LightCounting comments on Lumentum's latest acquisition
Once in a while success stories come from pure luck, but most of them are built on years and even decades of hard work and full commitment to the business. NeoPhotonics is one of these numerous examples. Tim Jenks led the company over two decades, navigating across new market opportunities, acquisitions, market downturns, restrictions on sales to China and what not. The $918 million success is well deserved, and it means a lot more when it comes as a result of hard work. Congratulation to Tim Jenks and his team at NeoPhotonics!
We are confident that company’s technology and products will find more market opportunities as part of Lumentum. Yes, there is a significant overlap between InP capabilities of the two companies, but scale always matters. It is even more critical 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.
LightCounting’s latest Market Forecast report, released last week, makes it very clear. The bulk of 400ZR/ZR+ shipments will go to the Cloud companies, as illustrated in the figure below. Amazon and Microsoft are the two largest consumers of 400ZR. The customer base for 400ZR+ is a bit more diverse, but the largest Cloud companies are likely to consume most of these products in 2022-2023.
Despite the limited customer base, LightCounting forecasts more than 20% CAGR for the DWDM transceiver market in 2022-2026, but there are many vendors targeting this business opportunity: Acacia (Cisco), Inphi (Marvell), Fujitsu Optical Components, Ciena, Huawei, Infinera, Nokia and ZTE.
Leadership of Acacia in the coherent DWDM transceiver market was solidified by Cisco acquisition, closed in January 2021. Cisco started shipping 400ZR transceivers to Amazon in 2021 and it will probably take most of this business in 2022-2023.
Inphi, now part of Marvell, built a close relationship with Microsoft co-developing 100G ColorZ modules. The company is starting to ship 400ZR modules now to support 400G deployments at Microsoft.
NeoPhotonics was a distant #3 in the race. In contrast with Acacia and Inphi, the company does not have an internal supply of DSP chips – the single most expensive component in coherent transceivers. By joining forces with Lumentum, it is more likely to win a larger share of business at key customers. The new Lumentum is still #3 in the race, but it is not a distant #3 anymore.
There is a lot of similarities between Lumentum’s acquisition of Oclaro a few years ago and NeoPhotonics now. Oclaro was the leader in 100/200G analog coherent (ACO) transceivers (not requiring DSPs) and Lumentum is still selling these products, but the market is shifting to 400G now. The difference is that there is no ACOs at 400G. It is all digital.
Will Lumentum be successful in 400G digital coherent (DCO) market? This is a $918 million question.
Acquiring or developing coherent DSP technology is very expensive. Partnering with a DSP supplier or a few of them may be the only option. It is a short list of companies to choose from: Acacia (Cisco), Inphi (Marvell), Huawei, Ciena, Nokia, Infinera, ZTE and NEL. Investment required to develop a 5nm CMOS chip (for a next gen DSP) comes with at least $100 million price tag. Only very large companies can afford it and even they are struggling to scale volumes and make a solid return on the investment.
If each one of the DSP manufacturers is trying to scale up, having a partner like Lumentum may be just the right strategy. Lumentum can be qualified as a second supplier to their existing customers and find new business, potentially taking share away from their direct competitors. There is no guarantee for success, but this strategy may work.
There is a lot more to NeoPhotonics business apart from 400ZR/ZR+: tunable lasers, coherent receivers and RF electronics. More importantly, it is the engineering talent - the most valuable part of this transaction, setting up the company for more success in the future. We wish all the best to NeoPhotonics team and their new colleagues at Lumentum.