Lumentum Holdings Inc at JPMorgan Global Technology, Media and Communications Conference (Virtual) Transcript

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

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : <_ALACRA_META_ABSTRACT>There was the opportunity to pursue a large TAM, which was one of the reasons that you had outlined in terms of your interest for Coherent. How do you intend to go about that same strategic rival now? What are the different parts that you can see to get to that same outcome without Coherent? And before I let you answer, let me just take a pause and remind investors you can send in the question as well. You just have to ask -- use the Ask a Question button on the website, and we'll ask it on your behalf. So Alan, sorry for that. Please go ahead.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : So on the same lines, Alan, I think one of the aspects of the business that has stood out in the past also has been the concentration to certain customers in the individual segments. Obviously, 3D sensing, there's one primary customer. Even in telecom, previously, there was a concentration to one customer. Now that's moderated. But generally, as you think about diversification of the customer base, is that one of the strategic priorities for the management team? How should we think about the business kind of 3, 4 years from now looking different compared to today?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Let me move to one of the segments and discuss telecom. (Operator Instructions) I know there's some. I'm seeing questions come in relative to 3D sensing, but let me hit that off in a bit. So let's start with telecom here first. From a demand perspective or demand confidence perspective sentiment related to demand from North American customers appears to be positive here just in light of their comments recently about 5G CapEx, how much of -- you did note some challenges in your telecom segment. So how much of that is purely China-driven as a kind of commentary relative to what is happening in North America?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Yes. No, Chris, let me just follow up on that. So from the earnings call, I think your comment was that you're expecting an uplift in telecom revenue starting in December quarter. I mean, I think this is a question we've got from investors. And even as we think through, just given that the lead times are quite extended, most of your customers are expecting a ramp in revenue in their telecom businesses, either in the kind of third quarter or even a bit earlier. Should it be more kind of logical to expect that ramp starting in the September quarter? Or are we missing something here? Or is that what you basically are calling the hedging part of it?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Great. Following up to the other aspect, just China and the fronthaul kind of weakness that you mentioned, Chris. What are you hearing latest in terms of timing of tenders? Is -- and how should we think about the likelihood that this spend starts, either in the back half of this year or is it more of early 2022 spend? 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 25, 2021 / 2:15PM, LITE.OQ - Lumentum Holdings Inc at JPMorgan Global Technology, Media and Communications Conference (Virtual)

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Let me stick with telecom for one more question. (Operator Instructions), and then I think we'll just start taking some of the audio questions. So particularly, it looks like 3D sensing is where audience has more questions. So just on telecom margins, the margins having grown significantly over the recent years, what's been the key driver there? Is it that the product mix has been more aligned to high-end component? High-end components, is that what's been the primary driver? Just walk us through what's the driver. And how should we think about continuing to improve that telecom margin?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Moving to 3D sensing then, and Chris, on the earnings call, you guided to 3D sensing market to decline 20%, 25% in your fiscal year '22. Obviously, a lot of questions on that. So I mean, just to get the backdrop here, maybe if Chris, if I can ask you to kind of go through what is driving that 20%, 25% decline. I know it will be repeating somewhat of what you've said on the earnings call already, but I know there are some follow-ups on that. So if you can just set that in terms of the background, in terms of what's driving that 20%, 25%. 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 25, 2021 / 2:15PM, LITE.OQ - Lumentum Holdings Inc at JPMorgan Global Technology, Media and Communications Conference (Virtual)

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : I know that was kind of repeating what you had already said on the earnings calls and probably multiple times after that, I mean, as you may. So follow-ups. Is the entire 20%, 25% just driven by price decline? Or does it include any -- does it embed any changes in terms of your market share from fiscal '21 to '22?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : A question that came and reads, your competitor in 3D sensing is not seeing the market down 20%, 25%. Why are they more positive on the market than you, especially when you may gain some share back or at least have stable share?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : The other follow-up, Chris, can you give more color on the minimum share agreements that you talked about and what the increase or magnitude of increased fundamental share could look like as a function of the minimum share agreements as you kind of take that forward a few more generations? Like how are you thinking about the magnitude of share that can change on account of that?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Just another quick follow-up. Chris, you mentioned the margins remain largely unaffected by this, which I understand would be largely true for gross margins, and the costs are coming down as well. But when you start thinking about operating margins, is the underlying cost structure where you can take cost out to align that because, I believe, your OpEx remains consistent, you should have a drop in operating margins, if not on the gross margin level. Why are you suggesting gross margins are higher and operating margins remain kind of flat?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Good. Great. So let's move to the positive side of it. You talked about 3D sensing market accelerating or getting back to growth in fiscal '23. So just help us understand the drivers there. What are you seeing there? I mean, if I now put together your pricing comments, definitely looks like you are seeing enough opportunity on the 3D sensing market in fiscal '23 to offset some of the annual price declines with your primary customer. So just help us walk us through the drivers there for your fiscal '23 comments.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Let me move to taking a couple of the investor questions that have come in. So I'll read out this one, which is more on the Coherent bid. And the question reads, did -- can you ask Lumentum if they saw the deal that their Coherent competing bidder signed up and if they looked at it? And if you -- if we see a deal announced in the space, can we assume that you've looked at it and passed?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : That's fine. I think we can move to the next one, I think, that looks like. Second follow-up question from investors. So I think this one is more about the supply chain constraints. So let me -- kind of first part of that, let me ask that you give us an update on the supply chain constraints. Where are you seeing those constraints? And since you've reported earnings, which I know hasn't been in a long time, but have things got better? Have things got worse? Any updates on that? The second part to that. Does Malaysia shutting down for 2 weeks impacted the supply chain?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Alan and Chris, I'll ask you this follow-up just because we're asking every company this question, which is, primarily, we're hearing about the extended lead times, but is there also aspect where your suppliers are raising prices on you or kind of you're paying expedite fees? Has that become a headwind to margins? And in your capacity, are you able to pass some of that through to your customers?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : The next investor question is on 3D sensing. It reads, is there any risk 3D sensing gets designed out based on advances in computational photography, software leveraging, tradition camera sensors? So I think the question is, basically, if the 3D sensing get designed out because software essentially leverages some of the traditional camera sensor.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : No. That's good. Any other investor questions, please feel free to send them over and we can ask them in the final few minutes here. I guess now, finally, I do have some time to kind of ask you on datacom here. So firstly, the 400 gig transition, that's obviously kind of top of mind for investors. How is Lumentum positioned? I know you had largely stepped away from a lot of the module business and more focusing on datacom chips. So how should we think about the leverage there in relation to 400-gig opportunity?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Great. So last question, and I think in the minute we have left here, Alan, you talked about announcing the capacity addition roughly a year ago. And I think everyone remembers on the call here that you talked about doubling capacity roughly. How should we think about the revenue impact of that? Because there's obviously some different economics as you go through down the cost curve. So how does that volume -- doubling of the volume capacity really impact revenue?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : I think we're close to the end-of-the-session time here. So Alan, Chris, Jim, thanks for taking the time to do this session, host this session, and thanks for participating at the conference as well.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Thank you, everyone, for dialing in. Thank you.