Lumentum Holdings Inc.

Good day, everyone, and welcome to the Lamentum Holdings first quarter fiscal year 2024 earnings call. All participants will be in a 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. I would now 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 First Quarter 2024 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 recent acquisitions, including Cloudlight and 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 10-K for the fiscal year ended July 1st, 2023 and our 10-Q that will be filed soon. 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 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. Lumentum's press release with the fiscal first quarter results and accompanying supplemental slides are available on our website at www.lumentum.com under the Investors section. With that, I'll turn the call over to Alan.

Thank you, Kathy, and good morning, everyone. We are thrilled to welcome the Cloudlight team to Lumentum. The addition of Cloudlight's products to our portfolio positions Lumentum as a leader in providing photonics to cloud operators at a time when artificial intelligence is rapidly accelerating growth in the data center market. We believe Lumentum's served opportunity within data centers has expanded more than five-fold as a result of the Cloudlight acquisition. For years, Cloudlight has been supplying differentiated high-speed products to leading hyperscale customers, both custom products to address unique customer needs, as well as standard products to address a broad range of hyperscale customer requirements. In the last 12 months, over 90% of Cloudlight's revenue was derived from 400G and higher speed products. In the most recent quarter, over half of Cloudlight's optical transceiver revenue was derived from 800G transceivers. In calendar 2024, we anticipate strong growth in cloud networking revenue. driven by accelerating AI compute requirements and a resumption of shipping more in line with in-market demand. Also in calendar 2024, we expect cloud applications to drive over 30% of Lumentum's cloud and networking revenue. Our cloud customers are responding very positively to this transaction. This combination results in a broader portfolio of differentiated products and technology. It also enhances the security of supply for our customers, giving our broader combined global manufacturing footprint and high levels of vertical integration. Lumentum is well equipped to address future cloud technology roadmaps as AI models drive an exponential increase in compute and networking requirements. I would also like to highlight that starting with this fiscal year, we are updating our financial segment reporting to better reflect the rapidly changing market opportunities ahead. Our financial reporting is now focused on two large and growing end market segments. One, cloud and networking, and two, industrial tech. Within cloud and networking, the cloudification of the network is blurring the lines between our historical served markets of telecom and datacom. Cloud data center and traditional telecom operators are increasingly purchasing the same types of data transmission products. We anticipate the emergence of new applications for optical switching technology, not only to serve the growing complexity of long haul and Metro networks, but also to support the high optical link density required for AI training models in the data center. Our customer mix is changing as well. The addition of CloudLight brings much more direct sales to cloud operators and infrastructure providers. We are also increasingly serving cloud and networking operators directly for their data center interconnect and edge networking applications. To better align our reporting with these market trends, the telecom product lines and the datacom product lines are now included in the cloud and networking segments. Turning to the industrial tech segment, our portfolio of imaging, sensing, and laser products aligns with industry 4.0 and 5.0 trends. Industrial sensing applications require high accuracy in determining distance, speed, and displacement, and are increasingly turning to laser-based approaches. Leading edge semiconductor, solar cell, and electronic component manufacturing require the beam precision and short pulse duration of ultra-fast lasers to produce precise cuts and features. To better reflect the growing importance of precision photonics across this broad application space, the industrial consumer and commercial lasers product lines are now included within the industrial tech segment. Now I will summarize our fiscal first quarter results. As we reported last week, First quarter revenue and EPS were above the midpoints of our guidance ranges. Through cost controls and efficient operations, we are managing the factors that are in our control. While we continue to see very strong growth in the demand for our data center chips, as well as our newly acquired intra data center transceivers, this strength is being offset by the telecom and industrial inventory drawdown activities. Due to this inventory correction, we believe we continue to ship below end market demand. As we navigate this transition period, we are delivering as planned on our product roadmaps and synergy attainment with respect to our neocatonic acquisition. Of course, we are also excited about the new opportunities that Cloudlight brings starting in the current quarter as we leverage their leading transceiver technology to deliver the fastest speed products to cloud customers. Now let me provide more detail on our segment-level results in Q1. Cloud and networking revenue was down 20% sequentially and down 36% year-on-year, with broad-based softness across most of our networking product lines, partially offset by sequential growth in intra-data center lasers and tunable access modules. This is as we had expected, given the inventory correction underway at our networking customers. robust cloud data center demand is currently the strongest growth driver for our cloud networking business. As data centers are designed to support the high bandwidth requirements of AI workloads, 800 gig transceivers can provide that bandwidth while also reducing latency. For our transceiver customers, their new 800 gig transceivers utilize eight different wavelengths at 100 gig per lane, triggering orders for our chip level photonics and driving growth for our EML product line. We are also seeing an increase in deployments of Eight Energy transceivers that are supplied by our Cloudlight business, and we are working with our new team to enable them to ramp even more rapidly. Over time, we also expect to supply custom-designed high-power CW laser arrays for leading AI hardware architectures to provide the high bandwidth, low latency optical interconnects essential for training and inference applications. 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 are shipping qualification samples of our 200 gig EMLs now and expect to ramp production in calendar 24 with customer qualifications of 800 gig and 1.6 terabit transceiver designs well underway. We expect that 200 gig per lane optics will be the workhorse of hyperscale data centers for years to come once these qualifications are completed. Through Cloudlight, Lumentum is now a leader in high-speed active optical cables, or AOCs, as well as VIXL-based transceivers to cloud customers to fulfill their short-reach connectivity requirements for new AI and machine learning cluster architectures. In addition, we've been developing high-speed 100 gigabit per second VIXLs and VIXL arrays for these short-reach optical links, and we expect to ramp these shipments meaningfully in calendar 24. Moving on to our high-speed transmission product developments. we are receiving positive customer feedback on our next generation of 130 gigabaud and 200 gigabaud data rate coherent technologies. These high-speed products will be available in both discrete and integrated form factors to enable enhanced performance in metro and long-haul applications. In addition, at the ECOC conference last month, we received positive customer feedback on our coherent 800 gig ZR product. We believe we are the first to market with this capability, which will provide high-speed connectivity with extended reach for data center interconnect within metropolitan areas. Turning to industrial tech, fiscal Q1 was up 4% sequentially from Q4, driven by the expected uptick in our 3D sensing business with a new smartphone product ramp partially offset. by softness in fiber lasers as our leading fiber laser customer works to bring down inventory. Industrial tech is down 40% year over year as expected, primarily due to more intense competition for market share on a certain 3D sensing socket and market demand and pricing as discussed previously. Based on our latest customer forecasts, we continue to expect industrial lasers demand to be soft into calendar 2024 due to customer inventory digestion and macro factors impacting in markets. However, we expect the rapid growth in new applications for ultra-fast lasers to partially offset these near-term headwinds given growth in new solar cell manufacturing applications. To summarize, our market outlook is currently a tale of two dynamics. On the one hand, we are experiencing a surge in demand for certain data center products and we are ramping up our production as quickly as possible to meet this demand. On the other hand, outside of the data center customers, we are facing continued headwinds from networking and industrial customer inventory digestion. In all of our end markets, we are committed to our long-term R&D roadmaps, and we are positioning the company for the robust growth of photonics opportunities that we see ahead. Before turning it over to Wajid, I would like to again welcome our new employees from Cloudlight and thank all of our employees and our customers around the world for their focus and dedication as they continue to collaborate and partner with Lumentum. With that, Wajid.