Lumentum bulks up with NeoPhotonics buy

Lumentum is to acquire fellow component and module specialist, NeoPhotonics, for $918 million.

The deal will expand Lumentum’s optical transmission product line, broadening its component portfolio and boosting its high-end coherent line-side product offerings.

Vladimir Kozlov

Gaining NeoPhotonics' 400-gigabit coherent offerings will enable Lumentum to better compete with Cisco and Marvell. Lumentum will also gain a talented team of photonics experts as it looks to address new opportunities.

Alan Lowe, Lumentum’s president and CEO, stressed the importance of this collective optical expertise.

Speaking on the call announcing the agreement, Lowe said the expanded know-how would benefit Lumentum’s traditional markets and accelerate its entrance into other, newer markets.

Transaction details

Lumentum will pay $16 in cash for each share of NeoPhotonics, valuing the company at $918 million. Lumentum will also pay $50 million to NeoPhotonics “for growth capex and working capital.”

Cost savings of $50 million in annual run-rate are expected within two years of the deal closing, with 60 per cent of the savings coming from the cost of goods sold.

The deal is reminiscent of Lumentum’s acquisition of Oclaro for $1.8 billion in 2018. Oclaro was also focussed on transmission components and modules. 

The acquisition is expected to close in the second half of 2022, subject to the approval of NeoPhotonics’ stockholders and regulatory bodies.

Background

Lumentum’s announcement follows its failed bid early this year for the laser company, Coherent. II-VI ended up winning the bid, paying $6.9 billion.

Coherent’s lasers are used in many markets and the deal would have diversified Lumentum’s business beyond communications and smartphones.

Now, the proposed acquisition of NeoPhotonics boosts Lumentum’s core communications business unit. NeoPhotonics’ focus is cloud and networking although the company has been using its coherent expertise to address LiDAR and medical markets.

Vladimir Kozlov, CEO of market research firm LightCounting, does not see any inconsistency in Lumentum’s strategy to first diversify and then strengthen its core business. “There are many directions to accelerate company growth,” he says.

Lumentum tried one way with Coherent, it didn’t work out, now it is trying another with NeoPhotonics. “You take opportunities as they come along,” says Kozlov.

NeoPhotonics has also been impacted by the trade restrictions on Huawei, a significant customer of the company. NeoPhotonics has had to adapt to on-off sales to Huawei in recent years. Huawei also has a long-term strategy to develop its optical components including tunable lasers for which NeoPhotonics has been their leading supplier.

“That certainly added pressure on NeoPhotonics to be acquired,” says Kozlov.

Business opportunities

Lumentum’s business is split 60 per cent cloud and networking and 40 per cent 3D Sensing, LiDAR, and commercial lasers for industrial applications.

Lumentum’s cloud and networking products include reconfigurable optical add-drop multiplexing (ROADM) sub-systems, optical components for high-speed client-side and line-side modules, and coherent optical modules.

NeoPhotonics brings ultra narrow-linewidth tunable lasers, silicon photonics-based components and transceivers, and high-speed coherent modules and components. NeoPhotonics also has passive and planar lightwave circuit components and an RF chip design capability using gallium arsenide and silicon germanium.

Tim Jenks, president, CEO and chairman of NeoPhotonics, said combining the two firms would accelerate its business developing high-speed optical communications.

In turn, their combined R&D and technology teams can address new markets such as the life sciences, industrial applications, and green markets such as energy efficiency, electric vehicles and climate change green manufacturing concerns.

But no detail was forthcoming on the call beyond Lowe saying the merger will expand the collective know-how and accelerate its entrance into these markets.

Lowe also highlighted the strong growth in high-speed ports due to the 30 per cent year-on-year growth in internet bandwidth.

LightCounting says the dense wavelength division multiplexing (DWDM) coherent market will experience a compound annual growth rate (CAGR) of 20 per cent over the next five years; the general optical market is growing at a 14 per cent CAGR.

Both companies have indium-phosphide components for coherent systems while NeoPhotonics has pluggable 400ZR and ZR+ products as well as silicon photonics components for coherent. Gaining NeoPhotonics’ ultra-narrow linewidth lasers will make Lumentum an even stronger laser supplier.

LightCounting’s Kozlov notes the importance of scale, especially when target markets are not huge and the number of large customers is limited. This is the case with 400ZR/ ZR+ coherent DWDM transceivers that NeoPhotonics started selling in 2021.

Amazon is the biggest buyer of such modules and it uses three suppliers. NeoPhotonics is a distant third in the race behind Acacia, now part of Cisco, and Inphi, part of Marvell. But unlike Acacia and Inphi, NeoPhotonics does not have its own coherent DSP.

Joining forces with Lumentum, NeoPhotonics is more likely to win a larger share of business at key customers, says LightCounting. The new Lumentum may still be third in the race, but it is no longer a distant third.

Recent announcements

Lumentum started shipping its 400-gigabit CFP2-DCO coherent module earlier this year. Its range of indium-phosphide coherent components operates at a 96-gigabaud (GBd) symbol rate that supports up to 800-gigabit wavelengths. Lumentum is developing components that will operate at 128GBd.

Lumentum also has a directly modulated laser (DML) supporting 100-gigabit wavelengths. Such a laser is used for 100-gigabit and 400-gigabit client-side pluggables. The company is also developing electro-absorption modulated laser (EML) technology that supports 200 gigabits and higher performance per lane. 

Meanwhile, NeoPhotonics is shipping 400ZR QSFP-DD and OSFP 400ZR coherent optical modules. NeoPhotonics also has a multi-rate CFP2-DCO module with a reach of 1,500km at 400 gigabits. And like Lumentum, the company has indium-phosphide technology that supports 130GBd coherent components.

Kozlov believes Lumentum is in a good position.

On the call announcing the deal, Lumentum also delivered its latest quarterly results. “They can hardly keep up with demand,” he says.

The issue of shortages is getting worse. This is not because the shortages themselves are getting worse but that demand is ramping faster than the shortage issue can be resolved. “It’s a good problem to have,” says Kozlov.

Industry consolidation

The Lumentum-NeoPhotonics deal follows the recent announcement of the merger of two other mature optical players such as the systems vendors: ADTRAN and ADVA.

LightCounting’s Kozlov agrees consolidation is happening among mature optical component and optical networking companies but he points out that many new optical start-ups are emerging and not just in China.

“At the telecommunications part of CIOE (China International Optoelectronic Exposition), 500 companies were exhibiting,” says Kozlov. “And with the trade barriers, there is an extra incentive for companies in the West to double down on what they have been doing and maybe new companies to be formed.”

Companies have concerns about buying stuff from overseas so local companies are getting more business.

“We are going to see more consolidation but also new vendors entering the market and competing with the bigger guys,” says Kozlov.