Lumentum Holdings Inc.

Good day, everyone, and welcome to the Lumentum Holdings Third 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. At this time, I would now like to turn the conference call over to Kathy Taw, Vice President of Investor Relations. Ms. Taw, please go ahead. Thank you, and welcome to Lumentum's Fiscal Third Quarter 2024 Earnings Call.

This is Kathy Todd, 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 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 Neophytonics, macroeconomic trends, trends and expectations for our products and technologies, our end markets, market opportunities, and customers, and our expected financial and operating 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 our most recent 10-Q and in our 10-Q that will be filed soon. 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 laws. 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 third quarter results and accompanying supplemental slides are available on our website at www.lamentum.com under the investor section. With that, I'll turn the call over to Alan.

Thank you, Kathy, and good afternoon, everyone. This is a very exciting time for Lumentum. We are making excellent progress on the huge opportunities the long-term demand for data center platonics creates for us, driven by the exponentially increasing compute requirements of artificial intelligence, machine learning, and advanced data centers. High-performance photonics are absolutely critical to enabling networks both within and beyond the data center to keep pace with these demands. Lumentum is pursuing a three-pronged strategy to drive significant growth in our cloud data center revenue. First, we are executing on our compelling new product roadmap that expands our offerings and market opportunities. We have multiple waves of product releases beginning later this calendar year and continuing into calendar 2025. This includes new 1.6 terabit intra data center optical transceivers, optical switching products, and 800G coherent pluggables for data center interconnect or DCI. This portfolio expansion is a result of our offerings spanning not only leading data center optical components at both 100G and 200G per lane speeds, but also high-speed 800G and 1.6 terabit transceivers that leverage these components across a range of customers. These transceiver product lines address a range of requirements from multiple market leading customers from short reach to long reach within their data center optical link fabric. Our 800 ZR and ZR Plus coherent transceivers utilize our photonic integrated circuit technology and deliver differentiated transmission performance and power consumption, critical factors for data center applications. We have already begun product sampling with key customers and our demos and customer discussions at the recent OSC trade show went very well. Given challenges in powering data centers, we expect to accelerate growth of our DCI products over the coming years. the second prong of our data center strategy we are significantly expanding our manufacturing capacity in our proven wafer fabs and back-end factories to ensure a secure high volume supply of our differentiated products to address our cloud customers strong demand now and into the future two weeks ago i visited our state-of-the-art manufacturing facility in thailand I am pleased to report that our expansion plans are progressing very well and remain on track. We expect to provide customers with qualification units including 1.6T modules from this facility this summer and based on current customer timelines, we expect volume production to start later this calendar year and accelerate into calendar 2025 in a meaningful way. Based on progress with new customer opportunities since our last call, we have ratcheted up the magnitude of our expansion plans to prepare for continued success in winning new sockets and customers in calendar 2025 and beyond. The third prong of our strategy focuses on partnering with cloud and AI infrastructure customers on new innovative solutions to scale data center infrastructure that leverages our extensive portfolio of in-house photonics and manufacturing technologies. For example, power consumption will continue to be a key limiter in further scaling of compute power in the future. To address this, we are focused on enabling innovative photonic approaches to more energy-efficient data center networks. These include supporting optical switching to replace certain electronic packet switches and new optical transceiver and link architectures, which will reduce the amount of power needed and will move photonics even closer to the processor and the switch chips. By implementing this three-pronged cloud strategy, Lumentum is well positioned to capitalize on the tremendous growth potential in data center photonics as compute and data center infrastructures increasingly rely on photonics to scale. In our recent OFC Lumentum Investor Technology event, we highlighted our current view that our cloud photonics opportunity in calendar year 2028 could be approximately $16 billion. Based on this and the progress we've made with leading customers, we believe we can expand our cloud revenue to multi-billions of dollars in the years ahead. Outside of the cloud, we continue to be focused on helping customers scale internet optical network infrastructure. Over many years, we have solidified our market share and technology leadership positions in this important market. We are addressing the growing bandwidth needs with our high speed components, but physical constraints, such as the Shannon limit, are impacting the ability to scale capacity by increasing speed alone. Further, networks will need to utilize increased parallelism with more wavelength channels and more fiber transmission bands and more fibers carrying data. These challenges create growth opportunities for Lumentum as higher volumes of leading edge coherent components and more advanced and complex rodents and optical amplifiers are required to enable further network capacity scaling. For example, our high port count and end-by-end ROADMs are addressing the growing number of wavelength channels, fibers, and degrees of connectivity. And our latest ROADM designs integrate C plus L band capability, enabling customers to better maximize the available bandwidth in a single fiber. Now let me move to our fiscal third quarter revenue and product highlights. Our cloud networking revenue grew 9% sequentially and 7% year-over-year, given by strong data center demand and the contribution from the CloudLight acquisition. Our revenue from 100G EML laser chips nearly tripled in fiscal Q3 compared to Q2, given by the expansion of output capacity at our Japanese wafer fab. Our earlier investments in this fab have proven to have been the right decisions. As we ramp up production of 100G EMLs with market leading customers, we are also qualifying our 200G EMLs for use in both 1.6 terabit and lower power 800G transceivers. Early customer feedback on our 200G EML is excellent, positioning this product line to be a key contributor to growth in calendar 2025. Data center demand is also increasing for 400 GR and GR plus modules for DCI. In addition to providing these modules, we are a market leader in the narrow line width tunable laser used in GR modules. We are encouraged by a notable uptake in demand for our tunable lasers in Q3, as customer inventory of these products appears to be normalized. We expect these strong cloud demand trends to continue based on the robust double-digit CapEx projections for calendar 24 coming from cloud data center operators. All that said, in the next few quarters, revenue will continue to be burdened by telecom customer inventory challenges. The pace of telco carrier spending has slowed more than previously anticipated. Because we continue to ship below end market demand, customer inventory of our products is decreasing, indicating that we are getting closer to the end of this lower demand phase in our industry. We remain highly confident in our market position and the future recovery and growth of our telecom business. Network bandwidth growth continues unabated, requiring network capacity additions. As fiber transmission approaches its physical limits, network providers increasingly recognize the value proposition of our technologies, which enable continued network scaling. This reinforces our long-term optimism for our opportunities in this market. In contrast to the extended inventory correction, I'm very pleased with the adoption and early ramp-up and growth potential of our newest telecom products by our customers. For example, we are ramping up shipments of our new 130 and 200 gigawatt coherent components. These enable the next generation of high-performance coherent transmission systems at 1.2 and 1.6 terabits per second. We have also seen increased customer activity in next-generation high port count and integrated extended C and extended L-band rotems. Customers are not burdened with excess inventory of these products, and increasing shipments highlight growing end market needs that will drive growth on top of the eventual market recovery. Turning to industrial tech, fiscal 2003 revenue was down 34% sequentially and down 42% year over year, driven by expected seasonality and increased competition in our 3D sensing business, as well as inventory consumption at our largest industrial laser customer. This decline masks the success we are having on new industrial laser platforms for emerging applications, particularly ultra-fast lasers, which experienced a more than 40% sequential growth in Q3. These lasers serve key micromachining applications in industries like semiconductor, EV batteries, displays, PCBs, and solar cell manufacturing. we anticipate an improved revenue profile for the industrial tech platform in the quarters to come. This is due to two factors. One, the smaller size of our 3D sensing business will have a less significant impact on our overall revenue profile. And two, we expect an uptick in industrial fiber laser shipments after the severe inventory correction experienced during Q3. To summarize, the combination of explosive growth in cloud data center and AI-driven demand, our customer traction and capacity additions for new data center products, and strong early demand for our new telecom products makes me confident and bullish about calendar 2025. We expect significant growth next calendar year as our investments in new data center products and manufacturing capacity this year translates into significant new revenues. This, combined with the telecom industry inventory correction abating, makes the outlook for calendar 2025 and beyond very promising. We have multiple cloud customer engagements, which will drive meaningful revenue growth and drive total company quarterly revenue to exceed $500 million exiting calendar 2025. Additionally, we expect that significant growth will continue into 2026 and 2027. We are working on several significant opportunities today that we expect will propel our cloud business into a multi-billion dollar annual run rate business in the coming years. Given all of this, it's clear that the future is bright 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 Momentum. With that, Wajid?