Lumentum is hot on the trail of pursuing new opportunities in the data center interconnection (DCI) market segment. Data center customers are leveraging Lumentum’s products to link two or more data centers together to share resources.
Alan Lowe, CEO of Lumentum, expressed his confidence in the company's growth strategy during the third quarter fiscal year 2024 earnings call. He emphasized the ample opportunity to scale Lumentum's DCI offerings, reinforcing the company's commitment to meeting the growing demand in the market.
“Given the challenges in powering data centers, we expect to accelerate the growth of our DCI products over the coming years,” he said.
Lumentum is enhancing its production facilities in markets like Thailand to meet the demand for DCI. “In this section of our data center strategy, we are significantly expanding our manufacturing capacity in our proven wafer fabs and back-end factories to ensure a secure high-volume supply of our differentiated products to address our cloud customers' strong demand now and into the future,” Lowe said.
Starting this summer, Lumentum will provide customers with qualification units, including 1.6T modules, out of its Thailand plant. Lowe said, "Based on current customer timelines, we expect volume production to start later this calendar year and accelerate into calendar 2025 in a meaningful way.”
Additionally, Lumentum will continue to partner with cloud and AI infrastructure customers on new solutions to scale data center infrastructure that leverage its portfolio of in-house photonics and manufacturing technologies.
The vendor is focused on helping data center provider customers address power consumption issues. The vendor will enable photonic approaches that enable more energy-efficient data center networks.
“Power consumption will continue to be a key limiter in further scaling of computing power in the future,” Lowe said. “To address this, we are focused on enabling innovative photonic approaches to more energy-efficient data center networks. These include supporting optical switching to replace certain electronic packet switches and new optical transceiver and link architectures, which was the amount of power needed and removal photonics even closer to the processor and the switch chips.”
Cloud and networking gains
As seen in earlier quarters, Lumentum continues to make headway with cloud and networking segments.
Driven by what Lumentum said is strong data center demand and the contribution from the Cloud Light acquisition, cloud networking revenue grew 9% sequentially and 7% year-over-year.
The third quarter cloud and networking segment was $313.8 million, up 9.5% sequentially and 7.1% year-on-year. Cloud and Networking segment non-GAAP operating profit of 14.6% increased sequentially and decreased year-on-year.
Likewise, Lumentum saw gains with its 100G EML laser chips, with revenues nearly tripling in fiscal Q3. Lowe said this revenue spike resulted from expanding “output capacity at our Japanese wafer fab.”
He added that “as we ramp up production of 100G EMLs with market-leading customers, we are also qualifying our 200G EMLs for use in both 1.6 terabit and lower-powered 800G transceivers” and that “this product line to be a key contributor to growth in calendar 2025.”
Data center demand is also increasing for 400GR and ZR+ modules for DCI.
Besides providing these modules, Lumentum is seeing growth in tunable lasers used in ZR modules. “We are encouraged by a notable uptick in demand for our tunable lasers in Q3 as customer inventory of these products appears to be normalizing,” Lowe said. “We expect these strong cloud demand trends to continue based on the robust double-digit CapEx reductions from cloud data center operators for calendar '24.”
Telecom inventory challenges
Lumentum has forecast a net revenue of $290 million to $315 million for the fourth quarter of fiscal '24.
The company noted that telecom customer inventory issues will impact the subsequent quarters’ revenue.
“In the next few quarters, revenue will continue to be burdened by telecom customer inventory challenges,” Lowe said. “The pace of telco carrier spending has slowed more than anticipated.”
He added that there is light at the end of the tunnel. “Because we continue to shift below end market demand, customer inventory of our products is decreasing, and we are getting closer to the end of this lower demand phase in our industry,” Lowe said. We remain highly confident in our market position and the future recovery and growth of our telecom business. Network bandwidth growth continues unabated, requiring network capacity additions.”
Although Lumentum said it expects telecom providers to take a few more quarters to work through their inventory, it is seeing an uptick in sales of new products such as its 130 gigabaud, 200 gigabaud, and integrated ROADMs.
“There are two aspects of our telecom business: all those new products that are ramping today, but from a small base and then growing fast,” Lowe said. “But then those other products that are still in the channel by the end of the calendar year, I'd say that those are probably taken care of, and that gives us confidence in the strength of telecom in calendar 2025, as that inventory is burned off.”
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