Summary of Conference Call Notes Industry Overview - **Industry**: China Communication Infrastructure - **Focus**: Co-packaged optics (CPO) and related components Key Points and Arguments 1. **CPO Total Addressable Market (TAM) Assessment**: - The CPO TAM assessment has been extended to 2028, with forecasts for CPO switch units at 300, 5,000, and 209,000 for 2025, 2026, and 2027 respectively, and a preliminary forecast of approximately 691,000 units for 2028, which includes 100,000 for scale-out and 591,000 for scale-up [1][2][28] - The derived TAM for various components in 2028 is projected to reach Rmb10.4 billion for FAU, Rmb29.6 billion for ELSFP, Rmb89.6 billion for fiber shuffle, and Rmb55.7 billion for fiber tray [1][3][28] 2. **CPO Migration and Product Development**: - The migration to rack-to-rack scale-up is expected to follow a phased approach, with Lumentum anticipating scale-out with spectrum CPO in the second half of 2026 [2][17] - The roadmap aligns with previous expectations regarding supply chain readiness for step-by-step migration [2] 3. **Market Forecasts for Components**: - Forecasts for the FAU/connectors market are Rmb3.9 billion in 2027 and Rmb10.5 billion in 2028 [3] - The ELSFP market is expected to reach Rmb11.2 billion in 2027 and Rmb29.6 billion in 2028 [3] - The fiber shuffle market is projected at Rmb34.3 billion in 2027 and Rmb89.6 billion in 2028 [3] - The fiber tray market is forecasted to be Rmb24.0 billion in 2027 and Rmb55.7 billion in 2028 [3] 4. **Stock Recommendations**: - TFC and USI are preferred stock picks within the CPO chain, with TFC seen as a major player in the Nvidia CPO era [1][4] - A recent pullback in stock prices is viewed as an entry opportunity, with a target price for TFC maintained at Rmb446, based on a 25x multiple of 2027 EPS [4][38] 5. **Investor Sentiment and Concerns**: - Investor feedback indicates mixed views on CPO switch assumptions, with Asian investors finding the 209k unit assumption rational, while US investors consider it aggressive [14] - Concerns include TFC's long-term position with US customers and missed opportunities in the FAU market related to Spectrum CPO [39] 6. **Future Catalysts**: - Anticipation of updates on CPO-related component pricing in late March or early Q2 is seen as a potential positive catalyst [39] - Confirmation of detachable FAU capability could alleviate investor concerns and improve visibility on CPO scale-up adoption in the second half of 2026 [39] Additional Important Information - **Company Performance**: TFC's CPO-related revenue is expected to account for 28% of its mix in 2027 [38] - **Market Dynamics**: The demand for InP optical lane volume is growing at an 85% CAGR, indicating a tight supply situation for optical chips [17] - **Technological Developments**: The introduction of NVIDIA's Kyber and Vera Rubin Ultra systems is expected to significantly impact the CPO landscape [15][17] This summary encapsulates the critical insights from the conference call, focusing on the CPO market dynamics, company forecasts, and investor sentiment.

Core Insights - CPO has emerged as a highly discussed technology in AI data centers, positioned as a potential solution to bandwidth, latency, and power consumption challenges faced by AI workloads [2][4] - Despite impressive demonstrations at industry events, actual deployment of CPO in most data centers remains limited, with a cautious attitude prevalent among data center managers [2][4] - The transition to CPO is not just a technical upgrade but involves significant changes in user psychology, risk tolerance, and the relationship between infrastructure buyers and suppliers [2][4] Group 1: CPO's Relevance and Advantages - CPO is not a new technology; its concept dates back years, but its relevance has surged with the rise of AI as a core workload in data centers [4] - CPO is seen as a solution to specific problems in AI data centers, particularly as the industry moves towards higher speeds (112G and 224G SerDes) where electrical interconnects become inefficient [4] - The advantages of CPO include energy efficiency improvements of 20%-40% in interconnect power consumption at 800G to 1.6T rates, potentially saving 5-15 watts per 800G port and reducing overall switch power consumption by 200-500 watts [5] Group 2: User Perspectives and Adoption Challenges - There is a divide in attitudes towards CPO among data center operators, with some fascinated by its potential while others are skeptical about operational risks [8] - Many traditional data center managers have limited knowledge of CPO, and even established suppliers of pluggable optical modules are often unaware of its implications [8] - CPO is viewed as a critical technology for ultra-large-scale enterprises, which are already experimenting with it to manage power budgets and enhance performance [9] Group 3: Transition Technologies and Market Dynamics - Users are likely to adopt transitional solutions like NPO and LPO before fully committing to CPO, as these provide some benefits without the risks associated with full co-packaging [12][13] - The rise of external laser sources (ELSFP) may reintroduce some level of modularity to CPO systems, addressing maintenance concerns while also presenting new risks [14] - The influence of key suppliers like Broadcom and NVIDIA is significant in shaping user perceptions and driving CPO adoption through credible engineering support [15] Group 4: Future Deployment Phases - The deployment of CPO is expected to follow a three-phase approach: skepticism to acceptance (2026-2028), acceptance to reliance (2029-2032), and reliance to optimization (2032-2035) [23] - The success of CPO will depend on overcoming challenges related to laser technology, packaging yield, and thermal design [23] - The evolution of AI workloads and the ongoing development of copper cabling will also impact the adoption rate of CPO technology [24]