Lumentum Holdings Inc.

signal conference specialist by pressing star then zero. Please also note today's event is being recorded. At this time, I'd like to turn the conference over to Jim Finucchi of Darrow Associates. Sir, please go ahead.

Thank you, Operator. Welcome to Lumentum's third 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 Colburn, 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, 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 10Q, where the fiscal quarter ended April 3, 2021, which the company expects to file later today. 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 third 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. I want to first say our thoughts and prayers are with everyone affected by the continuing COVID-19 pandemic. While vaccinations and case rates are declining in the United States and a few other countries, in many places around the world, the situation is not good. What is happening in India is absolutely heartbreaking. Again, our thoughts are with everyone affected. Turning to our business. Our third quarter results highlight a product portfolio increasingly rich in new and differentiated products, aligned with favorable long-term multi-year market trends. Revenue from key new product lines, but position as well for long-term growth, were each up by double-digit percentages year-on-year. These include indium phosphide-based coherent components and modules, next-generation contentionless M-by-N rotums, high-speed EMLs, and 3D sensing lasers. Non-GAAP gross margin expanded by 440 basis points year on year, driven by continuous improvements in our operations and product mix. The accelerating transition to digital and virtual approaches in all aspects of work and life is driving staggering amounts of data in the world's networks and cloud data centers. The proliferation of 5G wireless will remove bandwidth bottlenecks at the edge of the network and drive even more bandwidth in the core networks and cloud data centers. The computer and machine vision revolutions are in their early days, and we expect 3D sensing and LiDAR capabilities will expand to many more applications in multiple markets. These include augmented and virtual reality, 3D machine vision for industrial applications, frictionless and contactless biometric security and access control, and automotive and delivery vehicle applications. Laser-based material processing is critical to the manufacturing of the devices that enable the digital transformation and transition to 5G wireless and electric vehicle and energy storage. These multi-year trends combined with our product and technology leadership positions bode well for us over the long term. Recent discussions with market-leading customers gives me optimism. Customers have communicated that they are seeing growing in-market demand for their next-generation solutions, where we have a wide range of design wins with highly differentiated products. Now, it is about translating this growing in-market demand into shipments, and revenue. On this point, like others, we are seeing headwinds that may moderate near-term market growth in telecom and 5G-related components for the remainder of this calendar year. We believe the telecom and 5G components market will re-accelerate midway through our fiscal year 22 These views are driven by the combination of a tight supply of critical semiconductors that we and our customers depend on, customer inventory build in anticipation of strong in-market demand, and potential delays in deployments in certain geographies more impacted by COVID-19. We expect the lasers market recovery to continue and our business to return to pre-pandemic levels by the middle of fiscal 22. In 3D sensing, we believe the net impact of certain customer design decisions will reduce the overall global market for 3D sensing lasers in fiscal 22 by approximately 20% to 25%. We expect laser-based sensing to expand to more applications, customers, and markets in fiscal 22 and 23, setting the stage for re-acceleration of market growth in fiscal 23, as well Our product roadmaps include new designs for the future, where we integrate additional functionality to help customers further reduce size and their cost of incorporating 3D sensing capabilities, while allowing us to capture more dollar content over time. At this time, putting these market trends, supply constraints, and customer forecasts together, we expect our revenue for the first half of fiscal 22 to be down approximately 5% relative to the first half of fiscal 21. These near-term external market headwinds do not diminish my optimism around our long-term multi-year market outlook, our product portfolio and design lens, and the positive changes in our business model and the industry over the past several years. I believe the future continues to be very bright at Lumentum. Turning to capital allocation, we are disappointed the coherent transactions didn't turn out as we had initially hoped. We continue to believe strategic M&A will be a value creator for Lumentum over the long run. We will be thoughtful in our approach and timing. That said, we believe very strongly in our organic opportunities for value creation. From a capital allocation standpoint, after analyzing alternatives, we believe investing in our own stock is currently our best opportunity. As such, Momentum's board of directors has authorized a share buyback program for up to $700 million over the next two years. Now on to more details about our third quarter. Within telecom and datacom, revenue from Indian phosphide-based coherent components and modules was up 28% year-on-year after adjusting for the extra week of the recent third quarter. We had strong rodent revenue with record contention with end-by-end sales. These products are increasing in our revenue mix due to their incorporation in our customers' latest systems, which they are just starting to ramp up. The average selling price of these advanced rotums are significantly higher than the lower port count devices. This will help us accelerate revenue growth as new network deployments increase over the coming several years. In China, we are already designed into every major network equipment manufacturer or NEM with our in-by-in or high port count rotums. On our last call, we highlighted production shipments of end-by-end rodents to our largest Western NEM customer. And in the third quarter, we started production shipments to our next largest NEM customer in the West. We are designed in or in final qualification stages with many other customers with our latest advanced rodents. Revenue from email chips was up more than 40% year on year, again, adjusting for the extra week in the recent third quarter. These products serve the cloud data center market, which is increasingly transitioning to 200 and 400 gig speeds. At these higher speeds, our products are highly differentiated. We expect this differentiation will drive market share gains with non-vertically integrated and vertically integrated transceiver suppliers. We expect our growth will accelerate as cloud operators continue their transitions to higher speeds. Underscoring this, during the third quarter, we received $90 million of orders for EMLs, primarily from web-scale cloud operators and customers serving them, seeking to secure a production output. This backlog will be delivered over multiple quarters as we are capacity-constrained on EMLs. Our previously highlighted production capacity expansion is tracking well and will come online later this calendar year for significant increased output starting in the second half of fiscal 22. Due to continued delays in 5G front-haul deployments in China, our third quarter DML revenue was significantly below year-ago levels, and fourth quarter DML sales are expected to be down by more than $20 million year-on-year. At this time, we expect 5G front-haul deployments could resume this summer. This timing would drive increased demand for our products towards the middle of fiscal 22 once customers ramp up and burn through existing inventory. Looking to the fourth quarter, we expect telecom and datacom revenue to be up quarter on quarter. Third quarter industrial and consumer revenue was up year and higher volumes, and decline quarter-on-quarter as expected due to seasonality. In the fourth quarter, we expect industrial and consumer to be down sequentially due to normal 3D sensing seasonality, but up by double-digit percentage year-on-year. Additionally, we have begun mass production of new laser chip designs for upcoming major customer new products. We recently had an important Android customer launch a mobile phone with time of flight 3D sensing camera capabilities enabled by our lasers. This is a notable design win, as this customer is a large and leading supplier of camera components, and their features frequently proliferate to much higher volume Android manufacturers. During the third quarter, we announced industry-leading advancements in VIXL technology that position as well for future applications in the industrial and automotive markets. For example, we announced high-power, high-efficiency VIXL arrays leveraging industry-leading five- and six-junction design. These multi-junction arrays are of particular interest to the automotive and LIDAR markets. They have strong traction in solutions for autonomous vehicles, including in major retailers who are looking to deploy fleets of autonomous delivery vehicles. As well, we continue to receive design-ins and initial production orders from other auto LiDAR and access control customers. Turning to commercial lasers, in the third quarter, we had a significant increase in kilowatt fiber laser sales after four quarters of decline. Historically, during market downturns, macro material processing was among the slowest segment to recover, and we are now cautiously optimistic that we have seen the worst of the impact of COVID-19 in this segment. We expect fourth quarter lasers revenue to be up quarter on quarter. Throughout my remarks, I've highlighted that our markets are driven by strong long-term trends and that we have invested heavily in differentiated new products, technologies, and customer programs. With our latest products, we have secured key design wins and are on track for more with market-leading customers. Our product mix is becoming richer in these new products as customers are starting to ramp shipments of their next-generation solutions. We are seeing some nearer-term external factors that will moderate industry growth for the next few quarters, but these don't diminish our long-term market outlook. Before handing it over to Wajid to review the numbers, I want to once again thank and acknowledge all of our employees around the world for their hard work and contributions. Our employees are absolutely the company's greatest assets. 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.