Lumentum Holdings Inc. (NASDAQ:LITE) Q1 2024 Earnings Call Transcript
Lumentum Holdings Inc. (NASDAQ:LITE) Q1 2024 Earnings Call Transcript November 8, 2023
Lumentum Holdings Inc. beats earnings expectations. Reported EPS is $0.35, expectations were $0.27.
Operator: Good day, everyone, and welcome to the Lumentum Holdings First 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. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] 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 first 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, 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; financial and operating results; macroeconomic trends; trends and expectations for our products and technology; our end markets; market opportunities and customers; and our expected financial 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 the 10-K for the fiscal year ended July 1, 2023, and 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 first 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 morning, everyone. We are thrilled to welcome the Cloud Light team to Lumentum. The addition of Cloud Light's products to our portfolio positions Lumentum as a leader in providing photonics to cloud operators at a time when artificial intelligence is rapidly accelerating growth in the data center market. We believe Lumentum's served opportunity within data centers has expanded more than five-fold as a result of the Cloud Light acquisition. For years, Cloud Light has been supplying differentiated high-speed products to leading hyperscale customers, both custom products to address unique customer needs, as well as standard products to address a broad range of hyperscale customer requirements.
In the last 12 months, over 90% of Cloud Light's revenue was derived from 400G and higher-speed products. In the most recent quarter, over half of Cloud Light's optical transceiver revenue was derived from 800G transceivers. In calendar 2024, we anticipate strong growth in Cloud & Networking revenue, driven by accelerating AI, computer requirements and a resumption of shipping more in-line with end market demand. Also, in calendar 2024, we expect cloud applications to drive over 30% of Lumentum's cloud and networking revenue. Our cloud customers are responding very positively to this transaction. This combination results in a broader portfolio of differentiated products and technology. It also enhances the security of supply for our customers, given our broader combined global manufacturing footprint and high levels of vertical integration.
Lumentum is well-equipped to address future cloud technology roadmaps as AI models drive an exponential increase in compute and networking requirements. I would also like to highlight that starting with this fiscal year, we are updating our financial segment reporting to better reflect the rapidly changing market opportunities ahead. Our financial reporting is now focused on two large and growing end market segments: one, Cloud & Networking; and two, Industrial Tech. Within Cloud & Networking, the cloudification of the network is blurring the lines between our historical served markets of telecom and datacom. Cloud data center and traditional telecom operators are increasingly purchasing the same types of data transmission products. We anticipate the emergence of new applications for optical switching technology not only to serve the growing complexity of long-haul and metro networks, but also to support the high optical link density required for AI training models in the data center.
Our customer mix is changing as well. The addition of Cloud Light brings much more direct sales to cloud operators and infrastructure providers. We are also increasingly serving cloud and networking operators directly for their data center interconnect and edge networking applications. To better align our reporting with these market trends, the telecom product lines and the datacom product lines are now included in the Cloud & Networking segment. Turning to the Industrial Tech segment. Our portfolio of imaging, sensing, and laser products aligns with Industry 4.0 and 5.0 trends. Industrial sensing applications require high accuracy in determining distance, speed, and displacement, and are increasingly turning to laser-based approaches. Leading-edge semiconductor, solar cell, and electronic component manufacturing require the beam precision and short-pulse duration of ultrafast lasers to produce precise cuts and features to better reflect the growing importance of precision photonics across this broad application space.
The industrial and consumer and commercial lasers product lines are now included within the Industrial Tech segment. Now, I will summarize our fiscal first quarter results. As we reported last week, first quarter revenue and EPS were above the mid-points of our guidance ranges. Through cost controls and efficient operations, we are managing the factors that are in our control. While we continue to see very strong growth in the demand for our data center chips, as well as our newly acquired intra-data center transceivers, this strength is being offset by the telecom and industrial inventory drawdown activities. Due to this inventory correction, we believe we continue to ship below end market demand. As we navigate this transition period, we are delivering as planned on our product roadmaps and synergy attainment with respect to our NeoPhotonics acquisition.
Of course, we are also excited about the new opportunities that Cloud Light brings starting in the current quarter as we leverage their leading transceiver technology to deliver the fastest speed products to cloud customers. Now let me provide more detail on our segment level results in Q1. Cloud & Networking revenue was down 20% sequentially and down 36% year-on-year, with broad-based softness across most of our networking product lines, partially offset by sequential growth in intra-data center lasers and tunable access module. This is as we have expected, given the inventory correction underway at our networking customers. Robust cloud data center demand is currently the strongest growth driver for our Cloud & Networking business. As data centers are designed to support the high bandwidth requirements of AI workloads, 800 gig transceivers can provide that bandwidth while also reducing latency.
For our transceiver customers, their new 800 gig transceivers utilize eight different wavelengths at 100 gig per lane, triggering orders for our chip-level photonics and driving growth for our EML product line. We are also seeing an increase in deployments of 800G transceivers that are supplied by our Cloud Light business, and we are working with our new team to enable them to ramp even more rapidly. Over time, we also expect to supply custom-designed high-power CW laser arrays for leading AI hardware architectures to provide the high bandwidth, low latency optical interconnects essential for training and inference applications. In calendar '24, our 200 gig per lane EMLs will enable the next generation of transceivers with capacity of up to 1.6 terabits.
We are shipping qualification samples of our 200 gig EMLs now and expect to ramp production in calendar '24 with customer qualifications of 800 gig and 1.6 terabit transceiver designs well underway. We expect that 200 gig per lane optics will be the workhorse of hyperscale data centers for years to come once these qualifications are completed. Through Cloud Light, Lumentum is now a leader in high-speed active optical cables, or AOCs, as well as VCSEL-based transceivers to cloud customers to fulfill their short-reach connectivity requirements for new AI and machine learning cluster architectures. In addition, we've been developing high-speed 100 gigabit per second VCSELs and VCSEL arrays for these short-reach optical links, and we expect to ramp these shipments meaningfully in calendar '24.
Moving on to our high-speed transmission product developments, we are receiving positive customer feedback on our next generation of 130 gigabaud and 200 gigabaud data rate coherent technologies. These high-speed products will be available in both discrete and integrated form factors to enable enhanced performance in metro and long-haul applications. In addition, at the ECOC conference last month, we received positive customer feedback on our coherent 800 gig ZR product. We believe we are the first to market with this capability, which will provide high-speed connectivity with extended reach for data center interconnect within metropolitan areas. Turning to Industrial Tech. Fiscal Q1 was up 4% sequentially from Q4, driven by the expected uptick in our 3D sensing business with a new smartphone product ramp partially offset by softness in fiber lasers as our leading fiber laser customer works to bring down inventory.
Industrial Tech is down 40% year-over-year as expected, primarily due to more intense competition for market share on a certain 3D sensing socket, end market demand and pricing, as discussed previously. Based on our latest customer forecasts, we continue to expect industrial lasers demand to be soft into calendar 2024 due to customer inventory digestion and macro factors impacting end markets. However, we expect the rapid growth in new applications for ultrafast lasers to partially offset these near-term headwinds given growth in new solar cell manufacturing applications. To summarize, our market outlook is currently a tale of two dynamics. On the other hand, outside of the data center customers, we are facing continued headwinds from networking and industrial customer inventory digestion.
In all of our end markets, we are committed to our long-term R&D roadmaps, and we are positioning the company for the robust growth of photonics opportunities that we see ahead. Before turning it over to Wajid, I would like to again welcome our new employees from Cloud Light, and thank all of 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. Net revenue for the first quarter was $317.6 million, which was down 14% sequentially and down 37% year-on-year. During the quarter, we had three greater than 10% customers, two of which are in Networking and one 10% customer in the Industrial Tech market. GAAP gross margin for the first quarter was 24.1%, GAAP operating loss was 25.4%, and GAAP diluted net loss per share was $1.02. First quarter non-GAAP gross margin was 34.9%, which was down sequentially and down year-on-year, primarily driven by product mix, factory underutilization, and lower revenue. First quarter non-GAAP operating margin was 3.3%, which decreased sequentially and year-on-year. First quarter non-GAAP operating income was $10.6 million, and adjusted EBITDA was $34.6 million.
First quarter non-GAAP operating expenses totaled $100.1 million, or 31.5% of revenue, down $2.3 million from Q4 and down $6.6 million from the year-ago quarter due to tight expense controls. Q1 non-GAAP SG&A expense was $39.1 million. Non-GAAP R&D expense was $61 million. Interest and other income was $16.8 million on a non-GAAP basis due to higher interest rates on our cash and investments. First quarter non-GAAP net income was $23.4 million and non-GAAP diluted net income per share was $0.35. Our fully diluted share count for the first quarter was 67 million shares on a non-GAAP basis. Turning to the balance sheet. Our cash position decreased during the quarter due to a few key items. We used $30 million in cash to purchase our wafer fab and campus in the UK.
This purchase reflects our confidence in the longevity of indium phosphide technology to address the ever-growing need for higher and higher performance telecom transmission components. In order to capture our COGS synergies from the NeoPhotonics acquisition, we are pre-building nearly $30 million of inventory to help facilitate the factory consolidation happening over the next few months. And we had an annual Japan tax payment of approximately $17 million, as well as expenses related to the Cloud Light acquisition. As a result, cash and short-term investments decreased $69 million sequentially to $1.94 billion. To streamline operations and achieve synergies, we will be consolidating NeoPhotonics back-end manufacturing facilities, and therefore, we expect an under-absorption of capacity relating to these moves during Q2 and Q3.
By the end of Q4, as we ramp up production of NeoPhotonics' products within Lumentum's manufacturing footprint, we expect to shift buffer inventory, enabling these manufacturing costs to align with the rest of our production. In addition, as we continue to focus on cash generation, we expect our internal inventories to decline throughout the balance of the fiscal year. Turning to segment details. For the benefit of our investors, we have expanded our earnings press release to include tables of historical financial data that are reformatted into our new segment categories. First quarter Cloud & Networking segment revenue at $229.7 million decreased 19.8% sequentially and was down 36.2% year-on-year. Cloud & Networking segment non-GAAP reporting profit at 10.4% decreased sequentially and year-on-year.
Our first quarter Industrial Tech segment revenue at $87.9 million was up 4.3% sequentially and down 40.1% year-on-year. First quarter Industrial Tech non-GAAP reporting profit of 17.4% was up sequentially, but down year-on-year. Now let me move to our guidance for the second 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 second quarter of fiscal '24 to be in the range of $350 million to $380 million. Within this Q2 revenue forecast, we anticipate Industrial Tech to be down sequentially with Cloud & Networking to be up sequentially with the addition of a partial quarter of Cloud Light revenue. Based on this, we project second quarter non-GAAP operating margin to be in the range of 2% to 4%, and diluted net income per share to be in the range of $0.25 to $0.35.
Our non-GAAP EPS guidance for the second quarter is based on a non-GAAP annual effective tax rate of 14.5%. These projections also assume an approximate share count of 67.4 million shares. In terms of expectations beyond Q2, as Alan mentioned, we do expect a return to growth in Cloud & Networking shipments in calendar '24 compared to calendar '23 as customer inventory levels are reduced and our shipment rate is more in sync with end market demand. 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 would 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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