Lumentum (LITE) confirmed investors' fears this morning with an announcement that it will comply with the Trump administration's export restrictions on component sales to Huawei Tech, which were put into place last week. Lumentum is a major supplier of optical and photonic components. The company says it has "discontinued all shipments to Huawei effective as of the date the licensing requirements went into effect and cannot predict when it will be able to resume shipments."
Huawei has been a major customer for LITE, representing 11% of total revenue in FY18 and 15% thus far in FY19, according to the press release. In Q3 (Mar), Huawei accounted for an even larger part of total revenue at 18%, again, according to the press release.
This is going to have a significant impact on near term financial results. LITE lowered its Q4 (Jun) revenue guidance to $375-390 mln from $405-425 mln and non-GAAP EPS guidance was lowered to $0.65-0.77 from $0.85-1.00. What stands out to us is that's a large drop for only half a quarter; just imagine if this issue lingers into FY20 and the potential guidance we may be expecting for that period.
Last week, another US-based Huawei supplier, Acacia Communications (ACIA), said it expects to comply with the order as well but did not lower guidance. It just said that it's monitoring the situation. However, the significant decrease in LITE's guidance makes us nervous about ACIA. Perhaps it will be guiding lower as well in the near term.
LITE is trading lower today, but not by a huge amount. The stock actually took a hit last week, falling 18% combined on Thursday and Friday after the Commerce Dept issued its order. So, it appears much of this was already baked into the stock price. However, we would be cautious with buying on this recent dip as it's difficult to gauge just how long this order will be in effect.
Overall, we would be cautious on most optical component stocks. It's not just the impact from this Huawei issue with Lumentum. A bigger issue is that China may start to view the US as an untrustworthy trading partner. Large OEM tech firms in China may look for a longer-term solution to insulate themselves, perhaps they will look more toward Chinese suppliers or perhaps other countries. That would hurt the long-term prospects of US-based component makers like LITE and ACIA. Hopefully, this issue can get resolved soon. If not, we would expect more estimate reductions from LITE. Also, other names to watch include XLNX, QCOM, NPTN, FN, ACIA.