Lumentum Posted Weak 1Q Results but Issued Robust 2Q Guidance on 3D Sensing; Raising FVE to $55

Lumentum’s first-quarter results for fiscal 2018 were weaker than our expectations, with total revenue down 6% year over year versus our projection of a 2% decline. This is due to weaker performance in telecom and datacom optical products and commercial lasers. However, 3D sensing revenue outlook again is the market's main focus. Thanks to strong 3D sensing booking, management expects second quarter revenue to be between $345 million and $375 million, which is in line with our existing projection at midpoint. While profitability was weak this quarter with a 12% non-GAAP operating margin, up from last quarter’s 9% margin, the firm also guided margin to jump to 21%-23% in the coming quarter primarily due to anticipated favorable product mix and recovery of margin in the commercial laser segment. After raising our revenue and margin projections for fiscal 2018 and beyond, we are raising our fair value estimate to $55 per share, up from $50, for this no-moat stock. However, we consider shares modestly overvalued at current price, which reflects bullish growth and margin expectations for the firm.