Lumentum Holdings Inc.

Good day, everyone, and welcome to the Lamentum second quarter fiscal year 2021 earnings call. All participants will be in a listen-only mode. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Tim Finucchi of Darrow Associates. Sir, please go ahead.

Thank you, operator. Welcome to Lumentum's second quarter fiscal year 2021 earnings call. This is Jim Finucchi from Darrow Associates, assisting Lumentum with its investor relations. Joining the call today from the company's management team, we have Alan Lowe, President and Chief Executive Officer, Wajid Ali, Chief Financial Officer, and Chris Coldren, Senior Vice President of Strategy and Corporate Development. Today's call will include forward-looking statements, including statements regarding the markets in which we operate and our position in such markets, the impact of COVID-19 and responsive actions thereto on our business and continuing uncertainty in this regard, trends and expectations for our products and technology, our markets, market opportunity and customers, our proposed acquisition of Coherent, and our expected financial performance, including our guidance, as well as statements regarding our future revenues, our financial model, and our margin targets. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations, particularly the risk factors described in our SEC filings, including the company's quarterly report on Form 10-Q for the fiscal quarter ended December 26, 2020, which the company expects to file later today, and in Lumentum's 10-K for fiscal year 2020, ended June 27, 2020. The forward-looking statements provided during this call are based on Lumentum's reasonable beliefs and expectations as of today. Lumentum 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 second quarter fiscal 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. Before getting into the details of our business results, I'd like to make some comments about the COVID-19 pandemic. There have been a lot of developments since our last earnings call. We have unfortunately seen the significant impact of the COVID-19 pandemic expand to millions of people around the globe. Our thoughts are with all of those affected and the healthcare professionals who selflessly make a difference on the front lines every day. Fortunately, we have also of effective vaccines. This gives me optimism that the dark days we are living through will pass and there is a path to better days. We thank those who have developed and are now manufacturing these vaccines that are beginning to protect people. While I can't put us in the same category as these lifesavers, I am proud that Lumentum plays an important role in the critical infrastructure that helps people safely continue their work education, and life during these challenging times. Now on to our business and financial results for the second quarter. Increased demand in telecom and lasers added to the positive momentum from the prior quarter, resulting in record revenue, non-gap gross margin, operating margin, and earnings per share. For the first time ever, we achieved gross margins in excess of 53% and operating margins above 35%. As pleased as I am with these results and the progress we've made in driving towards our strategic and financial goals, I am as excited as ever about the opportunities ahead. As I often say, the future is truly bright and momentum. We are well positioned to grow revenue and earnings into the future. We believe long-term market trends are very favorable. We also believe there are upcoming growth catalysts in each of our markets. The accelerating shift to digital and virtual approaches to all aspects of work and life is driving staggering amounts of data in the world's networks and cloud data centers. To meet the challenges created by this digital transformation, our industry is poised for major new technology transitions that we believe are well served by our products and capabilities. These include higher speed telecom and datacom transmission solutions in the range of 400 to 800 gig, photonic solutions for 5G front haul and back haul, and newer advanced Rotums and other telecom transport solutions. The computer vision revolution that is driving our 3D sensing and LIDAR business is in its early days. Computational photography and augmented and virtual reality should drive the expansion of world-facing 3D sensing across many new smartphone designs and into consumer electronic devices and wearables. The increasing use of LIDAR and in-cabin 3D sensing in automobile and delivery vehicles significantly adds to our long-term market opportunities. We have made significant investments in R&D and developed a broad portfolio of new products and technologies that address both upcoming and long-term growth opportunities. This has been done in close coordination with our customers and we have obtained many important design wins. We are now starting to scale up production of many of these new products. We have exited underperforming product lines that would have been a drag on future growth. We continue to lower our fixed costs, thus increasing operating leverage and profitability as we grow. Our second quarter results underscore all of these points. with strong incremental profitability and an increasing level of new products in the revenue mix. Two weeks ago, we announced the coherent acquisition, which will expand and diversify our revenue and market opportunities. A motivating factor for this transaction is the significant role we believe photonics will play across the value chains, supporting many important long-term secular trends. For example, this includes the increasing role that lasers and photonics play in the manufacturing of the growing number of advanced semiconductors, displays, and microelectronics that enable the digital transformation that I mentioned earlier. Another example is the increasing role of lasers and photonics in the manufacturing and supply chains of electric vehicles and energy storage solutions. This is an important and significant opportunity as the world transitions to these sustainable technologies to combat climate change. The coherent acquisition will expand our market opportunities in fertile new areas for photonics, including in bio instrumentation and aerospace and defense. It will also strengthen our innovation engine to better serve the customers of today and tomorrow. In addition to the top line growth opportunities I have outlined, we believe there are significant efficiencies and optimizations to be gained in the combination with Coherent. With our proven track record of execution, we are confident the combination will ultimately deliver financial performance consistent with the targets we set forth in our first quarterly earnings call last November. I look forward to a timely completion of this transaction and the welcoming of the talented employees of Coherent to the Lamentum team. While the future is truly bright at Lamentum, I believe it will be even brighter with the addition of Coherent. Now on to more details about our second quarter. Telecom and Datacom revenue grew 10% sequentially and 7% year-on-year. Excluding revenue from the low-margin product lines we have divested or discontinued, telecom and datacom revenue grew 17% year-on-year. The largest contributors to growth in the second quarter were Rotums, high-speed 600 and 800 gig indium phosphide coherent components, DCO modules, and submarine products. Late in December, one of our contract manufacturing partners in Malaysia temporarily suspended production to implement measures to protect employees from COVID-19. This impacted second quarter revenue by approximately $6 million. In telecom, we continue to see our revenue mix shifting toward new products aligned with our customers' next generation systems. In the second quarter, we further ramped 400G and higher speed transmission solutions and we qualified several new Rotem designs with major customers in the West and in China. To this last point, we began shipping a complex twin M-by-N Rotem blade with other integrated functionality to a major Western customer for new web scale and other network deployments. As I mentioned earlier, the telecom and datacom industry is poised for a transition to next-generation networks. We anticipate strong growth in the coming years as network operators deploy 400, 600, and 800 gig systems with new integrated transmission solutions and rotums. We believe this upcoming telecom technology upgrade cycle has been delayed by COVID-19, which should start to accelerate as global vaccinations increase over time. In our Datacom chip business, as expected, 5G front-haul second quarter growth. Cloud demand remains very robust. Last quarter, we adjusted our wafer starts to better align with this new demand mix and expect to grow into the third quarter. We have a large and growing multi-quarter backlog. Market dynamics are favorable with increasing volumes and transitions to higher speeds where we have very differentiated products. Revenue from high-speed PAM4 EMLs has nearly doubled from year-ago levels. And we recently introduced a breakthrough 53-gigawatt PAM4 DML as customers seek even more cost-effective solutions to accelerate 400G growth in future 800G applications. Our wafer fab expansion plans are on track, with meaningful capacity additions coming online later this calendar year. Looking to the third quarter, we expect telecom and datacom revenue to be down sequentially due to seasonal factors and the anticipated timing of new end customer deployments. Industrial and consumer revenue declined modestly quarter on quarter. We believe we have a larger 3D sensing opportunity this fiscal year compared to the last, but it will be spread out more broadly in time. As such, we expect a lower seasonal decline in the third quarter compared with prior years. Within industrial and consumer, the contribution from industrial is now approximately 5%, about half of where it has been over the past several years. This has been driven by a transition to selling chips versus modules. We are optimistic about growth in the 3D sensing market in the coming years. we believe the introduction of 5g is driving an accelerated smartphone upgrade cycle new applications such as computational photography and augmented and virtual reality have the potential to drive world-facing 3d sensing capabilities more broadly especially across the android customer base we are working closely with major android customers on world-facing 3D sensing capabilities for their future products as they seek to differentiate their offerings. We believe our experience and leadership in current high volume world facing deployments positions us very well with these customers. We believe new customer devices and wearables that may reach the market in the coming years will benefit from 3D sensing capabilities and will drive additional market growth. Adding to this, Customers in the security and access control market are looking for 3D sensing to enable higher security in touchless, contactless solutions. This is of increasing importance in a post-COVID-19 world. LiDAR and 3D sensing for automobiles and delivery vehicles adds significantly to our long-term market opportunities. We believe our unmatched and invaluable photonics experience spanning 3D sensing, communications, and industrial lasers gives us a competitive advantage as we pursue these new opportunities. We are closely engaged with a wide range of customers. These include autonomous and delivery vehicle manufacturers, major tier one auto suppliers, and LiDAR solution providers. During our second quarter, we completed a number of design wins, some of which are targeting startup production during calendar year 22. In addition, we have many other customer engagements that are in various stages of qualification. Turning to commercial lasers, revenue grew 24% quarter on quarter. The largest contributor to growth was micro materials processing, including 5G applications. We expect Lazer's growth to continue into the third quarter. While we believe that it will take several quarters before we get back to the revenue levels we saw in fiscal 20, we are cautiously optimistic that we have seen the worst of the impact from COVID-19. Lazer's gross margin also grew quarter-on-quarter to 47.5%. We believe we are a leader in the lasers industry on this metric, despite having significantly lower scale than larger industry players. We believe this is because we have unique design and manufacturing experience and capabilities born from our many years of leadership in the photonics market. We expect to leverage this experience and these capabilities when we are able to combine with coherence. Throughout my remarks, I've highlighted how we are well positioned for continued top and bottom line growth over the next several years. We have made significant investments in differentiated new technology and products for new customer programs, attained many key design wins, and are on track for more. In each of our markets, there are significant catalysts for growth. We have a new generation of telecom and datacom solutions and customers who are poised to ramp them. We have the expansion of world-facing 3D sensing in mobile devices and wearables, and emerging LiDAR applications further add to our market opportunity. The broader lasers market we address is recovering from the impact of COVID-19, and we will benefit from this and additional growth driven by differentiated new products. We have exited underperforming product lines that would have been a drag on future growth. The coherent acquisition brings a significant opportunity to create a larger, more diverse photonics technology company, one with leading capabilities well aligned with many important long-term trends and financial performance consistent with the targets we previously set for Lumentum. Before handing it over to Wajid to review the numbers, I want to thank and acknowledge all of our employees around the world. They have been incredible, especially so working through the pandemic. Our employees are absolutely the company's greatest asset. I would also like to thank our customers, suppliers, and shareholders for their support and partnership during these challenging times. With that, I'll hand it over to Wajid.