Lumentum Holdings Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter of 2023, the 13 weeks ended October 1, 2022; comparable quarter ended October 2, 2021. Amounts are in U.S. dollars.
Business context and reporting period
Lumentum supplies optical communications and commercial laser products. It reports two segments: Optical Communications (OpComms) and Commercial Lasers (Lasers). During the quarter, it completed its acquisition of NeoPhotonics on August 3 and acquired IPG Photonics’ telecom transmission product lines on August 15; their results are included from their respective acquisition dates.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue | $506.8 million | $448.4 million |
| Gross profit / margin | $201.2 million / 39.7% | $232.2 million / 51.8% |
| Operating income | $13.5 million | $115.9 million |
| Net income (loss) | $(0.4) million | $81.5 million |
| Diluted EPS | $(0.01) | $1.08 |
| Operating cash flow | $20.8 million | $61.9 million |
| Capital expenditures | $22.9 million | $17.9 million |
Revenue increased 13.0%. OpComms revenue was $453.4 million, up 11.7%; Lasers revenue was $53.4 million, up 25.9%. Cash used in investing activities was $646.6 million, including $860.8 million for acquisitions, net of cash acquired. Cash used in financing activities was $59.1 million, including $35.8 million of share repurchases and $22.4 million of employee share-tax withholding payments.
At October 1, cash and cash equivalents were $605.3 million and short-term investments were $1,019.6 million, totaling $1,624.9 million. Total debt carrying value was approximately $2.32 billion, including $420.2 million current and $1,899.5 million long-term debt. The $448.1 million principal amount of 2024 convertible notes is classified as current. Total current assets were $2,438.4 million and current liabilities were $802.8 million.
Material changes versus the prior comparable period
- Gross margin fell 12.1 percentage points. Management cited lower OpComms margins and product mix, acquired-intangible amortization, $4.6 million of acquired-inventory fair-value amortization, $7.3 million of broker component costs, and a $5.9 million prior-year equipment-sale gain.
- OpComms Telecom and Datacom revenue rose $144.1 million, including $73.8 million from the acquired businesses since acquisition. Industrial and Consumer revenue declined $96.7 million, reflecting competition and market-share normalization. Lasers growth reflected recovering demand for kilowatt-class fiber lasers.
- R&D expense increased 34.4% to $72.7 million; SG&A increased 67.0% to $105.7 million, reflecting added personnel and stock compensation, acquisition costs and acquired-intangible amortization. Restructuring charges were $9.3 million versus a $1.1 million reversal a year earlier.
- Operating cash flow decreased from $61.9 million to $20.8 million. Cash and equivalents declined $684.9 million from July 2, primarily reflecting acquisition spending.
- Other income rose to $13.8 million, including $9.0 million of foreign-exchange gains and $4.8 million of interest and investment income. The tax provision was $19.2 million and included $13.1 million of discrete tax expense, primarily tied to international restructuring and currency remeasurement.
Outlook, commentary, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management expects component supply to remain challenging at least into the second half of fiscal 2023 and says supply constraints and procurement costs may weigh on margins. Inventory included $21.9 million of incremental supply-procurement costs.
- Management expects R&D spending to increase in absolute dollars in future quarters and believes cash and operating cash flow will meet liquidity and capital-spending needs for at least the next 12 months.
- Key risks include dependence on a limited number of customers and suppliers, semiconductor and logistics constraints, intense competition and pricing pressure, export controls and trade restrictions, customer concentration, foreign-exchange volatility, and successful integration and realization of benefits from acquisitions. Two customers collectively represented 34% of quarterly revenue.
- NeoPhotonics purchase-price allocations remain preliminary. The company recorded $20.9 million of NeoPhotonics merger-related costs in total, and $16.2 million of acquisition-related costs for both transactions during the quarter, primarily professional fees and retention costs.
- Adoption of ASU 2020-06 changed accounting for the 2026 and 2028 convertible notes and produced a noncash opening-equity adjustment; the company reported no diluted-EPS impact for this quarter. The filing reports no material indemnification claims considered probable or reasonably possible. NeoPhotonics merger litigation suits were dismissed; a separate Oclaro-related class-certification motion remained pending, with a hearing scheduled for November 17, 2022.
Important facts for investors to verify
- Whether acquired businesses contribute expected revenue, margins and synergies, and how preliminary purchase-price allocations change.
- Whether component availability improves as expected and whether elevated procurement costs, inventory and customer demand affect margins and cash conversion.
- The status and cash-settlement or conversion exposure of the $448.1 million principal amount of 2024 notes, alongside total debt and remaining liquidity.
- Whether customer concentration, export restrictions, and the decline in Industrial and Consumer revenue create further revenue or inventory risks.
- The effects of the international restructuring, discrete tax charges, and ongoing tax audits on future tax expense and cash flows.