The implications for the inability of Lumentum to acquire Coherent, despite the financial benefits in failing to do so, have become increasingly profound for the former. Obviously, a successful purchase of Coherent would have ameliorated difficulties on the industrial laser side. More critically, the announcement of the buyout of NeoPhotonics represents a shift in focus from margins to revenue, which fibeReality’s latest intelligence points to as part of a five-year plan to reach a substantial level of the latter. We understand that the realistic nature of the total goal might be subject to uncertainty. Moreover, there is apparently now political divisions at the top executive and board levels of Lumentum created by the loss of Coherent. Evidently, settling for a pickup of NeoPhotonics, a company that was up for sale for a very long time, and has been a solid technology house, while at the same time a relatively bad business, led to a consensus among the factions because it was deemed the most logical and available candidate — and there was a boatload of cash to purchase the entity. Neo will provide several components/capabilities lacked by Lumentum, allowing for the latter to start catching up on total volume to its archrival, II-VI, which is growing much bigger including once it closes on the Coherent deal. Both of these large companies remain holding companies and they grow mainly through acquisitions. However, in closely examining Lumentum’s rhetoric that: 1) it is currently well-positioned for horizontal integration — seems to leave something to be desired and 2) any perceived notion of taking all of NeoPhotonics’ products potentially down to the chip level needs to be somewhat tempered as the desire to get to the “lowest level building block technology” could easily have a more conservative meaning compared to the recent past. (This article elaborates on our initial reactions to the announcement with Neo and fibeReality has pointed out that the pressure on Lumentum’s industrial laser business resulted in a significant reorganization of the company.)
Neo appears to really bolster Lumentum’s existing transmission business unit rather than allowing for much diversification into other spaces. Furthermore, our recent report on VCSELs projects quite a small percentage of these devices being used in newer 3D sensing markets over our forecast period. Speaking of which, one should look out for how Lumentum’s new strategy gets sufficiently integrated with the now secondary priority established of employing the 3D-sensing model of outsourcing across the entire concern.
In turning to the other matter above, while it has been fairly easy to make a viable business in selling chips to datacom transceiver suppliers, doing so on the coherent side is more difficult because the margins and volume are not as good in moving down the food chain to that level. It remains to be seen whether there will ultimately be an exception when it comes to 400ZR, 400ZR+ and 800ZR modules.
Conversely, there is room for noticeable growth by just selling the components provided by NeoPhotonics, such as the Optical Transmitter & Receiver Sub-Assemblies (TROSAs) with above 32 gigabaud capability (the same advantage offered by Neo with the availability of its integrated coherent receivers as well). They will build upon Lumentum’s existing business for these TROSAs as they were an undisclosed reason for revenue being substantially higher in the last reported quarter. For example, Analog Coherent Optics (ACOs) were still alive and well with a bunch of new orders.
Naturally, NeoPhotonic’s biggest asset is its narrow linewidth external cavity laser which remains the superior high-end product for coherent applications internationally, particularly for ultra long-haul lengths. The supplier also provides IC gear – drivers and Transimpedance Amplifier (TIAs) — those are costly components in module development.
Interestingly, despite all of the justified criticism of silicon photonics in favor of Indium Phosphide by Lumentum over time, the vendor mentioned InnoLight providing SiPh in a matter of fact way. Of course, SiPh is a key part of a 400ZR (Neo is currently the third largest provider of this pluggable), which will itself become a new solution for Lumentum. The reality is that there is a lot out there in the marketplace of what is referred to as being SiPh, and we have observed in the past, there is a much greater success rate for telecom versus datacom purposes.
Another intriguing possibility, which would fit in with Lumentum’s new business model is whether coherent-lite gets to be a high volume and lower margin market for data center apps in a big way. At an ECOC 2021 workshop on “Applications for IMDD and Coherent in Short Reach Systems,” Chris Cole gave a presentation, which argued that just because coherent dominates transport, it should not be taken as an automatic given that it will be used within the DC.
In returning to the disunited combination of executives and directors at Lumentum, clearly some egos were damaged in not obtaining Coherent. In fact, we heard that one executive became a temporary scapegoat and received a demotion — only for it to be ultimately reversed. All in all, the infighting that is continuing to happen strongly indicates that NeoPhotonics, which is focussed on the traditional optics sectors, represents a tougher row to hoe for Lumentum moving forward.
Regarding antitrust matters, it is not totally clear the extent to which China may create hurdles in the way of the NeoPhotonics acquirement. On the one hand, Lumentum ensures the survivability of a unique tunable laser from a smaller supplier, which has struggled financially.
On the other hand, China may be inclined to make it painful to try to protect supply until Huawei Technologies or Accelink Technologies have made enough progress on their internal laser development. One possibility is a separation scenario as what was done with WSS in the II-VI-Finisar merger.
With the shift in its game plan, Lumentum avoids the alternative of pouring a lot more money into R&D on the ex-Oclaro portfolio, which it would find dislikable. Nevertheless, the emphasis will be less on margin generation. Once again, the overwhelming direction now is on dramatically growing its overall business.
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