For Lumentum, Coherent Acquisition Is Timely, Complementary, Analysts Say

JAKE SALTZMAN, NEWS EDITOR
jake.saltzman@photonics.com

Following Lumentum’s $5.7 billion acquisition of laser pioneer Coherent last week, analysts speaking to Photonics Media said the deal is poised to accelerate Lumentum’s presence in the telecom/datacom and 3D sensing sectors in which it already occupies positions of prominence. The acquisition also charts a course for Lumentum to bolster its relevance in areas to which its present business is tangential; Coherent’s established footprints in the precision manufacturing and scientific and medical instrumentation markets add immediate diversification to Lumentum’s core businesses.

Of added significance, analysts said, will be the addition of Coherent’s microelectronics business. That segment generated more than $144 million in Coherent’s fourth quarter ending Oct. 3, 2020 — more than in any three-month period since the quarter ending in March 2019, and about 45% of the fourth quarter’s total revenue. For the fiscal year ending in October 2020, the company’s microelectronics business generated more than 43% of the company’s total revenue.

Lumentum CEO Alan Lowe, whose company acquired optical components producer Oclaro Inc. in December 2018, cited both industry leaders’ shared eye on accelerating the future of the whole of the photonics industry.

“The combination creates a leading, highly diversified photonics technology company with significant increased scale and market reach,” Lowe said on an analysts’ call with executives from both sides of the newly combined company. In the laser space specifically, Lowe said, the deal will drive Lumentum’s penetration into laser-based markets outside of optical communications and 3D sensing. Where Lowe said that Lumentum has successfully now realized the telecom- and datacom-specific goals it outlined at the time of the Oclaro purchase 25 months ago, the mammoth Coherent combination positions Lumentum in business sectors in which it had not yet fully arrived independently, including consumer electronics.

Microelectronics an immediate driving force

Within Coherent’s microelectronics sector, Lumentum is positioned to capitalize on the laser company’s success in its annealing business, particularly for OLED devices and screen manufacturing and flat-panel displays.

Mark Miller, senior analyst with the Benchmark Group, told Photonics Media in November that growth in that area (OLEDs, flat-panel displays) stemmed in part from a rebound in advanced manufacturing in China as the region began its bounce back from the COVID-19 pandemic, despite the fact that Coherent showed its greatest quarter-over-quarter regional growth for its fourth quarter of 2020 in the United States. Another source of displays-related revenue stemmed from Apple’s adoption of flexible OLED displays for its iPhone 12 lineup.

Following the acquisition, Lumentum stands to gain immediate and significant traction in the semiconductor space and medical segments, Miller said, in part due to heightened demand for metrology (test and measurement) equipment.

“Semiconductor stocks are simply booming, and there aren’t enough chips — and people are buying equipment,” Miller said. “And Coherent’s lasers are used in metrology and other applications — to measure thickness and other properties of semiconductor films.”

Coherent additionally manufactures semiconductors for applications involving its CO₂ lasers, namely those for drilling and welding. In November, Miller pointed out, Coherent reported that it had received more orders for CO₂ lasers in the first third of the quarter ending Jan. 2 than it had in the entire quarter ending Oct. 3, 2020.

Coherent CEO Andy Mattes also pointed to the semiconductor industry, while on the conference call with Lowe; Chris Coldren, Lumentum’s senior vice president of strategy and corporate development; and Wajid Ali, Lumentum’s executive vice president and CFO. Mattes singled out OLED and microLED applications, too, going so far as to say that moving forward, all screens are going to involve annealing.

MicroLEDs, Miller told Photonics Media, are a particularly significant growth area, given that the technology remains a couple of years away from ramping. Coherent reported quarterly increases in both related bookings and investment following the close of its fourth quarter. Miller, noting that metrology-related revenue has continued to be strong into the next quarter, said bookings in the area contribute to growing the combined company’s footprint in China.

Lumentum executives on the call said they did not expect any delays in achieving regulatory approval in China.

A complementary transaction

In separate conversations with Photonics Media, both Miller and Alex Henderson, a senior analyst with Needham & Company covering networking and security technology industries, referenced the complementary nature of the acquisition. The tangentiality reaches beyond Coherent’s annealing business to its existing base of customers in the life sciences, such as medical labs, universities, and other R&D centers.

Beyond the traditional business of photonics, Henderson said, the move creates a broadened product portfolio that takes advantage of the lack of market presence overlap in sectors such as 3D sensing and automotive. The move is minimally duplicative in terms of what Lumentum will now be able to accomplish in the industrial space, pairing 3D sensing in industrial applications with the resources, experience, and technologies of the laser giant.

“It’s footprints for different purposes,” Henderson said, describing the companies’ technologies and customer bases that occupy related-yet-separate spaces, creating a diversification of markets and revenue mix. Other industries and applications in which the companies’ portfolios are complementary, and that executives mentioned on the call and in an accompanying presentation, include those for directed energy technology, green manufacturing, biometric security, diagnostics tools dependent on lasers and photonics, and electric vehicles. All involve precision technologies and have the potential to be profitable markets for the combined company, outside of its core areas.

“Lasers are not really sold primarily based on price,” Miller added. “There is one price-sensitive segment, which is 3 kW or under power fiber lasers. IPG Photonics, for example, operates in this market. The rest of the laser market is not that price competitive — it’s more technology serving — having lasers that work, that are reliable, than pricing. So, they are going to lower cost, which gives some help with their margins. I am sure there are some technologies in there — their solid-state diodes — that both firms can prosper from. But it’s pretty complementary.”

Miller’s point echoed one on which Coldren elaborated on the call.

“There are differences within the direct organization that the product might go to on the two sides of the combined company,” Coldren said. He cited the example of large customers who are purchasing electronics, or who buy or build displays, potentially incorporating 3D sensing technology.

“We do think there is certainly a lot of benefit to just the narrow business we’re talking about here in laser annealing,” Coldren said, “but the same thing is true as you start talking about more broadly other products that supply into the microelectronics supply chain.

“Our exposure on the Lumentum side over time is really just in optical devices that go into the application — whether that is 3D sensing lasers that go into smartphones, or the optical components that go into communication systems.”

Timely Move

Both companies released their respective preliminary quarterly financial results on Jan. 19, though neither has yet published its earnings report in full. Lumentum said it expects its second-quarter net revenue to be approximately $478.8 million; Coherent reported revenue for its first quarter of the fiscal year to be in the range of $325 million to $327 million.

Though the figures point to lower margins for Coherent than Lumentum, the combined company said it expects to grow revenue rather than cut.

That aligns with the upcycle Coherent leadership and analysts alike identified for the company coming out of the pandemic both at present and at the end of its previous fiscal year. Of Coherent’s four segments, its OEM components and instrumentation and scientific businesses had nearly returned to pre-pandemic levels by the close of the previous quarter. They were the fastest of the segments to do so, thanks in large part, Mattes said, to research labs and non-COVID-related hospital activity leading an increase in clinical testing and laser-related medical procedures.

The trend of reestablishing sales to medical and science labs and universities shuttered by the virus — supporting Coherent’s OEM components and instrumentation and scientific businesses — continues to come back for the company, said Miller this week, moving into February.

For Lumentum, any extended disruptions to its core businesses stemming from industry trends or the COVID-19 pandemic did not dissuade a positive outlook from management moving into its third quarter.

“Our outlook for telecom and datacom is as strong as it’s ever been,” Lowe said on the call. Ali added that Lumentum sees “a lot of opportunity on the G & A side.”

Speaking within the context of expectations to grow laser sales for commercial and materials processing — an area facing increased competition from China, and one from which Miller noted that Coherent had distanced itself in 2020 — Lowe also mentioned the success of Lumentum’s fiber laser business.

“We think we’re going to have a lot of opportunity to really grow that business at the component level, at the subsystem level, and at the fiber laser level,” he said.

Next Steps

Besides complementary, analysts say the acquisition is certain to influence the wide field of photonics, not just in the optics and 3D sensing space, and not just in the laser industry.

“They’re buying at the right time; it’s timely, accretive, and also complementary,” Miller said.

It does not, however, eliminate the fact that in the last five years, not all Coherent’s businesses have exhibited high top-line growth. Miller called out two segments that Mattes in November said were showing signs of returning to form.

“If you look at Coherent’s four major segments — microelectronics, materials processing, OEM components and instrumentation, and scientific and government — those last two segments have shown very little top-line growth in the last five years,” Miller said. Even prior to the acquisition, Miller said he would not be surprised to see Coherent spin out its OEM components and instrumentation and scientific and government businesses.

The option remains on the table, though he anticipates a strong next 18 months for Coherent. It is what happens after that, should the upcycle start to slow, that is of interest to Miller.

“It’s timely, complementary accretive — but two years from now, when the upcycle starts to slow, it’ll be interesting,” Miller said.

The companies for their part adopted an extended outlook marked by optimism and a lucrative partnership.

“This decade is going to be the decade of photonics,” Mattes said. “By combining our two companies, we will be able to be drive this change and be at the front end of it.”