Telecom & Networking Equipment: ECOC feedback remains constructive as optical demand outstrips supply, with margins seen as the key differentiator

Overview

This ECOC follow-up summarizes company meetings and investor feedback across North American telecom and networking equipment. Morgan Stanley remains constructive on optical demand but argues that the next year’s relative winners will be determined chiefly by supply availability, expansion-market traction and gross-margin improvement.

Core views

Morgan Stanley says the core ECOC message remains intact: optical content for AI-related infrastructure is growing faster than suppliers can produce it, with many vendors sold out for 12-18 months. Investors remain constructive after the conference but are asking what remains unknown and how stocks can continue to work after the demand story has become widely understood. The firm identifies the pace of supply expansion, adoption in new markets and gross-margin progression as the central variables for the next year. CPO/NPO is increasingly expected to happen, but the ultimate implementation approach remains unresolved. The report separates nearer-term and later-stage opportunities. Morgan Stanley sees Lumentum and Coherent as having the closest catalysts through CPO/NPO announcements, continuing strength across the InP supply chain and yield gains that can lift gross margins. It argues that gross-margin upside is a more important prospective driver of outperformance than demand itself, citing this as a reason Lumentum has performed better than its competitive set. Ciena, Corning and Cisco are viewed as having more opportunity somewhat further out, as new capacity eases supply constraints and higher-margin products begin to flow through. For Ciena, management reiterated confidence in its competitive positioning and said its $14 billion FY29 target excludes significant potential contributions from CPO, NPO and components. The company indicated that supply constraints have limited near-term revenue potential: without them, it could have achieved closer to $8 billion rather than the $6.4 billion Street expectation for FY26. Morgan Stanley highlights a future path to 50% gross margins as the key stock issue, dependent on supply of new products and broader RLS product adoption in addition to Hyper-Rail. A backlog decline would therefore be constructive if it reflects supply coming online rather than weakening demand. Cisco indicated that it has some product availability, which Morgan Stanley believes could support additional orders in coming quarters. Management remains confident in pluggables leadership and has raised its 400ZR and 800ZR expectations during the year. It expects particularly strong 1600ZR demand because vendors that moved from 400ZR will all need to transition to 1600ZR, whereas not all made an 800ZR upgrade. Cisco remains more reserved on CPO in scale-out applications, but Morgan Stanley sees opportunistic use of available supply as a possible source of quarterly upside not currently embedded in expectations. Coherent emphasized the growing role of VCSELs, citing power, cost and lower reliance on InP as advantages. High-density VCSELs are a focal point for CPO/NPO applications, while substrate availability—not tooling—is identified as the bottleneck. Optical circuit switching applications are broadening, although some implementations may be smaller. Morgan Stanley identifies evidence of CPO, NPO and OCS ramps over the next year as the potential catalyst for an improved gross-margin profile. Keysight is positioned across the optical-networking workflow from tape-out and production through AI traffic simulation. Morgan Stanley notes that its booth tour showed five to six product categories used as products progress from design to production, including newer traffic-simulation applications. As network and laser speeds advance, testing solutions require more content and cost more. The firm highlights Keysight's participation in more parts of the AI supply chain, rising testing content per generation and management's view that it is at least a year ahead of competitors. Lightmatter described bidirectional multiplexing that uses one fiber link for transmission and reception, potentially halving customers' fiber requirements. Its L20 CPX module is expected to begin ramping in 2027 and uses the Open CPX MSA's standard socketed form factor to support adoption. The company also pointed to its work within OCP toward more open CPO standards for AI infrastructure. Nokia described an aggressive optical roadmap supported by both Nokia and Infinera teams working on its 4 DSP timeline, strategic use of existing capacity and additional fab capacity expected next year. Nokia also reported momentum in AI RAN, with customer trials beginning this year and reaching 19 separate trials.

Analysis framework

Morgan Stanley combines post-conference investor feedback with management discussions at ECOC. It evaluates the optical supply-demand balance, the timing of capacity additions, product and technology adoption, and the resulting effect on revenue opportunity and gross margins across individual companies.

Methodology notes

• Industry AnalysisSupply-demand framework

  Assessment of optical-content demand relative to supplier capacity and bottlenecks.

  The report uses supply constraints, capacity additions and component bottlenecks to explain revenue timing, backlog movements and potential company performance.

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  Analysis of how AI infrastructure demand flows through optical components, networking equipment, testing and fiber requirements.

  Morgan Stanley links demand for faster networks and AI traffic to InP supply, VCSELs, optical modules, testing equipment and related margins.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Ciena

  Covered optical-networking company with potential upside from supply availability, RLS products and future CPO/NPO contribution.

  Strengths

  Management is confident in positioning; its FY29 target excludes significant potential CPO/NPO and component contribution.

  Weaknesses

  Supply constraints have limited achievable near-term revenue.

  Comparison

  Morgan Stanley places Ciena's opportunity somewhat further out than Lumentum and Coherent.

  Risks

  The gross-margin step-up depends on new-product supply and successful RLS product adoption.

• Cisco

  Covered networking-equipment company that may benefit from available product supply and higher-speed pluggables demand.

  Strengths

  Product availability, pluggables leadership and raised 400ZR and 800ZR expectations.

  Weaknesses

  Management remains relatively reserved on CPO in scale-out applications.

  Comparison

  Morgan Stanley sees Cisco's larger opportunity further out as supply loosens and higher-margin products flow through.

  Risks

  The opportunity depends on converting available supply into orders and on the timing of product demand.

• Coherent

  Covered optical-components company with nearer-term CPO/NPO and margin catalysts.

  Strengths

  VCSEL advantages in power, cost and reduced InP reliance; broadening OCS applications.

  Weaknesses

  Substrate availability is the bottleneck despite adequate tooling availability.

  Comparison

  Morgan Stanley groups Coherent with Lumentum as having nearer-term catalysts.

  Risks

  Gross-margin improvement depends on evidence of CPO, NPO and OCS ramps over the next year.

• Keysight

  Covered test-and-measurement company participating across the optical and AI networking supply chain.

  Strengths

  Exposure from design through production and AI traffic simulation; rising testing content as speeds advance; management sees a competitive lead of at least a year.

  Comparison

  The report emphasizes its broader supply-chain participation and differentiation.

• Nokia

  Covered optical-networking company with capacity, product-roadmap and AI RAN developments.

  Strengths

  Two teams working toward the 4 DSP timeline and 19 AI RAN customer trials.

  Weaknesses

  The roadmap is described as aggressive.

  Comparison

  Like Cisco, Nokia is strategically using remaining capacity ahead of additional capacity next year.

  Risks

  Execution against development timelines and capacity expansion remains important.

• Lightmatter

  Private company discussed as an example of CPO technology and open-standard development.

  Strengths

  BiDi multiplexing can halve fiber requirements; L20 CPX uses a standard socketed form factor.

  Risks

  The L20 CPX ramp is not expected to begin until 2027.

Key data

• Supplier availability12-18 monthsMany optical vendors are described as sold out for this period.
• Ciena FY29 target$14bnManagement said the target excludes significant potential CPO, NPO and component contributions.
• Ciena potential FY26 revenue without supply constraintsCloser to $8bnCompared with the $6.4bn Street expectation cited in the report.
• Ciena gross-margin path50%Morgan Stanley identifies a pathway to this level as a key issue for the stock.
• Lightmatter L20 CPX module ramp2027Management expects the module to begin ramping in that year.
• Nokia AI RAN trials19 separate trialsCustomer trials began this year and are gaining momentum.

Impact & implications

The report argues that strong demand alone is no longer sufficient to distinguish likely performers. It places greater emphasis on companies that can convert constrained supply, new product ramps, technology adoption and yield improvement into higher gross margins, while capacity additions could unlock delayed revenue for others.

Risks

• The precise form and timing of CPO/NPO adoption remain unsettled.
• Supply constraints and substrate bottlenecks could continue to limit revenue realization.
• Margin improvement depends on yield gains, new-product availability and successful product ramps.
• Nokia's aggressive roadmap requires execution against development timelines.

What to watch

• CPO/NPO announcements and evidence of adoption or ramp activity.
• InP supply conditions, substrate availability and the pace of new capacity coming online.
• Yield improvement and gross-margin progression, particularly at Lumentum, Coherent and Ciena.
• Ciena's ability to move toward 50% gross margins and unlock revenue constrained by supply.
• Cisco order activity from available product supply and demand for 1600ZR.
• The timing of Lightmatter's L20 CPX ramp and Nokia's additional fab capacity next year.