Lumentum to Join Marvell in AI Optical Connectivity Push

Key Points

• Marvell and Lumentum agreed to combine, aiming to create a leading provider of integrated electrical and optical connectivity for AI data centers. Lumentum’s CEO and two directors are expected to join Marvell’s board, while deal terms were not disclosed.
• The companies are targeting growing demand for near-packaged and co-packaged optics as copper connections face bandwidth and energy-efficiency limits. Marvell estimates the combined addressable market could reach $550 billion by 2030, while Lumentum cited a new NPO/CPO win expected to generate over $5 billion in revenue.
• Marvell expects more than $1 billion in annual run-rate synergies, primarily from cost savings, with the deal projected to boost margins and non-GAAP earnings per share beginning in the first year after closing.

Marvell said it has agreed to combine with Lumentum NASDAQ: LITE, positioning the proposed transaction as a move to build a larger provider of optical connectivity technology for artificial-intelligence infrastructure.

Marvell Chairman and CEO Matt Murphy said the combination would bring together Marvell’s electrical connectivity portfolio and Lumentum’s photonics capabilities as AI data centers increasingly adopt optical technologies to address performance, bandwidth and energy-efficiency requirements.

“By combining the two companies, we expect to define and become a category leader for the next generation of AI connectivity,” Murphy said during a conference call announcing the deal.

The companies did not discuss transaction consideration or other deal terms during the call. Murphy said Lumentum CEO Michael Hurlston and two other Lumentum directors are expected to join Marvell’s seven-member board after the transaction closes.

Focus on Integrated Optical Connectivity

Executives described an industry shift in which optical interconnects move closer to computing hardware as copper-based connections encounter physical limitations at higher bandwidths. Marvell and Lumentum said this transition extends beyond existing scale-across and scale-out data-center networks to scale-up and eventually scale-in architectures.

Hurlston said those emerging applications require more tightly integrated optical solutions, including near-packaged optics, or NPO, and co-packaged optics, or CPO. He said combining the companies would enable joint design across the electrical and optical signal chain, including lasers, photodetectors, digital signal processors, transimpedance amplifiers, drivers and silicon photonics.

“The market is sending us a strong signal that the next wave of explosive growth in AI connectivity cannot be satisfied solely by discrete point solutions,” Hurlston said.

Lumentum also announced what Hurlston called its second major NPO and CPO win, which the company expects to generate more than $5 billion in revenue. He did not identify the customer or provide a timeline for that revenue.

Marvell estimates that the combined company’s total addressable market could reach $550 billion by 2030. Murphy said most of the incremental opportunity identified by the companies is expected to come from NPO and CPO technologies.

Manufacturing and Ecosystem Strategy

The executives emphasized Lumentum’s manufacturing footprint for indium phosphide, a compound semiconductor used in lasers and other optical components. Hurlston said Lumentum owns what it describes as the world’s largest indium phosphide manufacturing footprint and is investing to expand capacity for laser products.

Marvell, which is fabless, said it plans to continue working with semiconductor supply-chain partners and investing in production capacity needed to support expected demand for AI connectivity products.

Murphy said the companies would retain their existing go-to-market approach in established optical markets, including sales of components to the broader module ecosystem. Addressing analyst concerns about potential competition with module makers that use Marvell components or Lumentum lasers, Murphy and Hurlston said the industry already operates through a mix of partnership and competition.

Hurlston said Lumentum supplies lasers to many companies that also compete with it, while Marvell supplies digital signal processors and other components to module manufacturers. Both executives said they intend to continue supporting those customers.

Expected Financial Benefits

Marvell CFO Dan Durn said the companies expect more than $1 billion of run-rate synergies, primarily from cost of goods sold. He said the transaction is expected to accelerate revenue growth and be accretive to Marvell’s non-GAAP gross margin, non-GAAP operating margin and non-GAAP earnings per share beginning in the first year after closing.

Based on Marvell’s current-quarter guidance and Lumentum’s reported results, Marvell presented pro forma annualized revenue of $17.7 billion and a non-GAAP operating margin of 39%. Murphy said that combining Lumentum’s next-quarter guidance with consensus expectations for Marvell’s next quarter would imply annualized revenue above $21 billion and a non-GAAP operating margin in the low-40% range.

Murphy said Marvell’s previously presented standalone growth plans remain unchanged and that the Lumentum combination is incremental to those plans. He added that the companies expect revenue synergies from broader product offerings and closer customer relationships, although he did not quantify those expected revenue benefits.

Why the Companies Are Combining Now

In response to questions about timing, Murphy said the deal was not driven by short-term supply constraints in indium phosphide or elsewhere in the industry. Instead, he said both companies see the transition toward scale-up optical connectivity as already underway.

“This is fundamentally a shift in the architecture inside the data center,” Murphy said, citing Marvell’s view of customer designs, volumes and demand for light sources.

Hurlston said Lumentum considered remaining independent and pursuing semiconductor acquisitions of its own, but concluded that a combination with Marvell offered a more compelling route to address scale-up and scale-in opportunities. He said Lumentum expects its standalone business momentum to continue, while the combination could accelerate its ability to co-design and market integrated optical solutions.

About Lumentum (NASDAQ:LITE)

Lumentum Holdings Inc is a technology company that designs and manufactures optical and photonic products for communications networks, industrial applications, and consumer electronics. Its portfolio includes optical components, modules, and subsystems used in fiber-optic networks, data centers, cloud computing infrastructure, telecommunications equipment, and high-speed connectivity systems.

The company also develops laser products for applications such as industrial processing, sensing, three-dimensional imaging, and other specialized commercial and consumer uses.

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