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

For fiscal second-quarter 2018 (to 30 December 2017), optical and photonic optical component and subsystem maker Lumentum Holdings Inc of Milpitas, CA, USA has reported record revenue of $404.6m, up 66.4% on $243.2m last quarter and 52.7% on $265m a year ago (and well above the $345-375m guidance). Growth was driven by the ramp of 3D sensing vertical-cavity surface-emitting laser (VCSEL) arrays, telecom pump lasers and reconfigurable optical add-drop multiplexers (ROADMs), and strong demand for commercial lasers (both micro-machining and kilowatt laser products). There were record revenues for nearly all laser product lines.

Optical Communications revenue was $360.1m (89% of total revenue), up 73.2% on $207.9m (85.5% of total revenue) last quarter and up 52.2% on $236.6m a year ago.

Of this, Telecom revenue was $110.2m, flat sequentially and down 31% on $160.1m a year ago. However, revenue for ROADMs rebounded by 22% quarter-on-quarter (with North American customers having worked down their inventories from prior quarters, and China rising to about 20% of shipment volume). Also, Telecom pump laser sales achieved record revenue. Datacom revenue was $34.4m, down 24% on $45.2m last quarter and 49% on $68.1m a year ago (with coherent components and datacom transceivers declining sequentially). Consumer & Industrial revenue was $215.5m (including over $200m in 3D sensing – well above expectation, after rapidly expanded 3D sensing VCSEL capacity and production volumes). This is up 312% on $52.3m last quarter (about $40m in 3D sensing) and just $8.4m a year ago. This also includes record revenue for industrial diode lasers, driven by strong demand from customers building material processing tools (including kilowatt glass-fiber lasers using Lumentum’s pump lasers).

Commercial Lasers revenue was a record $44.5m (11% of total revenue), up 26.1% on $35.3m (14.5% of total revenue) last quarter and up 56.7% on $28.4m (10.7% of total revenue) a year ago, driven by both micro-machining and kilowatt laser products (due to strong demand from equipment used in the production of next-generation consumer electronic devices such as new smartphones and wearables, which are increasingly using components that require laser-based processing).

“The steep production ramp and our consistently high yields were enabled by our proprietary laser design and production capabilities that have taken us years to develop,” says president & CEO Alan Lowe. “We have irreplaceable learnings and volumes of field data from multiple high-volume 3D sensing ramps. This, along with our decades of experience supplying laser diodes into the industrial and subsea communication markets, allows us to produce high-performance, highly reliable volumes of lasers,” he adds. “Our laser chip and manufacturing processes are specifically designed to enable the short-design cycles and high-volume production ramps needed by the fast pace of consumer electronics customers. These requirements are quite different from those of other customers in the industrial and communications market. We spent nearly a decade developing unique capabilities to address the 3D sensing market.”

Gross margin (on a non-GAAP basis) was 44.9%, up from 34% last quarter and 36.9% a year ago. This was particularly due to the favorable product mix and improved operating leverage from higher volumes in Optical Communications, for which gross margin was 45%, up from 34.7% last quarter and 36.6% a year ago (driven by 3D sensing gross margin significantly above the historical corporate average). Commercial Lasers gross margin was 44.7%, up from 30% last quarter and 39.4% a year ago (returning to the mid-40% level, consistent the longer-term target of 50%).

Operating expenses were $67.2m, up from $54.1m last quarter, due mainly to investments in new product programs, infrastructure investments to support growth, and variable incentive compensations. In particular, research & development (R&D) expenses rose from $35.4m to $38.9m and selling, general & administrative (SG&A) expenses rose from $23.5m to $28.3m. However, as a percentage of revenue, operating expenses been cut from 22.2% to 16.6%.

Demonstrating the strength of the firm’s operating model as volume increases, operating income was $114.6m (operating margin of 28.3% of revenue), up from $28.6m (11.8% margin) last quarter and $39m (14.7% margin) a year ago.

Likewise, net income was a record $107.8m ($1.67 per diluted share), up from $27.8m ($0.43 per diluted share) last quarter and $35.9m ($0.57 per diluted share) a year ago.

Capital expenditure (CapEx) was $26m (level with last quarter but down from $35m a year ago). During the quarter, cash and short-term investments hence rose by $92m, from $532.5m to $624.5m.

During the quarter, Lumentum continued to book new 3D sensing orders and exited the quarter with a solid order backlog for deliveries through June.

However, given the firm’s consumer electronics-oriented 3D sensing customer mix, for the seasonally lower fiscal third-quarter 2018 (to end March) Lumentum expects revenue to fall to $280-305m, with 3D sensing down significantly. Non-3D sensing revenue should rise by $25m sequentially to $35m, including $20m growth for ROADMs and telecom pump lasers plus (with demand outstripping what the firm can supply) $5m growth for Commercial Lasers to exceed $50m (a target that’s been pursued for a long time). ROADM revenue will be up for both the USA and China.

Lumentum expects operating margin to fall to 15.5-18% and diluted earnings per share to fall to $0.65-0.80.

Revenue should include contributions from new 3D sensing customers in the Android space, including some who have designed in Lumentum’s newest high-performance edge-emitting lasers. “These new opportunities are in the early stages and are only expected to contribute a few million dollars,” notes Lowe. “These new customers are expected to drive far more business as we look to our fiscal 2019 and beyond,” he adds. “Our proven capabilities position us well for the future as demand for our industrial lasers and ROADMs is strengthening, and 3D sensing opportunities are broadening to more customers and end markets… Consumer electronic manufacturers throughout China, Korea and North America are looking to 3D sensing to enhance security, to enable augmented and virtual reality, and to add other new functionality. Given the volume that these manufacturers produce, it is not difficult to imagine the annual market for 3D sensing lasers exceeding $1bn in the next year or two. To capitalize on these market opportunities, we are rapidly ramping our R&D investment in 3D sensing and in additional manufacturing capacity for VCSELs and edge-emitting lasers. Given the lengthy qualification times, we are already in the process of qualifying new equipment to permit even higher production starts in our fourth quarter for first-half fiscal 2019 deliveries.”,

“We expect strong North American ROADM demand to continue in the quarters ahead. Chinese demand for ROADMs will grow throughout calendar year 2018 and 2019 as China continues its march towards large-scale domestic deployments [building out networks in many of the large cities],” says Lowe. “We are adding capacity for ROADMs today, so I would expect our ability to get a new peak level of ROADM revenue this year is very highly likely.”

Finally, demand continues to be strong for both micromachining and kilowatt fiber laser product lines, so Lumentum expects Commercial Lasers to be on a growth trajectory over the coming quarters.