Lumentum sees growing revenue potential in cloud and data centers despite near-term inventory correction

The company’s cloud and networking revenue was up 25% sequentially, driven by solid cloud data center demand and the contribution from the Cloud Light acquisition, but down 25% year-on-year, given broad-based softness across most of our telecom networking product lines due to the continued inventory correction at our network equipment customers.

Cloud and Networking segment revenue was $286.8 million, up from $229.7 million in the previous quarter. Second quarter Cloud and Networking segment revenue at $286.7 million increased 24.8% sequentially and was down 25.1% year-on-year.

Lowe said the company sees an opportunity to play a significant role in enabling the optical bandwidth needed to support the growing AI trend.

“As fiber transmission reaches its physical capacity, network providers increasingly recognize the value of technologies like ours that enable continued network scaling, reinforcing our long-term confidence in this business,” he said. “We are also working closely with cloud infrastructure providers on novel components and modules that leverage our unique technology capabilities to enable new future AI hardware architectures for higher bandwidth, lower power density and low-latency optical interconnects essential for training and inference applications.”

400G, 800G rising

As data center operators continue to build out data centers fitted to support AI and ML, the ability to connect with high speed, power and cost-effective interconnection becomes even more pressing.

A recent Dell’Oro report revealed that while near-term budget cuts and project delays affect 800 Gbps port shipments, it expects increased shipments in 2024 in both back-end and front-end networks.

The research firm said that despite project delays, “800 Gbps port shipments are expected to quadruple in 2024.” This will result from the adoption of a significant cloud service provider, specifically Amazon, and the availability of 51.2 Tbps chips in the market.

Lowe said they are seeing similar trends. “With the rapid build-out of AI and ML data centers, connecting those data centers with high speed, power and cost-efficient interconnects is becoming even more important,” he said. “To that end, we continue to succeed in our 400 gig ZR module business, where in Q2, we grew over 30% sequentially.”

Also, Lumentum is getting positive customer feedback on its 800-gigabit ZR platforms and will have customer samples this year. “The market opportunity is accelerating, and we expect broader customer adoption of 800G technology as these qualifications finalize,” Lowe said. “Additionally, the initial ramp-up of 1.6 terabit products by early technology adopters is creating a lot of pull from customers, and we expect to have a first-to-market advantage given our vertical integration and test results from our labs.”

But data center is only one market. The vendor is finding its coherent transmission products are resonating with traditional service providers. “Our coherent transmission products outside of the data center are receiving positive customer feedback and traction on our next-generation 130 and 200 gigabaud data rate technologies that enable next-generation coherent applications at 800G, 1.2 Tbps and 1.6 Tbps,” Lowe said. “These high-speed products are available in discrete and integrated form factors to enhance performance in next-generation metro and long-haul applications.”

Cloud Light acquisition impact

Lumentum noted that its acquisition of Cloud Light is helping it gain momentum with new data center customers.

When the acquisition was announced, Lumentum said it would accelerate its push into the fastest-growing segments of the multibillion-dollar opportunity for optical modules used in cloud computing data center infrastructure. 

A large portion of Cloud Light’s over $200 million revenue in the last 12 months was derived from 400G or higher speed transceiver sales. Over half of Cloud Light’s optical transceiver revenue was derived from 800G modules in the most recent quarter.

“It has been just three months since we acquired Cloud Light, and we are thrilled with the team that has joined us and the many opportunities that lie ahead,” Lowe said. “In this brief period, we have had meaningful traction with customers on new data center opportunities, which we expect will drive significant additional growth as we develop the new products and receive customer qualifications.”

Lowe noted it gained a new 10% customer due to the Cloud Light acquisition. Looking forward, he foresees new opportunities with 800 Gbps and 1.6 Tbps. “We expect that diversification around our transceiver business will proliferate towards the end of this calendar year and into '25 as new 800 Gbps and 1.6 Terabit products are qualified with other hyper scalers and AI infrastructure companies,” he said.

Expanding manufacturing forward

Given the surge in data demand for AI data centers and the strong traction with transceiver opportunities, Lumentum is expanding its transceiver manufacturing capacity.

A key part of this expansion is enhancing production lines at its manufacturing facility in Thailand. This facility will manufacture its 1.6 terabit transceivers for multiple customers, providing additional bandwidth needed for AI workloads while alleviating data bottlenecks with lower power consumption and latency as customers move to 200 gig per lane technology.

“Our Thai factory has proven photonics manufacturing capabilities and has received numerous customer accolades, giving us confidence in our ability to ramp rapidly,” Lowe said. “This capacity will come online this summer, and we expect to lead the first wave of 1.6 terabit transceivers for multiple customers at this site.”

Additionally, Lumentum plans to leverage the new transceiver designs it gained from its Cloud Light acquisition. “We believe the combination of our established history of customer partnership, proven manufacturing leadership, and unrivaled breadth of differentiated photonic component capabilities puts us in an excellent position to accelerate top-line revenue growth and margins in this rapidly growing cloud transceiver market,” Lowe said.

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