Lumentum CEO Michael Hurlston detailed a major partnership with NVIDIA, featuring an investment and a "multibillion dollar purchase commitment" for high-power lasers. This deal underscores the industry-wide scarcity of Indium Phosphide (InP) capacity. To meet demand, Lumentum is acquiring a fifth fab and has already quadrupled capacity over the last 18 months, yet remains sold out through 2027. Strategic pivots include dedicating the San Jose and UK fabs to Co-Packaged Optics (CPO) and prioritizing 200G EMLs in Japan. Hurlston also highlighted "huge surprise" growth in Optical Circuit Switches (OCS) and a secured, non-Chinese substrate supply chain through the mid-2030s.
Key Takeaways
- NVIDIA Partnership: Lumentum secured a "multibillion dollar purchase commitment" from NVIDIA, validating the scarcity of Indium Phosphide (InP) and Lumentum's high-power laser reliability.
- Capacity Expansion: The company currently operates four InP fabs and is acquiring a fifth; capacity quadrupled in the last 18 months and is projected to grow another "20% over the next two quarters."
- Supply Constraints: Despite aggressive expansion, Lumentum is "sold out" through 2027 and likely into 2028 due to the supply-demand imbalance.
- Fab Dedication: The San Jose fab is now "entirely dedicated" to CPO, and the UK fab is shifting to CPO, while Japan fabs focus on EMLs and CW lasers.
- Transceiver Strategy: The previous goal to cap Cloud Light revenue at $1 billion is "not possible" due to customer demand; the business remains margin-dilutive but focuses on three key customers.
- OCS Growth: Optical Circuit Switch revenue is outperforming, with aspirations to reach "$100 million" in incremental revenue in Q4 as hyperscalers look to replace spine switches.
- Geopolitical Mitigation: Lumentum executed a "seven-year deal" with a non-Chinese supplier for InP substrates, securing supply "through mid-2030s."
Q&A
Meta A. Marshall (Morgan Stanley): Can you provide details regarding the announcement this morning involving a $2 billion investment from NVIDIA?
- Michael E. Hurlston: This is a "multibillion dollar purchase commitment" resulting from years of collaboration on high-power lasers; the investment will partially fund a new fab to address the "scarcity of the indium phosphide supply."
Meta A. Marshall (Morgan Stanley): How are you judging the right amount of capacity to bring online given the exponential increase in demand?
- Michael E. Hurlston: Lumentum quadrupled supply in the last 18 months and will add another "20% over the next two quarters," yet the company remains "sold out" through 2027 and likely into 2028.
Meta A. Marshall (Morgan Stanley): How are you balancing production needs and 200-gig versus 100-gig demand within your existing fabs?
- Michael E. Hurlston: The Japan fabs are prioritized for EMLs with a mix shift to "200-gig EMLs" for better margins, while the San Jose fab is "entirely dedicated now to CPO" and the UK fab is shifting to CPO due to high demand.
Meta A. Marshall (Morgan Stanley): You previously mentioned wanting to cap the transceiver business at $1 billion annual scale; is that still the plan?
- Michael E. Hurlston: The "$1 billion cap turns out it's not possible" as customers would simply find other suppliers; the strategy is now to focus on three main customers to balance the "margin headwind" against revenue growth.