Lumentum: Laser Demand, OCS, CPO and Optical Scale-Up

$LITE’s enviable market position, big order of UHP lasers, OCS deployments, optical scale-up benefits, and what needs to happen for full optical scale-up by when.

Lumentum ($LITE) delivered a stellar Q2 earnings report with revenue being up 65% YoY. We won’t get into all the numbers here, but you can hear CEO Michael Hurlston brimming with confidence:

Our position across OCS, optical scale-out and optical scale-up is the envy of the industry [...] we continue to believe that our current performance is only a precursor of things to come.

Let’s dive into each aspect of the earnings call, and think through possibilities of technology evolution. We will cover more engineering, less financials.

Lasers

Lumentum is the primary supplier of laser technology for optics in datacenters. The demand for their lasers have far outstripped supply, and while Lumentum has continued adding capacity, the demand-supply gap continues to widen. This “seller’s market” for lasers puts Lumentum in the enviable driver’s seat where laser supply is only guaranteed to buyers who are prepared to make long term purchasing agreements (LTAs). Those that do not, are left chasing table scraps if there are even any.

Their dominance in lasers is well known, but with Coherent ($COHR) bringing up with 6” InP wafer supply with continuously increasing yields compared to Lumentum’s 3” wafer supply, they have to compete with 2x wafer diameter and 4x more InP lasers per wafer. If their lasers are competent, Coherent is capable of taking away demand for Lumentum’s lasers especially from those who don’t currently have LTAs. Lumentum has been careful not to increase prices in the face of increasing demand, lest they frighten away customers when a lower price point hits the market. This is a prudent and cautious choice.

Their 200G EML lasers are currently 5% of their quarterly revenue, but they expect to hit 25% by the end of 2026 as the industry scales to 1.6T networking. They can sell these things for twice as much as 100G EML lasers which is a good sign for margins. This is standard stuff for LITE: lasers good, demand high, business booming. It’s the other dimensions that are more interesting.

In the rest of this report, we will cover UHP lasers for CPO, usefulness of OCS, and optical scale-up, particularly as it relates to what needs to happen and why when for optics to displace copper.

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