Lumentum Holdings Inc at UBS Global Technology and AI Conference Transcript

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

Question: David Vogt - UBS Equities - Analyst : So, Alan, so we did dinner last night. You've talked a lot of investors this morning already. I think maybe it helps to start with -- let's talk about your big end markets. I think most of the conversation, at least from an investor perspective, that we get is around your Cloud Light business, a company that you bought late -- almost over a year now. And maybe let's talk about Cloud Light and how that fits into the portfolio and what we're seeing there, and we can jump off from there.

Question: David Vogt - UBS Equities - Analyst : Great. So maybe we can dig in a little bit about the market. So if we had this conversation a year ago around the time of the deal, maybe you had the foresight, I don't think we had the foresight to predict the strength that you're seeing from the hyperscaler community, your legacy existing customer, plus new customers. You've announced a second customer 2 quarters ago, a third customer on the most recent earnings call. Can you kind of share with us how we should think about, one, the deployment schedule for each of these respective customers? And two, maybe to the best that you can talk about maybe the magnitude? I think at the time of the Cloud Light acquisition, you talked about an LTM basis of roughly $200 million for that business, primarily that one large customer with a different mix going forward. Obviously, I think the revenue is going to change, but maybe we can just start there and kind of talk about the time line since you've owned it and where we sit today?

Question: David Vogt - UBS Equities - Analyst : And so the initial premise that you had with Cloud Light and what's playing out today was that customers, particularly hyperscaler customers preferred to have a U.S.-domiciled business that they're working with. There still seems to be obviously a large number of Chinese-based competitors, U.S. competitors. We're going to have one shortly there after your presentation. How do you think the market evolves over time in the intermediate term in terms of where sort of the customer base kind of migrates to? Can we have 5, 6, 7 players in China, 2 to 3 players in the U.S.? Is the market growing fast enough and is large enough over the next, let's say, 5 years to support 2 to 3 different transceiver companies within different parts of the network?

Question: David Vogt - UBS Equities - Analyst : So I was going to bring me to my follow-up question. So when I look at the transceiver business that you bought from Cloud Light, obviously, there's an opportunity for you under your stewardship to vertically integrate, use your Thailand capacity, EML from Lumentum to structurally improve the profitability of that business. But at the same time, you're still working on selling EML to your competitors.

Question: David Vogt - UBS Equities - Analyst : Customers, excuse me. Customers. I'll change the phrase.

Question: David Vogt - UBS Equities - Analyst : Who happen to participate in your market.

Question: David Vogt - UBS Equities - Analyst : So as we think about that going forward, obviously, you're adding a ton of capacity to -- not a ton, but a couple of hundred million of CapEx to kind of support the business. How do you see -- are there any constraints from an EML perspective to meet not only your needs, but your customer needs over the next couple of years? And how should we think about sort of how that market develops?

Question: David Vogt - UBS Equities - Analyst : From the -- without getting overly technical, how do you see sort of the dividing line in terms of, from your perspective, a transition from silicon photonics to an EML-based transceiver? Is it customer-driven, speed-driven, your design sort of focus? Like what's the road map look like as we go from SiPho to EML?

Question: David Vogt - UBS Equities - Analyst : So does that then necessarily suggest that over the longer term, EML would be sort of the preferred technological sort of platform effectively, if you will, relative to silicon photonics as we move forward?

Question: David Vogt - UBS Equities - Analyst : Got it. Along those lines, obviously, you mentioned adding EML capacity. Can we talk about other capacity, just straight up manufacturing capacity in Thailand, you have facilities there. You own land around facilities. We talked about it a little bit last night. So maybe just to help frame kind of where your capacity sits today for optical transceivers. Maybe you can size what you can effectively sell today versus how you're thinking about the next couple of years in terms of as you add capacity? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 03, 2024 / 6:35PM, LITE.OQ - Lumentum Holdings Inc at UBS Global Technology and AI Conference

Question: David Vogt - UBS Equities - Analyst : And correct me, if I remember this incorrectly, I think 2 quarters ago, you said you were adding capacity with that win, but ahead of qualification.

Question: David Vogt - UBS Equities - Analyst : Is that the case?

Question: David Vogt - UBS Equities - Analyst : You have to. Right. Okay. So as we sit here today with 3 live customers effectively, does your Thailand facility road map basically account for what you think the revenue opportunity is over the next 18 to 24 months? Or is there incremental capacity needed to kind of hit those revenue targets for those customers?

Question: David Vogt - UBS Equities - Analyst : So is it fair to say, so if I just -- my words, not yours, if I look at your relationship with that large customer, these other customers could be of similar size in terms of volume and revenue contribution for the transceiver business as they ramp to get to some degree of sales? Is that a reasonable approximation of the opportunity near term? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 03, 2024 / 6:35PM, LITE.OQ - Lumentum Holdings Inc at UBS Global Technology and AI Conference

Question: David Vogt - UBS Equities - Analyst : End of the year of 20...

Question: David Vogt - UBS Equities - Analyst : '25. Right. To be clear. Okay. And so in the context of your 2025 commentary that you've laid out in OFC and on other calls, I believe you've said run rate revenue of around -- total company revenue around $500 million. Have you shared? And I have it in my notes. i don't know if I heard you correctly or maybe I missed taking up the number, but like what percentage of that $500 million could possibly be from the transceiver side as opposed to the more traditional telco side of the business?

Question: David Vogt - UBS Equities - Analyst : I want to come back to the datacom telco side in a second. So if I look at sort of the optical transfer opportunity, you have 3. You just mentioned you have confidence in a potential fourth win. When we move from the big 4, maybe big 5 U.S. hyperscalers, how would you frame the opportunity in terms of the TAM effectively? Is there a way to frame it? Because I mean, look, the big 5 account for the lion's share of the capital going into the ground, if you will. So is there an opportunity to add similar size, scale and TAM with customers 6 through 15? Does it drop off that dramatically from your perspective?

Question: David Vogt - UBS Equities - Analyst : On traditional telco, not related to the DCI as you mentioned, obviously, we've been in a very prolonged slump. Obviously, I know your crystal ball is not particularly great, but how do you think about where we are in the cycle? I mean is this sort of the trough and things should be getting stronger in 2025. Networks have been sweat, assets are a bit older, capacity needs to be upgraded? Like where are we in that cycle? And I know -- and Kathy will kill me for asking this, but previously, you were doing a $350 million peak revenue in that broadly defined segment. What has to happen to get the business back towards that type of revenue contribution?

Question: David Vogt - UBS Equities - Analyst : Got it. And then against that backdrop of that $500 million, obviously, I know Wajid not here, but I'll still ask it anyway. When I think about the portfolio today versus 5 years ago, it's changed quite a bit, right? You had a much heavier consumer business 5 years ago. Now you have a much stronger optical transceiver business, really strong EML chip business. Kind of what are the puts and takes as you see the business going forward from not only a revenue perspective but from a margin perspective? Because we get a lot of questions from investors, will they get back into the consumer market? It was a great business for them. Now they have a great transceiver business, but the financial profile is a little bit different.

Question: David Vogt - UBS Equities - Analyst : And then when I think about sort of the portfolio today, and I'll go back to the consumer comment, obviously, it had -- there are some issues with some of the other businesses, macro-related, like auto, industrial hasn't been a great market generically, not for Lumentum, but industry-wide. How are you thinking about your commitment to these markets given the success in sort of the data center hyperscaler market, where maybe the auto market isn't a great market over the next 3 to 5 years? Is there an allocation of capital decision that needs to be made where this is where all the growth is for the next 5 years? And maybe to be honest, maybe the industrial auto market is just not a particularly good market for you going forward and consumer is not a great market going forward.

Question: David Vogt - UBS Equities - Analyst : They have a lot.

Question: David Vogt - UBS Equities - Analyst : Got it. And then maybe just on -- going back to the macro. We've asked everyone this. Obviously, the economic climate is a little bit uncertain. We've got a change in the administration. You have tariffs. Can you remind us again what you learned last go around with tariffs, given what you're putting in the ground in Thailand? Obviously, it doesn't sound like it's at risk. How are we thinking about kind of the preliminary view around tariffs? And what potentially could come down the pipeline?

Question: David Vogt - UBS Equities - Analyst : Was that an incremental margin headwind in the short run as you maintain effectively kind of double dual infrastructure effectively?

Question: David Vogt - UBS Equities - Analyst : And then you can ramp...

Question: David Vogt - UBS Equities - Analyst : Got it. Okay. Also, just one more on telco. If we were having a conversation 12 months from now, where do you think the growth is? You mentioned ROADMs earlier, outside of ROADMs and some other markets, like where do you think the growth has cleared from a customer inventory perspective? Like where have we digested? Where is there still too much inventory out there from your seat, from your product portfolio?

Question: David Vogt - UBS Equities - Analyst : That's clear.

Question: David Vogt - UBS Equities - Analyst : Got it. And then just one question that we got here was on the transceiver business. Anything -- I'll paraphrase, anything on 1.6 that you can share with us, what you're seeing out there in the marketplace in terms of qualifications and...

Question: David Vogt - UBS Equities - Analyst : Before then. Got it. And can you just remind us, again, this came in, I missed it earlier. What percentage of Cloud Light sits at 400 versus different speeds today? And what would that look like maybe a year from now?

Question: David Vogt - UBS Equities - Analyst : 100 gig, EML, 400-gig...

Question: David Vogt - UBS Equities - Analyst : Okay. Curious about that.

Question: David Vogt - UBS Equities - Analyst : Got it. Final question from me on the transceiver side. Obviously, you touched on it briefly on margins. So we're going to vertically integrate. We're going to have our own EML capacity.

Question: David Vogt - UBS Equities - Analyst : No, it's kind of the dream scenario.

Question: David Vogt - UBS Equities - Analyst : Aspirational. Aspirational.

Question: David Vogt - UBS Equities - Analyst : Opening up a new team.

Question: David Vogt - UBS Equities - Analyst : Final question on capital, cash flow priorities. Obviously, your customers are asking you to meet pretty strong demand. How are we thinking about the balance between investing to meet your customer demand on CapEx versus the traditional concern that this industry is somewhat cyclical by nature? Visibility tends to be somewhat limited over a long period of time? So how are we thinking about that? And you have a lot of cash on your balance sheet, how are you thinking about deploying that cash? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 03, 2024 / 6:35PM, LITE.OQ - Lumentum Holdings Inc at UBS Global Technology and AI Conference

Question: David Vogt - UBS Equities - Analyst : Got it. And what could govern or what could be an impact on the growth in terms of customer acceptance at this point? I mean it seems like the demand is somewhat insatiable. I'm just trying to figure out what could potentially hold back demand at this point?

Question: David Vogt - UBS Equities - Analyst : Great. Right. I think that's it for me for now. Thank you, Alan. Thank you, Kathy.

Question: David Vogt - UBS Equities - Analyst : Thank you, everyone, for joining, and good luck, and we'll speak to you soon.