Lumentum’s quarterly revenue rises 45.6% year-on-year to $354.1m, driven by telecom and fiber-laser demand

For its fiscal first-quarter 2019 (ended 29 September 2018), optical and photonic optical component and subsystem maker Lumentum Holdings Inc of Milpitas, CA, USA has reported revenue of $354.1m, up 17.6% on $301.1m last quarter and up 45.6% on $243.2m a year ago, driven by strong telecom and fiber-laser demand, along with 3D sensing expansion across multiple customers and their products. “We saw new record revenues in ROADMs [reconfigurable optical add-drop multiplexers] and fiber lasers,” notes president & CEO Alan Lowe.

Optical Communications segment revenue was $310.1m (87.6% of total revenue), up 26.6% on $244.9m (81.3% of total revenue) last quarter and up 49.2% on $207.9m a year ago. Of this:

Telecom revenue was $142.9m, up 7% on $133.1m last quarter (and up 29% on $110.4m a year ago), due largely to transport products, with 10% or higher sequential growth in each of the ROADM, pump laser and optical amplifier product lines (with ROADMs exceeding $70m).
Datacom revenue was $34.2m, down 24% from $45.2m a year ago and down slightly on $34.5m last quarter. “We continue to be selective in our sales of this margin-challenged product area while we develop our next-generation 100G and 400G products,” says Lowe.
Industrial & Consumer revenue was $133m, up 72% on $77.3m last quarter and up 154% on $52.3m a year ago, driven by an earlier-than-planned ramp of 3D sensing diode laser products into a broader array of models and device types at customers compared with last year.

Commercial Lasers segment revenue was $44m (12.4% of total revenue), up 24.6% on $35.3m a year ago but down a larger-than-expected 21.7% on the record $56.2m (18.7% of total revenue) last quarter. Record revenue for kilowatt-class fiber lasers was up 24% sequentially (benefitting from capacity expansions and further ramping volumes for the firm’s newest fiber-laser product to meet strong customer demand). However, this was outweighed by a sharp drop in sales of other laser products, primarily solid-state lasers for semiconductor manufacturing and consumer electronic applications. These are usually seasonally soft in fiscal Q1 and Q2 (since manufacturers typically install laser-based equipment capacity in the spring and summer in anticipation of the annual fall consumer electronics cycle and holiday season), but this year Lumentum is seeing larger-than-normal seasonal declines, perhaps related to overall market softness (as reported by some of the firm’s larger peers).

On a non-GAAP basis, gross margin has risen from 34% a year ago and 37.2% last quarter to 40.3%, driven by an increased mix of higher-margin telecom and 3D sensing products as well as overall higher volumes.
Specifically, Optical Communications gross margin has grown from 34.8% last quarter to 40.3%, driven by the higher mix of Industrial & Consumer revenue (e.g. 3D sensing, which is higher than the segment-average gross margin), improvements in telecom margins (from the greater mix of higher-margin products such as ROADMs and pump lasers) and lower average manufacturing cost (due to the higher volumes).

Commercial Lasers gross margin was 40.2%, down from 47.9% last quarter (due to the significant increase in fiber lasers in the revenue mix plus lower volumes of non-fiber laser sales) but up from just 30% a year ago.

Operating expenses were $57.9m up from $54.1m a year ago but cut from $58.5m last quarter (and cut from 22.2% of revenue a year ago and 19.4% to 16.4%).

Driven primarily by gross margin expansion, combined with leverage over operating expense, operating income has grown from $28.6m (operating margin of 11.8% of revenue) a year ago and $53.6m (17.8% operating margin) last quarter to $84.7m (23.9% operating margin).

Likewise, net income has grown further, from $27.8m ($0.43 per diluted share) a year ago and $61.6m ($0.95 per diluted share) last quarter to $85.8m ($1.31 per diluted share).

Capital expenditure (CapEx) was $31.1m. During the quarter, cash and short-term investments rose by $22.8m from $711.5m to $734.3m.

Net inventory declined $17m sequentially as Lumentum consumed significant levels of 3D sensing inventory.

For fiscal second-quarter 2019, Lumentum expects revenue to grow to $405-430m, with Telecom revenue driven by continued growth for transport products and Industrial & Consumer revenue also rising (due to the ongoing 3D sensing production ramp: “While we have added significant manufacturing capacity, we are still not meeting our growing customer demand,” says Lowe). Commercial Lasers should be flattish quarter-on-quarter, but this is expected to be the bottom (as fiber-laser demand is continuing to be quite strong, and a new product pipeline from the firm’s ultrafast products will be introduced next year that should drive new design wins for both Lumentum and its customers). In contrast, Datacom revenue will be down 20-30%, as the firm is again forgoing certain unprofitable (lower-margin) customer opportunities (although this should be the low point as the firm introduces its low-cost CWM4 module later in the quarter and gets traction through calendar 2019.). The firm also expects increases in gross margin to over 40% (with mid-40s realistic), operating margin to 28-30%, and diluted earnings per share to $1.60-1.75.

“In the second quarter, based on investment decisions made quarters ago, we expect additional production capacity to come online, particularly in our ROADM product line,” says Lowe. “The strong demand for our telecom products is spread across a broad customer base and is driven by an increase in global demand for next-generation optical networks,” he adds. “In addition to an increase in the number of networks being built globally, we believe our growth in ROADMs is also driven by a fundamental shift in how optical networks are built. There is no practical way to accomplish that needed network capacity and agility, other than incorporating increasing numbers of even more advanced ROADMs.”

Lumentum has also increased its industrial diode pump capacity in its factory in Thailand. “These industrial diode pump lasers are at the heart of our fiber laser as well as those of our external pump customers,” notes Lowe.

“Our strategic investments in differentiated products targeting growth markets reliant on photonics have proven successful and position us well for the years to come,” believes Lowe.

Regarding its pending acquisition (announced on 12 March) of Oclaro Inc of San Jose, CA, USA (which provides components, modules and subsystems for optical communications), Lumentum has received approval under the USA’s Hart-Scott-Rodino (HSR) Antitrust Act, and Oclaro stockholders approved the transaction at their meeting in July. The merger is subject to certain other closing conditions (including anti-trust regulatory approval in China). “We continue to work with Oclaro in receiving anti-trust approval in China and completing this pending transaction,” notes senior VP, strategy & corporate development and interim chief financial officer Chris Coldren.

See related items:

Lumentum’s annual revenue grows 25% to record $1.25bn, yielding record profit

Oclaro stockholders approve takeover by Lumentum

Lumentum’s seasonal decline in 3D sensing revenue offset by growth in Telecom, Datacom and Commercial Laser products

Lumentum’s record quarterly revenue driven by VCSEL array ramp for 3D sensing in consumer mobile applications

Lumentum returns to sequential quarterly revenue growth

Tags: Optical communications

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