Lumentum Holdings Inc.

Good day, everyone, and welcome to the Lumentum Holdings second quarter fiscal year 2022 earnings call. All participants will be in listen-only mode. Please note today's event is being recorded for replay purposes. At this time, I'd like to hand the conference call over to Kathy Tarr, Vice President of Investor Relations. Ms. Tarr, please go ahead.

Thank you, Operator. Welcome to Lumentum's fiscal second quarter 2022 earnings call. This is Kathy Ta, Lumentum's Vice President of Investor Relations. Joining me today are Alan Lowe, President and Chief Executive Officer, Wajid Ali, Chief Financial Officer, and Chris Coldren, Senior Vice President and Chief Strategy and Corporate Development Officer. Today's call will include forward-looking statements, including statements regarding our expectations regarding the pending acquisition of Neophytonics, including market opportunity, expected synergies, financial and operating results, and expectations regarding accretion, time to close, strategies of the combined company, and benefits to customers in the markets in which we operate, as well as the impact of COVID-19 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. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in the quarterly report on Form 10-Q for the quarter ended October 2nd. and for those in the tent queue for the quarter ended January 1st, 2022 to be filed by Lumentum with SEC today. 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. Lamentum's press release with the fiscal second quarter 2022 results and accompanying supplemental slides are available on our website at www.lamentum.com under the investor section. This includes additional details about our non-GAAP financial measures and a reconciliation between our historical gap and non-gap results. With that, I'll turn the call over to Alan.

Thank you, Kathy, and welcome to the team. Good morning, everyone. This is certainly an exciting time at Lumentum. The insatiable demand for increased bandwidth and communication speed between networks, data centers, and all connected devices plays to our strengths as a technology and market leader in photonics. Demand is exceptionally strong and growing for our products. Our cloud and networking customers are entering a multi-year hardware upgrade cycle and rely on our leading edge photonics as their fundamental enabling technology. We are broadening the applications of our 3D sensing lasers beyond mobile handsets into automotive driver assistance designs and AR VR applications. Demand for our commercial lasers has never been stronger as industrial factories and semiconductor fabs expand and upgrade their capability. Second quarter demand was very strong across all major product lines. Our results were above the midpoint of our guidance on all metrics. Industry-wide supply shortages have worsened with the recent surge in COVID-19 and are negatively impacting our third quarter revenue guidance by more than $65 million. These shortages come at a time when customer demand is accelerating for our differentiated communications products. Our products are essential to multi-year expansions in next generation optical network capacity that are just beginning to be deployed. We continue to work to alleviate supply constraints and expect fourth quarter revenue to be up from that of the third quarter. Furthermore, we expect supply shortages to improve by the second half of this calendar year. Looking beyond these near-term supply challenges, I'm highly optimistic about our outlook and believe market inflections beneficial to us in our addressable markets will drive double-digit revenue growth in fiscal 23 and beyond. not including the pending acquisition of Neophotonics. On our last call, we announced the Neophotonics acquisition. This is a very exciting transaction, and we continue to receive positive feedback from our customers. The combination gives us a more complete product and technology portfolio. This enables our customers to address their next-generation cloud and networking speeds and scalability requirements. We are confident in this long-term market opportunity and the value this combination creates. We are also excited about adding Neoplatonic's talented team of experts to Lumentum. We have made excellent progress with our integration planning and are on track with the previously announced close timeline. Two key closing conditions are now satisfied. On January 21st, we announced that we have received US antitrust clearance And just two days ago, Neophotonic shareholders approved the transaction in a special meeting of their stockholders. We are working diligently with antitrust authorities in China and our expectations of closing the transaction in the second half of calendar 2022 remain unchanged. Now let me provide some details on our second quarter's results. Telecom and Datacom revenue was up quarter on quarter with exceptional strength in nearly every telecom product line. Demand in these markets is also accelerating. Next generation customer systems are just hitting an inflection point as new multi-year network deployments are just starting to ramp. While we were supply constrained across many of our product lines, revenue from high speed, 400 gig and above coherent components and modules nearly doubled quarter-on-quarter. As 5G, 4K streaming, and network access requirements increase, the speed at the edge of the network must also increase, and the core of the network must upgrade to higher speeds as well. Transceivers serving edge applications were up more than 60% quarter-on-quarter and more than 130% year-on-year. Pump laser sales grew more than 30% sequentially to a new all-time high. As we've said previously, elevated pump shipments frequently have been a leading indicator of future telecom demand. Another leading indicator of telecom demand is optical fiber deployments for networks. Significant investments in fiber infrastructure are underway as operators expand capacity, capability, and access. We expect these infrastructure investments will propel momentum into double-digit growth for multiple years. In Datacom, EMLs serving high-speed cloud data center applications also achieved new record revenue. Book-to-bill for telecom products exceeded one for the quarter, and we have more than two quarters of Datacom backlog already booked. We expect to bring additional EML manufacturing capacity online in March, which will help us ramp our data comp shipments through this calendar year to fulfill strong customer demand of our differentiated products. These points, along with our design wins and long-term share and supply agreements with market-leading customers, gives us confidence that we have a strong long-term outlook in telecom and data comp. Accelerating telecom and datacom market demand is coming at a time when the supply environment is very dynamic and challenging. Supply had been improving heading into and throughout the bulk of the second quarter. However, late in the quarter, the latest pandemic surge once again negatively impacted supply. This contributed to a $50 million gap between the supply of material and customer demand in the second quarter. Looking forward to the third quarter, we expect shipments of products that rely on third party supplied semiconductors will be the primary driver of supply constraints. The demand from our customers has also recently accelerated, and we expect this will increase the gap between supply and demand, resulting in more than a $65 million impact to our projected revenue in Q3. Therefore, Looking to our third quarter, we expect telecom and datacom revenue to be modestly down quarter on quarter. We continue to work diligently with our suppliers and on alternative sources of supply to alleviate shortages. Turning to industrial and consumer, second quarter revenue was down from last quarter as expected due to 3D sensing seasonality. Being the trusted partner in the industry enabled our 3D sensing revenue in the first half of fiscal 22 to be higher than that of the first half of fiscal 21. An important element of Lumentum's 3D sensing and LiDAR product strategy is to deploy our platforms into new markets and applications. I'm very excited about the milestones we have recently achieved on this front. Some of our recent public announcements highlight our progress. We recently announced two new automotive customer wins. The first was a partnership with Hasai, who is making all solid-state LiDAR modules for ADAS applications, leveraging our differentiated, high-power, multi-junction VIXL arrays. We also announced that we have begun mass production of a VIXL solution with Stanley Electric, used for in-cabin driver and occupant monitoring. These announcements complement other design wins and opportunities in our funnel. A broad range of customers are increasingly relying on our enabling technology for their critical LIDAR and in-cabin monitoring systems. We have strong customer traction in augmented and virtual reality opportunities that we expect will come to market in the next few years. We believe most AR, VR applications will employ multiple lasers. The use cases for these lasers include eye tracking, hand tracking or gesture recognition, and world-facing imaging applications. Customers in this space value our differentiated products as well as our unparalleled experience, quality and reliability track record, and scale in the industry as they are targeting high-volume and high-performance applications. We expect third quarter industrial and consumer revenue to be down sequentially primarily due to normal consumer product seasonality. Our commercial lasers business was up strongly again quarter on quarter as expected. Strength in lasers for manufacturing of semiconductor and consumer electronics and life science applications complemented strength in our fiber lasers for macro material processing. We expect third quarter laser revenue to be up again sequentially driven by growth in new products and the overall market. We expect Lazer's quarterly revenue to surpass our previous record as the business grows over the coming year. Before turning it over to Wajid to run through the numbers, I'd like to thank our employees around the world for all their hard work putting us in such a great position in the market and for the resilience in doing this during such challenging times. With that, Wajid.