Why Lumentum Is Buying Cloud Light For $750 Million

By Amit Chowdhry ● Nov 1, 2023

Lumentum Holdings and Cloud Light Technology Limited recently announced that they have entered into a definitive agreement under which Lumentum will acquire Cloud Light with a transaction value of approximately $750 million, subject to certain adjustments. At the time of closing, transaction consideration will be paid in cash, and the assumption and substitution of outstanding unvested Cloud Light options. The transaction has been unanimously approved by the Boards of Directors of both companies and by Cloud Light’s shareholders.

The deal with Cloud Light is expected to accelerate Lumentum’s push into the fastest-growing segments of the multibillion-dollar opportunity for optical modules used in cloud computing data center infrastructure. And Cloud Light has a demonstrated track record of developing and manufacturing the highest-speed connectivity solutions at the leading edge of new and rapidly growing technology transitions.

Nearly all of Cloud Light’s $200+ million revenue in the last 12 months was derived from 400G or higher speed transceiver sales. And in the most recent quarter, over half of Cloud Light’s optical transceiver revenue was derived from 800G modules.

Through this acquisition, Lumentum will be well-positioned to serve the growing needs of cloud and networking customers, especially those focused on optimizing their data center infrastructure for the demands of AI/ML. And Lumentum will be able to deliver immediate customer value with a more comprehensive product and technology portfolio, enabling customers to more effectively manage the escalating compute and interconnect requirements of AI workloads. The combination also features best-in-class design and assembly, test, and packaging capabilities together with Lumentum’s global scale and customer reach.

Strategic and Financial Benefits

— Captures AI inflection with expanded intra-data center opportunity – The highly complementary combination positions Lumentum as a leader in providing photonics to cloud operators, empowering more than a five-fold expansion in the company’s served opportunity inside of data centers. And with the advent of generative AI, cloud network needs for 400G and higher speed optical transceivers have accelerated rapidly, with the opportunity for these intra-data center products anticipated to grow at a 30% CAGR and exceed $10 billion by 2028. Plus, Cloud Light provides the highest-speed optical transceiver products to leading hyperscale cloud customers, with even higher-speed solutions well along in their development, complementing Lumentum’s existing portfolio of laser transmitters and other integrated components for data center transceivers.

— More prepared to address future customer roadmaps – AI models are driving an exponential increase in compute requirements, where performance doubles every 3 to 4 months, compared to the historical doubling every two years, according to Moore’s Law. Scaling workloads even higher is limited by existing network and interconnect bottlenecks. And with the addition of Cloud Light, Lumentum better addresses these challenges – both now and into the future – by combining advanced optical interconnect technologies based on chip-scale photonic integration, together with highly automated packaging and manufacturing technologies.

— More strategic partner to cloud and AI infrastructure customers – With the addition of Cloud Light, Lumentum can more effectively address the growing and diverse needs of cloud operators and AI infrastructure providers. And this includes providing next-generation optical connectivity and optical switching within data centers, as well as coherent pluggable modules and optical line system components for data center interconnect applications. Through Lumentum’s vertical integration capabilities in components and diversity in its global manufacturing footprint, customers can benefit from improved security of supply and superior technology and cost roadmaps.

— Amplifies edge and metro networking offerings – Cloud Light’s proven capabilities in low-cost product development and high-volume manufacturing are relevant not only for cloud data center and data center interconnect solutions but also for network edge applications, such as those served by direct detect and coherent tunable DWDM transceivers. And a broader set of networking customers will benefit from the added advanced packaging technologies and manufacturing capabilities offered by this combination.

— Immediately accretive for Lumentum’s earnings and accelerates Lumentum growth – The deal is expected to be immediately accretive to Lumentum’s non-GAAP earnings per share and is expected to more than double Lumentum’s cloud data center infrastructure revenue in the 12 months following the transaction close. Over the last year, over 90% of Cloud Light’s revenue was derived from 400G and higher speed products, and in their most recent quarter, over half of Cloud Light’s optical transceiver revenue was derived from 800G transceiver products.

Lumentum plans to finance the transaction through cash from its balance sheet. The deal is expected to close by the end of calendar 2023, subject to receipt of regulatory approvals and other customary closing conditions.

KEY QUOTES:

“With Cloud Light, we are making a strategic investment to significantly expand our opportunities in the cloud data center and networking infrastructure space. Cloud Light provides us with the highest speed transceiver solutions at scale and complements our advanced component capabilities. This results in a broad product and technology portfolio that addresses a wide range of cloud operator needs.”

“We are confident that this transaction will deliver substantial, long-term value to our stockholders, with immediate earnings accretion and accelerated revenue growth. We look forward to welcoming Cloud Light’s very talented team to Lumentum.”

— Alan Lowe, Lumentum president and CEO

“Today’s announcement is a pivotal milestone in the history of Cloud Light, and a testament to the hard work and dedication of our employees. We founded the company with a vision that our deep expertise in high-volume precision manufacturing would result in a superior value proposition for cloud data center customers. Having worked closely with the technology teams within leading cloud operators, we believe we can build upon our success to date and further accelerate cloud data center growth by combining Lumentum’s advanced photonic integration and transmission technologies with our highly automated packaging and manufacturing processes. We look forward to joining the Lumentum team and beginning an exciting new chapter.”

— Dr. Dennis Tong, Cloud Light Founder and CEO

 

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