Lumentum Holdings Inc.

The forward-looking statements provided during this call are based on Lamentum's reasonable beliefs and expectations as of today. Lamentum undertakes no obligation to update these statements except as required by applicable law. Please also note, unless otherwise stated, all results and projections discussed in this call are non-GAAP. Non-GAAP financials are not to be considered as a substitute for or superior to financials prepared in accordance with GAAP. Lumentum's press release with the first quarter 2021 results and accompanying supplemental slides are available on its website at www.lumentum.com under the investor section and includes additional details about our non-GAAP financial measures and a reconciliation between our historical GAAP and non-GAAP results. Now I will turn the call over to Alan for his comments.

Thank you, Jim. Good morning, everyone. I would like to make a couple of broader points before providing my business commentary. While we will be discussing our strong financial results and we benefit from the digital transformation that COVID-19 is accelerating, we recognize and don't want anyone to lose sight of the significant economic, health, and wellbeing challenges COVID-19 has tragically brought to millions of people around the globe. Our thoughts are with all of those affected. I thought so also with the healthcare professionals and first responders who selflessly make a difference on the front lines every day. I am proud that Lumentum plays an important role in the critical infrastructure that helps people safely continue their work, their education, and their life during these challenging times. Now on to my comments about our business and financial results. We started fiscal 21 on a strong note. In the first quarter, we achieved record non-GAAP gross margin, operating margin, and earnings per share. For the first time, we achieved gross margin in excess of 50% and operating margin above 30%. This performance demonstrates the strength and resilience of our business and financial model. We expect this positive momentum to continue into the second quarter. As pleased as I am with our results and the progress we've made in driving towards our strategic goals, I'm as excited as ever about the opportunities ahead. As I often say, the future is truly bright at Lumentum. Long-term market trends and industry dynamics are very favorable. The world is accelerating its shift to increasingly digital and virtual approaches to work, entertainment, education, healthcare, social interaction, and commerce, which all drive increasing need for our differentiated products and technologies. We intend to invest strongly in R&D to address these positive long-term trends and strengthen our market leadership positions. First quarter revenue was in the upper half of our guidance range. Our revenue mix was different than we had contemplated in our guidance due to changes throughout the quarter. Our assumptions for 3D sensing proved conservative, and demand for our 3D sensing products accelerated through the quarter. strength in 3D sensing sales more than offset lower than anticipated telecom and commercial laser sales. Telecom and datacom revenue grew 2% sequentially and 5% year on year. Excluding revenue from low margin product lines we have divested or discontinued. Telecom and datacom revenue grew 4% sequentially and 14% year on year. The largest contributor to this growth was telecom transmission. We had strong sales of indium phosphide-based coherent transmission modules and components, including ACO and DCO modules and 600 gig and 800 gig modulators. Rotem sales increased from last quarter, but we're still down year on year. However, our contentionless end-by-end rotems grew more than 30% quarter on quarter to a new high, highlighting the increasing shift to this technology in new customer systems. During the first quarter, we saw some push-outs in telecom customer orders. We also saw reductions in customer forecasts due to COVID-19 impacting the timing of new deployments, in addition to customer inventory management. These contributed to lower telecom revenue than we assumed in our guidance. On certain key new telecom products, however, demand exceeded our ability to supply, and we are working hard to expand output. During the first quarter, we made a lot of progress on new products, further strengthening our telecom leadership position. On the transmission side, we began sampling our 400G DCO transmission modules. On the transport side, we continued to proliferate our contentionless end-by-end and high-port count rodent technologies with C, L, and extended C-band versions to enable customers to next-generation systems globally. Prior quarter trends continued in Datacom, with chip sales growing 6% sequentially. We have seen a shift in near-term customer forecasts, with lower projected 5G demand offset by continued strength in demand for our market-leading chips for data centers. We have adjusted our way for start plans accordingly. Our backlog for Datacom chips remains very robust, and demand continues to outstrip our way for that capacity. As such, we are continuing to aggressively expand our wafer pad capacity based on long-term demand trends and expectations. On the new product front, we are working closely with our lead customers on their needs for future 800G and above Datacom transceivers. To this end, we have recently demonstrated high-performance 200GB PAM4 EMLs for such applications. Looking to the second quarter, we expect telecom and datacom revenue to be up sequentially, with the strongest growth coming from telecom transport, driven by growth in next-generation rodents. Industrial and consumer revenue grew strongly quarter-on-quarter and was significantly higher than in our guidance assumptions. Our unmatched experience in shipping hundreds of millions of pixel arrays per year continues to put us in a leadership position in the markets. Since we became an independent public company five years ago, we have shipped approximately $1.5 billion of 3D sensing revenue. We continue to believe we have a larger addressable opportunity over this product cycle. This is due to the significant increase in 3D sensing content per consumer device we are now shipping. Looking to the second quarter, we expect industrial and consumer revenue to be flat to modestly up quarter on quarter. We are optimistic about 3D sensing demand in the coming quarters and years. In addition to increasing content, we believe there is potential for a strong consumer upgrade cycle driven by new features including 5G, augmented and virtual reality, and computational photography. Further, we believe there is potential for market share shifts at our customers' level which could be beneficial to us. On Android, we continue to make very good progress on new opportunities. However, we are taking a conservative approach to Android revenue in our near-term projections due to COVID-19 and geopolitical factors. Looking even further ahead, we have multi-year product and technology roadmaps aligned with our consumer electronics customers. These include unique technologies to increase the integration of other components enable underscreen 3D cameras, produce higher density and larger arrays to enable higher performance 3D imaging, as well as to create new lasers to increase our opportunity within other consumer mobile devices. We are also focused on planting seeds for growth in markets beyond consumer electronics. We have unmatched and invaluable experience in 3D sensing lasers for consumer electronic applications and broad industry-leading photonic capabilities used across other markets. We believe this gives us a competitive advantage as we pursue emerging long-term opportunities outside of consumer electronics. In the past quarter, our VIXL arrays have completed the important AEC automotive qualification through a module partner, and we expect initial deployments of these products to be in automobile in-cabin applications. We are also now sampling high-power VIXO arrays into LiDAR for last-mile vehicle applications. According to our customers, these last-mile applications could be one of the largest LiDAR opportunities in the next several years. In addition, we are also sampling or are in qualification with major Tier 1 auto suppliers for broader automobile opportunities that will deploy and develop over time. We are making progress in the security and access control markets. We are already shipping in volume for facial recognition on payment kiosks. We are engaged with providers of security and access control systems who are looking to add 3D sensing to enable touchless or contactless high security access control. These applications are also accelerating due to public health and safety concerns. Turning to commercial lasers, revenue declined 37% quarter on quarter This is a larger decline than what we had assumed in our guidance. Given our customer mix, this decline was related to manufacturing weakness outside of China. We expect second quarter lasers revenue to be flat to up modestly. We believe that it will be several quarters before we get back to the revenue levels we saw in fiscal 2020. On the new product front, our latest 12 kilowatt fiber laser engines are now shipping to our lead customer for their newest platform. Additionally, we are very proud that our PicoBlade 3 was recently recognized by Laser Focus World with an Innovator's Award for being one of the most innovative products impacting the photonics community this year. I want to provide some color on our business with Huawei, given the regulatory restrictions that were announced in August. Sales to Huawei declined in the first quarter and were less than 10% of full company revenue. In the second quarter, our guidance contemplates sales to Huawei to decline further due to the regulatory restrictions. Beyond the second quarter, for modeling purposes, we currently expect sales to Huawei to be less than 5% of quarterly sales. Before I hand it over to Wajid to review the numbers, I want to thank and acknowledge all of our employees around the world. They are the ones who have put us in such a great position, both financially as well as with our technology and product leadership. They have been incredible, especially so working through the pandemic. This is despite each having their own personal challenges living and working in these times. In addition to our business goals, contributing to society and our local communities is very important to Lumentum and to our employees. We are committed to the highest standard of social, ethical, and environmental conduct and responsibility. This includes promoting safe, diverse, and inclusive workplaces free from discrimination and harassment. Again, thank you to all of our employees. They are absolutely the company's greatest asset. I would also like to thank our customers, suppliers, and shareholders for their continued support and partnership during these challenging times. With that, I'll hand it over to Wajid.

Thank you, Alan. Good morning, everyone. Turning to the first quarter's numbers, net revenue for the first quarter was $452.4 million, which was up 23% sequentially and 1% year-on-year. Gap gross margin for the first quarter was 45.5%. Gap operating margin was 21.9%. And gap diluted net income per share was $0.86. First quarter non-gap gross margin was 52%. which was up 480 basis points sequentially and up 620 basis points year-on-year. The sequential and year-on-year growth was driven by an improvement in product mix and acquisition synergies. As Alan highlighted, this record gross margin performance demonstrates the improvements we have made in our financial model. First quarter non-GAAP operating margin at 33.7% increased 890 basis points sequentially and 640 basis points year on year. Improvements were made by gross margin improvements as operating expenses were approximately flat with the comparable periods. Non-GAAP operating expenses totaled 82.7 million or 18% of revenue. SG&A expense was 36.8 million R&D expense was $45.9 million. Operating expenses continued to be a little lower than normal run rates due to COVID-19 reducing travel, trade show, and other expenses. First quarter non-GAAP net income was $139.2 million. This includes $900,000 of net interest and other income and $14.2 million of tax expense. Other income is down sequentially. as interest rates on our cash and short-term investments are lower overall, and we are being conservative in our investment portfolio. Non-GAAP diluted net income per share was $1.78, based on a fully diluted share count of $78.2 million. Now turning to the balance sheet. We ended the quarter with $1.61 billion in cash and short-term investments, up $57 million quarter-on-quarter. Strong growth in our accounts receivable during the first quarter should lead to an even stronger cash generation in the second quarter. We have $1.5 billion in aggregate principal convertible notes and no term debt. Of these convertible notes, $450 million is due in 2024 and $1.05 billion is due in 2026. The total cash interest expense associated with these notes is approximately $6 million per year. We are well positioned financially with a strong margin model, high levels of cash, and low interest expense, as well as long maturity financing. Turning to segment details, first quarter optical communications segment revenue at $428.5 million increased 29.7% sequentially due to 3D sensing seasonality and growth in telecom and datacom. Year on year, optical communication segment revenue increased 3% due to higher telecom and datacom revenue, particularly in datacom, due to strong growth in our chip business. Optical communication segment gross margin at 52.5% increased 590 basis points sequentially. due to a better product mix with higher chip-related revenue and increased 640 basis points year-on-year due to a more favorable product mix, improved telecom and datacom margins, and acquisition synergies. Our lasers segment revenue at $23.9 million decreased 37% sequentially and 29% year-on-year. First quarter lasers gross margin decreased to 43.5% due to the significant reduction in manufacturing volumes. Now on to our guidance for the second quarter of fiscal 21. Please note the outlook we are providing is on a non-GAAP basis and are based on our assumptions as of today. We expect net revenue for the second quarter of fiscal 21 to be in the range of $465 million to $485 million. This revenue projection includes telecom and datacom increasing sequentially, industrial and consumer being flat to up modestly quarter on quarter, and commercial lasers also being flat to up modestly quarter on quarter. Based on this, we project second quarter operating margin to be in the range of 32% to 34%. and diluted net income per share to be in the range of $1.70 to $1.90. These projections incorporate an increase in operating expenses, primarily due to an increase in R&D as we invest in new products and technology. An approximate share count of $79 million and an estimated other income of $0.5 million, as well as an estimated tax expense of $15 million. Before wrapping up, I'd like to make a few important comments about our financial model. It might be helpful to refer to the earnings slide deck on our website for the following points as well. When we announced the acquisition of Acquero, we put forth a target financial model with a gross margin range of 40% to 45% and an operating margin range of 22% to 28%. For the trailing 12 months, from the end of the first quarter of fiscal 20 to the end of the first quarter of fiscal 21, we exceeded this target model. We believe we will continue to grow margins over time due to further improvements in product mix, efficiency, and operating leverage. As such, we are now increasing this annual target in our midterm financial model. Our annual gross margin target moves up to 50%, and our annual operating margin target increases to 30%. We don't expect to exceed these new targets for the current fiscal year due to 3D sensing seasonality, as well as regulatory restrictions on sales to Huawei impacting the second half of the fiscal year. With that, I'll turn the call back to Jim to start the Q&A session.