EP 188: The Wild West of Optical, Cisco's AI Hack, and Is Compute an Investable Asset

**Ben Bajarin** (0:05)
Hello, everyone. Welcome to another episode of The Circuit. I am Ben Bajarin.

**Jay Goldberg** (0:11)
Greetings, programs. I'm Jay Goldberg.

**Ben Bajarin** (0:14)
Well, we, as I think any long-term listener of this podcast, as noted, we start talking a lot more about networking the last few years. We have joked and jested since day one. You've seen, all heard, who's been here from the beginning, Ben's evolution from networking, stupid, I don't want to talk about it, it's boring, to now it's the great interconnected networking and transceivers is the glue that makes AI interesting.
But in that vein, a lot has been going on around this optical conversation, which we haven't spent a ton talking about optics. We have both written about it, I know you and I have both independently researched this quite a bit. But it's time to double click, I think a little bit more on networking and we're going to lead into that through both coherent and Lumentum's earnings this week that happened. Different tones, obviously different reactions. So I'll let you start with both of those and then we'll dig into some of the implications and observations around the networking and optical environment.

**Jay Goldberg** (1:30)
Sure. Lumentum and Coherent both reported this week. I don't have the exact numbers in front of me. Lumentum beat across the board, guided up. Coherent was a revenue guide was good, but struggled with margins and a few other things.
There is a big divergence in their stock prices this week following those results. I think it's interesting because both of them are participating fully in this AI build-out, optical build-out. It's big, we've talked about it a lot. They have good revenue, but not all things are the equal. There's a lot of devil in the details of what they're actually selling, and that is conveyed through their margin profiles.

**Ben Bajarin** (2:22)
Correct me if I'm wrong, I think most people were pushing on their gross margins. There was some interesting conversation on both of their calls about what was going on around both two-inch wafers, all the way back to two-inch wafers, four-inch as well. I think Lumentum was pretty clear. They were going to be able to use some of those IP from those two to also go into NPO, which I think made people happy.
But it's like the industry is moving into six-inch wafers, and six-inch wafers is the yield. Sure, going to six-inch is going to help, but you still got to squeeze everything you can out of your four, and even your two-inch from what Lumentum said.

**Jay Goldberg** (3:09)
Right, right. So Semiconductor Economics 101, the size of your wafer matters a lot.
The bigger the wafer, the more chips you can fit on it. And so there's been a long history of moving towards 300-millimeter wafers for digital logic. We're seeing this transition now to six-inch wafers for optical components. And Lumentum says, hey, we've got four-inch and we're doing really well with that. And Coherent, I guess, perceiving that they're behind, is pushing really hard into six-inch wafers, which theoretically should offer much, much better gross margins because again, for the same wafer, you can get a lot more chips out of it. But that's not actually playing out. And there's lots of debate about why that is exactly. And I think the thing to keep in mind is that six-inch indium phosphate wafers, six-inch indium phosphate wafers are brand new. It is not a mature ecosystem. And these things take years to develop. And so you got to change the tools and a lot of the fixtures within the tools and the wafers themselves. There's not actually a good supplier of, there's only one supplier of indium phosphate six-inch wafers and they're very new to it too. So seems to be some growing pains there.
And this is normal stuff. It's just like, it would be better for Coherent if this were a few years more advanced.

**Ben Bajarin** (4:40)
100%. And I think, you know, there's two things I keep coming back to. I have been very vocal on the Twitter sphere and others and we will have guests in the upcoming months that can help us talk about the timing, adoption rate, attach of optical.
But there's two things that I think are going on, which is leading to people to be a little bit too optimistic in the attach rate of all of this optical stuff. Again, outside of LPO, which is sort of the standard today, right? It's a giant plug. You go and stick it in and it's at the edge of the board. It's not into the board.
And that's what most people are just starting to ramp, like today. Your standard optical is LPO. So we're not even at NPO yet. And NPO is the next version that takes this onto the board, but it is still not into the die, which is the goal of CPO. And then past that is scale in, which is onto the substrate.