Up onto stage. I will read some research disclosures to not waste everybody's time. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. I'm Meta Marshall, for those of you who don't know me, I cover networking here at Morgan Stanley. We're delighted to have Lumentum here today, helping us close out TMT and just off of OFC. We have Wajid Ali, CFO, and Kathy Ta, VP of Investor Relations with us. Maybe, you know, it's been a busy week for you guys between OFC. Maybe you could just kind of give us a sense of tone of investor conversations or kind of tone of messaging during OFC.
Sure. Maybe I'll take a first crack at that.
Yeah.
Nina, thanks for inviting us to your conference, and glad that we could make it. Yeah, OFC was a really upbeat event. This year we had an analyst day, and I invite you to take a look at the slides that we have online about that. But basically, we outlined the next stages of the technology roadmap that are ahead. Basically what happens after the 1.6T era in optical communications. And our answer to that is that we need to integrate more functions into our transceivers and more functions into our ROADMs. We basically are entering an era where we're going to have multiple channels or multiple wavelengths per channel, and we're going to enter an era where we'll have multiple fibers that are coming into our ROADMs.
It's basically this post-Shannon era that we're all, you know, anticipating and planning for and developing products towards. So that was super exciting. Another big announcement that we were able to make is that we have a partnership with NVIDIA, and so we too have a play in AI, and that layers on top of the data comm opportunities that we already serve with our high-end EML lasers. Those were the two big announcements that we made.
All right. Perfect. We'll dive into some of that. you know, you guys have been able maybe we'll just dive into that AI conversation now in a little bit, because, you know, you've been able to capitalize on a number of mega trends over the past couple of years, whether the 4G, 5G build-out in China, 3D sensing. You know, what is the new trends that you're gonna be able to capitalize on over the next few years? It sounds like kind of the AI opportunity is one of those.
Yeah. No, I mean, I totally agree with what Kathy talked about earlier as well. You know, certainly I think the broader trend is that there is a relentless demand for data.
Mm-hmm.
You know, the capacity that's gonna be required at the network is expected to continue to increase. I don't think that there's any doubt about that at all. You know, historically, we've been able to satisfy that demand or, you know, work with our partners, simply by, you know, increasing the speed of the products that, you know, we provide. You know, we've gone from 100G to 200G to 400G, and now we were showing some 800G products at OFC. Certainly that is a path that works for only so long.
You know, what we've really taken a look at, what do we think the market looks like, over the next, you know, three to five years? Because we wanna be ahead of the curve in terms of being able to, you know, win in this market. You know, our answer to that is really a term that we've coined CSDM. You know, that's really revolves around us being able to increase the optical bandwidth of our transceiver products and increase the optical bandwidth of our ROADM products. You know, we've introduced some shorter term solutions on the ROADM side with our, you know, XC products and our C+L products that we've demonstrated.
You know, eventually what we wanna be able to do is to be able to, you know, provide the integration of our photonics products and provide, you know, solutions that have, you know, more fibers that allow us to have, you know, more bandwidth moving through the optical network. That's really kind of almost our framework for how we're taking a look at, you know, each one of our product lines is, you know, how can we win given that data capacity is increasing, our customers need a lower cost per unit and power savings and smaller footprint? You know, how do we exceed all of those expectations while being a leader in the market and providing differentiated technology and products? You know, that's really kinda how we're thinking about it.
We believe we have a clear solution to win in those.
Got it. The 3D sensing market has obviously been a big conversation topic for you guys for going on five years now.
Right.
Just how you see that market evolving over the next couple of years, both in, just in terms of markets in which you can address and just number of competitors that are gonna be in that market.
Yeah, I mean, we continue to be very excited about the imaging and sensing market. You know, we are a leader in that market. We had an outsized share in one end market at one particular customer for a lengthy period of time, and we've certainly been able to, you know, leverage the technology that we've built there and use that actually even in our some of the opportunities we see in our datacom optical interconnect product space as well, which we should talk about at some point as well. You know, moving forward, you know, we've identified a number of markets where we've been investing in for quite some time.
The most prominent has been the LiDAR market, where we've got key partnerships, where we've been working on co-development projects, with key customers and players in the overall ecosystem and supply chain, in order to gain a foothold in that market. It's really very much like what we did when we brought out 3D sensing, is that it took a number of years of investment and co-development and finding the perfect partnership from a technology and product standpoint, so that our customers could be successful. Then as the market comes up, we're there to enjoy the fruits of the labor that we had invested in before.
you know, in the short term, we've talked about some of the 3D sensing normalization that we've had and the impact that's had, and certainly the upcoming fiscal year will not be a growth year for 3D sensing. We're quite confident, and we've put a lot of R&D dollars behind our thesis around what we see specifically on the, in the LiDAR market and the success we're expecting there. We're quite excited about it.
You know, we've kind of. Now you guys, another competitor in this space, has really changed the definition from 3D sensing to kind of the sensing and imaging. Just what are these kind of additional use cases that are kind of expanding how we think about what that opportunity is?
Yeah. I mean, the use cases are, you know, multifold. It's almost everywhere you look. you know, whether it's automotive, whether it's AR/VR, whether it's the industrial space, whether it's security. It's really about It's not so much about R&D dollars. It's more about where do we want our talented team to focus so that we can win because, the capacity of that team at some level is beyond how many resources we can put behind it.
Mm-hmm.
I think that the opportunity array is many. Just like we've been able to win in 3D sensing and then leverage some of that into the LiDAR market with the learnings we've had, we'll be able to leverage that into other markets as well. Certainly, you know, the sensing market from our standpoint is about $1 billion that's expected to double in the next 5 years. Because it's generally more of a chip-based business, it can certainly add to our financial model profile as well.
Got it.
From a technology perspective-
Yeah
I'll just add on to that. We kind of pick up where cameras leave off. When you think about a camera-based solution, you don't really get the depth of focus, you don't get the accuracy that is always required. When you think about applications like authentication, like recognizing a person's face, we saw it in the phone market, where you can only unlock that value and unlock your phone as it turns out with an a laser array, the laser solution. The same is true for other applications like automotive LiDAR, where you get the depth of the accuracy and the depth of focus -
Mm-hmm
- of a vision system. We're excited about this market because not only for automotive LiDAR, but industrial applications need that sort of precision in automated factories, modern factories, where on an assembly line, you would want to have the depth of focus, the accuracy, the number of points collected in a very short amount of time. And that's something that only a photonic product can deliver, and cameras don't deliver that sort of accuracy.
I mean, you guys have clearly the length of experience, kind of above the rest of your competitors. You know, it does appear we kind of have a third competitor within this space now. You know, you mentioned a market going from $1 billion- $2 billion, but just how do you guys make sure that you're kind of not gaining, but that you're getting your fair share and that you can continue to differentiate in this market?
Yeah. I mean, like, in the 3D sensing market, I know there's been, you know, a lot of rumors around other entrants coming into that market, and so we certainly don't want to comment on those rumors.
Yep.
You know, in terms of our focus on customer excellence with the various partners we've got in the LiDAR ecosystem, it certainly puts us ahead of the curve, especially because the investments that they're making and the type of hurdles that have to be passed in order for those products to come to market are certainly much more intense. We've been at it for a couple of years, and we have not seen other potential entrants that might now be making some headway into the 3D sensing market, also making any headway into those LiDAR opportunities. You know, we've been investing for a long time. The management team has had that vision. Alan has certainly led the charge on those investments.
I clearly see it paying off because we see the commitments on the other side and the level of commitment from them for us to move forward and to execute into that larger market that we're gonna experience very soon.
Got it.
Just to add on what Wajid just said, the automotive market is all about reliability, and the last thing they want is a recall or a safety excursion. We are the only supplier that has delivered billions of VCSELs onto the market with no field failures.
Mm-hmm.
That reliability performance is key for us to get in the door with all of the automotive LiDAR companies. The other great thing about the position that we have is we're sort of the photonic supplier for everyone, regardless of their architecture. It doesn't matter to us actually what their architecture is. We have the same product that would go into any architecture. With that reliability performance and the photonics know-how and capability, it really is giving us an early advantage in getting into the automotive LiDAR market. And it's also the same constraints or concerns are present in the industrial market too. Reliability is really important to them.
Got it. You guys have continued to lead in the telecom market, particularly now with supply chain challenges loosening just a hair. Just a hair. You know, how do you judge the health of demand here, you know, particularly just given that you're a little bit... You're kind of twice removed from the customer, or at least once removed from the customer?
Inventory, as it relates to the data center application. Yeah. We are two steps removed.
Mm.
from our hyperscale data center customers.
Mm-hmm.
We ship the world's leading edge lasers, EML lasers, into virtually all of the module makers that make modules for the data center owners, to consume the transceivers. As such, we shipped apparently into everyone's inventory on the transceiver side. When things started to slow down a bit in hyperscale data center spending, CapEx spending, when they tapped the brakes, it also slammed on the brakes of most of the transceiver makers. It makes sense that we would see it first.
Mm.
We would see it perhaps more severely than others because we're the world's supplier of 100G per lane lasers that go into many of the transceivers that are making 600G or 800G transceivers. We dialed our expectations accordingly. We're using this time well though because we expect to lead in this next transition to 200G per lane, which will enable the next 1.6T transceivers when they come to market. We expect we'll be ready with that at the end of this calendar year.
I mean, just since we're talking about datacom and clearly going through a digestion period right now, you're talking about areas where you can maintain leadership kind of going forward. Just, you mentioned kind of your partnership with NVIDIA upfront. AI, you know, OpenAI is gonna be here in a couple of hours.
Mm-hmm.
You know, it's the most topical conversation there is right now.
Right
A lot of that traffic is in data center traffic, a lot of the latency is networking. How can you guys take advantage of that opportunity, and how can you guys kind of differentiate in that opportunity?
Yeah. So, we're really excited about this opportunity. It layers on top of the opportunity that we already have with the leading edge transceivers that are equipping data centers with 800G and, you know, soon enough, 1.6T transceivers. We basically participate in a couple of ways. The first way is we supply a high-power laser to a co-packaged optics scheme in the new AI architectures that are appearing with NVIDIA and others. What we do is we supply a high-power laser that is basically outside the box.
Mm-hmm.
That high power enables a laser array, which enables basically the co-packaged optics to be successful. You're putting the burden more on the optics side in terms of data transfer compared to the traditional copper interconnect side. You're making the copper interconnect shorter by co-packaging the silicon photonics with the switch chip and putting the burden back on optics, where we have plenty of room to grow in terms of data transfer. Next stage is to enable the compute cluster, as NVIDIA calls it, where we take an even higher power laser, which is already removed from the architecture, and we are able to split that high-powered laser into a laser array, each of which has all of the wavelengths in it.
The wavelengths can then be split, and we have multiple ways to get data transferred into and out of this compute cluster architecture. We're very excited about it because in this market, and it doesn't really destroy any of the market that we have today.
Got it.
You want to also make a comment about the market size growing because of it?
From a Lumentum perspective, we expect that the market will basically double our opportunity in five years' time. Today, we have a certain market size that we already serve, in serving the leading transceivers. We expect this will at least double our opportunity from a dollar perspective in five years' time.
Got it. That answer of why the Lumentum IR person always has a PhD. I'm envious that all of that made sense to you, and 90% made sense. All right, I mean, I'm jumping ahead in questions, but I guess, you know, another area where Lumentum has been investing is just on that kind of DSP side.
Right.
You know, you bought a team out of IPG Photonics. You've done some kind of investment with yourselves. You know, typically, that's been a systems vendor product. Just what is the opportunity you guys see kind of in the DSP or kind of transceiver side there?
I mean, one of our key strategies that we talked about at our Investor Day, was really the fact that, you know, moving forward, we see that a key differentiator for us is integrating vertically and integrating from a functional standpoint. The DSP and, you know, which we acquired and, you know, silicon photonics technology from NeoPhotonics and, you know, ROA technology from NeoPhotonics, all those are key building blocks in terms of us having a full array of chips and being able to leverage that into our components and into, you know, final modules, where we, where we deem necessary, and where we think we can win from a, from a final module standpoint. You know, we're investing. You saw that we've increased our R&D investments.
Mm-hmm.
Over the last couple of quarters. you know, a lot of that investment has been because of our thesis on how critical DSP is gonna be in terms of our overall ability to integrate, functionally and vertically. you know, we're continuing to expect that to be an excellent contributor to our 400G ZR and ZR+ product line, both from a revenue standpoint as well as improvements that we'll see in operating profit as we have our own, DSP in there. That's really kind of our thinking on DSP, Kathy, on that.
I think you guys covered it.
Awesome. Maybe moving on to the telecom market. Clearly, you guys are a leader. You've been very successful kind of in the ROADM piece of the market. As we think about that market, you know, we just had Ciena. They're talking about kind of health in that market going forward. Are there other ways in which you can kind of participate in the telecom?
Well, the ROADM market itself is very exciting.
Yeah.
The ROADM market itself is expected to double over the next five years with, you know, the expected growth that we're expecting on the edge of the network. You know, with that level of growth and the ROADM technology we've got and the R&D investments we're making in new products, we're certainly excited just even about the base business.
Mm-hmm.
Of ROADMs. You add on top of that some of our differentiating advantages that we show in our MxN products. You know, we can see us even growing from the high level of market share that we already have. One of the places we're able to leverage the technical capability that we've had on ROADMs is really in the optical switching market. You know, we've gotten a lot of pull from our customers, from data center customers, for us to actually come in and lead in the optical switching market because of the success that we've had in the performance and reliability and power savings that we've demonstrated on the ROADM side.
You know, that's one area that I think will give us a nice runway in terms of growth for our telecom business in a category that we currently don't compete in.
Mm-hmm.
The other place is really around our pump lasers and some of the functional integration and innovation we're doing on our pump lasers. You know, generally, we've done very well with pump lasers in subsea, but we have not had as much market share from a satellite communication standpoint with pump lasers. Some of the innovations that we're coming up with are really through CSDM, through the framework of CSDM, is gonna allow us to win in that market as well. We see the overall, we call it transport side of our business, growing within that ROADM product category because of those reasons.
Got it. Another question that we get sometimes is just what is and is there a China opportunity still left for you guys?
Yeah. I mean, we're really, you know, relegated by the regulations-
Right.
That we have to follow and be responsible. Around our Huawei revenue over the last number of quarters has been, you know, low to mid-single digits because of that. China is obviously an important market. There's a lot of investment that's happening there from a carrier standpoint. you know, we're gonna kinda have to wait and see how that.
Mm-hmm.
How that all plays out, moving forward. We're certainly cognizant of the constraints that we've got and our ability to grow in that market.
Got it. At the Analyst Day, you guys kind of laid out additional synergies that you were seeing from NeoPhotonics, and just kinda some of the opportunities that exist there. For those who weren't down in San Diego.
Yeah.
Earlier this week, just kind of lay out where you're kind of seeing those opportunities from and just kind of the NeoPhotonics piece of the business.
You know, historically, Lumentum's done a great job of integrating acquisitions, and, you know, not just from a synergy standpoint, but also from bringing out new and innovative products that, you know, simplify the product platform to the customer and really bring the overall cost of our customers down, because, you know, we're providing them with one solution. Actually, that's really helping us from a synergy standpoint as we take a look at, what level of product platforms we want as a combined company. You know, we've had a little bit more from an OpEx synergy standpoint, and we laid that out in the analyst slides.
Where we're seeing, you know, more upside, versus what we originally thought, is in the manufacturing footprint consolidation that we've had, and some of the R&D investments that we're able to make, because we can streamline our product portfolio. Obviously, kind of just some of the regular volume ability, pricing, adjustments.
Mm-hmm
We have a combined purchasing power on single components and things like that. We've seen a little bit of uptick on that. Mostly it's been around product rationalization and manufacturing footprint consolidation that's allowed us to have confidence to increase our number from $50 million-$80 million. That's really important because we see our R&D expenses as a % of revenue remaining elevated, you know, with all the opportunities that we've talked about and the fact that we want to be ahead of the curve, in each one of our product portfolios. We really need those synergies so that we can fund that R&D and still have a reasonable financial model that supports growth.
Got it. I have more questions here. Any questions from the audience? All right. Maybe just diving into the industrial lasers market. You know, it's always been kind of a smaller but important business for you guys. It's clearly started doing pretty well and expanding kind of the customer set there. Just where do you see that business going, and kind of leads into another question of kind of where do you see your M&A strategy kind of more focused around?
Sure. I'll start and then Kathy, jump in please.
Okay. Sure.
You know, historically, we've done very well in our lasers business because of our experience in kilowatt fiber lasers.
Mm-hmm.
The end applications have generally been cutting, welding, industrial manufacturing, type of applications. We've got a very key partner in that market that we've done very, very well with. They've grown, we've grown. Over time, we've moved into the ultrafast market, and the ultrafast market has really given us an opportunity to hit some really nice end markets around semiconductor displays, and EV battery manufacturing, as well as the microelectronics market as well. Those are markets that we had not played in before. Because of the investments we've made in ultrafast, we've been able to do that. Probably, actually, one more I should mention, the solar cell market.
Mm-hmm
Really requires our ultrafast lasers as well, and, you know, the type of, you know, thermal benefits that our ultrafast lasers provide for solar cells. That's really important. Around M&A, you know, our focus has been on, you know, growing that organic business because it's a highly profitable part of our company, and it's grown nicely at those reasonable profit levels. Our gross margins have actually done very well in that business. But certainly as things come up, you know, we take a look at them and see how we can, you know, maybe move our lasers business forward if certain opportunities arise, but that's not the focus. The focus is really growing the organic side of the lasers business.
Got it. Anything else to add? All right. Well, I think with that, we're basically at time. I would recommend everybody to take a look at the Analyst Day presentation if you haven't. They did a very good deep dive there, but we're just trying to extract some of the good takeaways. Wajid, Kathy, thank you so much for being here today.
Thank you, Meta.
Yes, thank you, Meta.
Thank you so much.
I really appreciate it.
All right.