Lumentum Holdings Inc. (LITE) Q2 2022 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Lumentum Holdings Second Quarter Fiscal Year 2022 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] At this time, I’d like to hand the conference call over to Kathy Ta, Vice President of Investor Relations. Ms. Ta, please go ahead.

Thank you, operator. Welcome to Lumentum’s Fiscal Second Quarter 2022 Earnings Call. This is Kathy Ta, Lumentum’s Vice President of Investor Relations. Joining me today are Alan Lowe, President and Chief Executive Officer; Wajid Ali, Chief Financial Officer; and Chris Coldren, Senior Vice President and Chief Strategy and Corporate Development Officer. Today’s call will include forward-looking statements, including statements regarding our expectations regarding the pending acquisition of NeoPhotonics, including market opportunity, expected synergies, financial and operating results and expectations regarding accretion, time to close, strategies of the combined company and benefits to customers in the markets in which we operate as well as the impact of COVID-19 on our business and continuing uncertainty in this regard. Trends and expectations for our products and technology, our markets, market opportunity and customers and our expected financial performance, including our guidance as well as statements regarding our future revenues, our financial model and our margin targets. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations, particularly the risk factors described in our SEC filings. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in the quarterly report on Form 10-Q for the quarter ended October 2, 2021, and for those in the 10-Q for the quarter ended January 1, 2022, to be filed by Lumentum with SEC today. The forward-looking statements provided during this call are based on Lumentum’s reasonable beliefs and expectations as of today. Lumentum undertakes no obligation to update these statements, except as required by applicable law. Please also note, unless otherwise stated, all results and projections discussed in this call are non-GAAP. Non-GAAP financials are not to be considered as a substitute for or superior to financials prepared in accordance with GAAP. Lumentum’s press release with the fiscal second quarter 2022 results and accompanying supplemental slides are available on our website at www.lumentum.com under the Investors section. This includes additional details about our non-GAAP financial measures and a reconciliation between our historical GAAP and non-GAAP results. With that, I’ll turn the call over to Alan.

Thank you, Kathy, and welcome to the team. Good morning, everyone. This is certainly an exciting time at Lumentum. The insatiable demand for increased bandwidth and communication speed between networks, data centers and all connected devices plays to our strength as a technology and market leader in photonics. Demand is exceptionally strong and growing for our products. Our cloud and networking customers are entering a multiyear hardware upgrade cycle and rely on our leading-edge photonics as their fundamental enabling technology. We are broadening the applications of our 3D sensing lasers beyond mobile handsets into automotive driver assistance designs and AR/VR applications. Demand for our commercial lasers has never been stronger as industrial factories and semiconductor fabs expand and upgrade their capability. Second quarter demand was very strong across all major product lines. Our results were above the midpoint of our guidance on all metrics. Industry-wide supply shortages have worsened with the recent surge in COVID-19 and are negatively impacting our third quarter revenue guidance by more than $65 million. These shortages come at a time when customer demand is accelerating for our differentiated communications products. Our products are essential to multiyear expansions in next-generation optical network capacity that are just beginning to be deployed. We continue to work to alleviate supply constraints and expect fourth quarter revenue to be up from that of the third quarter. Furthermore, we expect supply shortages to improve by the second half of this calendar year. Looking beyond these near-term supply challenges, I’m highly optimistic about our outlook and believe market inflections beneficial to us in our addressable markets will drive double-digit revenue growth in fiscal 2023 and beyond, not including the pending acquisition of NeoPhotonics. On our last call, we announced the NeoPhotonics acquisition. This is a very exciting transaction and we continue to receive positive feedback from our customers. The combination gives us a more complete product and technology portfolio. This enables our customers to address their next-generation cloud and networking speeds and scalability requirements. We are confident in this long-term market opportunity and the value this combination creates. We are also excited about adding NeoPhotonics talented team of experts to Lumentum. We have made excellent progress with our integration planning and are on track with the previously announced closed time line. Two key closing conditions are now satisfied. On January 21, we announced that we have received U.S. antitrust clearance. And just two days ago, NeoPhotonics shareholders approved the transaction in a special meeting of their stockholders. We are working diligently with antitrust authorities in China and our expectations of closing the transaction in the second half of calendar 2022 remain unchanged. Now let me provide some details on our second quarter’s results. Telecom and Datacom revenue was up quarter-on-quarter with exceptional strength in nearly every telecom product line. Demand in these markets is also accelerating. Next-generation customer systems are just hitting an inflection point as new multiyear network deployments are just starting to ramp. While we were supply constrained across many of our product lines, revenue from high-speed 400 gig and above coherent components and modules nearly doubled quarter-on-quarter. As 5G, 4K streaming and network access requirements increase, the speed at the edge of the network must also increase and the core of the network must upgrade to higher speeds as well. Transceivers serving edge applications were up more than 60% quarter-on-quarter and more than 130% year-on-year. Pump laser sales grew more than 30% sequentially to a new all-time high. As we’ve said previously, elevated pump shipments frequently have been a leading indicator of future telecom demand. Another leading indicator of telecom demand is optical fiber deployments for networks. Significant investments in fiber infrastructure are underway as operators expand capacity, capability and access. We expect these infrastructure investments will propel Lumentum into double-digit growth for multiple years. In Datacom, EMLs serving high-speed cloud data center applications also achieved new record revenue. Book-to-bill for Telecom products exceeded one for the quarter, and we have more than two quarters of Datacom backlog already booked. We expect to bring additional EML manufacturing capacity online in March, which will help us ramp our Datacom shipments through this calendar year to fulfill strong customer demand of our differentiated products. These points, along with our design wins and long-term share and supply agreements with market-leading customers gives us confidence that we have a strong long-term outlook in Telecom and Datacom. Accelerating Telecom and Datacom market demand is coming at a time when the supply environment is very dynamic and challenging. Supply had been improving heading into and throughout the bulk of the second quarter. However, late in the quarter, the latest pandemic surge once again negatively impacted supply. This contributed to a $50 million gap between the supply of material and customer demand in the second quarter. Looking forward to the third quarter, we expect shipments of products that rely on third-party supplied semiconductors will be the primary driver of supply constraints. The demand from our customers has also recently accelerated, and we expect this will increase the gap between supply and demand, resulting in more than a $65 million impact to our projected revenue in Q3. Therefore, looking to our third quarter, we expect Telecom and Datacom revenue to be modestly down quarter-on-quarter. We continue to work diligently with our suppliers and on alternative sources of supply to alleviate shortages. Turning to Industrial and Consumer. Second quarter revenue was down from last quarter as expected, due to 3D sensing seasonality. Being the trusted partner in the industry enabled our 3D sensing revenue in the first half of fiscal 2022 to be higher than that of the first half of fiscal 2021. An important element of Lumentum’s 3D sensing and LiDAR product strategy is to deploy our platforms into new markets and applications. I’m very excited about the milestones we have recently achieved on this front. Some of our recent public announcements highlight our progress. We recently announced two new automotive customer wins. The first was a partnership with Hesai who is making all solid-state LiDAR modules for ADAS applications, leveraging our differentiated high-power multi-junction VCSEL arrays. We also announced that we have begun mass production of a VCSEL solution with Stanley Electric used for in-cabin driver and occupant monitoring. These announcements complement other design wins and opportunities in our funnel. A broad range of customers are increasingly relying on our enabling technology for their critical LiDAR and in-cabin monitoring systems. We have strong customer traction in augmented and virtual reality opportunities that we expect will come to market in the next few years. We believe most AR/VR applications will employ multiple lasers. The use cases for these lasers include eye tracking, hand tracking or gesture recognition and world-facing imaging applications. Customers in this space value our differentiated products as well as our unparalleled experience, quality and reliability track record and scale in the industry as targeting high-volume and high-performance applications. We expect third quarter industrial and consumer revenue to be down sequentially, primarily due to normal consumer product seasonality. Our commercial lasers business was up strongly again quarter-on-quarter as expected. Strength in lasers for manufacturing of semiconductor and consumer electronics and life science applications complemented strength in our fiber lasers for macro material processing. We expect third quarter laser revenue to be up again sequentially driven by growth in new products and the overall market. We expect lasers quarterly revenue to surpass our previous record as the business grows over the coming year. Before turning it over to Wajid to run through the numbers, I’d like to thank our employees around the world for all their hard work putting us in such a great position in the market and for the resilience in doing this during such challenging times. With that, Wajid?

Thank you, Alan. Net revenue for the second quarter was $446.7 million, which exceeded the midpoint of our guidance range. Net revenue was roughly flat sequentially and down 7% year-on-year. GAAP gross margin for the second quarter was 46.5%. GAAP operating margin was 19.1%, and GAAP diluted net income per share was $0.75. Second quarter non-GAAP gross margin was 51%, which was down sequentially and year-on-year, primarily driven by the change in product mix. Second quarter non-GAAP operating margin was 31.7%, which decreased sequentially and year-on-year, driven by the gross margin decline. Second quarter non-GAAP operating income was $141.6 million and adjusted EBITDA was $162.4 million. Second quarter non-GAAP operating expenses totaled $86.4 million or 19.3% of revenue. SG&A expense was $38.6 million, R&D expense was $47.8 million, other income and expense was a net expense of $1 million on a non-GAAP basis. Second quarter non-GAAP net income was $120.2 million and non-GAAP diluted net income per share was $1.60. Our fully diluted share count for the second quarter was $75.3 million, our non-GAAP tax rate remains at 14.5%. On to the balance sheet. Cash and short-term investments increased $178 million sequentially to approximately $2 billion. During the second quarter, we generated $206.5 million in cash from operations and purchased 330,000 shares for approximately $30 million. To date, we have purchased a total of 4.5 million shares for $363 million under our previously announced two-year $700 million share buyback program that was authorized by our Board of Directors in May 2021. Turning to segment details. Second quarter Optical Communications segment revenue at $397.4 million decreased 2% sequentially due to the expected seasonality for industrial and consumer, partially offset by strong sequential growth in Telecom and Datacom. Optical Communications segment gross margin at 50.8% decreased sequentially and year-on-year, primarily due to the change in the product mix. Our second quarter Laser segment revenue at $49.3 million increased 16% sequentially and 66% year-on-year. Second quarter Lasers gross margin at 53.1% was up sequentially and year-on-year due to higher volumes. Now on to our guidance for the third quarter of fiscal 2022, which is on a non-GAAP basis and is based on our assumptions as of today. We expect net revenue for the third quarter of fiscal 2022 to be in the range of $375 million to $405 million. This guidance reflects over $65 million of impact to revenue, driven by shortages of semiconductors and other materials. However, we do believe that this demand is durable, and that as the supply chain improves, we will return to strong growth. Based on this, we project third quarter operating margin to be in the range of 24% to 26% and diluted net income per share to be in the range of $1.01 to $1.19. Our non-GAAP EPS guidance for the third quarter is based on a non-GAAP annual effective tax rate of 14.5%. These projections assume an approximate share count of $75 million and interest and other income and expense that is a net expense of approximately $1 million. With that, I’ll turn the call back to Kathy to start the Q&A session. Kathy?

Thank you, Wajid. Before we start the question-and-answer session, I would like to ask everyone to keep to one question and one follow-up. This should help us get to as many participants as possible before the end of our allotted time. Operator, let’s begin the question-and-answer session.

[Operator Instructions] Our first question is coming from Samik Chatterjee from JPMorgan. Samik your line is now open, if you’d like to proceed with your question.

Thank you. Thanks for taking my question. So on the first one, if I can just start with the supply chain. And I want to see if I can get a clarification on your comments about 4Q. It did sound like in terms of your guidance for 4Q for revenues to be up quarter-over-quarter or you’re not embedding in as much supply chain improvement, and it’s more the fiscal 2023 where you see the supply chain improving, so maybe if you can clarify that? Because what I’m trying to get to is how much of that fourth quarter guidance is contingent on supply improving, and you being able to capitalize on some of this constraint – led pent-up demand that you’re talking about in fiscal third quarter? And I have a follow-up. Thank you.

Yes. Okay. Thanks, Samik. Well, I’ll start with demand being very, very strong, as we said in the script. And the impact that we’re seeing in Q3 was really a result of what we saw happen late in Q2 and into January where some of our suppliers were impacted by an increase in COVID. We’ve seen that abate a bit. And so we’re starting to see a better supply of chips today that turn into deliveries really late this quarter and into Q4. So that gives us confidence even with the seasonality of 3D sensing in Q4, Lasers will be up, Datacom will be up. We believe the supply will be up, that will give us confidence that Q4 will be up even in the typical low point of 3D sensing in the June quarter. So that’s kind of the where we are with the short-term outlook. I think long term for 2023 and beyond, our confidence is really based upon the demand of – the inflection point of demand where new networks, we’ve been talking about this for over a year, new networks are starting to be deployed at higher speeds, 400 gig and new architectures for ROADMs, and that’s just at the very early stages. And we believe that through fiscal 2023, we’ll see a better supply of componentry and semiconductors that will allow us to get that double-digit annualized growth even with 3D sensing seasonality throughout the year. So, I think it’s just a great time for us and getting through this short-term supply challenge is challenging for us, but we’ll get through it and our products and technology and our people are just doing a great job getting us through it.

Got it. Got it. And Alan for the follow-up, I know you mentioned the double-digit growth in revenue in fiscal 2023 and seeing that sort of being supported over a multiyear period as well. Can’t help, but ask 3D sensing, obviously, is a big portion of your revenue today. So what would be the assumption in terms of growth over a multiyear period in 3D sensing embedded in that sort of guidance?

Well, I mean, we’ve gone five years in a row thinking we’re going to be losing share, and we’re certainly modeling share loss into our projections. That said, if we continue to execute and I would execute our competitors, that’s an upside to our expectations. So, I think that’s number one on the mobile handsets. I do think, as we mentioned in the script, that we are getting into automotive, and we are getting into AR/VR, which is more of a longer-term investment that we’ve been making over the last several years. And so I think that really starts kicking in, in a more meaningful way in fiscal 2024 and beyond. But we are starting to see the early signs of revenue coming from those applications. So, I think from our perspective, the Telecom and Datacom growth is at the early stages, and that will really fuel us through the double digits in 2023 and 2024 and beyond. But that said, I do think there are other drivers and tailwinds that will help us on commercial lasers with new products and industrial production as well as 3D growth that I talked about.

Thank to Samik for his question. Our next question is coming from Tom O’Malley from Barclays. Tom your line is now open if you’d like to proceed. Tom O’Malley: Good morning guys. Thanks for taking my question. I had one on your largest iOS customer. Clearly, you’ve heard other reports this earnings period that results are quite strong there in December and also into March. Supply issues seem to not be impacting them as much as in other areas. Can you just talk about why you’re seeing kind of the greater than seasonal decline in the December quarter? I understand that you had kind of signaled that, that would be down, but it seems down more robustly. Any reasons for that?

Well, Tom, I mean, this is primarily due to timing of the announced new products. I mean if you look back in calendar 2020, if you recall, the introduction of the new handsets was much, much later, and that drove a higher December quarter than September quarter. Well, this year, the products were announced early. The ramp-up happened earlier. And that’s why we, in the script, talked about first half of our fiscal 2022 compared to first half of our fiscal 2021. And so fiscal 2022 is actually up from fiscal 2021. And if you look at in the aggregate of that six-month period, which is really the launch period, we actually did quite well with growing our revenue, even though the chip size and the ASP of those chips were down. I think that’s why we’re confident in our continued share at our leading customers. So, I think that’s really the difference between the two years. And it’s really about when the products were launched and when they started ramping us up to put devices on the shelves.

Yes, Alan, I will add that the seasonality we – I was going to say that the seasonality that we’re assuming is not atypical from years prior to last year. And as Alan highlighted last year was the anomaly from a seasonality standpoint. Tom O’Malley: Helpful. And then my follow-up is just on the other side of the coin, with some of the shortages that are happening in the Telecom and Datacom business. Could you just walk through where specifically you’re seeing those headwinds get worse? And I think a nice way to kind of lay that out is maybe transport first transmission in the Telecom business and on the Datacom side as well. Just to get a better feel for where those increasing headwinds are kind of taking hold? Thank you.

Sure, sure. Well, I’d say if I look back in Q2, the primary shortage was really in Telecom Transport. And we were, as I talked about during the earlier remarks, the telecom transmission business was quite strong, and we were able to really ramp coherent components and 10G tunables quite rapidly. Well, that’s now also being impacted in Q3. And so I’d say still the majority of the shortages are on Telecom Transport, but we are seeing componentry semiconductors that are impacting our ability to continue to ramp those coherent components and 10G tunables because demand is so strong as expected in those higher speeds and coherent as well as higher speeds at the edge of the network, why – which is why our 10-gig tunables are so strong. So that’s kind of the Telecom story, the shift from mostly transport in Q2 to a mix of transport and transmission in Q3. On Datacom, we grew our EML business year-over-year by 45%. We’re bringing on more capacity, the EML revenue will grow in the March quarter and then grow more significantly in the June quarter. And that’s really because we have such differentiated products in that transition what 400 gig in the hyperscalers is really, really starting to happen in a meaningful way. And that’s why we have multiple quarters of backlog there as customers are wanting to get in line to get that capacity as we bring it online. So that’s kind of the story in Datacom. I’d say the DML business is still a headwind for us as 5G in China is now starting to consume that inventory we talked about over the last several quarters, but there’s still a little bit more work there to do before we start having really more meaningful revenue in DML. So our focus is how fast can we ramp our EML capacity, and that’s coming online quite successfully.

Thank you. Our next question is coming from Alex Henderson from Needham. Alex your line is now open. Please proceed.

Thank you very much. So, I wanted to go back into the 3D sensing for a second. I think the numbers in the back half – or the first half of the fiscal year are actually better than what you had originally expected. And I was wondering if you could talk about what you think happened relative to your share position given the strength of your technology? And what the mix might have looked like so that we can get some sense of how you outperformed relative to the original guide of down 20%, 25%, I think is what you talked about in that business? And similarly, as we look forward to the next round, should we anticipate a further reduction in die size? Or does the dynamic that caused that die size change and hence, pressure on the overall demand or revenue for the category. Does that reverse as we go into – or stabilize as we go into the next fiscal year?

Yes. Thanks, Alex, for the question. Yes, we did do better than we had said probably a year ago, the die size did go down and ASPs did go down. I think our focus with our lead customer is just to make sure we are their launch partner and we execute out of the gate, and are there design partner of choice. And I think that’s what we saw play out in the first half of our fiscal year, where we were really the launch partner, and we got a good share of that business, and that’s what offset those ASP reductions that we saw due to the chip size. And so I think it’s just a matter of the team doing a great job of executing there. Your second question around further reduction in die size, I’d say no. I mean the shrinkage of the die today that we saw in the launch in the second – in the first half of our fiscal year was really the most dense VCSEL array that we think we can do and still give the capabilities that they’re looking for. That said, we’re working on a lot of different chips for a lot of different applications, and so one might even expect that there might be more content in the next launch of products. Don’t know because they don’t tell us everything, but we are working on a lot of different chips that have a lot of different capabilities from how we look at it. And so I don’t believe there’s going to be further die size or shrinkage componentry from the 3D sensing in handsets. I think there’s going to be expansion into other products in a more meaningful way.

If I could follow up. The second question would be on the chip supply that you’re coming on stream in the end of March. Can you scale that for us? And is that a 30% type increase in production? What type of volume increase are you able to get out of that new product line capacity?

Yes. I think if you recall back 18 months or so ago, we said we were going to be doubling the EML wafer capacity, but that didn’t necessarily mean we’d be doubling the revenue as pricing does come down over time. So last quarter – in Q2, we were up 45% year-on-year. This quarter, we’ll call be up another 10% from the December quarter. And then we’ll get the full quarter of benefit in the June quarter. So, we could expect high teens to 20%-ish growth sequentially in the June quarter. That said, we’re still not going to be caught up with demand, and that’s why six or nine months ago, we actually added more capacity that will be coming online late in the calendar year and into calendar 2023. So, our confidence is strong that our differentiated products, especially on the high-speed EML is going to drive our demand for those chips and the capacity that we’re bringing online will be utilized. So that’s kind of how we envision the growth in the EML business. And then the DML comes back, that will be an extra added tailwind for us.

Thank you to Alex for his question. Our next question is coming from Rod Hall from Goldman Sachs. Rod, your line is now open. If you’d like to proceed.

Yes, great. Thanks for giving me a question. I got, I guess, one on the sort of phasing of demand. There are other suppliers into the Apple ecosystem talking about significant reductions in June. And I wonder if you guys look at that consumer electronics sector, maybe more broadly, as you look into the summer, do you expect any kind of demand normalization particularly in 3D sensing like that? Or is it just too early to have visibility on that? Then I have a follow-up.

Hey Rod, this is Chris. I think it’s a little early to comment that far out in time. That said, we’re not seeing anything unusual in our outlook at this point in time. As I said earlier on a prior question, the seasonality in the March quarter is not atypical from what we’ve seen in years past other than last year given the later launch in products. And the June quarter seems to, at least at this point, look to set up in a similar way, similar historical seasonality. In the prepared remarks, we commented that the first half, we used the first half this year versus first half last year comp. So, we kind of think that’s where it averaged out the timing delays of – or the difference in the timing between the two years, and now we’re in a much more normal regime. But again, very early to tell.

Okay. Great. Thanks, Chris. And then my follow-up is just on the ZR products. I wonder – could you give us any kind of a thought on what the content for you might look like in those? Is it similar to a smartphone? Or is it likely to be quite a bit more – it’s kind of hard to gauge how many scanning systems there might be and so on? So, I just wonder if you could give us any color on what kind of content you might see in that kind of a product?

Yes, Rod, I think from the question, I don’t think you meant ZR, I think your meaning in mixed reality AR/VR. And...

Oh, no. I mean VR/AR. But – yes.

Okay. So the point is we have multiple lasers going into a virtual reality, augmented reality headsets, right? They’re going to be eye tracking, gesture control, role facing, all of those require different 3D sensing or sensors or LiDAR sensors, if you will, each containing lasers. Now the lasers probably will have in the ZIP code of the individual price that we supply into the consumer space today, but since there’s more of them, so we believe there’s actually an overall content gain opportunity in that case.

Rod, did that answer your question? Were you asking about AR/VR? Or were you asking about ZR? We lose Rod, right? Sorry about that. Go ahead, Harry. Let’s get to the next question.

Certainly. And our next question is from Simon Leopold from Raymond James. Simon, your line is now open. Please proceed.

Thanks for taking the question. I’m still a little bit confused on what occurred in the supply chain. And Alan, I definitely heard your prepared remarks, but I guess you talked about $50 million constraints in the quarter, which we had assumed were primarily in the Telecom and Datacom segment, but you ended up putting up $267 million versus $216 million. So, if I can just confirm that the constraints are in that segment and not in industrial and consumer or lasers, just to make sure? And then in terms of this specific components, I didn’t know whether you were exposed to sort of commodity-type low-tech components or whether we’re talking about things like FPGAs, if you could clarify that? And then I’ve got a quick follow-up. Thank you.

Sure, Simon. Yes. So that the impact – if you remember the earnings call from last quarter, we said we expected it to be about $40 million impact supply constrained impact. And we weren’t talking about Datacom. And the Datacom we view is in our control we have the wafer fab, we produce and add capacity. So this specifically is talking about the Telecom segment, Telecom portion of the Telecom and Datacom. And so that impact actually grew through the quarter both from a matter of stronger demand that we talked about, but also late in the quarter constraints that came out from semiconductors. And I’d say that it’s a broad range of semiconductors from very simple cookie-cutter components to things as complicated as FPGAs. I would say that as we look forward, we’re starting to see some of that get better from the standpoint of products that we expect to get delivered late in this quarter to help us with the Q4 supply. And so that’s why the combination of extra strong demand and an easing of the supply constraints of those componentries, gives us confidence that Q4 will be up even in a seasonally slower 3D sensing market. I would say that if you look at our consumption of semiconductors, they’re not the bleeding edge 5-nanometer and 7-nanometer node products. They’re the older technology nodes. And so not a lot of foundries are adding a lot of capacity in that area. But they are adding some, but it just takes time. So that’s coming online. And I think that’s what gives us confidence in our ability to start really tackling some of this very, very strong demand as we look into fiscal year 2023 and beyond.

Thanks. And then just the follow-up is how are you thinking about wage inflation and the effects on your operating expenses? And I’m sure the employees are going to thank me for that one.

Yes. Simon. I think just like it’s – Wajid here, I think just like most other companies, we’re also experiencing, I’d call it, normalized wage inflation in the company. I think with the demand that Alan talked about, especially what we’re seeing on some of our higher-margin product lines, whether it’s EMLs or our laser business growing both sequentially into Q3 and expect it actually into Q4 as well, we’ll be able to offset some of those inflationary OpEx gains from better margin product shipping.

And thank you to Simon for his question. We now have our next question from George Notter from Jefferies. George, your line will be open now. If you’d like to proceed with your question.

Hi guys. Thanks very much. I guess I would – I’d be interested in asking about the NeoPhotonics acquisition. You guys are another three months down the road in terms of getting towards the close of that transaction. Any more perspectives on your synergy opportunities, where they come from sizing? An update there would be great. Thanks.

Yes. Thanks for the question, George. I couldn’t be more excited about where we are with the NeoPhotonics acquisition. And the more I get to know the team there, the more excited I am about bringing them on board. I’d say from a synergy standpoint, we are diving into the innovation planning in a meaningful way. And there’s nothing that has changed our outlook as we talked about in November of $50 million of synergies, of which, 60% of that should come from cost of goods sold. So, we’re still going through the tactical, how do we get that, but there’s nothing that we’ve seen so far that changes that set of numbers, and we certainly can give you an update next time we get together because I think we’ll have will be much further down the road of the detailed synergy planning and integration planning. But again, it’s an exciting opportunity and customers just absolutely love the combination together.

Great. Thank you.

Thank you, George. Our next question is from Meta Marshall from Morgan Stanley. Meta, your line is now open. Please proceed.

Great. Thanks. Alan, you talked encouragingly about kind of AR/VR or the ADAS opportunity and that opportunity kicking in over the next couple of years. Just wanted an update on how you’re thinking about kind of the Android universe and any potential pickup that could happen there? I have a follow-up question. But I’ll let you answer that one first.

Sure. Thanks, Meta. We continue to work with all of the Android handset manufacturers and we are shipping, but just not a very not very much to them today. I think it’s a matter of if they adopt and if they adopt the mainstream products, it will become a meaningful part of our business. We’re not counting on that in our guidance, and we’re not counting on that with respect to our double digits expectations of growth through fiscal 2023 and beyond. And if that does come through, then that will be upside to that expectation. I’d say AR/VR and ADAS, it’s a long-haul, especially on the ADAS side because of that’s a multiyear design cycle, and we have some wins, and we’re starting to launch, but I think that’s really more of a fiscal 2024 contribution with – from our perspective. Your second question?

Got it. Yes, just I’ll do the other part of Rod’s question of ZR. And just – I mean, I know that, that’s primarily kind of from your NeoPhotonics opportunity, but just how you’re viewing that opportunity developing? Thanks.

Yes, Meta, this is Chris. We think it’s a huge opportunity. And one of the part of the calculus in the NeoPhotonics acquisition that data center interconnects and connecting cloud data centers is a huge opportunity in the transition to 400 gig, and frankly, a transaction to kind of a more universal solution that all the major cloud operators are using creates a very large opportunity, both at the transceiver level as well as selling components into folks building transceivers. So, we think between the combinations, we will have all bases covered to do very well in that opportunity.

Great. Thanks.

Thank you, Meta. Our next question is from Christopher Rolland from SIG. Christopher, I’ll open your line now, if you would like to proceed with your question.

Thanks guys for the question. Alan, that was some great color on FPGAs. I was wondering if you could detail perhaps some more subcomponents that are constraining you guys as analysts, it’s just the more data, the better and to track this kind of stuff provides a lot of help for our analysis? And also, if you could talk about that $65 million progression over, call it, the next three to four quarters? And what’s your best guess on those constraints?

Yes. So FPGAs are one of the components that are causing us brief. But we through the past couple of months, we’ve been surprised by the commitments of deliveries that we were counting on, and that’s lessened more recently as I think the pandemic has had less of an impact. But it’s not just FPGAs, it’s analog devices, it’s other kinds of devices that are, as I said before, a cookie cutter stuff that, for whatever reason, we get surprised, and that’s why we’re working very closely with our suppliers and with our customers who oftentimes have more influence over these suppliers than we do. And so it is broad. But again, it’s probably a handful or two handfuls of suppliers that are creating most of degree for us that we’re working on with, but also working to, as we’ve talked about in the past to get second sources to alleviate some of those constraints. I’d say the $65 million progression over time, I think it’s a function of supply that we think is getting better, but also a function of demand that is very, very strong. And so if you look at Q4 and our expectations for growth in Q4, will that number of $65 million be less? I don’t think so. I think we’re going to grow in Q4 and have pent-up demand that, as Wajid talked about in the script, is durable. It’s really durable because of the product differentiation. And in most cases, we’re sole sourced and if not dual source, but mostly sole sourced, especially in the high-end ROADMs, where these constraints are hitting us quite frequently. So, I’d say that we’re going to continue to grow in Q4 and into the second half of the calendar year. And then demand becomes the other function of does that number get bigger or not? I think it’s probably going to get bigger.

Alan, maybe something useful that – I was going to say something maybe yes, useful to add is the product lines that are being hit by the shortages are pretty big product lines for us. If you were to go sort of look at it, everything else, the product lines that aren’t getting hit by semiconductor shortages they’re up almost 100% year-on-year. So, now you kind of come back and say, wow, well, that probably underscores if you think about a network, you need a little bit of everything to be able to build a network. So it really highlights that the underlying demand environment is really, really strong. So as we get more supply, you can imagine what that’s going to do to those product lines that are now impacted being able to grow at those kinds of rates. That’s why we’re very confident about as supply improves, how strong the outlook looks in 2023 and beyond.

Thanks for that question. And yes, we track 80-plus weeks of lead times for FPGAs. So that does all work. For my second question, for the industrial laser business. Obviously, coherent didn’t happen for you guys, but we kind of see why you were so interested in that market, and it seems really quite resilient here. What about ramping kind of organic investment into that area? And are there some other areas where you can ramp organic investment outsized at this point, given the constraints in your traditional communications businesses?

Yes. I mean the industrial lasers business is very interesting to us. I think we were willing to buy coherent at the right price and it got to the wrong price. And so I wish them well. As I said in the script, our expectations are that our industrial lasers business hits new record revenue levels in the coming quarters, and it’s really due to both market but also new product introductions that we’re introducing new higher-power fiber lasers. We’re introducing new ultrafast lasers for different kinds of material processing in new markets that we haven’t participated in the past. And so we are ramping up our investments in industrial lasers. But we’re also looking at new markets to consume Photonics, and that could be in lasers markets for EV, battery welding or other kinds of applications where we haven’t played in the past, but also into different types of industrial markets where the shift is happening to allow them to use photonics where they haven’t in the past. And so our perspective is, we’ve got a lot of great technology that’s really useful in other markets, and that’s where we’re going to be able to expand our addressable market through investing in these types of market investigations, and we have a very, very big program in looking at that.

Thank you to Christopher for his question. Our next question is coming from Richard Shannon from Craig-Hallum. Richard, your line is now open. Please proceed.

Great. Thanks guys. I’m going to follow up on the 3D sensing topic here, maybe a slight change in past questions here, kind of looking out into fiscal 2023 and later, you talked about some opportunities in automotive, both inside and outside the car and a little bit on Android. I guess from your – the answer that I heard, I wasn’t necessarily – I wouldn’t have concluded that you see a lot of dollar contribution or added to the current base here. So, I guess maybe I’ll turn it around and ask the question of do you see the ability to grow your 3D sensing business much in fiscal 2023 with these new markets? Or is it going to take years beyond that before that happens?

I’d say the contribution of fiscal 2023 will be small, but there are seeds that we’re planting today, and we’ve made some announcements today that will pay off in the long run. I would say that our expectations are that AR/VR becomes meaningful in 2024 and ADAS and in-cabin become more meaningful in 2024 and 2025. And so those seeds that we’re planting today and through this calendar year are going to pay off in a meaningful way and contribute to diversifying our customer base in 3D sensing, but also we’re working on other types of applications within existing customers that will allow us to grow 3D sensing in fiscal 2023 and beyond. And so I’d say we’re focused on making sure we continue to be the partner of choice and we’re the NPI partner of choice, development partner of choice for our lead customer but also the Android base. And so if and when they choose to put 3D sensing into their devices, we’ll be there for them. And so I’m very optimistic about 3D sensing.

Well, thanks, I certainly echo your enthusiasm right it’s just a matter of timing, and we look forward to hearing about that. Alan, my second question is on your comments and prepared remarks around double-digit growth potential. I think you said that both in fiscal 2023 and 2024. I wonder if you can delineate a couple of things within that comment, first of all, on Telecom versus Datacom relative growth opportunities there? And then within Telecom, I would presume, but please correct me if I’m wrong, that the ROADMs are a big part of that maybe you kind of delineate within Telecom and maybe kind of give – if you can kind of peel back the layer on kind of the network dynamics that are driving this growth, that would be helpful? Thanks.

Sure. I think it’s just bandwidth demand that I’d say is probably pent up. As we talked about over the last – since the pandemic, that most of the capacity adds were happening with 100 gig and 200 gig. That transition is happening now. So higher speeds, 400 gig and above, new generations of ROADMs are being deployed today, pump lasers at new record high, submarine pumps and repeaters at very high levels today. So all of these things are really good leading indicators for what’s to come. So ROADMs are a big portion of our growth expectations for 2023 and 2024. But as well, the transmission speeds, so our componentry, coherent components that we talked about in the script, growing dramatically. The 10 gig at the edge of the network, up over 100% year-on-year. We’re adding capacity to probably double that again next year and adding higher speeds to the edge of the network. So there’s just a lot of demand for bandwidth that our Telecom products and technology and differentiation is really enabling our customers to address. And so I’d say that’s on the Telecom side. On Datacom, up 45% year-on-year on EMLs. We’re going to continue to grow that. We’re adding more capacity late this year and into next year. So that’s going to have a meaningful contributor to our expectations on double-digit growth. And don’t forget commercial lasers business. We’re going to continue to grow that business and get into new markets. And so I think the combination of those things, putting aside through even 3D sensing and what happens there, our confidence is very, very high that as these short-term supply constraints alleviate, we will be on a very, very strong growth trajectory.

Thank you, Richard. Our next question is from Tim Savageaux from Northland Capital Markets. Tim, your line is now open. Please proceed with your question.

All right, how about that? Couple of questions here in terms of Telecom, Datacom sort of breakdowns. First off, would it be fair to say the sequential growth in fiscal Q2 is pretty evenly split between Telecom transmission and Datacom chips, given your comments about strength in 400 gig components, so that’s one? And then as a follow-up, you talked about some pretty impressive growth rates at 400 gig. I assume that’s both Telecom and Datacom. Can you try and size that business relative to the whole of your Telecom and Datacom business, that 400-gig plus business? Thanks.

Hi Tim. So, I think first, between the December quarter, Telecom, Datacom, a lot of the growth was in Telecom, I think as we’ve highlighted we’re capacity constrained in Datacom. Demand is not at all an issue in Telecom or Datacom, but in the case of Datacom, certainly, it is our own internal manufacturing capacity. So the growth you’re seeing came from Telecom. The split between – a little tricky because pump lasers and ROADMs and passives are those higher low speed, if you will 400 gig and above. We certainly believe what we’re providing today goes into next-generation networks that are growing. So actually a relatively small portion of our business that is at the 100 gig, 200 gig at this point in the combined Telecom, Datacom. And of that portion, the most interesting part is perhaps the 10-gig tunable piece. It’s by far the largest less than 400 gig speed portion of the business, and that’s growing because as we highlighted in the script, as you put 400 gig, 600 and 800 gig in the core of the network, you’re going to be upgrading the edge of the network to 10 gig, and 10-gig tunable pluggable transceivers are really booming. They’re more than doubled year-over-year, and we think they’re on a multiyear growth trajectory as well. As they push out into those edge applications, broadband access applications that you’re very familiar with.

Thank you to Tim. We have time for just one more question. Ananda Baruah from Loop Capital. Your line is now open. If you’d like to proceed with your question.

Hey guys. Good morning, I appreciate you to squeezing me in here, squeezing up in here. Alan, just a couple. I believe you had mentioned a little bit ago potential for – and this is 3D sensing for content increases on upcoming models. And I was wondering if you’d have any sense of when that may get set, and is there some potential that you could update us on that 90 days from now? And then I have a quick follow-up. Thanks.

Yes. I mean typically, if something were to go into a new device that were to be released in the fall, we would know for sure by our next earnings call for sure. Sometime between now and in May, we would need to start production of that. And again, as I said, we’re working on multiple different chip designs. And so until it becomes a plan of record for one of our customers, it’s hard to say. But I do think that there’s there is potential for content increase in the back half of this year.

That’s super helpful. And then just a quick related follow-up. If that content increase were to occur, when it makes sense that dollars like basically the blended ASP would be stronger as well?

Yes. I believe so if I understand your question right, I think more revenue per handset would with another chip in it would also drive ASP increases.

Yes, that was the question. I really appreciated. Thanks so much guys.

Ananda, thanks for the question.

And thank you to Ananda. We have run out of time for any further questions. So I’ll hand back to Alan Lowe from Lumentum for any closing remarks.

Great. Thank you, Harry. I want to thank our customers and suppliers for their partnership in these challenging times. I would also like to leave you with a few thoughts as we wrap up this call. While we have work to do to manage through the current near-term supply shortages, I’m very excited about the accelerating customer demand in Telecom and Datacom and lasers. Additionally, the opportunities we have in automotive, augmented and virtual reality and industrial applications which increasingly leverage 3D sensing and LiDAR capabilities at Lumentum are beginning to emerge and grow. Our market-leading and proven product and technologies position us well for all of these opportunities ahead. With that, I would like to thank everyone for attending today, and we look forward to talking with you again during upcoming investor events, which you will find posted on our website. Thank you, and have a great day.

Thank you to everyone, who has joined us today. This concludes the call, and you may now disconnect your lines.