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.
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.
NeoPhotonics secures PIC specialist Santur
NeoPhotonics has completed the acquisition of Santur, the tunable laser and photonic integration specialist, boosting the company's annual turnover to a quarter of a billion dollars.
Source: Gazettabyte
The acquisition helps NeoPhotonics become a stronger, vertically integrated transponder supplier. In particular, it broadens NeoPhotonics’ 40 and 100 Gigabit-per-second (Gbps) component portfolio, turns the company into a leading provider of tunable lasers and enhances its photonic integration expertise.
“Our business over a number of years has grown as the importance of photonic integrated circuits and the products deriving from them have grown,” says Tim Jenks, CEO of NeoPhotonics. “We believe it is a critical part of the network architecture today and going forward.”
Some US $39.2M in cash has been paid for Santur, and could be up to $7.5M more depending on Santur’s products' market performance over the next year.
NeoPhotonics has largely focussed on telecom but Jenks admits it is broadening its offerings. “Certainly a very significant portion of fibre-optic components are consumed in data and storage, and while historically that has not been a significant part of NeoPhotonics, it is a large and important market overall,” says Jenks.
"It [optical components] portends the future of the technology industry"
Tim Jenks, NeoPhotonics
The company will continue to address telecom but will add products to additional segments, including datacom. In July, the company announced its first CFP module supporting the 40 Gigabit Ethernet (GbE) 40GBASE-LR4 standard. Santur also supplies 40Gbps and 100Gbps 10km transceivers, in QSFP and CFP form factors, respectively.
Santur made its name as a tunable laser supplier and is estimated to have a 50% market share, according to Ovum. More recently it has developed arrays of 10Gbps transmitters. Such photonic integrated circuits (PICs) are used for the 10x10 multi-source agreement (MSA).
The acquisition complements NeoPhotonics’ 40Gbps and 100Gbps integrated indium-phosphide receiver components, enabling the company to provide the various optical components needed for 40 and 100Gbps modules. Santur also has narrow line-width tunable laser technology used at the coherent transmitter and receiver. But Jenks confirms that the company has not announced a transmitter at 28Gbps using this narrow line-width laser.
10x10 MSA
Santur has been a key player in the 10x10 MSA, developed as a low cost competitor to the IEEE 100 Gigabit Ethernet (GbE) 10km 100GBASE-LR4 and 40km -ER4 standards.
Large content service providers such as Google want cheaper 100GbE interfaces and the 10x10 MSA module, built using 10x10Gbps electrical and optical interfaces, is approximately half the cost of the IEEE interfaces.
"There is an opportunity with the 10x10 MSA," says Jenks. "The 10x10 does not require the gearbox IC, it is therefore lower cost and lower power, and fulfills a need that a 4x25Gig, with a rather immature technology and a requirement for a gearbox IC, does not."
In August the 10x10 MSA announced further specifications: a 10km version of the 10x10 MSA as well as two 40km-reach WDM interfaces: a 4x10x10Gbps and an 8x10x10Gbps. "There are end users that want to use these," says Jenks.
“The ability for a system vendor to lead is a challenging task. For a system vendor to lead and simultaneous lead in developing their componentry is a daunting task.”
Acquisitions
NeoPhotonics has made several acquisitions over the years, including four in 2006 (see chart). But Santur's revenues - some $50m - are larger than the aggregated revenues of all the previous acquisitions.
"I think of acquisitions as being inorganic for maybe two years and after that they are all organic," says Jenks. The acquisitions have helped NeoPhotonics broaden its technologies, strengthen the company's know-how and acquire customers and relationships.
“If someone says what did you do with this product from that company, they are asking the wrong question,” says Jenks. “By the law of averages, some [acquisitions] do better, some do worse but overall it has been quite successful.”
System vendors and vertical integration
Jenks says he is aware of system vendors taking steps to develop components and technology in-house but he does not believe this will change the primary role of the component vendors.
"Equipment vendors are building some things in-house for a near-term cost advantage, better insights into cost of production or better insights in how the technology can go,” says Jenks. “All reasons to have some form of vertical integration.”
But in technology leadership, no one company has a monopoly of talent. As such vertical integration is a double-edged sword, he says, a company can become quite expert but it can also isolate itself from what the rest of the world is doing.
“The ability for a system vendor to lead is a challenging task,” says Jenks. “For a system vendor to lead, and simultaneous lead in developing their componentry, is a daunting task.”
The world is flat
Jenks, whose background is in mechanical and nuclear engineering, highlights two aspects that strike him about the optical component industry.
One is that telecoms is ubiquitous and because optical components go into telecoms, optical components is a global industry. "The world is very flat in optical components,” he says.
Second, the hurdles to undertake experiments in optical components is lower than the significant capital investment needed for nuclear engineering, for example. "Colleges and universities turn out graduates in physics and electrical engineering that are well trained and need a lighter physical plant,” says Jenks. This aspect of the education promotes a globally diverse and a rather 'flat' industry.
“When I go to a trade show in China, Europe or the US, I'm running into colleagues from the industry that I know from each country we do business, and that is a lot of countries,” he says.
All this, for Jenks, makes optical components a fascinating industry, one that is on the leading edge of technology and also industrial trend.
"It [optical components] portends the future of the technology industry: flatter and flatter with more global players and more global competition," says Jenks. “At the moment it is novel in optical components but in a few years' time it won't be unique to optical components.”
NeoPhotonics at a glance
The company segments its revenues into the areas of speed and agility (10-100Gbps products, planar lightwave circuits - ROADMs, arrayed waveguide gratings), access (FTTh, cable TV, wireless backhaul) and SDH and slow-speed DWDM, products designed 3-5 years ago.
Historically these three segments' revenues have been equal but this year the access business has been larger, accounting for 40% of revenues due to China's huge FTTx rollout.
Huawei is NeoPhotonics' largest customer. “They have been as much as half our revenue," says Jenks. And depending on the quarter, Ciena and Alcatel-Lucent have been reported as 10% customers.
