15 February 2023

For its fiscal second-quarter 2023 (ended 31 December 2022), Lumentum Holdings Inc of San Jose, CA, USA (which designs and makes optical and photonic products for optical networks and lasers for industrial and consumer markets) has reported revenue of $506m, roughly level with $506.8m last quarter but above the midpoint of the guidance range, and up 13.3% on $446.7m a year ago.

Specifically, sequentially higher revenue from Telecom and Commercial Lasers customers offset the reduction from certain cloud customers due to inventory digestion and from a major consumer customer due to reduced smartphone unit production.

The Commercial Lasers segment contributed a record $57.2m (11.3% of total revenue), up 7.1% on $53.4m last quarter and up 16% on $49.3m a year ago, aided by gaining market share.

The Optical Communications segment contributed $448.8m (88.7 % of total revenue), up 12.9% on $397.4m a year ago, but down 1% on $453.4m last quarter. The drop was driven primarily by a decline in Industrial & Consumer – specifically, consumer vertical-cavity surface-emitting lasers (VCSELs) for 3D sensing, due to expected market share normalization relative to Lumentum’s main competitor (although this has the advantage of reducing Lumentum’s exposure to such a cyclical market). This was mostly offset by 44% year-on-year growth in Telecom & Datacom.

“In addition, due to the escalated data traffic at the edge of the network, customers are deploying our products originally developed for core network applications at the edge or access part of the network. Revenue from edge networking products was up 40% year-on-year in the second quarter, and is now a major component of our Telecom business,” notes president & CEO Alan Lowe.

Growth from Telecom customers was partially offset by the inventory digestion at certain cloud customers. “Revenue growth continues to be limited by supply shortages of ICs from third parties. We have made significant progress over the last year on closing supply gaps, which has enabled our growth to date. At the end of the second quarter, remaining IC supply shortages resulted in approximately $60m of unsatisfied customer demand. This is a modest improvement from the $80m gap articulated in our last call,” says Lowe.

Revenue was especially strong in products which play into the industry’s transition to 400G-and-above speeds in next-generation networks, including narrow-linewidth tunable lasers, tunable transceivers for network edge applications, high-speed coherent components and modules, as well as Lumentum’s latest ROADMs.
“We achieved a new quarterly revenue record in narrow-linewidth tunable lasers, which are key enablers of all coherent transmission solutions, including 400G ZR and ZR+ modules, and our customers’ latest 600G and 800G transmission systems,” notes Lowe.

“We also set a quarterly revenue record with our tunable transceivers for network edge applications where a growing set of cable, MSO, and wireless network operator customers use our modules to expand data bandwidth in metro access, fiber deep, and wireless 5G front-haul applications,” he adds.

Coherent components serving 400G-and-above applications also achieved record revenue, with about half of that revenue coming from the highest-data-rate applications at 600G and 800G.

Due to continued strong demand and improved access to critical ICs, revenue from ROADMs grew 45% year-on-year, including 78% growth for MxN ROADMs and over 70% for high-port-count ROADMs, representing “broader adoption of these next-generation ROADMs with market-leading customers”.

As anticipated, inventory digestion at certain cloud customers and their module manufacturers resulted in a sequential decline in Datacom’s laser chip revenue.

“Nearly 90% of total revenue is now derived from [telecom] infrastructure markets, which are driven by durable, long-term secular trends in which we serve with highly differentiated products and technologies,” says Lowe. “Our technology leadership position is stronger than ever due to successful investments in developing new products and technologies, as well as the two acquisitions we closed this past August [NeoPhotonics Corp, and the IPG Photonics’ telecom transmission product lines],” he adds.

On a non-GAAP basis, gross margin has fallen further, from 51% a year ago and 48.2% last quarter to 44.9%, driven primarily by product mix, including lower-margin revenue from the acquisition of NeoPhotonics. Gross margin for the Optical Communication segment was hence 43.9%, down on 50.8% a year ago. Gross margin for the Commercial Lasers segment of 52.4% was roughly flat sequentially but down from 53.1% a year ago.

Operating expenses have risen further, from $86.4m (19.3% of revenue) a year ago and $106.7m (21.1% of revenue) last quarter to $110.3m (21.8% of revenue), due to R&D expense rising from $47.8m a year ago and $60.8m last quarter to $64.4m. Selling, general & administrative (SG&A) expense was $45.9m, up from $38.6m a year ago but level with last quarter. OpEx was $5-7m better than expected, since synergy targets for the first year post-acquisitions have been pulled into the first six months, offsetting some of the impact of NeoPhotonics on margins.

“We are now six months into integrating these acquisitions and tracking ahead of plan in realizing overall cost synergies, which contributed to our profitability and earnings per share results being above our guidance ranges,” says Lowe.

Operating income has fallen further, from $141.6m (operating margin of 31.7%) a year ago and $137.4m (27.1% margin) last quarter to $116.7m (23.1% margin), due to product mix including from the recent acquisitions, but above the guidance of 20–22%.

Likewise, net income has fallen further, from $120.2m ($1.60 per diluted share) a year ago and $119.2m ($1.69 per diluted share) last quarter to $104.1m ($1.52 per diluted share, but above the guidance range of $1.20–1.45, driven partly by the accelerated attainment of acquisition synergies, a cost savings action taken late in Q2, and higher interest income on cash and investments).

During the quarter, Lumentum recorded one-time restructuring and related charges of $13.9m (due mainly to company-wide integration efforts as it accelerated the attainment of acquisition synergies after the merger with NeoPhotonics, as well as some cost-reduction initiatives, and severance and employee-related benefits related to NeoPhotonics) plus a charge of $7.8m related to the settlement of non-ordinary course litigation matters. Lumentum also incurred $11.7m in extraordinary charges to acquire IC components from brokers to satisfy customer demand.

Overall, during the quarter, total cash, cash equivalents and short-term investments rose by $55.5m, from $1624.9m to $1680.4m.

“These results reflect structural improvement in the long-term operating costs of the company, as we continue to execute on our synergy plan,” says Lowe.

When Lumentum acquired NeoPhotonics, it highlighted $50m in synergy opportunities with $20m in annual operating expense opportunities within the first fiscal year and then another $30m cost of sales synergies as it exits the second fiscal year. “We have already exceeded our $20m cost savings target in annual operating expense synergies over the last six months of integration activity, we have executed well on our operating expense reduction plans, and are confident we will exceed our initial synergy targets,” says chief financial officer Wajid Ali. “In December, we took additional actions that will structurally improve the long-term operating costs of the company. The benefits of these actions are reflected in our diluted net income per share guidance for Q3.”

For fiscal third-quarter 2023 (to end-March), Lumentum expects revenue to fall to $430–460m. This is due to about $60m of impact primarily in Telecoms from continued supply constraints due to shortages of third-party IC components, in addition to reduced cloud and consumer end-market revenue (with Datacom and 3D sensing lower than prior projections), and a few million dollar sequential decline in Commercial Lasers revenue.

“We expected the hyperscale customers to reduce their inventories of our laser chips during the second quarter. Now, we expect that this will continue throughout most of calendar 2023,” says Lowe.

Fiscal Q3 operating margin should fall further to 17–19%. Diluted earnings per share are expected to fall to $1.00–1.15.

Given the assumption of growth in Telecom and Datacom business offset by seasonally lower consumer revenue, for fiscal Q4 Lumentum expects that Q4 revenue will be roughly flat on Q3, still constrained by IC supply.

Full-year fiscal 2023 revenue will therefore be at the low end of the previously announced outlook of $1.9–2.05bn. However, due to the substantial structural improvements in operating expenses and tight cost controls, Lumentum now expects that full-year earnings per share will be $5.15–5.45, above the midpoint of the prior guidance of $4.65–5.65.

See related items:

Lumentum’s high-speed DMLs to be used in POET’s 400G FR4 transmit optical engines

Lumentum’s quarterly revenue falls 5.7% year-on-year to $395.4m

Lumentum’s revenue falls 6.7% year-on-year to $447m

Tags: Optical communications

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Source: https://www.semiconductor-today.com/news_items/2023/feb/lumentum2-150223.shtml