Lumentum Holdings Inc.

Good day, everyone, and welcome to the Lamentum Holding second quarter fiscal year 2023 earnings call. All participants will be in listen-only mode. Please also note today's event is being recorded for replay purposes. You will have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypads. Please note we'll be taking one question and one follow-up per person. At this time, I'd like to turn the conference call over to Cathy Tarr, Vice President, Investor Relations. Ms. Ta, please go ahead.

Welcome to Lumentum's Fiscal Second 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 acquisitions, including neophotonics, such as expected synergies in financial and operating results, 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 December 31st, 2022, and those in the 10K for the fiscal year ended July 2nd, 2022. 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 second quarter 2023 results and accompanying supplemental slides are available on our website at www.lamentum.com under the Investors 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 second quarter financial and operational performance was very strong, led by robust demand from our telecom and commercial lasers customers. Operating margin and earnings per share were both above the high end of our guidance range with revenue above the midpoint. We'll cover this more in detail in the next section. As expected, sequentially higher revenue from telecom and commercial lasers customers in the quarter offset the anticipated reduction in revenue from certain cloud customers due to inventory digestion and at a major consumer customer due to reduced smartphone unit production. As discussed over the past several years, share normalization has occurred in our consumer business, lessening our exposure to this cyclical market. Nearly 90% of our total revenue is now derived from infrastructure markets, which are driven by durable, long-term secular trends in which we serve with highly differentiated products and technologies. Lumentum lights up the optical fiber of the most advanced cloud carrier, submarine, and 5G mobile networks across the globe. The technology we provide enables compute, data, and communications infrastructure to scale from a performance, cost, and power consumption standpoint. We enable higher precision, new materials, and cleaner and more energy efficient processes to be used in the microelectronics industry. The type of lasers we supply are key to manufacturing of electric vehicles, energy storage solutions, and solar cells. Our technology leadership position is stronger than ever due to successful investments in developing new products and technologies, as well as the two acquisitions we closed this past August. We are now six months into integrating these acquisitions and tracking ahead of plan and realizing overall cost synergies, which contributed to our profitability and earnings per share results being above our guidance ranges. Our technology capabilities in manufacturing scale make Lumentum the innovation partner of choice for our customers. We have the communication industry's broadest photonic capabilities, including high bandwidth coherent and direct detect optical components and modules, ultra narrow line with tunable lasers, advanced optical amplification and Rotem solutions, coherent DSPs and RF integrated circuits, as well as silicon and indium phosphide photonic integrated circuits. In close partnership with our customers, we enable the deployment of the industry's latest high-capacity 400, 600, and 800G cloud and core network solutions. In addition, due to the escalating data traffic at the edge of the network, customers are deploying our products originally developed for core network applications at the edge or access part of the network. Revenue from edge networking products was up 40% year-on-year in the second quarter and is now a major component of our telecom business. We are confident that our technology leadership position and solutions for advanced compute, data, and communication infrastructure will continue to provide a tailwind for Lumentum's long-term growth. Now, let me provide some detail on our second quarter results. Telecom and datacom revenue was up 44% year-on-year, driven by organic and inorganic growth in telecom. Within this, growth from telecom customers was substantially higher, but partially offset by inventory digestion at certain cloud customers. Revenue growth continues to be limited by supply shortages of ICs from third parties. We have made significant progress over the last year on closing supply gaps, which has enabled our growth to date. At the end of the second quarter, remaining IC supply shortages resulted in approximately $60 million of unsatisfied customer demand. This is a modest improvement from the $80 million gap articulated in our last call. Revenue was especially strong in products which play into the industry's transition to 400G and above speeds in next generation networks, including narrow line with tunable lasers, tunable transceivers for network edge applications, high speed coherent components and modules, as well as our latest Rotums. We achieved a new quarterly revenue record in narrow line with tunable lasers which are key enablers of all coherent transmission solutions, including 400 gig VR and VR plus modules, and our customers latest 600 gig and 800 gig transmission systems. We also set a quarterly revenue record with our tunable transceivers for network edge applications, where a growing set of cable, MSO, and wireless network operator customers use our modules to expand data bandwidth in metro access, fiber deep, and wireless 5G front-haul applications. Coherent components serving 400G and above applications also achieved record revenue, with approximately half of the quarterly revenue in coherent components coming from the highest data rate applications at 600 and 800 gigs. Second quarter ROADM revenue grew 45% in the same quarter last year. due to continued strong demand and improved access to critical ICs. Shipments of M by N rotums grew 78% and high port count rotums grew over 70% from the same quarter last year, representing a broader adoption of these next-generation rotums with market-leading customers. As anticipated, inventory digestion at certain cloud customers and their module manufacturers resulted in a sequential decline in Datacom laser chip revenue. As highlighted in our last call, we expected the hyperscale customers to reduce their inventories of our laser chips during the second quarter, and now we expect that this will continue throughout most of calendar 23. Looking ahead on the technology roadmap, cloud data centers will be designed for artificial intelligence and machine learning applications which bodes very well for us as we extend our technology leadership to even higher speed laser chips. We are on track with our 200 gig per lane EMLs for 1.6 terabit per second applications and expect to enter production as we exit fiscal 23. We are also broadening and diversifying our product portfolio for intra data center applications with differentiated high speed pixels DMLs, and high-power CW lasers and receiver photodiodes for silicon photonic solutions. For example, we expect to ramp production of our new 100 gig per lang pixels during fiscal 24. This is a major new opportunity for us and addresses the accelerating transition from copper to optical fiber in shorter-reach data center applications, especially those for machine learning and artificial intelligence. Turning to industrial and consumer, Q2 was down from Q1 as expected. During the quarter, we saw incrementally weaker overall demand for consumer pixels. We continue to focus on ramping new automotive and industrial sensing applications for our technology. In the second quarter, we recognized approximately $3 million in revenue from automotive and IoT applications, and we expect this revenue to grow significantly in the coming years as these opportunities ramp. At this year's CES show, we had strong customer engagement across all applications of 3D sensing and LIDAR, including from numerous automotive customers. We have a broad, multi-pronged approach to solid-state LIDAR and automotive, with a wide range of design wins with market-leading customers who are pursuing a variety of in-cabin and LIDAR approaches. In the second quarter, commercial lasers revenue was up 7% sequentially and 16% from the same quarter last year. While fiber lasers for metal cutting and welding continue to be our largest commercial lasers product line, products for emerging high growth applications in solar, display, and electric vehicle manufacturing are becoming more meaningful, and we now expect them to increase in our mix in the coming quarters. Underscoring this, ultra-fast laser revenue in the quarter more than doubled from the same period last year due to expanded use cases. Our FemtoBlade laser was recognized with the 2022 Innovators Award at Laser Focus World due to our innovative design, which enables faster processing time in micromachine applications for OLED displays, semiconductor ICs, printed circuit boards, and solar cells. We are very excited about our lasers product roadmap, which will expand our addressable market further in the coming years. I'm very confident about Lamentum's future, given our differentiated portfolio of innovative products and technologies, our strong foundation of intellectual property, and our significant opportunities for long-term growth in the cloud, networking, and advanced manufacturing markets. I am also very confident in our ability to grow into adjacent markets, extend product leadership, and expand profitability over the long term. In addition, we have made tremendous progress towards achieving our corporate responsibility goals, including our drive to a net zero carbon footprint by 2030. Lumentum has also been named by Newsweek as one of America's most responsible companies for a second consecutive year in recognition of our achievements. in ESG. Finally, I would like to thank all of our employees around the world for all their hard work and resilience as they continue to execute upon our strategy. With that, I'll turn it over to Wedjid.