Lumentum Bets on the Future of Data Centers

For companies doing business in optical telecommunications and networking equipment, the past year has been a tough one, with revenues slowing as telecom service providers have pulled back on capital expenditures and orders and have focused instead on digesting existing inventory. Yet Alan Lowe, the president and CEO of Lumentum Holdings—one of the firms that has been navigating these choppy waters—thinks the emerging network and data requirements of AI and machine learning point to a strong long-term future for the business.

As a result, after a couple more potentially challenging quarters in the remainder of its June 2024 fiscal year, Lumentum looks for volume and profitability to recover strongly thereafter. And Lowe says the company is gearing up for this more positive environment by investing in expanded, geographically diversified capacity and continuing to integrate a key recent acquisition, Cloud Light. OPN recently talked with Lowe about where Lumentum and its markets are headed.

A “new inflection point” for Lumentum?

Lowe started with Lumentum’s precursor company, JDS Uniphase (JDSU), in 2007, heading up JDSU’s laser business, and became CEO of Lumentum when it was spun out of JDSU in 2015. Today, the company does business through two broad divisions: Cloud and Networking, which delivers lasers and optics for high-speed telecom and datacom; and Industrial Tech, focusing on automation, imaging and sensing for advanced manufacturing.

Looking at the company today, Lowe believes it’s at “a new inflection point” related to the surge of activity in AI and machine learning. Taking advantage of that surge, and more generally of expected growth in the cloud and data center markets, was a key rationale for Lumentum’s US$750 million acquisition of Cloud Light, a Hong Kong–based designer and manufacturer of optical networking equipment, in November 2023.

Before that acquisition, Lowe told OPN, Lumentum principally provided laser components to transceiver manufacturers, including electro-absorption modulated lasers (EMLs), directly modulated lasers (DMLs), VCSELs and “CW lasers for the silicon photonics aspect of it.” Adding Cloud Light’s manufacturing and design capabilities to the picture, Lowe maintains, provides the vertical integration necessary to boost Lumentum’s market share with “hyperscalers” and infrastructure providers—the Amazons and Googles of the world—and to create solutions in transceivers and chip-to-chip interconnects within the data center.

To 800G and beyond

Lowe says the initial integration of Cloud Light into Lumentum has gone “very well.” In its earnings report for the fiscal 2024 second quarter, the firm noted that Cloud Light had kicked in revenues of US$59.5 million in the first eight weeks or so after the acquisition.

A key driver going forward will be the increasing demand for higher-speed transceivers in the face of the cloud’s voluminous appetite for data, especially in AI and machine-learning applications. Lowe notes that more than half of the Cloud Light unit’s revenues in the December quarter came from 800-gigabit-per-second transceivers, with the balance from 400G transceivers. And this, he says, “gives our customers confidence” that Lumentum and Cloud Light can push the envelope further in the move toward 1.6-terabit products that has already begun among some hyperscalers and early adopters, and that he believes will gather momentum next year.

Lowe sees the transition to 1.6 terabit as “a real growth engine for fiscal 2025 and beyond” for Lumentum. And he thinks the diverse array of technologies enabled by the Cloud Light acquisition—“silicon photonics–based 1.6 terabit, EML-based 1.6 terabit or even multimode 1.6 terabit”—will stand it in good stead as it seeks to diversify its customer base.

Lowe sees the transition to 1.6 terabit as “a real growth engine for fiscal 2025 and beyond” for Lumentum.

“Since we have all of the technologies,” Lowe maintains, “customers can pick the right tool for their needs.” He adds that the company’s abilities in coherent components and modules could also offer advantages as customers eventually start bringing those traditionally long-haul technologies into the data center in the quest for ever-greater bandwidth.

Navigating a difficult transition

En route to that projected bright future, Lumentum still expects a few difficult quarters as it closes out the fiscal year ended June 2024. Indeed, the past several years have held some unique challenges for the company.

These have included the loss of significant business with Apple Inc. as the smartphone maker split its iPhone VCSEL business among multiple suppliers, and a big hit when US trade restrictions choked off sales to Huawei, which accounted for 11% of Lumentum’s fiscal 2021 sales. More recently, the demand slowdown owing to ongoing inventory correction among network equipment customers has made it harder for Lumentum to book new orders. This led to a 25% year-on-year revenue decline in the December 2023 quarter.

While acknowledging the recent sluggishness in shipments, Lowe points out that “bandwidth demands don’t slow down,” and in fact have continued to accelerate. As a result, he says that after a couple of additional potentially soft quarters, Lumentum sees much better prospects for the second half of calendar 2024 and beyond, as meaningful demand for 1.6 terabit starts to kick in and as the company adds new customers. “A lot of good things coming together,” Lowe argues.

To prepare for that expected demand boost, he says, Lumentum is investing heavily in building out production capacity at its production facility in Thailand. As most of Cloud Light’s existing transceiver manufacturing is done in China, the focus on the Thai facility will, Lowe believes, not only aid the 1.6-terabit ramp-up, but will also help the company offer “the outside-of-China manufacturing that our customers really, really want.”

Beyond the communications segment, Lowe also sees an improved picture for the company’s industrial-technology arm, and in the ways photonics can “enable the manufacturing of the future.” These may include products tied to computer and machine vision, lidar, laser-based measurement and other aspects of state-of-the-art manufacturing for areas such as automotive and aerospace. This segment, too, has an AI angle, Lowe points out, as these capabilities “generate a ton of data that then get used by artificial intelligence.”

Moving at “cloud speed”

“We’re planning on winning,” Lowe says.

In his talk with OPN, Lowe found at least some silver lining in the recent slowdown in demand, which he believes is allowing the company to re-evaluate its efficiency and reallocate resources accordingly to serve a rapidly evolving market, at what the company calls “cloud speed.” The cloud is “moving so fast,” Lowe says. “We have to make decisions and move and develop products at the speed that they need us to execute upon.”

Lowe is convinced that Lumentum is well positioned for the upturn in demand it envisions for late 2024 and beyond. “We’re planning on winning,” he says. “And I think every signal today is that we are going to win.”