Lumentum Holdings Inc.

Please press Start followed by 1 on your telephone keypad. If you change your mind, please press Start followed by 2. At this time, I would like to turn the call over to Cathy Ta, Vice President and Investor Relations. Ms. Ta, please go ahead.

This is Cathy Ta, Lumentum's Vice President of Investor Relations. Joining me today are Alan Lowe, President and Chief Executive Officer, Wajid Ali, Executive Vice President and Chief Financial Officer, and Chris Cauldron, 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 Neophytonics, financial and operating results, macroeconomic trends, trends and expectations for our products and technologies, 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 Lamentum's reasonable beliefs and expectations as of today. Lamentum 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 second quarter 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. Lumentum stands at the leading edge of photonics innovation, partnering with customers to enable the future of data centers and the networks that connect them. We equip our customers with the industry's most comprehensive photonics portfolio, enabling them to unlock unparalleled performance and efficiency. From pluggable high-speed transceivers to enabling customers AI-optimized architectures with industry-leading transmitters and photonics, We are at the forefront of data centers' needs. Together with our cloud customers, we are shaping the future of data transmission through pioneering technologies such as chip-scale photonics and advanced data transmission protocols, as well as highly efficient and automated manufacturing at scale. It has been just three months since we acquired Cloudlight, and we are thrilled with the team that has joined us and the many opportunities that lie ahead. In this brief period, we have had meaningful traction with customers on new data center opportunities, which we expect will drive significant additional growth as we complete the development of the new products and receive customer qualifications. The market opportunity is accelerating and we expect broader customer adoption of 800G technology as these qualifications finalize. Additionally, The initial ramp up of 1.6 terabit products by early technology adopters is creating a lot of pull from customers, and we expect to have a first to market advantage given our vertical integration and test results from our labs. Cloudlight transceiver shipments were very strong in the December quarter, contributing $59.5 million during the approximately eight weeks after the acquisition. We expect our shipments will be even stronger in the March quarter. Given a mid-calendar year product transition planned by our largest data center customer, we expect revenue from data center transceivers to temporarily dip in the June and September quarters and then grow significantly through the end of the year and into calendar year 25 as this transition completes and other new customer programs start to ramp. Given the surging data demands of AI data centers and our strong traction on new transceiver opportunities, we are strategically expanding our leading-edge transceiver manufacturing capacity. As a key part of this expansion, we are investing in state-of-the-art production lines at our manufacturing facility in Thailand. Our Thai factory has proven photonics manufacturing capabilities and has received numerous customer accolades. giving us confidence in our ability to ramp rapidly. This capacity will come online this summer, and we expect to lead the first wave of 1.6 terabit transceivers for multiple customers at this site. In addition to this new capacity expansion in Thailand, we will be leveraging Lumentum's components in new Cloudlight transceiver designs. We believe the combination of our established history of customer partnership, proven manufacturing leadership, An unrivaled breadth of differentiated photonic component capabilities puts us at an excellent position to accelerate top line revenue growth and margins in this rapidly growing cloud transceiver market. While cloud data centers are forecasting double digit CapEx growth in calendar 24, we are navigating challenging market conditions in other parts of our business. Based on sluggish carrier CapEx spending, and our latest customer discussions, we now expect customer inventory digestion to extend through the balance of fiscal 24. Nevertheless, we are highly confident in our market position and the ultimate recovery and growth of this business. As fiber transmission reaches its physical capacity, network providers increasingly recognize the value of technologies like ours that enable continued network scaling reinforcing our long-term confidence in this business. Moving to our industrial tech segment, we are very excited about our traction on new products serving new applications, particularly for our ultra-fast lasers. These are ramping up and are adding to our customer and market diversification in our industrial tech segment. That said, we do expect a period of lower demand over the coming quarters driven by typical seasonality in our consumer business and by macro softness in the industrial market along with elevated customer inventory levels at one of our large laser customers. We expect the industrial laser inventory to be corrected over the next six months around the same time frame as the seasonal uptick in our consumer business. This combined with our wins at new customers in new markets should lead to an industrial tech segment recovery during the second half of the calendar year. Moving on to fiscal second quarter results. Second quarter revenue and EPS results were above the midpoints of our guidance ranges with revenue of $366.8 million and EPS of 32 cents. I'm very excited about the contribution that our Cloudlight acquisition had on the quarter and will have in the future given the technology and capability of the combined companies to address the rapidly growing AI and ML photonics market. We have continued to drive acquisition synergies to drive down our fixed costs, and Wajid will provide more color on this shortly. The combination of these lower fixed costs and the rebound in revenue will result in an accelerated expansion in our margins during fiscal 25. Cloud and networking revenue was up 25% sequentially, driven by strong cloud data center demand and the contribution from the Cloudlight acquisition, but down 25% year on year, given broad-based softness across most of our telecom networking product lines due to the continued inventory correction at our network equipment customers. The future is bright for our cloud technology roadmap. In the second half of calendar 24, we expect to qualify the industry's first power efficient 800G transceivers that employ 4 by 200 gig lanes of traffic using silicon photonics technologies. As I mentioned earlier, we expect to ramp capacity this summer at our campus in Thailand and expect to lead the first wave of 1.6 terabit transceivers for multiple customers in this facility. These ultra high speed transceivers provide additional bandwidth needed for AI workloads, while also alleviating data bottlenecks with lower power consumption and latency as customers move to 200 gig per lane technology. We expect that 200 gig per lane optics using not only silicon tectonics technology, but also our vertically integrated EML lasers will be the workhorse of the next generation of hyperscale data centers once these new products are qualified at leading cloud and cloud infrastructure customers. We have been receiving positive customer feedback about our 100 gig VIXIL performance for short distance data center applications and expect to start ramping production in the second half of calendar 24. We will qualify our VIXILs in CloudLight's active optical cables and transceiver platforms in the coming quarters. We are also working closely with cloud infrastructure providers on novel components and modules that leverage our unique technology capabilities to enable new future AI hardware architectures for higher bandwidth, lower power density, and low latency optical interconnects essential for training and inference applications. With the rapid build out of AI and ML data centers, connecting those data centers with high speed power and cost efficient interconnects is becoming even more important. To that end, we continue to have success in our 400 gig ZR module business, where in Q2, we grew over 30% sequentially. Additionally, we are receiving positive customer feedback on our 800 gig ZR modules, and we are on track to be first to market with customer samples this year. These modules will enable even higher speed extended reach data center interconnects to help keep pace with rapidly expanding data center infrastructure. Our coherent transmission products outside of the data center are receiving positive customer feedback and traction on our next generation 130 and 200 gigabaud data rate technologies that enable next generation coherent applications at 800G, 1.2T, and 1.6T. These high-speed products are available in both discrete and integrated form factors to enable enhanced performance in next-generation metro and long-haul applications. As we move through calendar 24, we believe we are at the forefront of 200-gigawatt optical technology with our first-to-market and first-to-volume products. Turning to industrial tech. Fiscal Q2 was down 9% sequentially as expected, driven by seasonality in our 3D sensing business and inventory consumption at one of our large industrial lasers customers. Industrial tech was down 35% year-over-year primarily due to increased competition for market share on a certain 3D sensing socket that we have discussed previously and overall macroeconomic softness. We expect revenue of 3D sensing for consumer applications to contribute approximately 5% or less of company revenue in Q3 and Q4 of fiscal 24. As the shift to industry 4.0 and 5.0 drives demand for greater automation and precision manufacturing, our laser products are well positioned to address evolving industrial needs. With precise control and pulse parameters, beam quality, and stability, we are seeing growing opportunities for our ultrafast and solid-state lasers across key micromachining applications in semiconductor, EV batteries, displays, PCBs, and solar cell manufacturing. Growth in new micromachining applications will help to partially offset the near-term headwinds I mentioned earlier. To summarize, High-speed data center demand is skyrocketing, and we are accelerating product development and production to capture this growth. Armed with longstanding customer partnerships, industry-leading manufacturing, and an unmatched portfolio of advanced photonic components, we are positioned to capture market share in the surging cloud transceiver market, driving significant top line and margin growth for Lumentum. 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. With that, Wajid.