Lumentum Holdings Inc.

Good day, everyone, and welcome to the Lamentum Holdings first quarter fiscal year 2023 earnings call. All participants will be in a listen-only mode. Please also note today's event is being recorded for replay purposes. If you'd like to register an audio question, you may do so by pressing star followed by one on your telephone keypad. At this time, I'd like to turn 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 First Quarter 2023 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 recent acquisition of Neophytonics, 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, the impact of COVID-19 on our business and continuing uncertainty in this regard, 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, including the risk factors described in the quarterly report on Form 10-Q to be filed for the quarter ended October 1, 2022, and those in the 10-K for the fiscal year ended July 2, 2022. 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 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. Lumentum's press release with fiscal first quarter 2023 results and accompanying supplemental slides are available on our website at www.lumentum.com under the investor section. This includes additional details about our non-GAAP financial measures and a reconciliation between our historical GAAP and non-GAAP results. With that, I'll turn the call over to Alan.

Thank you, Kathy, and good morning, everyone. Our first quarter financial and operational performance was excellent, and we achieved a record revenue quarter. I would like to thank our global team for their solid execution, which drove first quarter revenue above the midpoint of our guidance, earnings per share at the high end of our range, and operating margin above guidance. we are well positioned for the long term. The recent closure of two acquisitions further strengthens our optical communication business. We now have the photonic industry's most comprehensive product portfolio to serve our networking and cloud data center customers. We continue to see strong fundamental demand drivers for network infrastructure. We are seeing strong demand from our customers who have reported record order backlog levels. Leaders in optical fiber are reporting record shipments of new fiber to handle the unrelenting need for bandwidth. Our products and capabilities are well aligned to telecommunication market inflections now occurring. In fiscal Q1, compared to the same quarter last year, we delivered 136 million of incremental revenue dollars in telecom, a 79% increase, which includes two months of revenue from our recent acquisitions. Organically, we grew telecom 38% year over year. Over the years, we have built a foundation of customer trust as our differentiated solutions have been proven within network architectures. Also, Lumentum's revenue exposure to infrastructure markets through our communications and commercial lasers product lines has never been stronger. we expect that greater than 85% of company-wide revenue will come from infrastructure markets outside of consumer in fiscal 23. This is due to the share normalization in consumer discussed on previous calls and recent strategic investments. As we are now three months into the integration of our recent acquisitions, I am even more excited about the high quality of the products and the technology expertise that we have added to our global team. We are in an excellent position to capitalize on our strength in optical communications, and we are executing upon our strategic plan. We plan to expand our product offerings in communication networking with our combined R&D teams, realize synergies and greater benefit of manufacturing scale with an overall higher volume of business, and enter adjacent markets now accessible to us with more tools in our tool belt. These acquisitions position us to accelerate long-term technology trends in advanced networking hardware and adjacent markets and to expand our share in the growing telecom infrastructure market. Since closing these acquisitions, we have even higher confidence in accomplishing our goals. We look forward to sharing more on our progress in the upcoming quarters. Last quarter, we gave a full year financial outlook to help the investment community model our fiscal 23 business. Since then, there have been several developments in the supply and demand landscapes. In telecom, I see supply shortages are not improving as quickly as previously anticipated. We now expect these shortages to gate our revenue throughout fiscal 23. In addition, like many others, we are now seeing incrementally lower cloud and consumer in-market demand from our customers. Taken together, these changes result in a new outlook for fiscal 23 revenue, which Wajid will discuss in detail later. Overall demand for our telecom products remains strong, especially in edge networking applications which are transitioning to wavelength-tunable technologies, higher-speed components and modules, and advanced transport products. All of these play into the industry's transition to 400G and above speed networks. Now, let me provide some detail on our first quarter results. Telecom and datacom revenue was up 67% year-on-year, with organic telecom and datacom up 33% year-on-year. Our supply chain team continues to work diligently to close the gap on IC chip shortages as we work to fulfill robust demand for our products. We expect the revenue impact of these chip shortages will be approximately $80 million at the end of the second quarter, similar to that of the first quarter. In the first quarter, we achieved record quarterly revenues in three transmission product leadership areas. narrow line with tunable lasers, tunable products for edge networking applications, and coherent components for high-speed coherent modules and line cards. Our narrow line with tunable laser business performed to our expectations in the quarter. I'm impressed with the deep bench of talent that we have added to our team with the recent acquisitions. Our R&D teams are very excited about the expansion of our photonic toolkit in leading edge modules, silicon photonics, high bandwidth coherent components, ultra narrow line width external cavity tendable lasers, coherent DSPs, and RF integrated circuits. Regarding DSPs, we are focused on our production tape out of a 400G capable coherent DSP to enable significant cost reduction in our growing ZR and ZR plus module business. Our tunable products for network edge applications have unique capabilities that help to expand bandwidth in metro access, fiber deep, and wireless 5G front haul applications. We are expanding both our front end wafer fab and back end assembly and test capacity to serve these growing applications. We doubled our Q1 revenue from the same quarter last year and the next phase of manufacturing expansion in the coming quarters will further increase our capacity by another 80% to 100%. As edge network data rates increase, we are uniquely positioned to serve the growing demand from a diverse set of cable and wireless networking customers. Our 400G and above coherent components also reached a new revenue record in the quarter, with approximately one-third coming from 800G applications. We are very excited about our robust product pipeline of next generation 800G and above components and modules. In the quarter, Rotem revenue grew 23% sequentially and 34% from the same quarter last year due to continued strong demand along with better access to critical ICs. Shipments of contentionless M by N Rotems grew over 50% sequentially as next-generation networks need to increase scalability to handle new fiber deployments. In the quarter, we also closed a significant new opportunity for pump lasers in the area of satellite communications. We continue to lead the industry in transport product innovation. In the quarter, we began shipping the next generation of transport products, including Rotem node-on-a-blade architectures and our next generation of contentionless M-by-N WSS blades to leading customers, further distancing ourselves from our competitors. In Datacom, we saw a sequential decline in EML revenue from a record fourth quarter. The decline was due to lower demand by a subset of cloud data center customers. We anticipate continued softer demand from hyperscale operators, which has lowered our Datacom revenue outlook for the balance of fiscal 23. We continue to drive the next phase of the 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 we are engaged with multiple customers in design and activities for these leading edge chips. In addition, we are excited about enabling the transition from copper to optical fiber in data center applications with our 100 gig per lane Vixels. We expect to ramp this product line during fiscal 24. Turning to industrial and consumer, Q1 was up from Q4 due to the new smartphone product launch. As expected, share normalization caused our Q1 3D sensing revenue to be approximately half of last year's level. We are optimistic about our 3D sensing business as applications in automotive and industrial markets begin to ramp. Underscoring this, in the first quarter, we recognized approximately $4 million in revenue from automotive and IoT applications, and we expect this to grow significantly in the coming years. In the first quarter, commercial lasers revenue was up 4% sequentially and 26% from the same quarter last year. Fiber lasers serving industrial applications grew 25% from the same quarter last year. We have a growing set of applications with the introduction of new laser products, which is generating new customers for us, such as in solar cell and EV battery processing. Looking ahead to the second quarter, we expect laser revenues to grow again quarter on quarter. I'd like to take a moment to share the significant progress we have made toward achieving our corporate social responsibility goals toward a low carbon future. In September, we published our second CSR report, which outlined the excellent progress our team has made in ESG initiatives. Our company-wide use of renewable electricity has expanded from 3% to 31%, and we are poised to increase this percentage again this year. We have extended our award-winning diversity, inclusion, and belonging program to include training at all of our global sites. We've established new employee resource groups for career development, mentorship, and employee retention. We look forward to realizing the measurable benefits of this year's initiatives in fiscal 23 and beyond. I'm very excited about Lumentum's strategy, our competitive position, and our unique opportunities to grow in advanced communication and networking technologies, edge and cloud computing, industrial 4.0, and machine vision markets. To capitalize on these trends in the communication, consumer, and industrial end markets, and consistent with our prior earnings call, we are increasing R&D investments during fiscal 23 which we believe will accelerate top line growth in fiscal 24 and beyond. Lumentum is extremely well positioned to win in the current environment, execute our strategy to invest in our product portfolio, grow in existing and adjacent markets, and expand profitability over the long term. 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 today. With that, I'll turn it over to Y.J.