Despite the evident busting of the optical ecosystem, many of the analysts on the Street apparently continue to hold a special place in their hearts for Lumentum, mainly because of the current lead it has in what is perceived to be the attractive 3D-sensing VCSEL bare die market. While Viavi Solutions presently monopolizes 3D-laser filters supplied in that smartphone business, it is less sexy in nature and does not produce comparable sales volume. Nevertheless, fibeReality believes that Lumentum’s current strategy is heavily influenced by a continuing desire to outshine its former partner in which it had to take a backseat to in those years they were both part of JDSU. This rationale would explain Lumentum’s focus on the higher end of the traditional optical food chain, which enhances its visibility in being more on a par with the system vendors, especially in this age of open line systems, even at the expense of potentially sacrificing valuable assets at the chip level with the Oclaro purchase. It also plays a factor in JDSU’s aggressive diversification efforts in general. However, we think that Viavi’s much broader product lines provide it with a substantially higher ceiling regarding long-term growth, as well as the distinct possibility for an even greater disparity in gross margins in comparison to Lumentum down the road.
One of Viavi’s underrated strengths is that it took over the Optical Security and Performance division in the company breakup, starting out as Optical Coating Laboratory (OCLI), which JDSU purchased in 1999 (and enabled supply of those filters to Apple). The business has tended to provide insurance of sales even during times of economic turmoil as well as could be specifically counted on to maintain cash flow during declines in the telecommunications sector. The most dramatic demonstration was that three years after the big bubble burst around the turn of the century, although JDSU’s total sales declined by more than 80 percent, OCLI represented more than 50 percent of its revenue.
Certainly, the anti-counterfeiting applications for Viavi can be problematic, as it tends to be highly cyclical with limited visibility on new opportunities, along with the fact that cash will be decreasingly used around the world. Conversely, regarding brand authentication, the supplier is very far out on the learning curve with an impressive IP portfolio in a challenging arena in that there needs to be intensive programming of software in order to recognize each individual product of a brand to avoid fraud. With this division, Viavi is able to sell into a variety of spaces, including military, aerospace, consumer, and healthcare, such as the employment of its 3D laser filters into laser-guided missile systems and the usage of 3D holographic paints for automobiles.
For at least a couple of years, the lack of sufficient capital and the technical complexity will hamper significant 400G revenues for Lumentum. In contrast, Viavi is in a position to benefit now as there is demand for test systems at that data rate in labs, which although obviously much smaller in terms of unit sales, can generate a much higher premium than those used by network craftspeople in the field.
Moreover, although the amount of vitriol expressed for 5G may be unprecedented for a next generation technology in the history of telecom, we remain rather bullish on its use in targeted applications within the next five years. Similar to the 400G situation, with Viavi’s purchase of AvComm and wireless businesses, it can take advantage of opportunities long before the next-gen solutions take off in a big way.
As always fibeReality does not recommend any securities, and this writer does not invest in any companies being analyzed by us.
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[written by Mark Lutkowitz]