Lumentum Holdings Inc.

Good day, everyone, and welcome to the Lumentum Holdings fourth quarter fiscal year 2022 earnings call. All participants will be in listen-only mode. Please also note today's event is being recorded for replay purposes. If you'd like to ask a question, please press star followed by one. To withdraw your question, please press star followed by two. And should you require operator assistance, please press star followed by zero. Thank you. At this time, I'd like to turn the conference call over to Cathy Tarr, Vice President of Investor Relations. Miss Tarr, please go ahead.

Thank you, Operator. Welcome to Lumentum's Fiscal Fourth 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 our two recent acquisitions, including market opportunity, expected synergies, financial and operating results, and expectations regarding accretion, strategies of the combined company and benefits to customers and the markets in which we operate, as well as the impact of COVID-19 on our business and continuing uncertainty in this regard, including macroeconomic trends, 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 Quarter Report on Form 10-Q for the quarter ended April 2, 2022, and those in the 10-K for the fiscal year ended July 2, 2022, to be filed dilumentum with the SEC within 60 days of our fiscal year end. The forward-looking statements provided during this call are based on Momentum's reasonable beliefs and expectations as of today. Momentum undertakes no obligation to update these statements except as required by applicable law. Please also note, unless otherwise stated, all financial 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 fourth 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 good morning, everyone. This is truly an exciting time for Lumentum. We have an expanding set of use cases for our market-leading photonics products. With the close of neophotonics and yesterday's announced purchase of IPG's telecom transmission product lines, we have a more comprehensive product portfolio than ever before. We expect fiscal 23 revenue to be up more than 25% from fiscal 22 at the midpoint of our outlook. And as I look ahead, we forecast healthy double-digit growth in our telecom and datacom business over a multi-year period. In fiscal 22, we achieved record revenue in datacom EMLs, coherent components, pump lasers, tunable products, and subsea components with company profitability above expectations. Fiscal fourth quarter revenue was above our midpoint, with both operating margin and earnings per share exceeding the top end of our guidance. We are well positioned for double-digit growth into fiscal 23 and beyond due to strong fundamental drivers in our telecom and datacom businesses. On August 3rd, we completed our acquisition of Neophotonics, which increases Lumentum's exposure to the rapidly growing 400 gig and above optical communication opportunities, creates an even better partner for our customers, and expands our photonics toolkit into areas such as ZR and ZR plus modules, silicon photonics, high bandwidth coherent components, ultra narrow line with external cavity tunable lasers, and RF integrated circuits. The feedback from our customers on this transaction has been very positive, as they appreciate the logic of adding Neophotonics products and capabilities to our portfolio. I am also delighted to welcome the talented Neophotonics team to the company, and I can't wait to see what our combined innovation engine comes up with next. Yesterday, we announced the purchase of IPG's telecom transmission product lines. As we have mentioned previously, there is a significant opportunity in providing tunable transceivers into the cable and wireless network operator market. This acquisition augments our product offering, addressing this opportunity. This acquisition also brings a talented team developing communication ICs, including coherent DSPs, which complements the IC capabilities we obtained from the Neophotonics acquisition. This brings vertical integration opportunities in future coherent transceivers in addition to our 400G, VR, and VR Plus products, including those targeting opportunities within the data center and at the edge of the network. We are making progress to increase the supply of third-party materials and ICs that are limiting our ability to meet the very strong customer demand for our telecom products. The diligent work of our supply chain team enabled a 16% sequential growth in telecom and datacom revenue in the fourth quarter, but demand still exceeded supply by approximately $100 million. We expect sequential growth again in the first quarter. We do, however, expect shortages to continue at least until the first half of calendar 2023. Now let me provide some detail on our fourth quarter and full year results. As I mentioned earlier, telecom and datacom revenue was up 16% quarter on quarter. In fiscal 22, our 10G tunable transceiver products achieved record revenues with particular strength in metro access and fiber deep applications for cable and wireless networking customers. We are investing to double our manufacturing capacity for our 10G and upcoming 25G tunable transceiver products in our wafer fab, and our back-end assembly and test factories, supporting the rapid transition to our differentiated technology by cable MSO and wireless network operator customers to support their increasing needs for bandwidth. In fiscal 22, we also set new revenue records for our subsea components, which were up 65% year over year, and for our terrestrial pump lasers, which were up 49% year over year. Typically, increases in sales of these products is a leading indicator of future demand, which adds to our confidence of continued growth in our telecom product lines. In the quarter, Rotem revenue grew 23% sequentially. While Rotem growth has been slowed by icy supply shortages, the mix continues to shift to newer, more advanced products. In Q4, high port count and M by N rotums comprised over 70% of the revenue mix. This richening of the mix towards newer and more advanced rotums is consistent with our customers being in the early phases of new network deployments. It is also another leading indicator of future demand for our telecom products, including transmission products, which we bolstered with the Neophotonics acquisition. In Datacom, as expected, we grew EML revenue to a new quarterly record in the fourth quarter and achieved a new annual record for fiscal 22. We nearly doubled our internal manufacturing capacity for EML products in fiscal 22, enabling us to better support the robust customer demand for our 100G per lane solutions. We are also driving the next phase of Datacom industry roadmap with our 200G per lane EMLs for 1.6 terabit per second applications. We expect these to enter production as we exit fiscal 23 and are engaged with multiple customers in design and activities for these leading edge chips. Looking ahead to our first quarter, we expect telecom and datacom revenue to be up sequentially due to strong demand and improvements in IC supply. While growth continues to be gated by IC supply, we believe that we will shrink the gap between supply and demand from the more than $100 million level in Q4 to approximately $75 million in Q1. Turning to industrial and consumer, Q4 revenue was down from Q3 due to normal seasonality and 3D sensing. we are executing on our strategy to expand our 3D sensing and LiDAR platforms into applications beyond smartphones. As we've discussed previously, our product pipeline for automotive, industrial, and consumer use cases is growing. In automotive, we are ramping production of multi-junction VIXL arrays, long-range LiDAR products, and products for in-cabin driver monitoring systems. We are also the supplier of record for building automation and occupant sensing reference designs. In the consumer space, we are working closely with multiple customers who are developing extended reality solutions. While we execute on our long-term strategy in 3D sensing, as we have mentioned previously, we expect share normalization and normal price reductions in the coming smartphone cycle. We expect smartphone 3D sensing revenue in fiscal 23 to be reduced by approximately 40% to 50% from last year's run rate, starting from our first fiscal quarter. As such, we expect first quarter industrial and consumer revenue to be up only modestly from the prior quarter. We are still optimistic about our 3D sensing business as applications in automotive, the metaverse, and industrial begin to ramp. Underscoring this, in the fourth quarter, we recognized approximately $2 million in revenue from automotive applications, and we expect this to grow in the first quarter. In fiscal 22, our commercial lasers revenue was up 59% from fiscal 21. In the fourth quarter, revenue was up 39% from the same quarter last year. Approximately half of the revenue was driven by fiber lasers serving industrial applications. with the other half derived from ultra-fast lasers, solid-state lasers, gas lasers, and our laser service business. These solid results reflect a growing set of applications, introduction of new products, and growth into new markets and with new customers, such as in solar cell and EV battery processing. Looking ahead to the first quarter, we expect laser revenue to grow quarter on quarter to a new record level. To summarize, I am very excited about our future. We are well positioned to capitalize on the increasing use of photonics in growing use cases across multiple end markets. Over the coming years, our products are critical to multi-year cloud and network infrastructure expansion, and deployments are accelerating. Underscoring this, at the midpoint of our revenue guidance, we expect first quarter telecom, datacom, and lasers revenue to be up over $130 million, or 45 percent, compared to the same quarter last year. About half of this growth is organic, despite ongoing supply constraints. To capitalize on these trends in communications, consumer, and industrial end markets, we are accelerating R&D investments during fiscal 23, which we believe will accelerate top-line growth in fiscal 24 and beyond. These investments include coherent DSPs, 800G and higher speed communication technologies, laser sources for high performance computing architectures and the adoption of AI and data centers, industrial sensing and 3D imaging, LIDAR and in-cabin sensing for automotive, and industrial lasers for electric vehicle and battery manufacturing. Wajid will quantify the impact of this on our fiscal 23 outlook. I would like to thank our employees around the world for all of their hard work and resilience that has put us in such a great position in our markets and to grow strongly over the coming years. With that, I'll turn it over to Wajid.