4 February 2022
Lumentum’s revenue falls 6.7% year-on-year to $447m
For its fiscal second-quarter 2022 (ended 1 January), 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 $446.7m, down by 6.7% $478.8m a year ago and by 0.4% on $448.4m last quarter.
Demand was strong across all major product lines, but Lumentum was supply constrained across many of them. “Accelerating telecom and datacom market demand is coming at a time when the supply environment is very dynamic and challenging,” says president & CEO Alan Lowe. “Supply had been improving heading into and throughout the bulk of the second quarter. However, late in the quarter, the latest pandemic surge once again negatively impacted supply. This contributed to a $50m gap between the supply of material and customer demand,” he adds.
Despite this, results were still above the midpoint of guidance on all metrics (e.g. $435-455m for revenue).
Commercial Lasers segment revenue was $49.3m (11% of total revenue), up 16.3% on $42.4m last quarter and 66% on $29.7m a year ago. Strength in lasers for manufacturing of semiconductor and consumer electronics as well as life science applications complemented the strength in fiber lasers for macro material processing. “Demand for our commercial lasers has never been stronger as industrial factories and semiconductor fabs expand and upgrade their capability,” says Lowe.
Optical Communications segment revenue was $397.4m (89% of total revenue), down 2.1% on $406m last quarter and 11.5% on $449.1m a year ago.
The sequential drop was due to the expected 3D sensing seasonality in Industrial & Consumer business (down from $190m to $130.3m).
This was partially offset by Telecom & Datacom revenue, which was still down on $286.2m a year ago but rebounded sharply from $216m last quarter to $267.1m due to strong growth in both Telecoms (with exceptional strength in nearly every product line) and Datacoms (with record revenue from externally modulated lasers (EMLs) – up 45% year-on-year by – serving high-speed cloud data-center applications).
“Revenue from high-speed 400G-and-above coherent components and modules nearly doubled quarter on quarter. As 5G, 4K streaming, and network access requirements increase, the speed at the edge of the network must also increase and the core of the network must upgrade to higher speeds as well,” says Lowe. Transceivers serving edge applications were up more than 60% quarter on quarter and more than 130% year on year. Pump laser sales grew more than 30% sequentially to a new all-time high.
“Next-generation customer systems are just hitting an inflection point as new multi-year network deployments are just starting to ramp,” says Lowe. “Our cloud and networking customers are entering a multi-year hardware upgrade cycle and rely on our leading-edge photonics as their fundamental enabling technology,” he adds. “We are broadening the applications of our 3D sensing lasers beyond mobile handsets into automotive driver-assistance designs, and AR/VR [augmented reality/virtual reality] applications.”
On a non-GAAP basis, gross margin was 51%, down from 55% last quarter and 53.4% a year ago. In particular, Optical Communications segment gross margin was 50.8%, down on 55.6% last quarter and 53.8% a year ago, due primarily to the change in product mix. Commercial Laser segment gross margin has risen further, from 47.5% a year ago and 49.1% last quarter to 53.1%, due to higher volumes.
Operating expenses were $86.4m (19.3% of revenue), cut slightly from $87.8m (19.6% of revenue) last quarter.
Operating income has fallen further, from $169.9m (operating margin of 35.5% of revenue) a year ago and $158.9m (35.4% margin) last quarter to $141.6m (31.7% margin, although this is towards the top end of the 30-32% guidance range).
Likewise, net income has fallen further, from $145.4m ($1.85 per diluted share) a year ago and $135.1m ($1.79 per diluted share) last quarter to $120.2m ($1.60 per diluted share, towards the top end of the $1.47-1.64 guidance range).
Cash generated from operations was $206.5m. During the quarter, Lumentum used $29.9m to repurchase 330,000 shares of its common stock. (Since the two-year, $700m share buyback program was approved by the board of directors in May 2021, the firm has repurchased 4.5 million shares for a total $362.6m.)
Overall, total cash, cash equivalents and short-term investments rose by $137.8m during the quarter, from $1884.6m to $2022.4m.
“Industry-wide supply shortages [of semiconductors and other materials] have worsened with the recent surge in COVID-19 [in January],” says Lowe. “We expect shipments of products that rely on third-party supplied semiconductors will be the primary driver of supply constraints. The demand from our customers has also recently accelerated… This will increase the gap between supply and demand, resulting in more than a $65m impact to our projected revenue in Q3. We expect telecom and datacom revenue to be modestly down quarter on quarter”.
Industrial & Consumer revenue will also be down sequentially, due primarily to normal consumer product seasonality.
Hence, for fiscal third-quarter 2022 (to end-March), Lumentum’s revenue should fall to $375-405m. This is despite Commercial Lasers growing again sequentially (driven by growth in new products and the overall market). Operating margin is expected to fall to 24-26%, and diluted earnings per share should drop to $1.01-1.19.
“Shortages come at a time when customer demand is accelerating for our differentiated communications products, which are essential to multi-year expansions in next-generation optical network capacity that are just beginning to be deployed,” says Lowe. “Book-to-bill for telecom products exceeded one for the quarter, and we have more than two quarters of datacom backlog already booked,” he adds.
“We continue to work diligently with our suppliers and on alternative sources of supply to alleviate shortages, and expect [fiscal] fourth-quarter revenue to be up from that of the third quarter and supply shortages to improve by the second half of this calendar year,” says Lowe. “Looking beyond these near-term supply challenges, I am highly optimistic about our outlook,” he adds.
“Elevated pump [laser] shipments frequently have been a leading indicator of future telecom demand. Another leading indicator of telecom demand is optical fiber deployments for networks. Significant investments in fiber infrastructure are underway as operators expand capacity, capability, and access.”
“We expect to bring additional EML manufacturing capacity online in March, which will help us ramp our datacom shipments through this calendar year to fulfill strong customer demand of our differentiated products,” says Lowe. EML revenue should rise by 10% in the March quarter, then grow more significantly in the June quarter.
“These points, along with our design wins and long-term share and supply agreements with market-leading customers, gives us confidence that we have a strong long-term outlook in Telecom & Datacom,” says Lowe.
“An important element of Lumentum’s 3D sensing and LiDAR product strategy is to deploy our platforms into new markets and applications. We recently announced two new automotive customer wins,” notes Lowe. “The first was a partnership with Hesai, who is making all solid-state LiDAR modules for ADAS applications, leveraging our differentiated high-power multi-junction VCSEL arrays. Also, we have begun mass production of a VCSEL solution with Stanley Electric used for in-cabin driver and occupant monitoring,” he adds. “These announcements complement other design wins and opportunities in our funnel. A broad range of customers are increasingly relying on our enabling technology for their critical LiDAR and in-cabin monitoring systems. We have strong customer traction in augmented- and virtual-reality opportunities that we expect will come to market in the next few years. Most AR/VR applications will employ multiple lasers. The use-cases for these lasers include eye tracking, hand tracking or gesture recognition, and world-facing imaging applications. Customers in this space value our differentiated products as well as our unparalleled experience, quality and reliability track record, and scale in the industry as targeting high-volume and high-performance applications.”
Also, Lumentum expects Commercial Lasers quarterly revenue to surpass its previous record as the business grows over the coming year.
“Market inflections beneficial to us in all of our addressable markets will drive double-digit revenue growth in fiscal 2023 and beyond, not including the pending acquisition of NeoPhotonics [announced in November]” believes Lowe.
“The combination gives us a more complete product and technology portfolio. This enables our customers to address their next-generation cloud and networking speeds and scalability requirements,” says Lowe regarding NeoPhotonics. “We have made excellent progress with our integration planning and are on track with the previously announced closed time line,” he adds. “Two key closing conditions are now satisfied. On 21 January, we announced that we have received US antitrust clearance. Just two days ago, NeoPhotonics shareholders approved the transaction in a special meeting of their stockholders. We are working diligently with anti-trust authorities in China and our expectations of closing the transaction in the second half of calendar 2022 remain unchanged.”