results were above the midpoint of our guidance ranges, with revenue of $366.5 million and non-GAAP EPS of $0.29. We're very excited about the contribution that our Cloud Light acquisition had on the quarter and will have in the future, given the technology and capability of the combined companies to address the rapidly-growing AI and ML photonics market. We recognize a record revenue quarter in our cloud data center business, fueled in part by a full quarter of Cloud Light revenue contribution. Q3 gross margins were in line with expectations as the overall product mix included a full quarter of transceiver revenue from the Cloud Light acquisition, while operating margins saw a modest improvement due to lower operating expenses in the quarter as we continued to execute on synergy actions.
We remain confident in our market position and compelling growth opportunities across our served markets that Alan discussed earlier, and we are focused on continuing to lower our fixed cost base to accelerate operating margin expansion as revenue recovers. To achieve this, we've made significant progress on manufacturing synergies. Following the closure of two factories in China last December, we have transferred those products to our infrastructure in Thailand. Our Japan wafer fab consolidation plans are on track for execution in the first half of fiscal '25. This will unlock significant synergies in both manufacturing and operating expenses starting in fiscal Q3 2025. In addition, we have implemented initiatives to capture synergy and efficiency opportunities within our operating expenses.
Our strong financial discipline drove a $2.4 million sequential decrease in company-wide non-GAAP operating expenses, despite Q3 being the quarter where the annual payroll tax and employee fringe rates reset. Our non-GAAP operating expenses will step down further in Q4 with the actions we have already taken. As I have mentioned in previous earnings calls, we had pre-built product inventory from these two factories in China to facilitate these transitions. In Q3, we achieved a $51 million sequential reduction in Lumentum's overall inventory levels, and we plan to continue to increase our inventory turns during the next several quarters. We are confident that our combined focus on manufacturing efficiency, inventory management, and cost control will pave the way for improvement in gross and operating margins as telecom revenue recovers and cloud revenue grows.
We are on track to achieve our $100 million annualized synergy target from the NeoPhotonics acquisition. To date, we have secured approximately $70 million in annual run rate savings and expect to capture the balance of the $30 million as we execute the remaining actions of our plan. We will continue to provide updates as we reach key milestones. Net revenue for the third quarter was $366.5 million, which was approximately flat sequentially and down 4.4% year-on-year. GAAP gross margin for the third quarter was 16.2%. GAAP operating loss was 31.3%, and GAAP diluted net loss per share was $1.88, with a large portion of the GAAP net loss due to acquisition-related charges, restructuring charges, and amortization of acquired intangibles. Third quarter non-GAAP gross margin was 32.6%, which was flat sequentially and down year-on-year driven by product mix.
Third quarter non-GAAP operating margin was 4.1%, which was up 60 basis points sequentially and down year-on-year. Third quarter non-GAAP operating income was $15 million and adjusted EBITDA was $41 million. Third quarter non-GAAP operating expenses totaled $104.3 million, or 28.5% of revenue, down $2.4 million from Q2 and down $0.6 million from the year-ago quarter, despite the additional operating expenses from the Cloud Light acquisition due to tight expense controls and continued synergy attainment. Q3 non-GAAP SG&A expense was $38.1 million. Non-GAAP R&D expense was $66.2 million. Interest and other income was $8 million on a non-GAAP basis, driven by interest earned on our cash and investments. Third quarter non-GAAP net income was $19.6 million and non-GAAP diluted net income per share was $0.29.
Our fully diluted share count for the third quarter was 68.1 million shares on a non-GAAP basis. Our cash and short-term investments decreased by $353.1 million during the quarter to $870.9 million. This was primarily due to the $323 million in cash used for the repayment of our 2024 convertible notes, which matured in March. In addition, we incurred approximately $30 million in restructuring, integration and manufacturing consolidation charges in the quarter, as well as $23.8 million in CapEx. Turning to segment details, third quarter Cloud & Networking segment revenue at $313.8 million increased 9.5% sequentially and increased 7.1% year-on-year. Cloud & Networking segment non-GAAP operating profit at 14.6% increased sequentially and decreased year-on-year.
Our third quarter Industrial Tech segment revenue at $52.7 million was down 34.2% sequentially and down 41.7% year-on-year. Third quarter Industrial Tech non-GAAP reporting loss was 5.1%, which was driven by declines in our 3D sensing business and a fiber laser inventory correction at our largest industrial laser customer as expected. Now, let me move to our guidance for the fourth quarter of fiscal '24, which is on a non-GAAP basis and is based on our assumptions as of today. We expect net revenue for the fourth quarter of fiscal '24 to be in the range of $290 million to $315 million. This Q4 revenue forecast includes the following assumptions: Cloud & Networking to be down sequentially. This decline includes an approximate incremental $40 million reduction at the midpoint due to the recent broad-based demand softness in telecom.
And Industrial Tech to be up slightly sequentially with increased industrial laser shipments partially offset by typical 3D sensing seasonality. Based on this, we project fourth quarter non-GAAP operating margins to be in the range of negative 3% to positive 1%, and diluted net income per share to be in the range of negative $0.05 to positive $0.10. Our non-GAAP EPS guidance for the fourth quarter is based on a non-GAAP annual effective tax rate of 14.5%. These projections also assume an approximate share count of 68.5 million shares. These projections also exclude certain unusual expenses, including factory under absorption due to factory consolidations and transitions, restructuring, other synergy attainment and integration activities, and inventory reduction activities related to prior acquisitions and the COVID-19 pandemic.
These expenses are related to one-time events and we expect these will in general decline over the coming quarters. These expenses for our third fiscal quarter can be found in our GAAP to non-GAAP reconciliation tables. With that, I'll turn the call back to Kathy to start the Q&A session. Kathy?
Kathy Ta: Thank you, Wajid. Before we start the Q&A session, I'd like to ask everyone to keep to one question and one follow-up. This should help us get to as many participants as possible before the end of our allotted time. Now, let's begin the Q&A session.
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