Lumentum Holdings Inc at JPMorgan Global Technology, Media & Communications Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : If I had to ask you to sort of share your thoughts on a potential recession here, and what probability you would put on depending on the customer demand that you're seeing, how would you sort of respond to what's the likelihood of a recession here?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Yes. Fair, fair. Yes. On the supply situation, we were -- the industry was already running pretty constrained and now you have the lockdowns in China. So how much worse is that making sort of the supply situation? Is it just something marginal in terms of impact? Or do you think it's a more material impact? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 23, 2022 / 7:50PM, LITE.OQ - Lumentum Holdings Inc at JPMorgan Global Technology, Media & Communications Conference

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : And the last one in that sort of series. When does supply normalize? Because I think all investors are hearing the same thing, which is all hardware companies have record backlogs, but in terms of really being realistic about when you can digest backlog, you would first need supply to normalize. When do you expect that?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Got it. I'll move into the company specific questions. (Operator Instructions) So getting to more company-specific stuff here, you've recently outlined an outlook for double-digit growth for the company for multiple years, and that is in the scenario that 3D sensing remains flat, roughly flat, and that is about 25% of your company revenue, which obviously then indicates that the remaining 75% of the company is growing pretty strong. So what's providing that level of confidence? I mean, obviously, backlog is one. But outside of sort of the backlog, what do you think are the sort of demand drivers that can sustain that level of growth? Obviously, you're not thinking 10, you're thinking materially above that?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Wajid, I guess the question on that front would be, I mean these are all sort of demand drivers you're seeing, but I did go back and look at your historical sort of track record and Lumentum has done double-digit revenue growth in the past, but those have typically been years where 3D sensing actually grew a lot, right?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : So what's changed in terms of when you take a telecom and datacom, obviously, capacity investment is more a decision based on what you're seeing for demand? What changed from what we had a few years ago to now where you have this high confidence into a double-digit growth trajectory?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Got it. Moving to sort of a question more in terms of profitability, but I think I'm using 2015 here as a starting point. So it predates you, but revenues have doubled compared to 2015. Operating income is 10x what you had in 2015. So clearly, there's been a big transformation of the company or the operating model. How do you think about the drivers of that improvement continuing now that the market still remains very competitive. It's still -- the optical components market is pretty fragmented despite the consolidation that's happened. So how do you think about sort of the improvement continuing, competitive landscape that's still pretty fragmented and everyone's very focused on sort of gaining that extra bit of market share.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. And as you think about sort of this growth strategy as well as the secular tailwind, like how is NeoPhotonics fitting into the overall growth expectations? Particularly, like how would you think of the secular tailwinds related to NeoPhotonics?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Good. As a reminder, again, for everyone on the webcast, I think webcast working, so you can submit your question. Moving to ROADMs, and I'm sure you're getting a lot of questions on that front as well, including supply constraints. But one of the things -- if I again sort of go back and think about ROADMs as a technology, there has been sort of from your customers a higher reliance on Lumentum and II-VI for that technology, right? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 23, 2022 / 7:50PM, LITE.OQ - Lumentum Holdings Inc at JPMorgan Global Technology, Media & Communications Conference

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : And there have been multiple discussions at different points of time that would reduce over time as more competition came in, but we haven't really seen that. What continues to drive the differentiation that you and your sort of primary competitor have relative to the rest of the market, which I'm sure there's a big broad base of customer -- competitors trying to catch up on the ROADM technology?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. So ROADMs, that's optical transport. If I move to sort of transmission products and pluggables that the entire optical ecosystem is now investing in, and you definitely have a position there as well. We're seeing sort of these 2 diverging sort of 2 sort of separate roadmaps where everyone is investing in pluggables. And at the same time, companies like Cisco are talking about the need to sort of potentially collapse ROADMs and build a router and a pluggable together into a different architecture, right? That sort of takes away the need to have a ROADM. So how do you sort of think about that architecture decision? And would that -- I mean how are you -- what's the likelihood that, that does happen? And how does that impact your ROADM business?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Got it. Before I move to 3D sensing, let me just check in the room if anyone has a question. Anyone with the question in the audience, please go ahead and raise your hand. Can we get a mic over? Sorry, are you running a mic? Unidentified Analyst If you're able to share, could you speak about like your integration of MEMS devices into like your technologies versus like the (inaudible) like timing solutions or timing devices.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. So Wajid, moving to 3D sensing? I know you've tried to take that discussion somewhat out of the picture by guiding to flat, but it won't die down. How sustainable is the market share position? I think what you've sort of outlined is more of a balance between you and the primary compared to there, but what gives you the confidence that there's not going to be another competitor in the picture in the next few years?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. But I guess, Wajid, the follow-up would be, as you look over the next 3 to 5 years, what gives you confidence that it's not a third competitor that emerging?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Good. Going back to your comments about share in 3D sensing with the primary customer because we've got questions on this. It does sound more of you just taking a prudent approach, given this is the second year of the cycle rather than sort of the other part of that could be that you have enough those design wins and the visibility that your share cannot be over a certain percentage based on the sockets you won on the phone, but it seems to be more of the former. Just wanted to clarify that, that you're taking a prudent approach based on that being the second year...

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Got it. Moving to commercial lasers and that business has been in a steady revival over the recent quarters. So how are you thinking about sort of that steady improvement continuing in that business? And how is the diversification beyond sort of that one large customer way?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. On new applications that you just referenced, can you just outline how you think about those contributing over time? And how they help you diversify? I mean, obviously, given your concentration communication as a vertical, this -- those are sort of good opportunities to diversify the business. How would you sort of see them ramping from here?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. And a follow-up there is then, how do you think about M&A respective to scaling these businesses quickly?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Got it. Last couple of questions. So your operating model that you had sort of outlined for the company had 30% operating margin, and so with even the revenue that you gave up to Apple with the reduction in die size, you fairly -- remain fairly consistent with or close to your long-term operating model. Now as you integrate for NeoPhotonics, how are you thinking about sort of tracking to that long-term model as you go through sort of driving the synergies. Actually, let me get you to answer that and then I'll...

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. And just to sneak in the last one here, then sort of capital allocation, and there are multiple sort of confluence of multiple things going on. You are waiting to close an acquisition and integrate it. You also have strong demand visibility while supply sort of constrains your revenue. And you have a market sort of condition where clearly, you're not getting sort of full credit for the backlog that you have. So given all those, how you're thinking about capital allocation priorities?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Great. Thank you. Thanks for coming to the conference, and thank you, everyone, for attending.