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Lumentum Holdings Inc. (LITE)

Q1 2013 Earnings Call· Sat, May 11, 2013

$854.56

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Transcript

Operator

Operator

Welcome to the NeoPhotonics First Quarter 2013 Conference Call. This call is being webcast live on the NeoPhotonics Event Calendar webpage at www.neophotonics.com. As a reminder, this call is being recorded. This call is property of NeoPhotonics and any recording, reproduction or transmission of this call without the expressed written consent of NeoPhotonics is prohibited. You may listen to a webcast replay of this call by going to the NeoPhotonics Event Calendar webpage. I would now like to turn the call over to Erica Mannion of Sapphire Investor Relations, Investor Relations for NeoPhotonics. Please go ahead.

Erica Mannion

Management

Good afternoon. Thank you for joining me today with Tim Jenks, Chairman and CEO and JD Fay, CFO. The call today contains forward-looking statements that involve risks and uncertainties. These include statements related to the NeoPhotonics business outlook for the quarter ending June 30, 2013, future periods and industry trends, and forward-looking statements that management may make in response to questions. Actual results may differ materially from forward-looking statements. Factors that could cause results to differ materially from these statements include those described in today’s press release as well as those detailed in the section entitled “Risk Factors” of the Company’s Annual Report on Form 10-K most recently filed with the SEC. NeoPhotonics cautions you not to place undue reliance on forward-looking statements, and that these statements speak only as of the date they are made. Non-GAAP financial measures will be discussed today. Please visit NeoPhotonics Investor Relations webpage for the Company’s press release, which contains an explanation of these non-GAAP financial measures and reconciliation to the comparable GAAP measures. Now, I will turn the call over to Tim Jenks, CEO.

Timothy S. Jenks

Management

Thank you for joining us today. NeoPhotonics made solid progress in 2012 and we are off to a strong start in our first quarter of 2013. We met or beat each of our projections, accelerated our 100G product growth and closed a strategic acquisition that enhances our 100G product portfolio. We’ve seen great traction with our 100G and Coherent products and we have strong momentum with new products in the pipeline. Revenue in the first quarter was $56.1 million, which was above the high end of the projected range of $50 million to $55 million. We are pleased with these results for a seasonally low first quarter. Our year-over-year growth came primarily from our 100G products including those used in Coherent networks. Revenue from our 100G products was up approximately 41% over the fourth quarter and up over 400%compared to the first quarter of last year. Our 100G growth led our strongest first quarter for revenue in the company’s history. 100G is a strong market and one in which we believe we are a share taker. As we work to increase our content per port, we believe that our percent of revenue in the 100G business is one of the highest of companies in the optical components market. Our 100G revenue growth stems from both coherent line-side and client-side or enterprise demand. We believe that having this suite of 100G solutions is a competitive advantage as well as an important catalyst to our growth. And because we’ve been investing in capacities for these products over the last several years, we are prepared to support added demand for 100G deployments. I will now talk about our Product Groups. In the first quarter of 2013, revenue from “Speed and Agility” products was approximately 64% of our total revenue, up from 60% in…

James D. Fay

Management

Thank you, Tim, and good afternoon. For the first quarter of 2013, revenue was $56.1million, which was above the high end of our projections, and was the highest first quarter revenue in our history. First quarter revenue was lower by approximately 10% from the prior quarter but up approximately 3% from the first quarter of 2012. GAAP gross margin for the first quarter of 2013 was 20.9%. Non-GAAP gross margin for the first quarter was 23.1%, which was at the middle of our projection, though down from the previous quarter’s Non-GAAP gross margin of 24.5% and 23.9% in the same period last year. Loss from continuing operations for the first quarter of 2013 was $10.5 million, as compared to a loss of $3.0 million in the fourth quarter and a loss of $11.8 million in the first quarter of 2012. The first quarter of 2013 included approximately $3.2 million of transaction-related expenses for the LAPIS deal. Diluted loss per share from continuing operations for the first quarter of 2013 was $0.34, and compares to a loss of $0.10 in the prior quarter and is an improvement from a loss of $0.47 in same period last year. Non-GAAP loss from continuing operations for the first quarter of 2013 was $4.4 million, as compared to a loss of $0.1 million in the fourth quarter of 2012 and an improvement from a loss of $5.4 million in the year ago period. Non-GAAP diluted loss per share from continuing operations for the first quarter of 2013 was $0.14, which was better than the high end of our projected range. This result compares to break-even in the prior quarter and is an improvement from a $0.22 loss in the year ago period. Non-GAAP income and diluted income per share from continuing operations for the first…

Timothy S. Jenks

Management

Thank you, JD. To wrap up, I would like to talk a bit about our expanded production facility and recent product developments. JD noted that we opened a new manufacturing facility in Dongguan, China, which adds approximately 80,000 square feet of new production space; an increase of approximately 50%. We are making progress in expanding our production while improving yield and operating efficiencies. As a result we are ready to address increasing industry demand. As noted earlier, we recently introduced some important new products. During the first quarter we announced a new micro-ITLA narrow line width tunable laser which leverages our core PIC array laser technology. The product is designed to provide enhanced performance in a smaller size and add key functionalities for the most demanding 100G systems. In fact this generational progress has reduced the form factor by approximately two-thirds while lowering power consumption. The micro-ITLA is just one of many products in our suite of 100G Coherent solutions. We also announced a new variable power integrated coherent receiver that is focused on the most demanding 100G coherent transmission systems. We announced lower power and lower cost 100G client modules as CFP2 LR10 and LR4 versions, for both carrier telecom and for enterprise 100G applications. We have been working with our tier 1 customers and some developing customers on the new products to meet the specifications for their next generation systems. As a company we continue to focus on solutions that. Increase 100G deployments and expand coherent applications to include metro deployments. Connect data centers to telco networks with 100G links. Enable coherent switching. Provide new Access solutions that enhance network reliability; and data rates, with improved efficiency and cost. Finally, given the strong position we are in with our 100G product suite, our customer design win positions and our new product developments, we believe we are on a path to regain profitability and sustain profitable growth going forward. This concludes our formal comments and now I will ask the operator to open up the line for questions.

Operator

Operator

Thank you. (Operator Instructions) We’ll take our first question from Simon Leopold with Raymond James. Simon M. Leopold – Raymond James & Associates, Inc.: Great. Thank you very much. A couple of things I wanted to touch on real quick. One is, just want to revisit your prior commentary about organic sales growth prior to the LAPIS acquisition. I think you talked about 8% to 10% organic growth, and just wanted to revisit that metric.

James D. Fay

Management

Yeah, that’s right. We did and that is our expectation now as well for the year. Simon M. Leopold – Raymond James & Associates, Inc.: Great. And has anything changed in terms of the commentary you had given us on the LAPIS business and, I guess, part of what I’m wondering in that question is, we’ve noticed some weakness in the yen, which I assume, helps you from a cost perspective. So, any updates on the LAPIS acquisition since our last briefing.

Timothy S. Jenks

Management

Simon, this is Tim. Thanks for the question. We’re pretty excited about the LAPIS transaction. So, as JD noted now, NeoPhotonics Semiconductor is part of the company, and shipping, we had previously said that it would add $40 million to $50 million on a full year basis. That’s still our expectation. Things are running well according to plan and we’re working with our new business on both supporting existing customers all over the world as well as on new product activities. Simon M. Leopold – Raymond James & Associates, Inc.: Great. And now, just shifting kind of to more the trending side of things, 100G numbers, pretty impressive here in the quarter. And so, I’m assuming you have not, have yet seen material 100G deployment in China as of yet, And so, first of all, is that correct assumption? And then, in terms of the China opportunities, how do you think about that ramping over what period of time and what is your due to your business model?

Timothy S. Jenks

Management

Okay. Well, again, this is Tim. So, I think you’re referring specifically to China Mobile’s contract. Simon M. Leopold – Raymond James & Associates, Inc.: Yeah.

Timothy S. Jenks

Management

The China Mobile, as we understand, that’s really divided into two subcontracts. There is an east part and a west part. The border line is kind of from Beijing, down to Zhangzhou and Wuhan. So the west part is mostly below 100G. It’s essentially mostly 10G as we understand it, but the east part actually has a fair amount of 100G this year. Next year the west part may also. So what we’ve actually seen is some increase in forecast and backlog, but I think it will reflect from the back end of the second quarter through the summer. We really haven’t seen a benefit from that directly in the numbers at this point. Simon M. Leopold – Raymond James & Associates, Inc.: Okay. And in terms of your business with Huawei, so lower in the next year. Are you seeing any evidence that they are vertically integrating any of the products they are buying from you and that’s part of what’s playing into that?

Timothy S. Jenks

Management

Well, so let me divide that into two parts. So when you ask me about a 100G, are we seeing them vertically integrating anything in the 100G? No, we’re not. However, they do and we do make 10G transceivers and certainly the west part, as I indicated at the China Mobile, is mostly 10G network. So to some extend that would be reflected because of the fact that Huawei does make some of their own 10G transceivers. Simon M. Leopold – Raymond James & Associates, Inc.: Great. Thank you. I’ll leave the floor.

Timothy S. Jenks

Management

Thank you, Simon. Is that what you’re getting at? Simon M. Leopold – Raymond James & Associates, Inc.: Yes, exactly.

Timothy S. Jenks

Management

Okay.

Operator

Operator

And we’ll move on to our next question from Tal Liani with Bank of America Merrill Lynch. Eric A. Ghernati – Bank of America Merrill Lynch: Hi. This is Ghernati for Tal.

Timothy S. Jenks

Management

Hi, Eric. Eric A. Ghernati – Bank of America Merrill Lynch: Hi. How are you?

Timothy S. Jenks

Management

Great. Eric A. Ghernati – Bank of America Merrill Lynch: That’s for taking the question. Just want to (inaudible) what is now NeoPhotonics Semiconductor. Could you just give us a ballpark of what you expect the contributions from that to be in second quarter, if possible? And also, on the OpEx side, can you just give us a flavor how, what kind of OpEx number should we be thinking about, just to make sure we have the right numbers and how much of that is actually associated with the acquisition versus organic R&D investment?

James D. Fay

Management

Sure. Hi, Eric. This is JD. The expectation for NeoPhotonics Semiconductor for the second quarter for revenue is on the order of $10 million to $12 million and that is consistent with what we have said in the prior calls of $40 million to $50 million on an annual basis for revenue and that number does exclude NeoPhotonics as a customer of NeoPhotonics Semiconductor. From an OpEx point of view, I think it would be reasonable to assume sort of $2 million to $2.5 million of additional operating expenses layered into our consolidated results as a result of now operating NeoPhotonics Semiconductor, within which I would say the majority of it, certainly more than half, of course would be focused on R&D versus G&A. Eric A. Ghernati – Bank of America Merrill Lynch: Okay. And, I guess, shifting gears to your expectations for the back half, and on the gross side, you sounded you remain optimistic about the improvements in the gross margins. I guess now that you have a big mix of 100G, because it sounds your revenue, a much higher case versus what we have thought. How do we think about gross margins reasonably going in second half once all the one timers and production yield issues are closely behind you because your mix is really rich and it seems like your gross margin should be in the 20s anymore?

James D. Fay

Management

Yeah. Thanks. Eric A. Ghernati – Bank of America Merrill Lynch: On a normalized basis of course.

James D. Fay

Management

Understood. Yeah, this is JD again. I think broadly your thesis is correct. On a normalized basis, we would expect those margins to go back up to where we saw them, for example, in the third quarter last year, above 30%. We certainly operate with a fixed cost infrastructure. And so, when we see the higher revenue, we do tend to see the overhead recoveries increase and that certainly will help us grow gross margins. Just to be a bit more granular about it, we did talk about some manufacturing costs we’re working to eliminate in 4Q and in first Q and those are on the steep decline in absolute dollar a terms, which is good. We still believe that those costs will be substantially mitigated or not impacting the third quarter going forward. So, I think that will help to improve gross margins as well. And with the growth that we expect to see in the second half, helping the model, improve gross margins, the mix, which you’ve noted, is rich and continues to grow at exponential or rather extraordinary growth rates in the 100G space, plus the normalized cost structure. We’d expect those gross margins to get up there where they have been, first high 20s and then low 30s. Eric A. Ghernati – Bank of America Merrill Lynch: And one final for me, your lead time commentary. Was it in relation to kind of 40G or 100G and 100G combined?

James D. Fay

Management

The lead time comment, I’m sorry. I would say that’s just general behavior in the business right now. I wouldn’t say it was specific to one particular product segment. Eric A. Ghernati – Bank of America Merrill Lynch: Okay. Thank you.

Timothy S. Jenks

Management

You’re welcome.

Operator

Operator

(Operator Instructions) And next we’ll hear from Simon Leopold with Raymond James. And Simon has telephoned me. Hold. We’ll go to Brian Modoff with Deutsche Bank. Vijay K. Bhagavath – Deutsche Bank Securities, Inc.: Yeah, hi, guys. Vijay Bhagavath on behalf of Brain.

Timothy S. Jenks

Management

Hi, Vijay. Vijay K. Bhagavath – Deutsche Bank Securities, Inc.: Yeah, hi. Two questions. One is, you’re obviously seeing strength in 100G coherent in both Metro and in the core. I’d like to get your view of the 100G market opportunity, any CAGR numbers you can give us from a component vendor point of view and also from your customers’ OEM point of view? Very helpful.

Timothy S. Jenks

Management

Well, from a component vendor point of view, I think, we’ll try to illustrate this in the course of the discussion because on an annual basis what we’ve seen is more than a 400% increase year-over-year. We also talked about the fact that over the last two years it’s gone up by 50. So it’s been a very, very steep ramp. What we do think is that this year versus last year, broadly speaking, the number of units will essentially be doubling. We’ve seen that level of ramp and it reflects in forecast. So that is referring specifically to 100G and then also my comments about 40G versus 100G, certainly we’re seeing the preponderance of our revenue really driving from 100G and 100G growing much faster now than that 40G. Vijay K. Bhagavath – Deutsche Bank Securities, Inc.: Thanks. And then, you mentioned Cisco as 11% revenue customer. Any thoughts on which set of products in Cisco do you sell into.

Timothy S. Jenks

Management

Well, Cisco has been a very good customer for us for a long time. This is the first time that they are in the 10% group. We do sell products in the speed and agility product group as well as in the access product group to Cisco and Cisco also does use products that are focused on Coherent as well. The other thing about Cisco that I’ll mention is that are having acquire what’s now NeoPhotonics Semiconductor. NeoPhotonics Semiconductor actually provides a number of products that really uses Cisco, although, generally in the form of modules from direct customers. So that may have a dilutive effect on the top line Cisco percent in the several quarters. We closed that deal the last business day of the first quarter. So it doesn’t reflect in the first quarter, but it certainly will reflect in the second quarter. But the direct sales to Cisco from that business are very low. But NeoPhotonics is selling directly. Does that address your question? Vijay K. Bhagavath – Deutsche Bank Securities, Inc.: Yeah, yeah. It does. A final question is on 40G datacenter switching. And I personally have been hearing accelerating trends in 40G datacenter switch deployment with the [QSF] people smartly. Do you play into that opportunity, are you more on the Telco side?

Timothy S. Jenks

Management

Well, the focus of our company has been in the switching side, has been on the Telco side. With respect to datacenter, we’re much more focused on length and access at 100G. And if you’re referring, for example, to transponder kinds of applications or QPSK applications in 40G that’s not a place where you normally see us. Our products in the datacenter really do focus on single mode rather that multi-mode and I think the things you are referring to are multi-mode. Vijay K. Bhagavath – Deutsche Bank Securities, Inc.: Yeah. I was really kind of referring to the long reach 40G modules in the datacenter switches.

James D. Fay

Management

Yeah, so that’s not us. Vijay K. Bhagavath – Deutsche Bank Securities, Inc.: Okay. Thank you again.

Timothy S. Jenks

Management

Thank you.

Operator

Operator

We’ll take a follow-up question again from Simon Leopold with Raymond James. Simon M. Leopold – Raymond James & Associates, Inc.: Sorry about that hold music. Quick couple of follow-ups for you. One is, just looking at the OpEx in this quarter, I don’t think you mentioned it in the prepared remarks, but I think the general expenses jumped quite a bit sequentially in the March quarter, just if there’s anything that was driving that general administrative line.

James D. Fay

Management

Yeah, it was the transaction expenses for the OCU acquisition of approximately $3.2 million. Excluding that it was flat sequentially. Simon M. Leopold – Raymond James & Associates, Inc.: Okay. So when we think about operating expenses on an absolute dollar basis for the June quarter, so we’re adding in the incremental expenses. What’s the range of expectation for pro forma operating expenses in the June quarter?

James D. Fay

Management

The range of expectations for pro forma operating expenses in the June quarter are about $20 million to $21.5 million. Simon M. Leopold – Raymond James & Associates, Inc.: Okay. Great. That helps me a lot, clarifying. And then, just one last one is, the Access business. Seasonally June is generally, I think, pretty good for Access spending, general level that could be in China, still sounds good, but maybe if you can provide some commentary on what you see going on globally in our Access business and if there is any sense that some of the, I’ll call it buzz, coming out the U.S. market with a couple of these incremental 1G builds, whether you see that as a driver for your business over the next year or so?

Timothy S. Jenks

Management

Okay. Let’s see. Well, first of all let me address in China. China has been a healthy market for fiber-to-the-home for a numbers of years. It continues to be. Our business does focus a lot on technology and in the central office and ultimately that business has been growing reasonably well. The first quarter is the seasonal low and our business in the first quarter was healthy. What we did say is that the Access business was essentially flat on a percentage basis. It continues to be quite healthy. That serves not just China, but more broadly the market share leaders really, Huawei and Alcatel, but there are a number of other companies certainly. Recent activity in the U.S. is focused some on the builds by Google. although they’re still small by global standards, some also in discussion with Calix, but also relatively small in comparison to Huawei or Alcatel. Simon M. Leopold – Raymond James & Associates, Inc.: Thank you.

Operator

Operator

(Operator Instructions) We’ll take a follow-up from Tal Liani, Bank of America Merrill Lynch. Tal Liani – Bank of America Merrill Lynch: Hi, thanks again. I guess on an organic basis, Q2 is going to be growing like 80%. Wanted to discuss the quarter in terms of to see them right now, A, from China, and B, from North America, now that you’re almost in the middle of the quarter, how are the order trends shaping up like?

Timothy S. Jenks

Management

Well, let’s see. Let me talk about China first and then I can go to North America. China, we talk about it in each call about the seasonality, the first quarter and the fact that it’s a shorter quarter in China, because of their Chinese New Year, spring festival. So, it’s shorter number of week. So generally on revenue level, it’s a bit lower. However, it has continued to be a modernly good market. I think with the change in the government in China and the People’s Congress, generally we and others in the industry expected an uptick subsequent to the People’s Congress. This usually happens in the few weeks following the Chinese New Year. This year it was considerably later and not really as up. So, I think, to some that was late and low and that reflected similarly in the Access business. We do see now that China Mobile that we’ve already discussed that’s going on. There is the China Telecom coming. And then, now North America, that is a much more kind of steady as you go. So we’re not seeing that to be very lumpy in the way that sometimes China is. Tal Liani – Bank of America Merrill Lynch: It seems kind of broad base concern that [carries] have kind of taken down this and then in Q1, and did looked like it has improved much in the month of April. Are you suggesting that things are relatively steady for you or nothing really has changed?

Timothy S. Jenks

Management

Yeah, what we see is less about the absolute number and just the fact that they are spending their money obviously on 100G deployments and then to some extent also spending it on the wireless LTE side. Wireless LTE, much more in North America and Europe, less over in China. China is still doing a lot of activity on 3G, but is expected to be ramping up LTE. So I think a lot of the discussions in the fourth quarter and the beginning of the first quarter were for more lofty expectations, but just based on what we see a lot going on is the spending on 100G and on LTE. Tal Liani – Bank of America Merrill Lynch: Any comments on Europe or on EMEA from an order of trajectory standpoint?

Timothy S. Jenks

Management

Frankly no. We don’t, because we’re dealing with the global customers, it’s certainty better than it was in 2012, but it’s very slow. So I can’t give you really any granularity there. Tal Liani – Bank of America Merrill Lynch: Thank you.

Operator

Operator

(Operator Instructions) At this time, I show that we have no further questions. I would like to turn the call over to Tim Jenks for closing remarks.

Timothy S. Jenks

Management

Okay. Well, thank you everyone for joining us today. Before we conclude, I would like to thank our shareholders for their time today and their continued interest in the company. I also want to thank our customers for their continued support, and really our exceptional employees for their dedicated, diligent and professional efforts. We do look forward to our next update with you. Thank you very much.

Operator

Operator

This does conclude today’s conference. We thank you for your participation. You may now disconnect.