11 May 2022
Lumentum’s quarterly revenue falls 5.7% year-on-year to $395.4m
For its fiscal third-quarter 2022 (ended 2 April), 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 $395.4m, down 11.5% on $446.7m last quarter and 5.7% on $419.5m a year ago.
“Strong demand and solid execution by our team around the world resulted in all third-quarter financial metrics being at the high end of our guidance range,” says president & CEO Alan Lowe. This was despite the industry-wide shortages of third-party-supplied semiconductors constraining production so that the gap between Lumentum’s supply and demand for its products suppressed revenue by more than $65m (up from $50m the prior quarter).
Commercial Lasers segment revenue was a near-record $51.2m (12.9% of total revenue), up 3.9% on $49.3m last quarter and 62% on $31.6m a year ago, driven primarily by fiber lasers serving automotive and industrial applications, as well as ultrafast lasers for manufacturing semiconductors and consumer electronics.
In contrast, Optical Communications segment revenue has fallen further, to $344.2m (87.1% of total revenue), down 13.4% on $397.4m last quarter and 11.3% on $387.9m a year ago. Specifically, Telecom & Datacom revenue was $243.5m, down 9% on $267.1m last quarter and $255.8m a year ago, due to IC supply shortages for Telecoms despite very strong demand. However, pump laser revenue was near record highs. Also, despite capacity constraints in Datacoms, externally modulated lasers (EMLs) rose to 70-75% of Datacom revenue (aided by increased manufacturing capacity now coming online). Industrial & Consumer revenue (including 3D sensing and lasers sold into industrial applications) was $100.7m, down on $130.3m last quarter (due to 3D sensing seasonality) and $132.1m a year ago, as about five years of Lumentum having an outsized market share in 3D sensing is now undergoing some share normalization.
Driven primarily by lower revenue and higher supplier costs, gross margin (on a non-GAAP basis) was 49.5%, down from 51% last quarter and 49.9% a year ago.
In particular, Optical Communications segment gross margin was 49%, down on 50.8% last quarter and 50.1% a year ago, due primarily to lower revenue as well as product mix. Commercial Laser segment gross margin was 52.9%, down slightly on 53.1% last quarter but up from 47.2% a year ago due to higher volumes.
Operating expenses were $90.7m 4m (22.9% of revenue), up from $86.4m last quarter but cut from $92.1m 4m a year ago.
Operating income was $104.9m (operating margin of 26.5% of revenue), down from $141.6m (31.7% margin) last quarter and $117.1m (27.9% margin) a year ago. However, operating margin was above the expected 24-26%.
Net income was $88.9m ($1.19 per diluted share), down from $120.2m ($1.60 per diluted share) last quarter and $99.7m ($1.26 per diluted share) a year ago, but at the top of the guidance range of $1.01-1.19 per diluted share.
Cash generated from operations was $76.6m (down from $206.5m last quarter). Nevertheless, cash, cash equivalents and short-term investments rose by $541.7m during the quarter, from $2022.4m to $2564.1m. In March, Lumentum issued $861m worth of 0.50% convertible notes due in 2028, yielding net proceeds of $854.1m (after deducting $6.9m in issuance costs). Of this, $200m was used to repurchase 2 million shares of the firm’s common stock in privately negotiated transactions, and $124m was used to repurchase a further 1.3 million shares. (The firm has hence repurchased 7.8 million shares over the last 12 months, including 5.8 million shares purchased for $487m under the board-authorized $1bn share buyback program, leaving $513.5m remaining under the program.) In fiscal Q3, Lumentum also funded a $30m loan to support the revenue growth of NeoPhotonics Corp, whose acquisition remains on track for calendar second-half 2022. “We are working diligently with antitrust authorities in China, with their approval being the final key closing condition for the transaction,” says Lowe.
For fiscal Q4/2022, Lumentum expects revenue to grow both sequentially and year-on-year to $405-430m (driven primarily by Telecom product shipments), with operating margin of 26.5-28%, and diluted earnings per share $1.25-1.40 (all records for a fourth quarter).
“Though component supply is increasing, demand is growing even faster,” notes Lowe. Lumentum expects more than a $100m revenue impact as a result of the gap between demand and supply in Q4, up significantly on the $65m gap in Q3. “While we expect these [IC] supply shortages to continue to improve with the diligent work of our team and our suppliers, given the accelerating demand environment, we will likely see customer demand outpacing third-party material supply into calendar 2023,” he adds. “We believe this demand is durable due to customers being at the initial stages of their network upgrades,” adds chief financial officer Wajid Ali.
Industrial & Consumer revenue is expected to be down sequentially, with typical consumer product seasonality. However, Telecom & Datacom revenue is expected to be up quarter-on-quarter by $50m (up 20%, with EMLs growing faster than 20% and telecom growing slower than 20%). This growth is due to the improvements in IC component supply, although this will still be significantly below the level of customer demand. “While we’re able to grow that business by 20% quarter-on-quarter, the demand is growing even faster than that,” says Ali. “We continue to work diligently with our suppliers and on alternative sources of supply to alleviate shortages,” says Lowe. Also, additional EML capacity is fully online in fiscal Q4 (which will impact calendar 2023).
Commercial Lasers revenue is expected to grow again quarter-on-quarter to a new record, driven by new products and the overall market expansion.
“I am highly optimistic about our outlook and believe market inflections beneficial to Lumentum in our addressable markets will drive double-digit revenue growth in fiscal 2023 and beyond,” Lowe adds.