Optical solutions providers Infinera (NASDAQ:INFN) and Lumentum (NASDAQ:LITE) recently teamed up to develop new XR optics networking solutions. These new devices, which use Infinera's low-power DSP (digital signal processor) technology and Lumentum's optical modules and manufacturing process, could reduce the costs of delivering data across 5G networks, wireline connections, and cloud-based services.

Dr. Dave Welch, Infinera's founder and chief innovation officer, claims that the new XR optics products could generate "unprecedented savings" for network operators. Beck Mason, the general manager of Lumentum's telecom transmission business, stated that the XR optics strategy would help it provide "scalable and flexible coherent optical network solutions" for "next-generation transport networks."

Network connections across a city.

Image source: Getty Images.

What do XR optics solutions actually do?

Many service providers use a "hub and spoke" model, in which devices operating on various speeds (the spokes) link back to a smaller number of devices (the hubs). This model is inefficient because lower-bandwidth spokes can be paired with higher-bandwidth hubs, resulting in higher operating costs for the carrier.

A close-up shot of a fiber optic cable.

Image source: Getty Images.

Infinera and Lumentum's XR optics solution replaces the hub and spoke model with a "point to point" model, in which each spoke device is matched to a hub device by its corresponding speed. For example, a 10G device would be matched with a 10G connection, which conserves the carrier's remaining bandwidth for higher-bandwidth devices.

Infinera's WDM (wavelength division multiplexing) technology already allows carriers to boost the capacity of their existing networks without laying down additional fiber. It accomplishes this by splitting a single fiber connection into multiple wavelengths (or colors) of laser light for each transmission.

Combining Infinera's technology with efficient "point to point" connections would enable carriers to significantly boost the capacity and efficiency of their existing networks without laying down more fiber while reducing the number of transceivers for each network.

Infinera claims that an XR optics installation could "deliver CapEx savings of up to 80%, power savings in excess of 80%, and space savings in excess of 90%" at a carrier's hub site -- which could significantly reduce the expenses of operating networks to meet the surging data demands of 5G and cloud networks.

What does this partnership mean for Infinera and Lumentum?

Infinera's stock rallied more than 50% over the past 12 months as the company's revenue growth accelerated, its gross margins expanded, and it unveiled new next-gen products for 600G and 800G connections. Its takeover of Coriant also boosted its exposure to the shorter-range metro and data center markets, which both generate stronger growth than Infinera's core portfolio of long-range WDM solutions.

Infinera already expects to benefit from the upcoming "super cycle" of fiber upgrades as carriers struggle to address the rising use of cloud, streaming, and mobile services. With Lumentum's help, Infinera can bundle its new XR optics solutions with its existing WDM solutions to offer carriers a cost-effective way to deal with surging bandwidth demands. 

Lumentum, which acquired its rival Oclaro in late 2018, could benefit from the deal by boosting its core optical communications products revenue, which rose 26% annually last quarter and accounted for 89% of its top line. It could also reduce its overall dependence on Apple, Huawei, and Ciena, which together accounted for a whopping 50% of its revenue last year.

A win-win partnership for both companies

Infinera and Lumentum's partnership probably won't generate visible returns right away, but it's a smart move for both companies. Infinera gains another way to boost the efficiency of carriers' networks with XR optics, while partnering with Lumentum could reduce the project's operating expenses. Lumentum, which gains a major customer for its optical communications business, could reduce its dependence on its three top customers. In short, it's a win-win deal that could benefit both optical companies over the long term.

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