12 February 2024
Lumentum’s quarterly revenue falls 27.5% to $366.8m
For its fiscal second-quarter 2024 (to 30 December 2023), Lumentum Holdings Inc of San Jose, CA, USA has reported revenue of $366.8m, down 27.5% on $506m a year ago but up 15.5% on $317.6m last quarter, and above the midpoint of the $350–380m guidance. However, $59.5m of this came from a partial quarter (about eight weeks) of revenue after the acquisition on 7 November of Cloud Light Technology Ltd of Hong Kong (which designs and makes optical transceiver modules for automotive sensors and data-center interconnect applications), mostly from very strong shipments of 800G transceivers for artificial intelligence (AI) platforms.
Lumentum’s three existing greater-than-10% customers (two in the Networking segment and one in the Industrial Tech segment) have been joined by a fourth, primarily due to the Cloud Light addition to revenue from that customer.
Driven by strong cloud data-center demand and boosted by the contribution from the Cloud Light acquisition, Lumentum’s Cloud & Networking segment hence contributed $286.7m (78.2% of total revenue), up 24.8% on $229.7m (72.3% of total revenue) last quarter. However, this is still down 25.1% on $382.9m a year ago, due to broad-based softness across most of the firm’s telecom networking product lines as a result of the continued inventory correction at network equipment customers.
Lumentum’s Industrial Tech segment contributed $80.1m (21.8% of total revenue), down 8.9% on $87.9m (27.7% of total revenue) last quarter (driven by seasonality in 3D sensing business and inventory consumption at a large industrial laser customer) and down 34.9% on $123.1m a year ago (due mainly to increased competition for market share on a certain 3D sensing socket and overall macroeconomic softness).
On a non-GAAP basis, gross margin has fallen further, from 44.9% a year ago and 34.9% last quarter to 32.6%, driven by factory under-utilization and product mix.
Due partly to the Cloud Light acquisition, operating expenses have risen by $6.6m from last quarter to $106.7m (29.1% of revenue). Despite this, Opex is still down by $3.6m from $110.3m a year ago due to tight expense controls and continued synergy attainment. Specifically, while research & development (R&D) spending of $68.3m is up from $61m last quarter, sales, general & administrative (SG&A) expense has been cut further, from $45.9m a year ago to $38.4m.
Operating income was $13m (operating margin of 3.5%), down from $116.7m (23.1% margin) a year ago but up from $10.6m (3.3% margin) last quarter, and above the mid-point of the 2–4% guidance range.
Net income has fallen further, from $104.1m ($1.52 per diluted share) a year ago and $23.4m ($0.35 per diluted share) last quarter to $21.7m ($0.32 per diluted share, although this is also above the mid-point of the $0.25–0.35 guidance range).
During the quarter, Lumentum completed the acquisition of Cloud Light for a total purchase price of $728.5m, of which $705m of cash was paid on the closing date of 7 November, plus about $8m of normal course expenses incurred in association with the transaction.
Total cash, cash equivalents and short-term investments hence fell by $720.3m during the quarter, from $1944.3m to $1224m.
“Late last year, we were notified by certain critical IC suppliers that service the industry broadly that their products do not comply with the latest [US] export regulations. Consequently, in December, we stopped the majority of our product shipments to the largest networking equipment manufacturer in China,” notes executive VP & chief financial officer Wajid Ali. “Our assumption is that these export regulations will continue indefinitely, and result in a $40–50m reduction in calendar year 2024 revenue from our prior expectations. Longer-term, we believe geopolitical factors could pose a benefit to our revenue opportunity given our larger product footprint within other customers who are expected to be end-market share-gainers over time.”
For fiscal third-quarter 2024 (to end-March), Lumentum expects revenue to be roughly flat, at $350–380m.
Cloud & Networking segment revenue should rise, despite an impact of more than $10m from the export regulations, due to strong cloud demand and an even stronger, full-quarter contribution from Cloud Light.
Industrial Tech segment revenue is expected to be down by nearly $40m sequentially at the midpoint due to 3D-sensing seasonality and share dynamics, as well as inventory digestion by one of Lumentum’s largest industrial laser customers. “We expect revenue of 3D sensing for consumer applications to contribute about 5% or less of company revenue in Q3 and Q4 of fiscal 2024,” says president & CEO Alan Lowe.
Operating margin should be 2–5%, and diluted earnings per share is expected to be $0.20–0.35.
“While cloud data centers are forecasting double-digit CapEx growth in calendar 2024, we are navigating challenging market conditions in other parts of our business,” notes Lowe. “Based on sluggish carrier CapEx spending and our latest customer discussions, we now expect customer inventory digestion to extend through the balance of fiscal 2024. Nevertheless, we are highly confident in our market position and the ultimate recovery and growth in this business,” says Lowe.
Also: “Given a mid-calendar-year product transition planned by our largest data-center customer, we expect revenue from data-center transceivers to temporarily dip in the June and September quarters, and then grow significantly through the end of the year and into calendar year 2025, as this transition completes and other new customer programs start to ramp,” notes Lowe.
Manufacturing efficiency, inventory management, and cost control
“We are focused on lowering our fixed-cost base so that, as the revenue recovers, operating margin dollars will expand faster than revenue,” says Ali. “To this end, we have made significant progress on manufacturing synergizes by hitting key milestones on closing two NeoPhotonics factories in China this past December [following Lumentum’s acquisition of NeoPhotonics Corp in August 2022]. The benefit will accrue to our financial position as we ramp production of most of those products at our Thailand facility. Additionally, our Japan wafer fab consolidation plans are progressing well. We expect to execute this plan by the first-half of fiscal 2025, allowing us to attain significant additional synergies in both manufacturing and operating expenses beginning in the fiscal third-quarter 2025,” he adds.
“We had pre-built inventory of NeoPhotonics products [worth nearly $30m] to enable these factory transitions. In [fiscal] Q2, we reduced Lumentum’s overall inventory levels by about $20m sequentially, excluding the increase in inventory related to Cloud Light,” says Ali.
“We continue to see incremental synergy and efficiency opportunities within our operating expenses,” he continues. “Consequently, we are increasing our synergy attainment expectations to $100m, up from the prior target of $80m [following the NeoPhotonics acquisition]. To date, we have achieved about $60m in annual run-rate savings and expect to achieve the remaining $40m as we execute against our plan.”
“Our combined efforts on manufacturing efficiency, inventory management, and cost control will pave the way for continued improvements in gross and operating margins as telecom revenue recovers and our cloud revenue continues to grow,” concludes Ali. “We are confident about our market position and growth opportunities across our surge markets.”
Manufacturing capacity expansion in Thailand
“Given the surging data demands of AI data centers and our strong traction on new transceiver opportunities, we are strategically expanding our leading-edge transceiver manufacturing capacity,” says Lowe. “As a key part of this expansion, we are investing in state-of-the-art production lines at our manufacturing facility in Thailand. Our Thai factor has proven photonics manufacturing capabilities, and has received numerous customer accolades, giving us confidence in our ability to ramp rapidly. This capacity will come online this summer, and we expect to lead the first wave of 1.6 Terabit transceivers from multiple customers at this site,” he adds.
“In addition to this new capacity expansion in Thailand, we will be leveraging Lumentum’s components in new Cloud Light transceiver designs. We believe the combination of our established history of customer partnership, proven manufacturing leadership, and unrivaled breadth of differentiated photonic component capabilities puts us at an excellent position to accelerate top-line revenue growth and margins in this rapidly growing cloud transceiver market.”
Industrial Tech segment recovery in second-half 2024
“In the Industrial Tech segment, we are very excited about our traction on new products serving new applications, particularly for our ultrafast lasers. These are ramping up and are adding to our customer end-market diversification in our Industrial Tech segment,” says Lowe. “That said, we do expect a period of lower demand over the coming quarters, driven by typical seasonality in our consumer business and by macro softness in the industrial market, along with elevated customer inventory levels at one of our large laser customers. We expect the industrial laser inventory to be corrected over the next six months, around the same timeframe as the seasonal uptick in our consumer business. This, combined with our wins at new customers in new markets, should lead to an Industrial Tech segment recovery during second-half of the calendar year.”