Michael Hurlston has had an eventful 2018.
The year started with him replacing Finisar’s veteran CEO, Jerry Rawls, and it is now ending with Finisar being acquired by the firm II-VI for $3.2 billion.
Michael Hurlston
Finisar is Hurlston’s first experience in the optical component industry, having spent his career in semiconductors. One year in and he already has strong views about the industry and its direction.
“We have seen in the semiconductor industry a period of massive consolidation in the last three to four years,” says Hurlston, in his first interview sinced the deal was announced. “I think it is not that different in optics: scales matters.”
Hurlston says that, right from the start, he recognised the need to drive industry consolidation. “We had started thinking about that fairly deeply at the time the Lumentum-Oclaro acquisition was announced and that gave us more impetus to look at this,” says Hurlston. The result was revealed in November with the announced acquisition of Finisar by II-VI.
“Finisar considered so many deals in the past but could not converge on a solution,” says Vladimir Kozlov, CEO and founder of market research firm, LightCounting. "It needed a new CEO to bring a different perspective. The new II-VI will look more like many diversified semiconductor vendors, addressing multiple markets: automotive, industrial and communications."
“We really have two complementary companies for the most part,” says Hurlston, who highlights VCSELs and reconfigurable optical add-drop multiplexers (ROADMs) as the only product segments where there is overlap. Merging II-VI and Finisar with disparate portfolios further benefits scale, he says.
Chip background
Hurlston’s semiconductor experience was gained at Broadcom and involved Wi-Fi devices. The key lessons he learned there is the importance of offering differentiated products to customers and the need to expand into new application areas.
“Wi-Fi is a standard, a technology, that has rules as you have to interoperate between different chipsets and different producers,” says Hurlston. “But we did find ways to differentiate under a standards umbrella.”
What he has found, to his surprise, is that it is harder to differentiate in the optical components industry. “What we are trying to do is find spots where we can offer differentiation,” says Hurlston.
Optical components usage needs to also expand into new segments, he says, just as Wi-Fi evolved from a PC-centric technology to home networking and ultimately mobile handsets.
It turns out co-packaging is a great top-line opportunity for optics companies because eventually we will be tasked with pulling together that sub-system
Hurlston cites as an example in the optical components industry how VCSELs are now being used for 3D sensing in handsets. There are also emerging opportunities in automotive and the data centre.
For the automative market, applications include in-cabin sensing to assist drivers and LIDAR (laser detection and ranging) to help vehicles build up an image of their surroundings in real-time. “LIDAR is further out but it is a significant opportunity,” says Hurlston.
For data centres, a key opportunity silicon co-packaging: bringing optics closer to switch silicon.
Currently, switch platform use pluggable optical modules on the faceplate to send and receive data. But with switch silicon capacity doubling every two years, the speed and density of the input-output means optics will have to get closer to the switch silicon.
On-board optics - as promoted by the Consortium for On-Board Optics (COBO) - is one option. Another is co-packaged optics, where the optics and silicon are placed in the same package.
“It turns out co-packaging is a great top-line opportunity for optics companies because eventually we will be tasked with pulling together that sub-system,” says Hurlston. “The integration of the switch chip and optics is something that will be technically difficult and necessitate differentiation.”
Challenges
As well as the issue of acquisitions, another area Hurlston has tackled in his short tenure is Finisar’s manufacturing model and how it can be improved.
“Finisar is a technology company at heart but the life-blood of the company is manufacturing,” he says.
Manufacturing is also one area where there is a notable difference between chips and optics. “There are manufacturing complexities with semiconductors and semiconductor process but optics takes it to a whole different level,” he says.
This is due to the manufacturing complexity of optical transceiver which Finisar’s CEO likens to manufacturing a mobile phone. There are chips that need a printed circuit board onto which are also added optical subassemblies housing such components as lasers and photo-detectors.
“Part of it [the complexity] is the human labour - the human touch - that is involved in the manufacturing and assembling of these transceivers ” he says. Finisar says its laser fab employs several hundred people whereas its optical transceiver factories employ thousands: 5,000 staff in Malaysia and some 5,500 in China.
“Our manufacturing model has been where I’ve spent a lot of time,” says Hurston. Some efficiencies have been gained but not nearly as much as he initially hoped.
Whether there will be three, four or five large players, I don’t know but we are definitely going to see fewer
Consolidation
One of the issues that has hindered greater industry consolidation has been the need for synergy between companies. A semiconductor company will only acquire or merge with another semiconductor company, and the same with a laser company looking for another laser player, he says. “What I admire about II-VI is that they are pretty bold,” says Hurlston. “What II-VI did is go after something that is not overlapping.”
He believes the creation of such broad-based suppliers is something the optics industry will have to do more of: “The transceiver guys are going to have to go after different areas of the value chain.”
In most mature industries, three large diversified companies typically dominate the marketplace. Given Lumentum’s acquisition of Oclaro has just closed and II-VI’s acquisition of Finisar is due to be completed in mid-2019, will there be another large deal?
“This is a big industry and the opportunity today and going forward is big,” says Hurlston. But there are so many players in different parts of the supply chain such that he is unsure whether these niche companies will survive in the long run.
“Whether there will be three, four or five large players, I don’t know,” he says. “But we are definitely going to see fewer; this [II-VI - Finisar deal] isn't the last transaction that drives industry consolidation.”
How will Finisar make optical transceivers in such a competitive marketplace, that includes an increasing number of Chinese entrants, while delivering gross margins that meet Wall Street expectations?
Finisar does have certain advantages, he says, such as making its own lasers. “We also make our own semiconductors, a lot of the semiconductor solutions the Chinese guys have are sourced,” he says. “That gives us an inherent advantage.”
Having its own manufacturing facilities in the Far East means that Chinese players have no inherent manufacturing advantage there. However, he admits that the gross margin expected of Finisar is higher that its Chinese competitors.
This is why Finisar’s CEO stresses the need to pursue pockets of differentiation and why the company has to be first to market in important productareas that all players will target. “We historically have not been first to market,” he says. “We have made adjustments in the last year in our time-to-market and our ability to get to big products transitions that will be hyper-competitive first.”
Hurston expresses some satisfaction in the improved revenues and gross margins as reported in Finisar’s last two quarters’ results, albeit these quarters coming after what he calls ‘a low base’.
“We have also made significant progress in 3D sensing that has been a big challenge for us,” he says.
What next?
Hurlston says he hopes to have a role in the new company once the deal closes.
“But If I don’t, I’ve really enjoyed working with the [Finisar] team and in this space,” he says. “It’s been a bit of a learning curve but I’ve learnt a couple of tricks. Hopefully there will be another opportunity to apply some of that learning to a job elsewhere.”