Lumentum Holdings Inc. — Q2 FY2018 Form 10-Q
Reporting period: Fiscal second quarter and six months ended December 30, 2017; comparative periods ended December 31, 2016. Amounts are in U.S. dollars.
Business context and financial performance
Lumentum supplies optical and photonic products through Optical Communications (OpComms) and Commercial Lasers (Lasers). Its markets include telecom, datacom, consumer and industrial applications, including 3D sensing for consumer electronics.
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $404.6 million; up 52.7% year over year | $647.8 million; up 23.8% |
| Gross profit / margin | $171.1 million / 42.3%; prior-year margin 32.8% | $239.6 million / 37.0%; prior-year margin 32.3% |
| Operating income | $90.8 million; prior year $13.3 million | $93.5 million; prior year $30.1 million |
| Net income | $204.8 million; diluted EPS $3.17 | $211.9 million; diluted EPS $3.29 |
| Operating cash flow | Six-month inflow of $114.8 million, versus $55.5 million a year earlier |
Revenue mix: OpComms revenue was $360.1 million for the quarter (+52.2%) and $568.0 million for six months (+24.9%). Lasers revenue was $44.5 million (+56.7%) and $79.8 million (+17.0%), respectively. Quarter growth was led by 3D sensing; the company shipped more than $200 million of 3D sensing VCSEL arrays. Telecom and datacom sales declined versus the prior year.
Cash, debt and liquidity
- At December 30, cash and cash equivalents were $202.1 million and short-term investments were $422.4 million, totaling $624.5 million in cash and investments. Cash alone had fallen $70.8 million from July 1, largely because net purchases of short-term investments and capital spending used cash.
- Six-month investing cash outflow was $191.1 million, including $50.2 million of capital expenditures and $140.9 million of net purchases of short-term investments. Operating cash flow less capital expenditures was $64.6 million.
- Total current assets were $1,053.8 million and current liabilities $217.7 million. The filing says existing cash and expected operating cash flows should cover liquidity and capital spending needs for at least 12 months.
- The 2024 Convertible Senior Notes have $450 million face value, 0.25% contractual interest and mature March 2024. Carrying value was $325.7 million after unamortized discount; the effective interest rate on the liability component was 5.4%. The company says it intends and is able to settle the face value in cash.
Changes, outlook and notable items
- Growth and margin expansion were concentrated in consumer and industrial 3D sensing. OpComms quarterly gross margin rose to 45.0% from 36.6%; Lasers margin rose to 44.7% from 39.4%. Six-month Lasers margin declined to 38.2% from 41.6% due to mix and excess-inventory write-downs.
- Management expects 3D sensing revenue to decline in fiscal Q3. No numeric revenue or earnings guidance is provided. Management expects R&D spending to increase in absolute dollars in future quarters.
- Customer concentration is pronounced: Apple represented 49.8% of quarterly revenue and 37.2% for six months, versus less than 10% in the corresponding prior-year periods. Management expects revenue from this customer to decline in Q3 and fluctuate in future quarters.
- Net income includes a substantial, unusual tax benefit: the company released $207 million of U.S. federal and certain state valuation allowances, contributing to a reported tax benefit of $109.3 million for the quarter and $112.9 million for six months. This was partly offset by a provisional $83 million tax expense from the Tax Act rate reduction. Tax Act accounting remained incomplete; impacts from BEAT, GILTI and the transition tax were not yet reliably estimable. California deferred tax assets continued to carry a full valuation allowance.
- Gross margins remained exposed to lower telecom/datacom capacity utilization and excess or obsolete inventory; six-month unallocated costs included write-downs related to canceled programs. The company also cited pricing pressure, cyclical demand, customer seasonality, and dependence on a limited number of customers, suppliers and contract manufacturers.
- Purchase obligations totaled $187.4 million, generally expected to be fulfilled within one year. Ordinary-course legal claims were not expected by management to have a material adverse effect, though outcomes remain uncertain. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Key facts for investors to verify
- How much of reported earnings and EPS reflects the one-time valuation-allowance release, and what is the normalized tax rate and earnings outlook?
- Whether 3D sensing demand and customer orders—particularly from Apple—rebound after the expected Q3 decline, and how customer concentration evolves.
- Whether telecom/datacom weakness, capacity underutilization and inventory write-downs persist, and what this means for sustainable gross margins.
- Whether the $624.5 million cash-and-investment balance and operating cash generation remain adequate alongside $450 million face-value notes, capital needs and purchase commitments.
- How final Tax Act accounting, including transition tax, BEAT and GILTI, changes tax expense, cash taxes and deferred tax balances.