15 November 2021
Lumentum’s quarterly revenue hit more than expected by semiconductor shortage
For its fiscal first-quarter 2022 (ended 2 October 2021), Lumentum Holdings Inc of San Jose, CA, USA (which designs and makes photonics products for optical networks and lasers for industrial and consumer markets) has reported revenue of $448.4m (exceeding the $430-445m guidance range), up 14.4% on $392.1m last quarter but down slightly (by 0.9%) on $452.4m a year ago.
“Driven by strong demand, first-quarter financial results were above our guidance ranges across all metrics," says president & CEO Alan Lowe. “Our Industrial & Consumer product lines and our Commercial Lasers segment revenues were ahead of expectations, which more than offset the [greater than expected] impact of semiconductor shortages in our Telecom and Datacom product lines,” he adds.
Optical Communications segment revenue was $406m (90.5% of total revenue), down 5.3% on $428.5m (94.7% of total revenue) a year ago. However, this is up 14.3% on $355.2m last quarter, since record first-quarter Industrial & Consumer revenue was up strongly, more than doubling from $98.8m last quarter to $190m – due to seasonality in the consumer market, such as vertical-cavity surface-emitting lasers (VCSELs) for 3D sensing applications – but also up 14% from $167.2m a year ago, aided by continued design-in activities and ramps in automotive light detection & ranging (LiDAR), driver monitoring and other new applications. In contrast, Telecom & Datacom revenue fell further, from $261.3m a year ago and $256.4m last quarter to $216m. However, strong cloud data-center end-market demand drove record externally modulated laser (EML) datacom chip revenue. Also, terrestrial pump laser revenue grew again to new multi-year highs. “Elevated pump shipments frequently have been a leading indicator of future telecom demand,” remarks Lowe.
Commercial Lasers segment revenue was $42.4m (9.5% of total revenue), up 14.9% on $36.9m last quarter and 77.4% on $23.9m (just 5.3% of total revenue) a year ago due to the ongoing (and faster-than-expected) recovery from the impact of COVID-19 on fiber laser demand.
On a non-GAAP basis, gross margin was 55%, up from 47.7% last quarter and 52% a year ago, due to a better mix of products and improvements in Optical Communications and Lasers segment gross margins. “Demand mix is shifting to products aligned with next-generation customer solutions, many of which are just ramping,” says the firm.
Optical Communications segment gross margin was 55.6%, up on 47.7% last quarter and 52.5% a year ago, due primarily to a richer product mix.
Commercial Lasers gross margin was 49.1%, up on 48.5% last quarter and 43.5% a year ago due to higher volumes.
Operating expenses were $87.8m (19.6% of revenue), up from $82.7m (18.3% of revenue) a year ago but cut from $90.6m (23.1% of revenue) last quarter.
Operating income was $158.9m (operating margin of 35.4%, above the expected 30.5-32.5%), up from $96.6m (24.6% margin) last quarter and a then-record $152.5m (33.7% margin) a year ago.
Net income was $135.1m ($1.79 per diluted share, exceeding the $1.47-1.61 guidance), up from $81.9m ($1.06 per diluted share) last quarter and the then-record $131.2m ($1.68 per diluted share) a year ago.
During fiscal Q1, Lumentum purchased 1.1 million of its shares for $91.7m (so, to date, the firm has repurchased a total of 4.2 million of shares for $333m under its $700m share buyback program).
Total cash, cash equivalents and short-term investments hence fell by $61.4m during the quarter, from $1946m to $1884.6m.
For fiscal second-quarter 2022 (to end-December 2021), Lumentum expects revenue of $435-455m. This includes Telecom and Datacom revenue up quarter-on-quarter due to the increasing semiconductor supply. However, demand is increasing even faster than supply. Due to semiconductor and material shortages, more than $40m of demand is expected to go unsatisfied. Industrial & Consumer revenue will be down sequentially due to seasonality. “We expect this year’s demand trend to be more like that of fiscal 2020 than that of fiscal 2021, since COVID-19 delayed key customer programs last year, says Lowe. “Commercial Lasers is recovering ahead of our original expectations, with strong kilowatt fiber laser sales.” Lasers revenue should be up again sequentially, with strength across all major product lines.
“Demand continues to be strong, particularly in Telecom and Datacom as well as Commercial Lasers,” summarizes Lowe. “While we are increasing our supply of semiconductors, we expect the gap between demand and supply for our products in the second quarter will be larger than it was in the first quarter, and we have incorporated this in our guidance,” he notes. Operating margin is expected to fall to 30-32%. Diluted earnings per share should fall to $1.47-1.64.
“Despite near-term supply challenges, we are seeing a favorable demand environment that we expect will continue throughout fiscal 2022,” says Lowe. “Our markets are driven by powerful long-term trends, and customers have communicated that they are seeing accelerating end-market demand for their next-generation solutions,” he adds. “We have been successful in developing differentiated new products and designing them into market-leading customers for their next-generation solutions, many of which are just starting to ramp.”
On 4 November, Lumentum also announced that it had entered into a definitive agreement to acquire San Jose-based NeoPhotonics Corp – a vertically integrated designer and manufacturer of silicon photonics and hybrid photonic integrated circuit (PIC)-based lasers, modules and subsystems for high-speed communications – for $16 per share in cash (a total equity value of about $918m), a premium of about 39% to NeoPhotonics’ closing stock price on 3 November. Lumentum intends to finance the transaction through cash from the combined company’s balance sheet. As part of the transaction, Lumentum will provide up to $50m in term loans to NeoPhotonics to fund anticipated growth, which may require increased working capital and manufacturing capacity. The deal has been unanimously approved by the boards of directors of both companies.
The transaction is expected to be immediately accretive to non-GAAP earnings per share upon closing. Given the complementary nature of the businesses, Lumentum expects to generate more than $50m of annual run-rate synergies within 24 months. Cost of goods sold (COGS) synergies are expected to be more than 60% of this total, driven by manufacturing infrastructure and supply chain efficiencies. Operating expense synergies will be driven by organizational efficiencies related to aligning and integrating business processes post-closing and serving a similar customer base.
The transaction to currently expect to close in calendar second-half 2022 (subject to the approval by NeoPhotonics’ stockholders, regulatory approvals, and other customary closing conditions).