Lumentum Holdings Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended December 31, 2022. Comparisons are to the three and six months ended January 1, 2022, respectively. Amounts are in U.S. dollars.
Business context and reporting period
Lumentum supplies optical and photonic products through Optical Communications (OpComms) and Commercial Lasers (Lasers). Results include NeoPhotonics from its August 3, 2022 acquisition and IPG Photonics telecom product lines from their August 15, 2022 acquisition. NeoPhotonics contributed $104.6 million of quarterly revenue and $177.4 million for the six-month period.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $506.0 million, up 13.3% | $1,012.8 million, up 13.1% |
| Gross profit / margin | $166.2 million / 32.8% | $367.4 million / 36.3% |
| Operating income (loss) | $(21.9) million | $(8.4) million |
| Net income (loss) | $(31.7) million; $(0.46) diluted EPS | $(32.1) million; $(0.47) diluted EPS |
| Operating cash flow | Not provided separately for the quarter | $115.7 million, versus $268.4 million |
| Capital expenditures | Not provided separately for the quarter | $62.8 million, versus $44.0 million |
Quarterly OpComms revenue was $448.8 million, up 12.9%; Lasers revenue was $57.2 million, up 16.0%. For the six months, OpComms revenue was $902.2 million and Lasers revenue was $110.6 million. Cash and cash equivalents were $592.1 million at December 31, down from $1,290.2 million at July 2; short-term investments were $1,088.3 million, for combined cash and short-term investments of $1,680.4 million.
Debt carrying value totaled $2,321.0 million: $420.7 million current and $1,900.3 million long-term. The associated principal outstanding was $448.1 million on 2024 Notes, $1,050.0 million on 2026 Notes and $861.0 million on 2028 Notes. The company said cash and operating cash flows should cover liquidity and capital spending needs for at least 12 months.
Material changes versus prior comparable periods
- Revenue growth reflected NeoPhotonics, partially relieved component shortages, and recovery in demand for kilowatt-class fiber lasers. Telecom and Datacom revenue increased; Industrial and Consumer revenue fell by $65.7 million in the quarter and $162.4 million for six months, which management attributed primarily to competition and market share normalization.
- Gross margin declined from 46.5% to 32.8% for the quarter and from 49.1% to 36.3% for six months. Drivers included lower OpComms margins and product mix, acquired-intangible amortization, acquired inventory fair-value amortization, and premium component purchases.
- Operating expenses rose: quarterly R&D increased 42.5% and SG&A 42.6%. Higher costs reflected acquired-business headcount and compensation, acquisition and integration costs, amortization, and litigation expense.
- Operating cash flow fell to $115.7 million from $268.4 million for six months, while investing cash use included $861.6 million for acquisitions, net of cash acquired. Cash declined by $698.1 million over the period.
Outlook, management commentary, risks and unusual items
- Management expects component supply to remain a challenge through the rest of fiscal 2023 and said supply-chain-related costs may pressure near-term gross margin. Inventory included $18.0 million of incremental supply and procurement costs. Management plans to continue R&D investment and expects absolute R&D spending to increase in future quarters.
- Management cited volatile macroeconomic conditions, inflation, supply constraints, changing demand, China-related economic and geopolitical uncertainty, COVID-19 effects, and Russia-Ukraine-related risks. It did not provide specific revenue or earnings guidance in the supplied filing text.
- Quarterly results included $13.9 million of restructuring charges; six-month charges were $23.2 million. Other gross-profit pressures included $11.7 million of broker component-purchase charges in the quarter and $9.6 million of acquired inventory step-up amortization. The six-month figures were $19.0 million and $14.2 million, respectively.
- NeoPhotonics acquisition consideration was $934.4 million; the IPG product-line purchase price was $55.9 million. Purchase-price allocations were preliminary and subject to adjustment. Management cautioned that integration may not deliver anticipated synergies or benefits.
- Two customers collectively accounted for 31% of quarterly revenue and 33% of six-month revenue. The company also relies on a limited supplier base and reported $391.5 million of purchase obligations.
- The company recorded $7.8 million for settlement of certain non-ordinary-course litigation matters. A separate Oclaro merger litigation matter had an agreement in principle for class-wide settlement, subject to court approval.
- Adoption of ASU 2020-06 changed accounting for the 2026 and 2028 convertible notes and reduced reported interest expense. The 2024 Notes remain classified as current liabilities. No goodwill impairment was identified in the quarter.
Important facts for investors to verify
- How much future revenue and margin contribution the acquisitions deliver, and whether integration benefits materialize.
- Whether supply constraints, broker sourcing costs and premium procurement costs ease, and how they affect gross margin and inventory.
- Demand trends in Telecom and Datacom versus Industrial and Consumer, including customer concentration and order patterns.
- Cash generation, acquisition-related spending, and the company’s capacity to meet the 2024 Notes maturity and other debt obligations.
- Final acquisition purchase-price allocations, restructuring costs, and the outcome and potential cost of pending litigation and tax examinations.