Lumentum Holdings Inc.

Good day, everyone, and welcome to the Lamentum Holdings Fiscal Fourth Quarter and Fiscal Year 2023 Earnings Call. All participants will be in the listen-only mode. Please also note today's event is being recorded for replay purposes. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. At this time, I would like to turn the conference call over to Kathy Ta. Vice President of Investor Relations. Ms. Ta, please go ahead.

Thank you, and welcome to Lumentum's fiscal fourth 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 and beliefs regarding synergies with recent acquisitions, including neophotonics, financial and operating results, macroeconomic trends, trends and expectations for our products and technology, our end markets, market opportunities, and customers, and our expected financial performance, including our guidance, as well as statements regarding our future revenues, financial model, and 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 April 1, 2023, and those in the 10-K for the fiscal year ended July 1st, 2023 to be filed by Lumentum with the SEC. 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 that 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 and full year 2023 results and accompanying supplemental slides are available on our website at www.lamentum.com under the Investors section. With that, I'll turn the call over to Alan.

Thank you, Kathy, and good morning, everyone. We are extremely optimistic about the long-term secular demand drivers in the markets in which we participate and lead. Additionally, our efforts and investments to grow our share in our existing markets and adjacent markets are generating positive traction that will benefit us for years to come. Our focus on technology and product leadership will ensure our growth and differentiation in support of our customers' needs now and into the future. In the near term, we are facing significant headwinds as both our direct and end customers actively work to reduce their elevated inventory levels. We believe that the current customer inventory correction cycle will continue through the balance of the calendar year, and therefore, our shipments will be well below end market demand. Even at these depressed shipment levels, we believe we are continuing to grow our market share outside of the consumer market. We are seeing meaningful demand strengthening for our Datacom chips as hyperscale customers prepare to ramp AI capacity. We believe that our Telecom and Datacom revenue will be up in calendar 24 compared to calendar 23 as inventory levels should return to more appropriate levels at our customers and their customers. Despite the inventory headwind we experienced in the second half of fiscal 23, our full year revenue was up 3% from fiscal 22. Also, fourth quarter revenue and EPS were both above the midpoints of our guidance ranges we announced last quarter. Our acquisition integration is going very well, And in fact, we have completed our ERP consolidation and are now running on one company-wide ERP system. We are tracking ahead of our previously announced synergy plans while we continue to deliver on our new product and technology roadmaps. At the same time, we continue to focus on our customers to drive an even stronger partnership and a differentiated level of satisfaction. Rotem revenue was especially strong in Q4 with increased sequential shipments across all Rotem product categories. Also, our commercial lasers business grew sequentially, particularly in new applications of ultra-fast lasers for the solar cell market. As I indicated earlier, long-term demand trends for photonics products continue to be extremely favorable. Generational upgrades to C plus L band as well as extended C and extended L-band architectures are underway in the backbone of networks where our transmission and transport products are highly differentiated and enabling for our customers. We are designing products for the next generation of our customers' photonics roadmaps, which will use 130 gigawatt and 200 gigawatt data rate coherent technologies. We are developing these high-speed products in both discrete and integrated form factors, paving the way for enhanced performance in metro and long-haul applications, as well as new applications at the edge of the network. With the addition of the teams from our neophotonics and IPG acquisitions and the capabilities to develop DSPs and RFICs, we believe that our vertically integrated approach to these high-speed transmission products will give us the lowest product cost in the industry. In addition, we demonstrated our coherent 800G ZR technology earlier this year, which we believe is the industry's first, which will provide high-speed connectivity with extended reach for data center interconnect within metropolitan areas. Turning to cloud data centers, as I indicated earlier, We are seeing increased customer activity for AI in the data center and expect this to translate to increased shipments of our chip level products for 800 gig transceivers. We have broadened our Datacom product portfolio with continuous wave or CW lasers for silicon photonic applications that connect server racks in AI clusters, which require higher data rates while consuming less power. Starting in fiscal Q1, we expect a return to sequential growth in our Datacom revenue. The data center optical component market is projected to grow sharply over the next four to five years to accommodate the increased traffic associated with AI as customers employ ever higher bandwidth interconnects between racks, within racks, and between servers and storage. We also believe that Datacom pixel growth will be meaningful in the next several years as copper is replaced by short-reach multi-mode optical links. As stated earlier, we expect telecom and datacom revenue to be up in calendar 24 from calendar 23 as customers reduce their inventory levels of our products and our shipment rate is more in sync within market demand. Before I provide additional detail on the fourth quarter results, I would like to address the topic of China's export controls placed on gallium and germanium. We have determined that our existing supply is sufficient for the medium term, and therefore we expect that these controls will have little to no impact on our manufacturing output. We will continue to monitor this situation and work with our suppliers to source material outside of China to mitigate any long-term impacts of these controls. Now, let me turn to the fourth quarter and full year results. Telecom and Datacom revenue was down 2% sequentially, but up 2% year on year. As expected, we saw sequentially lower shipments of tunable access modules in the quarter. As we expand our customer base and current customers complete near-term product transitions and reduce inventory levels, we expect this business to return to growth in fiscal 24. The lower revenue in tunable access modules was partially offset by sequential increases in narrow line with tunable lasers and rotem shipments across several leading customers. In fiscal 23, our tunable access module product line achieved new record revenues growing 57% year over year with strength in metro access and fiber deep applications. These products enable cable MSOs and wireless network operators to improve network performance while avoiding the cost of replacing existing infrastructure. In fiscal 23, we doubled our manufacturing capacity for tunable access modules in our wafer fab and our back end assembly and test factories to address the anticipated growth in our shipments to these customers. Our ultra narrow line with tunable lasers and our advanced rotums are key enablers of our customers' next generation network architectures that are just starting to be deployed. We saw sequential growth in narrow-line with tunnel lasers and across all major categories of ROADMs, including low port count, high port count, and contention-less M-by-N platforms. Also, fiscal 23 ROADM revenue grew 22% from fiscal 22, driven by the adoption of these advanced ROADM architectures. Cloud data centers are being redesigned to support the high bandwidth requirements of AI workloads. These workloads require several times more bandwidth than traditional cloud computing. At this early stage of AI hardware deployment, 800G transceivers can provide the bandwidth while also reducing latency. The new 800G transceivers utilize eight different wavelengths at 100G per lane, triggering orders for our EML products and driving a return to growth for our EML product line. Additionally, we are seeing strong demand for our high-power CW lasers for customers utilizing silicon photonics to build 800G transceivers. In calendar 24, our 200 gig per lane EMLs will enable the next generation of transceivers with capacity of up to 1.6 terabits. We expect to start ramping shipments of 200 gig EML products in calendar 24, and customer qualifications of 800G and 1.6 terabit transceiver designs are well underway. We expect our 200G per lane optics to be the workhorse of hyperscale data centers for years to come. To further address the connectivity requirements for AI and machine learning clusters, we have been developing high speed pixels for short reach connections between servers and switches in these systems. and we expect to begin to ramp these shipments meaningfully in calendar 24. In the longer term, we also expect to supply even higher power CW lasers for leading AI hardware architectures to provide the high bandwidth, low latency optical interconnects essential for training and inference applications. Turning to industrial and consumer, fiscal Q4 was down from Q3 and down year over year as expected due to smartphone seasonality and end market demand. We continue to expect our fiscal 24 3D sensing revenue will be lower than that of fiscal 23 due to our assumption around 3D sensing end market demand, pricing, and an additional competitor on a certain socket as discussed previously. In the fourth quarter, commercial lasers revenue was up 4% sequentially but down 2% from the same quarter last year. Overall, fiscal 23 commercial lasers revenue was up 8% from fiscal 22. We achieved a 35% sequential growth in ultrafast laser revenue and over 25% sequential growth in fiber lasers, which was partially offset by sequentially lower solid-state laser shipments primarily for semiconductor applications. Our growth in ultra-fast lasers is being driven by new applications, particularly in solar cell processing. We expect that as demand for these new types of applications grows, we will continue to gain share in ultra-fast lasers. Based on our latest customer forecasts, we expect overall commercial lasers demand to be softer over the next several quarters due to customer inventory digestion and macro factors impacting in markets. We expect continued rapid growth in new applications for our ultra-fast lasers to partially offset these near-term headwinds. Although we expect our shipments in the near term to be soft, I'm very confident about Lumentum's mid- to long-term prospects, given the current softness is primarily driven by high inventory levels, the fundamental in-market and technology trends driving our growth expectations are strong and unchanged, and Lumentum is investing in R&D to capitalize upon the long-term growth drivers and is uniquely positioned to serve our customers at scale with financial and structural resilience built into our business model. In the near term, we are focused on expense controls while maintaining crucial R&D to continue to drive the forefront of innovation as we partner with our customers. Before turning it over to Wajid, I would like to thank our employees and our customers around the world for their focus and dedication as they continue to collaborate and partner with Lumentum as we execute upon our strategy. With that, Wajid.