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Lumentum Holdings (LITE) Q2 Earnings Miss, Revenues Beat

Zacks Equity Research

Lumentum Holdings Inc. LITE reported second-quarter fiscal 2019 earnings of $1.15 per share, which missed the Zacks Consensus Estimate by 3 cents. The figure also decreased 31% on a year-over-year basis.

Net sales of $373.7 million beat the Zacks Consensus Estimate of $356 million. However, the figure decreased 7.6% on a year-over-year basis. Notably, Lumentum Holdings’ acquisition of Oclaro contributed $29.6 million to total revenues.

Lumentum Holdings Inc. Price, Consensus and EPS Surprise

Lumentum Holdings Inc. Price, Consensus and EPS Surprise | Lumentum Holdings Inc. Quote

Quarter Details

Optical Communications (87.1% of total revenues) revenues declined 9.6% on a year-over-year basis to $325.4 million.  However, revenues were up 5% sequentially.

Telecom revenue increased 21% sequentially to $172.5 million due to growth in reconfigurable optical add-drop multiplexer (ROADM) sales and contribution from Oclaro's telecom product lines. ROADM revenues surged 110% year over year and 29% sequentially. Lumentum Holdings stated that demand for telecom products is solid from a number of customers and geographical areas.

However, datacom revenues were down 2% sequentially to $33.4 million. Revenues were impacted by selective sale of transceivers by the company. However, with the acquisition of Oclaro, Lumentum Holdings can sell chips required in the datacom and 5G markets. This may boost revenues going forward.

Industrial and consumer revenues declined 10% sequentially to $119.5 due to soft demand for 3D sensing lasers. Notably, Lumentum received a request from Apple AAPL to reduce shipment of laser diodes for 3D sensing due to sluggish iPhone demand.

However, revenues from Android customers came in line with management expectations and Lumentum Holdings expects to win new designs from these customers.

Lasers (12.9% of total revenues) revenues increased 8.5% on a year-over-year basis to $48.3 million due to strong demand for fiber laser and capacity expansion.

Lumentum Holdings’ investments in new and different products aided growth in the laser segment. Notably, fiber lasers (kilowatt class) revenues surged 133% year over and 12% sequentially

Operating Details

Non-GAAP gross profit decreased 17.7% to $149.7 million. Gross margin contracted 480 basis points (bps) from the year-ago quarter to 40.1%.

Optical Communications segment gross margin contracted 60 bps to 39.7% due to lower industrial and consumer revenues. However, lasers' gross margin expanded 240 bps to 42.7% owing to reduction in product costs and higher volumes.

Non-GAAP research and development (R&D) expense increased 1% on a year-over-year basis to $39.3 million due to investments in new product development and addition of R&D expense from Oclaro acquisition. Selling, general and administrative expenses (SG&A) decreased 0.4% year over year to $28.2 million.

Lumentum Holdings’ non-GAAP operating profit came in at $82.2 million, down 28.3% from the prior-year quarter. Operating margin contracted 630 bps from the year-ago quarter to 22%.

Cash Details

As of Dec 29, 2018, cash & cash equivalents were $371.3 million compared with $459.4 million in first-quarter fiscal 2019 due to Oclaro acquisition.

Recent Updates

Lumentum Holdings completed the acquisition of Oclaro, a developer of “optical components, modules and subsystems for optical transport, metro and enterprise networks, and data centers” on Dec 10.

The acquisition is expected to broaden Lumentum Holdings’ revenue mix and strengthen its product portfolio. The company is expected to see more than $60 million in synergies per year within 12 to 24 months after the close of the transaction.

Lumentum Holdings noted that Oclaro will help it become a leader in high-speed transmission, complementing its existing leadership position in transport. Additionally, Oclaro will help Lumentum Holdings drive its chip sales across a range of photonic chips, which are used in wireless, datacom and access market.

Moreover, the company is expected to have competitive edge in indium phosphide lasers and photonic integrated circuits. Further, Lumentum Holdings expects to use indium phosphide lasers to witness adoption in consumer and automotive market.

Q3 Guidance

Lumentum expects net revenues in the range of $420-$440 million. Non-GAAP operating margin is anticipated in the range of 16-18%. Non-GAAP EPS is expected to be 76-94 cents.

Strength in telecom is expected to continue into third-quarter fiscal 2019 due to market growth and acquisition. Datacom revenues are expected to grow to around $50-55 million owing to acquisition strength. However, industrial and consumer revenues are expected to decline due to customer seasonality.

Lasers revenues are expected to increase due to new product growth.

Zacks Rank and Stocks to Consider

Currently, Lumentum Holdings has a Zacks Rank #2 (Buy).

Some other top-ranked stocks in the broader technology sector are GTT Communications GTT and Cornerstone OnDemand CSOD. Both the stocks carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings growth for GTT Communications and Cornerstone OnDemand is projected to be 35% and 8%, respectively.

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