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    LITE
    Earnings call· Dec 2024(Q2 FY25)

    Lumentum Holdings Q2 FY25 earnings call LITE

    Feb 6, 2025 Source

    Executive summary

    Lumentum Q2 FY25 — Cloud & Networking Strength Drives Revenue and EPS Beat Amidst Leadership Transition

    Lumentum exceeded Q2 FY25 revenue and EPS guidance, driven by robust demand in its Cloud & Networking segment, particularly from hyperscale customers and DCI. The company is strategically expanding capacity and customer engagements in the rapidly growing AI cloud market, despite facing supply chain constraints for certain components. A leadership transition is underway, with Alan Lowe retiring and Michael Hurlston succeeding him as CEO.

    Highlights

    5

    • Q2 FY25 revenue of $402.2 million exceeded the high end of guidance.

    • Non-GAAP EPS of $0.42 exceeded the high end of guidance.

    • Cloud & Networking segment revenue grew 20% sequentially and 18% year-over-year.

    • Achieved another record for EML unit shipments in Q2 FY25, including new 200G/lane speed variants.

    • Strengthening demand for Data Center Interconnect (DCI) products and long-haul transmission solutions.

    Concerns

    3

    • Industrial Tech segment revenue was down 21% year-over-year and is anticipated to decline sequentially by approximately $10 million in Q3 FY25.

    • Supply chain shortages on critical components (e.g., hermetic packages, CW lasers) are limiting Cloud & Networking growth, preventing a double-digit sequential increase in Q3 FY25.

    • Initial yield issues during new product ramps in the transceiver business negatively impacted Q2 FY25 non-GAAP gross margin by 100-150 basis points.

    Guidance & targets

    8
    CategoryTargetConfidence
    Net Revenue
    $410 million to $425 million
    high materiality
    High
    Non-GAAP Operating Margin
    9.5% to 10.5%
    high materiality
    High
    Diluted Net Income per Share
    $0.47 to $0.53
    high materiality
    High
    Cloud & Networking Revenue
    up sequentially
    medium materiality
    High
    Industrial Tech Revenue
    down sequentially by approximately $10 million
    medium materiality
    High
    Non-GAAP Annual Effective Tax Rate
    16.5%
    low materiality
    High
    Share Count
    approximately 73 million shares
    low materiality
    High
    Quarterly Revenue
    $500 million
    high materiality
    High

    Segment performance

    2
    SegmentRevenueYoYQoQMargin
    Cloud & Networking
    Primarily driven by strong end market demand from cloud hyperscale customers. Sequential increases seen in nearly all product lines. Profitability improved due to higher revenue.
    Segment profit increase QoQ: 330 basis pointsSegment profit increase YoY: 610 basis points
    		$339.2 million18%20%16.2%
    Industrial Tech
    Sequential increase driven by higher industrial laser shipments, partially offset by seasonally lower 3D sensing. Year-over-year decline reflects challenged demand due to weak industrial end market.
    		$63 million-21%15%6.2%

    Operational metrics

    19
    Non-GAAP Gross Margin
    32.3%slightly down sequentially, up year-on-year
    Q2 FY25

    Impacted by initial yield issues in transceiver ramp-up and underutilized Thailand infrastructure.

    Non-GAAP Operating Margin
    7.9%up 490 basis points sequentially, up 600 basis points year-on-year
    Q2 FY25

    Primarily driven by improved Cloud & Networking profitability and lower SG&A expenses.

    Non-GAAP Operating Expenses
    $98.3 milliondecrease of $2.1 million from Q1, decrease of $9.9 million from year-ago quarter
    Q2 FY25

    Reduction driven by restructuring actions in FY24 and stringent cost controls, despite increased investment in cloud opportunities.

    Non-GAAP SG&A Expense
    $35.9 million
    Q2 FY25

    Component of total non-GAAP operating expenses.

    Non-GAAP R&D Expense
    $62.4 million
    Q2 FY25

    Component of total non-GAAP operating expenses.

    Non-GAAP Net Income
    $30 million
    Q2 FY25

    Reported non-GAAP net income for the quarter.

    Non-GAAP EPS
    $0.42
    Q2 FY25

    Diluted non-GAAP net income per share.

    Adjusted EBITDA
    $57.6 million
    Q2 FY25

    Reported adjusted EBITDA for the quarter.

    Cash and investments balance
    $897 milliondecreased by $19 million sequentially
    Q2 FY25 end

    Total cash and short-term investments.

    Inventory levels
    approximately flatsequentially
    Q2 FY25 end

    Despite expected growth in Cloud & Networking revenue.

    CapEx
    $65 million
    Q2 FY25

    Investment for future growth and capacity.

    Diluted Share Count
    71.6 million shares
    Q2 FY25

    Used for non-GAAP EPS calculation.

    EML unit shipments
    record
    Q2 FY25

    Includes new 200G/lane speed EMLs.

    EML capacity expansion
    40% or higher growth
    June CY24 to June CY25

    For both 100G and 200G EMLs. Demand is still expected to exceed supply.

    Datacom transceiver volume ramp
    —
    Q2 FY25

    Began ramping to largest customer and one new customer. Qualification work with another new customer is ongoing, with initial volume production expected in Q4 FY25.

    Ultrafast laser shipments
    new record
    Q2 FY25

    Driven primarily by growing demand from a leading tool supplier for high-volume solar cell manufacturing.

    GAAP Gross Margin
    24.8%
    Q2 FY25

    Reported GAAP gross margin.

    GAAP Operating Loss
    12.8%
    Q2 FY25

    Reported GAAP operating loss.

    GAAP Net Loss per Share
    $0.88
    Q2 FY25

    Reported GAAP net loss per share.

    Industry KPIs

    6
    MetricValueDetails
    Orders backlog qualitystrengthening demand
    Product orders order growthrobust demand
    Ai cloud infrastructure orderspreproduction volumes
    Revenue mix by product customer typeCloud & Networking: $339.2 million; Industrial Tech: $63 millionUSD
    Design wins product cycle transitions200G/lane speed EMLs delivered
    Front end vs back end scale up vs scale across moptical links essential

    Product announcements

    4
    ProductTypeDetails
    200G/lane speed EMLslaunch
    200G lens integrated photodetector arrayslaunch
    26-kilowatt fiber laserslaunch
    Ultra-high power laserslaunch

    Capital programs

    2
    Thailand Manufacturing Site Expansionunderway
    Period spend: $65 million

    Benefit: clean room capacity

    Construction of a large new three-story facility and clean room on the same campus is well underway, with the first 4 completed and ready for tool installation. This CapEx also supports moving production out of China into Thailand. The $65M CapEx for Q2 FY25 was primarily focused on this expansion and indium phosphide wafer production.

    Indium Phosphide Wafer Production Expansionunderway
    Period spend: $65 million

    Benefit: increased equipment capacity for EML chip manufacturing

    Wafer fab expansion plans to enable higher volumes of EMLs and other indium phosphide lasers and photodetectors continues to be on track. The $65M CapEx for Q2 FY25 was primarily focused on this expansion and Thailand clean room capacity. Additional CapEx in H2 FY25 will be related to EML capacity expansion.

    Risks & headwinds

    4
    Weak industrial end marketQ2 FY25, expected to continue into Q3 FY25

    Industrial Tech segment revenue down 21% year-over-year

    Mitigation: Developing innovative laser solutions (e.g., 26-kilowatt fiber lasers, ultrafast lasers) to address demand for high precision and speed.

    Supply chain shortages for critical componentsQ3 FY25 and Q4 FY25

    Prevented Cloud & Networking from achieving double-digit sequential growth in Q3 FY25; impacting hermetic packages and CW lasers.

    Mitigation: Working with suppliers to increase capacity, qualifying alternative suppliers, and bringing CW laser production in-house to control supply chain more effectively.

    Initial yield issues in transceiver new product rampsQ2 FY25, expected to be resolved in Q3 FY25

    Negatively impacted Q2 FY25 non-GAAP gross margin by 100-150 basis points.

    Mitigation: Working through the issues; expected to be behind them, leading to sequential gross margin improvement in Q3 FY25.

    Underutilization of new manufacturing infrastructureQ2 FY25, expected to improve in back half of fiscal year

    Negatively impacted Q2 FY25 gross margin.

    Mitigation: As utilization rates of equipment and production lines increase, it should dramatically help gross margins. Infrastructure is being put in place for new products, new customers, and to move production out of China.

    What to watch in Q3 FY25

    5

    Cloud & Networking Revenue Growth

    Q3 FY25
    CurrentUp 20% sequentially in Q2 FY25
    TargetUp sequentially in Q3 FY25

    Why it matters

    This segment is the primary growth driver, and its continued sequential growth is key to the company's overall performance and AI/cloud strategy.

    Cloud & Networking to be up sequentially, with strong growth in products addressing cloud applications and improving network customer demand

    Q&A highlights

    6

    Clarify the rank order of drivers (Cloud Light/transceivers, Datacom chips, telecom) for the expected $25M sequential increase in Cloud & Networking revenue for Q3 FY25.

    The Datacom business, including both chips and transceivers, is the primary driver of sequential growth in Cloud & Networking, with new products ramping. Telecom is also aiding growth due to inventory drawdowns. Supply chain shortages are limiting the potential for even higher growth.

    “The Datacom business is really what's driving the growth quarter-over-quarter, both Datacom chips and transceivers. We've got some new products, both on the chip side as well as the transceiver side, that are going to be ramping through the quarter.”

    asked by Samik Chatterjee · answered by Wajid Ali

    2 min read6 chapters

    Detailed Narrative

    01

    Leadership Transition and Strategic Direction

    Alan Lowe announced his retirement as CEO, effective February 7, 2025, with Michael Hurlston succeeding him. Lowe will remain on the Board and serve as an advisor. The company is positioned for continued growth, particularly in the rapidly expanding cloud market, leveraging its photonics technologies for AI scaling within and between data centers. The transition is seen as timely, with the company in a strong financial and operational position.

    02

    Cloud & Networking Segment Performance and Drivers

    The Cloud & Networking segment saw robust sequential and year-over-year revenue growth, driven by strong demand from cloud hyperscale customers. This includes increased shipments of Datacom transceivers to its largest cloud customer and initial volume production for a new customer. The company is also experiencing strengthening demand for Data Center Interconnect (DCI) products and long-haul transmission solutions, which are increasingly utilized by cloud customers.

    03

    EML and Indium Phosphide Technology Advancements

    Lumentum achieved record EML unit shipments in Q2 FY25, including the delivery of 200G/lane speed EMLs to multiple customers. The company expects to gain market share in upcoming 800G and 1.6T transceivers due to its 200G EML design wins. Additionally, new 200G lens integrated photodetector arrays are being introduced, strengthening vertical integration and content opportunity in next-generation transceivers. Wafer fab expansion for indium phosphide lasers and photodetectors remains on track, with demand for EML chips expected to exceed supply into calendar year 2026.

    04

    Capacity Expansion and New Customer Ramps

    Transceiver manufacturing capacity expansion is progressing as planned, with construction of a new facility and clean room in Thailand underway. The first four completed sections are ready for tool installation. The company expects to start initial volume production with another new customer during Q4 FY25, ramping through the first half of fiscal '26. Engagement with cloud customers on long-term technology roadmaps is at an all-time high, including shipping preproduction volumes of unique ultra-high power lasers to an AI infrastructure customer.

    05

    Industrial Tech Segment Challenges and Innovations

    The Industrial Tech segment experienced a sequential increase in revenue but a significant year-over-year decline, reflecting a challenging macroeconomic environment. Despite this, the company continues to innovate, shipping sample units of its latest 26-kilowatt fiber lasers, which offer up to 3x faster cutting speeds. Ultrafast laser shipments reached a new record, driven by demand from solar cell manufacturing and growing traction in advanced packaging and semiconductor processes.

    06

    Supply Chain Constraints and Gross Margin Impact

    Lumentum is facing supply chain shortages for critical components, such as hermetic packages and CW lasers, which are limiting its ability to fully meet demand, particularly in telecom products. These constraints are expected to impact growth in Q3 and Q4 FY25. Additionally, initial yield issues during the ramp-up of new transceiver products in Q2 FY25 acted as a headwind to gross margins, though these issues are expected to be resolved, leading to sequential margin improvement.

    AI-generated summary of the company’s earnings call. Not investment advice.