While it could turn out to be a blessing in disguise for Lumentum Holdings down the road, II-VI’s actions over the last 18 months or so, amply demonstrate that it had no interest in opening the door further for a duopoly across the optics realm. The intention started with the willingness of the latter to pay quite a high premium to acquire Coherent, a major reason being to keep it out of the hands of the former, as the two engaged in a bidding war. There were definite consequences for Lumentum, as it quickly became clear that it was a pivotal battle (at least for the foreseeable future) for supremacy in horizontal integration in the optics space. Naturally, another blow was with II-VI’s apparent, recent decision to dramatically lower prices on 3D sensing chips (the assumption being that II-VI was finally able to at least somewhat take advantage of its vertical integration edge), which had obvious negative consequences on revenues in the one non-traditional optical sector that Lumentum had established a true, leadership position. (It should be noted that fibeReality is not exceptionally bullish on the outlook for 3DS apps outside of smartphones.) Most critically, given the entire situation, Lumentum felt forced to purchase the IPG Photonics telecom assets, which resulted by far in the biggest shock to its corporate culture. For a supplier that was seriously interested in adopting a 3DS model of outsourcing across all its businesses, to now move to a hefty amount of internal R&D spending, is indeed quite a bitter pill for the top-level executives to swallow.
II-VI’s CEO, Chuck Mattera, who when first taking over the reins of power was arguably running what would be considered a second-tier optical operation by certain equipment purchasers, gets the bulk of the credit for the positive conversion. He has been bound and determined to see that his original vision of becoming the “Intel of optoelectronics” could become a reality. Perhaps there is always the possibility of “be careful what you wish for,” but II-VI has never been better positioned for the greatest amount of business diversification, which can be all-important given historic margin pressures in the optics market.
At the same time, Lumentum’s decision to draw the line on the level of debt in obtaining Coherent, ought to still be looked upon as financially prudent. The player retreated toward the traditional telecom/datacom arenas, with a greater focus on revenues compared with margins.
With the NeoPhotonics buyout, the transmission business unit became the top revenue generator for Lumentum. fibeReality expects the Neo team to have quite a noticeable impact with its managers and staff as well as in driving new solutions.
Yet, there was still the determination at Lumentum to pull the trigger on the IPG assets, which would involve much bigger R&D investments in order to facilitate in-house DSP functionality. (The timing was likely not a coincidence with the forceful grabbing of a significantly greater share of 3D sensor shipments to Apple by II-VI.)
Of course, the keys to success with developing its own DSPs for Lumentum go well beyond the 400ZR opportunity (interestingly, the latest from Lumentum on its last quarterly conference call is that 400ZR+ continues not to be the initial priority). There is seemingly enablement with its new stress on the top line, albeit, such revenue will not materialize overnight. Moreover, there is no longer the formerly high-comfort level of relatively limited risk, and the ability of corporate management to remain patient in achieving results will be tested.
One helpful change is that the very top leaders at Lumentum are no longer as cloistered. In 2021, each of the heads of the business units started reporting to Vince Retort, EVP and COO. CEO, Alan Lowe, has an extensive, trusting bond with Retort.
Returning to the 3D sensing space, neither Lumentum nor II-VI appear that excited about penetrating newer opportunities based on our intelligence gathering. Even publicly, the latter continues to redefine the marketplace, as generalized sensors, which turned out to be more than providing an excuse for any previous yield issues.
Assuming that Lumentum can pull its biggest challenge off since becoming an entity (after the JDSU breakup), a more targeted strategy may in the final analysis be very beneficial in which it can potentially be the dominant force in the telecom/datacom arenas — along with a rather conservative game plan for other sectors. Jason Reinhardt as the Chief Transformation Officer will likely be somewhat restricted from a practical standpoint. Maybe the lesson will be that at least in the optical market, there can be only room for one highly diversified competitor anyway.
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