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16 May 2019

Lumentum’s growth in ROADM and fiber-laser capacity outweighs drop in 3D sensing laser revenue

For fiscal third-quarter 2019 (to end-March), optical and photonic optical component and subsystem maker Lumentum Holdings Inc of Milpitas, CA, USA has reported revenue of $432.9m, up 15.8% on $373.7m last quarter and 44.9% on $298.8m a year ago, boosted by a full quarter of revenue from the acquisition on 10 December of optical communications component and module maker Oclaro Inc of San Jose, CA, USA as well as continued strong growth in Telecom transport products and Commercial Lasers.

Optical Communications segment revenue was $377.9m (87.3% of total revenue), up 16.1% on $325.4m last quarter and 53.4% on $246.3m a year ago. Of this:

  • Telecom revenue was $243.4m, up 41% on $172.5m last quarter and almost doubling from $122.6m a year ago, driven by the acquired Oclaro telecom revenue and by strong double-digit quarter-on-quarter growth in both telecom transport sales and reconfigurable optical add/drop multiplexers (ROADMs, which grew about 80% year-on-year to $200m). “Chinese customers are an increasing portion of our ROADM revenue, which should be expected given the limited historical deployments of ROADMs in China. However, their contribution is still well below their share of the market,” says president & CEO Alan Lowe. “We continue to add ROADM capacities, but demand outstripped our ability to supply… this will continue throughout the fourth quarter.” With the full quarter contribution from Oclaro, telecom revenue mix is now about 40% transmission and 60% transport (more balanced than Lumentum’s historically heavy transport mix, and closer to the overall telecom market). This mix could further balance out over time as new higher-speed transmission products, including DCO (digital coherent optics) modules, ramp later this year. “The telecom market should be strong, based on the continued growth in global network bandwidth requirements and the needed infrastructure for 5G,” believes Lowe.
  • Datacom revenue was $57.3m (including chip revenue of $20m), up 72% on $33.4m last quarter and 58% on $36.3m a year ago.
  • Industrial & Consumer revenue (which includes 3D sensing) was $77.2m, down 35% on $119.5m last quarter (due to usual seasonality in the consumer electronics market) but also down 11.7% on $87.4m a year ago. “We continue to make excellent progress with Android customers and additional new design wins on both front and the world-facing applications,” says Lowe. “For the first time, we had a single Android customer drive more than $10m of revenue in the quarter… They are in the very, very early stages. So, I expect that 3D sensing for Android customers will grow more rapidly than it has in the past, as we look out over the next four quarters.”

Commercial Laser segment revenue was $55m (12.7% of total revenue), up 13.9% on $48.3m last quarter and 4.8% on $52.5m a year ago, driven by growth in fiber-laser sales. “We benefited from capacity expansion and further ramp volumes of our newest fiber-laser products,” says Lowe. “We again achieved record revenues from our kilowatt-class fiber lasers [up 23% sequentially and 135% year-on-year].”

“The third quarter continued a theme that started more than a year ago for our ROADM and fiber-laser product lines,” says Lowe. “For the fifth quarter in a row, we achieved double-digit sequential quarterly revenue growth and new record revenues for these product lines, driven by strong customer demand for our new and differentiated products.”

Growth in ROADM and transport revenue has outpaced the telecom transmission revenue growth for several reasons, says Lowe:

  • In new network deployments, the transport equipment is installed first and then individual transmission wavelengths are lit up over time.
  • With the new colorless, directionless, contentionless (CDC) network architectures, the number of ROADMs per network node and the number of ports per ROADM (and therefore the average selling price) are increasing. These more advanced ROADMs enable customers to achieve the needed network reconfigurability and capacity. Additionally, ROADMs are pushing into new geographies and applications: Chinese domestic deployments have started (significantly increasing the addressable market over time) and ROADMs are pushing further towards the edge of the network (replacing fixed optical add-drop multiplexers).

On a non-GAAP basis, gross margin was 39%, down from 40.1% last quarter (due to product mix) but up from 36.3% a year ago. Specifically, Optical Communications gross margin has fallen from 39.7% last quarter to 38%, due to lower Industrial & Consumer revenue (3D sensing lasers) in the product mix, albeit still up from 33.7% a year ago. In contrast, Commercial Lasers gross margin was 46%, down from 48.4% a year ago but up from 42.7% last quarter (due to higher volumes and product cost reductions). “We moved pump laser production to our new facility in Thailand, which is achieving lower cost than our prior manufacturing location,” says Lowe. Production in Shenzhen, China will stop by the end of fiscal Q4 and that capacity will be moved to Thailand to raise that facility’s capacity to the full run rate over the next couple of quarters (increasing Lumentum’s peak run rate for pump lasers by 20-30%).

Operating expenses were $91.8m (21.2% of revenue), up from $67.5m (18.1% of revenue) last quarter due to having a full quarter of the acquired Oclaro business as well as the seasonal impact of new calendar year resets of labor fringe rates.

Operating margin was 17.8%, down from 22% last quarter but up from 16.5% a year ago. Likewise, net income was $69.9m ($0.91 per diluted share), down from $78.3m ($1.15 per diluted share) last quarter but up from $50.6m ($0.78 per diluted share) a year ago.

During the quarter, cash and short-term investments rose from $684.1m to $697.5m.

“The third quarter was the first full quarter since completion of the acquisition of Oclaro. We made solid progress on integrating the companies and attaining synergies,” says Lowe.

“We announced to our telecom customers two strategic actions catalyzed by the Oclaro acquisition. First, we are rationalizing overlapping product lines, which we expect to have minimal impact to revenue. This rationalization should result in gross margin improvement once completed over the next few quarters. Second, we are discontinuing some legacy telecom product lines where growth and profitability forecasts are inconsistent with our long-term goals. Revenue from these products is about $15m per quarter at present, and will decline to zero once we satisfy our customers last-time-buying needs over the coming three to four quarters,” reckons Lowe.

Also, during the fiscal third quarter and in the fiscal fourth quarter to date, Lumentum executed a series of strategic actions related to a fundamental shift in its datacom strategy (announced in early March at the OFC 2019 trade show). “We are now focused on datacom chip sales and will stop selling datacom transceivers over time,” states Lowe. These actions include (on 18 April) completing the divestiture of several datacom transceiver product lines (manufactured by subsidiary Oclaro Japan Inc) to Shanghai-based Cambridge Industries Group (CIG) in exchange for a long-term strategic supply agreement for Lumentum’s photonic chips.

“We expect sales of our remaining datacom transceiver product lines to ramp down to zero as we bleed down inventory with only chip sales remaining in the future,” says Lowe. “This process could take up to 4-5 quarters.” Currently, datacom chip revenues are about $20m per quarter. “Since the announcement of the transaction and our clarification on our datacom strategy, we have seen increased interest from new customers for our datacom chips as we will no longer compete with them at the transceiver level,” he adds. “We are investing in new datacom chip development and expect sales of chips to customers serving the datacom and 5G markets to grow over time.”

For fiscal fourth-quarter 2019, Lumentum expects revenue to fall to $405-425m. This includes a rise in Telecoms (driven by continued market growth and capacity expansion). However, due mostly to the product line divestiture plus continuing declines in remaining datacom transceiver sales, Datacoms will drop by $20-25m to $32-37m (comprising just $12-17m from transceivers plus the $20m from chip sales). Industrial & Consumer (including 3D sensing) should be flat to slightly down, driven by the seasonal low for existing products not being fully offset by initial ramps for new product cycles (although this should ramp up again this summer and into the fall). Commercial Lasers revenue is expected to fall by 15-20% (to about $47m). “Our largest fiber-laser customer has communicated that their inventory of our products has reached targeted levels,” says Lowe. “We are making healthy investments in new laser product development, targeting higher-growth material processing applications. Over the long run, we believe we have good opportunities for growth driven by new product introductions,” he notes.

“Switching to telecom transmission; we continue to make progress on our high-speed coherent products, including indium phosphide photonic integrated circuit (PIC)-based components, 200G DCO modules and future 400Gb/s and 1.2Tb/s DCO products,” says Lowe. “We expect these products to ramp in volume and to be a growth driver later this year,” he adds.

“When we announced the [Oclaro] acquisition, we expected synergies would be in excess of $60m per year within 12-24 months from the close of the transaction,” notes chief financial officer Wajid Ali. “Through the third quarter, we have achieved more than $20m in annual expense synergies. We expect synergies to continue to grow in the fourth quarter [driving OpEx lower] and into fiscal year 2020.” Despite lower revenue from higher-than-average-margin 3D sensing and Commercial Lasers product lines, operating margin should rise to 18-20% in fiscal Q4 (Lumentum’s seasonally weakest quarter of the year). Diluted earnings per share should be steady at $0.85-1.00.

“This continued progress results in our fourth-quarter projected operating margins being sequentially higher on lower revenues after the divestiture, and positions us well for achieving our long-term strategic goals,” Lowe notes. “We’re going to continue to see that operating margin growth as we expect our 3D sensing business to really pick up in the second half of the calendar year.”

See related items:

Lumentum selling Oclaro Japan optical transceiver product lines to CIG

Lumentum’s revenue suppressed by faltering 3D sensing laser demand, but telecoms demand outstripping capacity expansion

Lumentum completes Oclaro acquisition

Lumentum reduces December-quarter revenue, operating margin and earnings guidance

Lumentum’s quarterly revenue rises 45.6% year-on-year to $354.1m, driven by telecom and fiber-laser demand

Lumentum’s annual revenue grows 25% to record $1.25bn, yielding record profit

Lumentum’s seasonal decline in 3D sensing revenue offset by growth in Telecom, Datacom and Commercial Laser products

Tags: Optical communications

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