目录
I. Opening Remarks
II. Management Remarks
Chief Executive Officer Remarks
Components Business
Systems Business
Chief Financial Officer Remarks
III. Q&A Session
Financial Targets and NPO Opportunities
Product Pricing and Indium Phosphide Competition
OCS and Ultra-High-Power Laser Revenue
OCS Revenue Target and Supply-Demand Gap
External Laser Source Modules
Market Structure for CW Lasers and EMLs
200G-per-Lane Products and Operating Leverage
Indium Phosphide Substrate Supply and Greensboro Capacity
NPO, CPO, and Scale-Up OCS
Long-Term Agreements for Pump Lasers
Standards-Based and Custom NPO Solutions
IV. Closing Remarks
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I. Opening Remarks
Operator: Hello, everyone, and welcome to Lumentum Holdings’ fiscal 2026 fourth-quarter and full-year earnings call. All participants are currently in listen-only mode. This call is being recorded for replay. Following management’s prepared remarks, we will open the call for questions.
I will now turn the call over to Kathy Ta, Vice President of Investor Relations at Lumentum.
Kathy Ta: Thank you, Matthew. Welcome to Lumentum’s fiscal 2026 fourth-quarter and full-year earnings call. I am Kathy Ta, Vice President of Investor Relations at Lumentum.
Joining me today are:
Michael Hurlston, President and Chief Executive Officer;
Wajid Ali, Executive Vice President and Chief Financial Officer;
Wupen Yuen, President of Global Business Units.
Today’s call will include forward-looking statements, including, but not limited to, statements regarding future operating results, strategies, trends, and product and technology expectations. These statements are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that may cause actual results to differ materially from current expectations.
We encourage you to review the company’s most recent filings with the U.S. Securities and Exchange Commission, particularly its Form 10-Q for the fiscal quarter ended March 28, 2026, as well as the risks described under “Risk Factors” and elsewhere in the company’s forthcoming Form 10-K for the fiscal year ended June 27, 2026.
The forward-looking statements made on this call are based on Lumentum’s reasonable judgments and expectations as of today. Except as required by applicable law, the company undertakes no obligation to update or revise these statements.
Please also note that, unless otherwise stated, all financial results and projections discussed on this call are presented on a non-GAAP basis. Non-GAAP financial measures have inherent limitations and should not be considered in isolation from, or as a substitute for or superior to, financial measures prepared in accordance with GAAP.
The company’s earnings release and SEC filings provide reconciliations between non-GAAP and GAAP measures, information regarding the company’s use of non-GAAP measures, and factors that may affect its financial results. Lumentum’s fiscal 2026 fourth-quarter and full-year earnings release and accompanying supplemental materials are available on the company’s investor relations website, and we encourage you to review them carefully.
I will now turn the call over to Michael.
II. Management Remarks
Chief Executive Officer Remarks
CEO: Thank you, Kathy. Good afternoon, everyone.
Lumentum is at the center of a long-term industry transformation. As compute workloads demand ever-greater speed and bandwidth, data-center architects are adopting optical interconnects as the primary means of connectivity. Fourth-quarter results reflected the early stages of this transition, with broad-based growth across both the company’s scale-out and scale-up product portfolios.
Fourth-quarter revenue increased 109% year over year to $1.1 billion, marking the eighth consecutive quarter of revenue growth. At the same time, the company maintained strong revenue momentum, delivering sequential growth of more than 20% for the third consecutive quarter. This is particularly noteworthy given the increasingly demanding comparison base.
Growth was broad-based across multiple business areas, while some previously highlighted growth drivers are only beginning to contribute.
In cloud optical modules, 800G shipments reached a record level, while production of the next-generation 1.6T modules commenced. The company successfully navigated supply-chain constraints to meet rapidly growing customer demand and increased shipments from its internal manufacturing system as planned.
In addition to strong revenue performance, non-GAAP gross margin exceeded 50%. The company had originally expected to reach this target only at a quarterly revenue run rate of $2 billion, making this milestone substantially earlier than anticipated.
Driven by an improving product mix and disciplined operational execution, we expect gross margin to continue expanding. Non-GAAP operating margin improved by more than 2,150 basis points year over year.
These results demonstrate two points: first, the company’s differentiated technology commands premium pricing; and second, its operating model can generate significant operating leverage.
Driven by a sharp acceleration in AI-related revenue, the midpoint of first-quarter revenue guidance has already reached the $1.25 billion target, more than one quarter ahead of the original plan. In addition, first-quarter non-GAAP operating-margin guidance exceeds the upper end of the company’s previously established target model for this revenue level.
There has recently been some market discussion regarding co-packaged optics and near-packaged optics, which I would like to address.
First, the volume-production plan for the company’s primary CPO customer remains fully on track, and its demand signals have strengthened further since the last update. The timing of CPO scale-up deployments has also become clearer.
We remain confident that demand for ultrahigh-power laser chips will begin ramping in the second half of 2027 in preparation for customers’ scale-up deployments in 2028. Because the first phase of scale-up optical connectivity will span multiple compute racks within a cluster, this demand applies to any topology larger than a single rack, further reinforcing our confidence.
The company also recently received its first purchase order for external laser source modules, with delivery scheduled for the second half of 2027.
Second, the company’s other customers are currently prioritizing near-packaged architectures as an intermediate step before ultimately adopting CPO. The NPO opportunity is entirely incremental for the company and will significantly expand the addressable market for optical components.
The company is seeing strong NPO momentum across several rapidly advancing projects, all of which use our differentiated laser chips. Even the company’s largest CPO customer is evaluating NPO solutions for certain new applications, which would further expand the optical-component opportunity with that customer.
These architectural shifts represent a major market inflection point that aligns closely with the company’s core strength as a leading laser-chip manufacturer. As optical technology begins entering areas previously served by copper interconnects, the company will benefit directly.
By placing the optical engine on the circuit board adjacent to the XPU accelerator, NPO offers a faster time-to-market solution. In optical scale-up applications, this design provides simpler system implementation at the expense of some power efficiency and cost.
Customers are currently evaluating two types of laser chips for NPO:
A medium-power laser integrated directly into the optical engine;
A high-power laser used in an external laser source module.
The company’s medium-power lasers inherit the reliability and engineering capabilities of its flagship high-power platform.
The company’s NPO and CPO laser portfolios leverage a common foundation of design and process expertise, delivering industry-leading efficiency at output-power levels including 120 milliwatts, 150 milliwatts, and 400 milliwatts.
From a long-term technology-roadmap perspective, CPO continues to be viewed as the natural end state. Through foundry-level advanced packaging, it places optical components directly on the substrate or interposer, thereby achieving the highest power efficiency.
I will now discuss the fourth quarter’s operating metrics in greater detail.
Components Business
Fourth-quarter revenue from the components business was $649 million, up 22% sequentially and 103% year over year.
The company’s laser portfolio maintained strong growth across all categories. Narrow-linewidth laser assembly shipments increased sequentially for the tenth consecutive quarter and grew by more than 130% year over year.
Pump-laser shipments increased by more than 80% year over year. Despite the company’s rapid capacity expansion, these products will remain essentially sold out for the foreseeable future.
Inference and training applications are driving full-speed interconnectivity between data centers, while policy and regulatory constraints are also encouraging the adoption of smaller, more modular data-center buildouts. These two factors, together with other trends, are significantly increasing demand for the company’s pump-laser solutions.
For context, for one major hyperscale cloud provider, the network capacity required to connect just two AI data-center sites is equivalent to twice the total capacity added to the global backbone network over the past decade.
To support scale-up deployments, the company has signed multiple long-term customer agreements that help offset planned capital expenditures. We continue to expect pump-laser shipments to increase to four times their current level over the coming quarters to meet growing demand.
In laser chips, the company’s EML products delivered another record quarter, primarily driven by strong demand for 100G-per-lane devices. Growth in 200G-per-lane EMLs is also accelerating rapidly, and these products now account for more than 25% of total EML revenue.
At the same time, the company is expanding its laser-chip strategy in a manner consistent with its financial model to capture a broader market opportunity.
One important example is the company’s CW laser chip for 200G-per-lane applications. The product is compact and offers high yields, proven reliability, and industry-leading performance, and can be supplied to a broad range of customers.
Through the internal deployment of these lasers, the company has further validated an advantage frequently cited by customers: Lumentum can deliver consistently at scale within tight specification ranges, helping customers achieve higher yields in optical-module manufacturing.
Importantly, these new CW laser products will generate margins above the company’s long-term financial targets.
Looking ahead, to capture the forthcoming 200G- and 300G-per-lane opportunities, the company expects demand for EML and CW lasers to increase significantly in the second half of 2026 and continue through 2027.
The company is expanding capacity at its two indium phosphide wafer fabs in Japan and, as new equipment comes online, is qualifying both CW and EML process flows on that equipment.
Even with more capacity allocated to CW lasers, the company remains on track to deliver EML shipment growth of more than 50% year over year in December 2026.
Within the components business, the company is also seeing a growing number of opportunities in 3D-sensing applications. These new opportunities are expected to drive growth during the upcoming product cycles of key customers.
Systems Business
Fourth-quarter revenue from the systems business reached $357 million, up 30% sequentially and 123% year over year.
Cloud optical modules and OCS were both major drivers of quarterly revenue growth, although localized supply constraints for certain components continued to keep shipments below total market demand. The company’s factories met aggressive production plans for both product lines.
Cloud optical-module shipments during the quarter were primarily 800G products, while the company also began shipping 1.6T optical modules as planned.
Profitability in the optical-module product line continued to improve, driven by better yields and capacity utilization, as well as the initial rollout of higher-ASP 1.6T optical modules.
The company’s visibility into future cloud optical-module demand is at an all-time high. Adoption of 1.6T optical modules is expected to begin accelerating in the first quarter of fiscal 2027 and continue throughout 2027.
This momentum is primarily supported by the company’s leading Tier 1 hyperscale cloud customers. These customers are deploying customized AI clusters at scale, driving a rapid technology transition from 800G to 1.6T.
Through improvements to its design-engineering approach, the company appears in many cases to be reaching the market ahead of larger competitors, and the resulting market-share advantage is expected to persist throughout the product cycle.
The greater design complexity of 1.6T once again plays to the company’s strengths. Lumentum’s signal-integrity team is widely regarded as one of the best in the competitive market.
The expansion of internal manufacturing is progressing well. The company doubled OCS shipments from the third quarter to the fourth quarter, and first-quarter guidance includes the company’s first quarter with OCS revenue exceeding $100 million.
Demand signals for 2027 remain extremely strong. The company has begun preliminary work to add capacity through contract manufacturers while continuing to increase output at its internal factories.
The OCS product roadmap has also become clearer since the last earnings call. The company is currently planning products with both higher and lower port counts, including entry-level products for specific use cases.
The industrial-laser and wired-access businesses within the systems segment also improved sequentially. In industrial lasers, the company’s ultrafast lasers used for via drilling in high-density PCBs are gaining further adoption. These PCBs are used in advanced AI XPU boards and 1.6T optical modules.
Looking ahead to the first quarter, the company expects to set another quarterly revenue record and reach the previously cited $1.25 billion revenue target, more than one quarter ahead of the plan established at the last OFC conference.
Approximately half of the sequential growth is expected to come from the components business, primarily driven by continued growth in scale-out and scale-up applications. The other half is expected to come from the continued ramp in the systems business, particularly accelerating deliveries of 1.6T optical modules and OCS.
I will now turn the call over to Wajid.
Chief Financial Officer Remarks
CFO: Thank you, Michael.
Fourth-quarter revenue was $1.1 billion, at the high end of the company’s guidance range. Non-GAAP earnings per share were $3.23, significantly above the previous guidance range, demonstrating the operating leverage in the company’s business model.
Fourth-quarter GAAP gross margin was 47.4%, and GAAP operating margin was 27.8%, with both metrics reflecting the company’s strong performance.
As previously disclosed, the company proactively converted a portion of its convertible notes into equity during the fourth quarter. Following the appreciation in the company’s share price over the past year, these notes were in the money. This action reduced the company’s debt by $1.1 billion, equivalent to approximately 35% of outstanding convertible debt.
The transaction resulted in a one-time, noncash GAAP charge of $7.8 billion, bringing the fourth-quarter GAAP net loss to $7.2 billion.
On a non-GAAP basis, fourth-quarter gross margin was 50.4%, up 250 basis points sequentially and 160 basis points year over year, primarily driven by improved manufacturing-capacity utilization, favorable product mix, and price increases for certain products.
Fourth-quarter non-GAAP operating margin was 36.6%, up 440 basis points sequentially and 2,160 basis points year over year.
The company continued to invest in critical R&D; programs serving cloud-computing and AI customers while maintaining disciplined cost controls to optimize its business model.
Fourth-quarter non-GAAP operating income was $368.8 million, and adjusted EBITDA was $406.4 million.
Fourth-quarter non-GAAP operating expenses totaled $138.1 million, representing 13.7% of revenue, up $11.9 million from the third quarter and $28.8 million from the prior-year period, primarily to support expanding cloud-computing and AI business opportunities.
These included:
Non-GAAP general and administrative expenses of $50.6 million;
Non-GAAP R&D; expenses of $87.5 million;
Non-GAAP net interest and other income of $22.0 million;
Non-GAAP net income of $326.3 million;
Non-GAAP net income per share of $3.23;
Non-GAAP diluted weighted-average shares outstanding of 101.1 million.
I will now discuss the balance sheet.
During the fourth quarter, the company’s cash and short-term investments decreased by $430 million to $2.74 billion, primarily due to the conversion of convertible debt into equity.
Inventory increased by $59 million sequentially to support expected growth in cloud-computing- and AI-related revenue.
Fourth-quarter capital expenditures were $167 million, primarily to expand manufacturing capacity serving cloud-computing and AI customers.
By revenue mix:
Components business revenue was $649.4 million, up 22% sequentially and 103% year over year;
Systems business revenue was $356.9 million, up 30% sequentially and 123% year over year.
I will now discuss the company’s non-GAAP guidance for the first quarter of fiscal 2027, based on current assumptions.
The company expects first-quarter net revenue of $1.225 billion to $1.275 billion. The guidance midpoint of $1.25 billion implies revenue growth of more than 130% year over year and would set another quarterly revenue record for Lumentum Holdings.
First-quarter non-GAAP operating margin is expected to be 39.5% to 40.5%, and non-GAAP diluted net income per share is expected to be $4.05 to $4.35. At the midpoint, operating margin would improve by more than 2,100 basis points year over year.
Non-GAAP EPS guidance is based on a full-year non-GAAP effective tax rate of 16.5% and assumes approximately 102 million shares for calculating non-GAAP diluted EPS.
I will now turn the call back to Kathy to begin the Q&A; session.
III. Q&A; Session
Moderator: Thank you, Wajid. To give as many participants as possible an opportunity to ask questions, please limit yourselves to one question and one follow-up. Matthew, please begin the Q&A; session.
Operator: The first question comes from Joseph Cardoso of JPMorgan.
Financial Targets and NPO Opportunities
Analyst: Good afternoon, everyone. Congratulations on the excellent results, and thank you for taking my questions.
First, the company has highlighted that it will reach its $1.25 billion revenue target one quarter ahead of schedule, while operating margin has already materially exceeded the upper end of the original target range.
Given stronger demand and a potentially more favorable product mix, how should we think about the impact of these factors on the next set of financial targets? Relative to the original framework, the company appears to be developing more incremental opportunities, including external laser sources, NPO programs, and the scale-up OCS opportunity you mentioned. How should we think about the next set of targets?
CEO: First, thank you for your continued support of the company.
The company may announce new financial targets at the next OFC conference. Clearly, we are now materially ahead of nearly all our original targets, whether for revenue, gross margin, or operating margin, and actual performance has been much better than expected.
You are right. We spent some time in our prepared remarks discussing NPO and CW lasers. These are incremental opportunities that the company had not discussed extensively at previous OFC conferences.
OCS also appears to be performing better than expected. We are currently focused on execution, keeping our heads down, and running the business well.
Increasing sequential revenue guidance by nearly $250 million is an outstanding achievement. Looking ahead over the next several quarters, we believe there is an opportunity to continue delivering similar growth.
Analyst: Understood. A specific follow-up on NPO: Could you provide more information?
It sounds as though some of these opportunities may materialize slightly earlier than expected. You also discussed different form factors and the associated laser content opportunities. Which architecture are customers currently more inclined to choose? Is there a clear preference in either direction?
For the company’s largest CPO customer, how should we think about the company’s content under the different approaches relative to ultra-high-power lasers?
CEO: Let me start with a few points, and then I will ask Wupen to elaborate on the differentiation of our medium-power lasers.
The timing of these opportunities is broadly consistent with what the company previously discussed regarding its major CPO customer. As stated in our prepared remarks, the company expects to begin high-volume shipments of scale-up products in the second half of 2027 for customer deployments in 2028. Of course, the company is already shipping products for scale-out applications.
The leading NPO customer is also broadly within that timeframe, potentially about one quarter earlier.
The first few programs to launch primarily use similar external laser sources and high-power lasers. Several integrated solutions may follow, integrating medium-power lasers within the optical engine to create an all-in-one unit.
The programs with the greatest visibility and earliest timing primarily use high-power lasers and are highly consistent with the solution previously discussed for the largest CPO customer.
However, there are some misconceptions in the market regarding medium-power lasers integrated within the optical engine. There are actually many points of differentiation. Wupen, please elaborate.
Wupen: Certainly. Thank you, Michael.
Using an NPO optical engine as an example, each NPO optical engine can provide approximately 6.4T of bandwidth, equivalent to four 1.6T modules.
Fitting all components into a very small optical engine requires extremely high integration and power density, while also achieving very high efficiency. Therefore, only the best laser technology and efficiency can meet the requirements of a compact package.
Lumentum’s advantage is its ability to leverage the company’s technology accumulated in medium-power laser design and scale it to the relevant applications by utilizing the inherently high efficiency of the underlying design and process.
Products with output power of approximately 150 to 200 milliwatts can support these applications, and this technology is actually derived from the company’s unique high-power laser technology. As a result, the company has a unique advantage in serving this market.
We believe NPO will enter the market around late 2027 to 2028 to support optical scale-up. This will represent a significant opportunity to expand the company’s laser business.
Analyst: Thank you, Michael, and thank you, Wupen.
Product Pricing and Indium Phosphide Competition
Operator: The next question comes from Simon Leopold of Raymond James.
Analyst: Thank you. I would like to understand the extent to which the company can reprice its backlog. What impact did this have on gross margin this quarter and on the outlook for gross margin going forward? I then have a brief follow-up.
CEO: Thank you, Simon.
The company has indeed made some pricing adjustments. Most of the pricing impact under long-term agreements is weighted toward future periods.
As Wajid noted in the prepared remarks, gross margin this quarter already benefited to some extent from pricing. We believe more pricing benefits will continue to flow through over time.
However, the most important driver of gross margin this quarter was product mix, as the company shipped more high-margin components. As previously stated, we expect this product-mix effect to continue.
Therefore, we believe gross margin has further room to improve.
Analyst: Great, thank you. I would also like to ask about the increasing number of reports that Chinese companies are building new indium phosphide wafer fabs. How do you view this trend and the competitive landscape going forward?
CEO: We have heard similar reports, but the company’s performance has not been affected to date, and I do not expect it to be affected.
The company has clear differentiation in EMLs. The high-power and medium-power lasers required for NPO and CPO are similarly highly differentiated.
Even in CW lasers, the results achieved through price increases have exceeded our expectations. As mentioned in the prepared remarks, customers are achieving materially higher yields because the company can consistently deliver lasers with highly uniform performance.
The company’s lasers exhibit very little performance variation and a very narrow specification distribution, allowing customers that have adopted the company’s CW lasers to achieve higher optical-module yields.
As a result, the company can command a fairly substantial price premium. Even if the relevant competitors begin production, we expect this premium to be sustained.
In addition, I would remind everyone that some laser suppliers have not yet delivered meaningful output to the market. They can announce very large capacity figures without being held accountable for them. To date, we have not seen actual output commensurate with the scale they claim.
Analyst: Thank you very much.
OCS and Ultra-High-Power Laser Revenue
Operator: The next question comes from Mike Genovese of Rosenblatt Securities.
Analyst: Thank you. It is encouraging to see that this quarter’s guidance includes more than $100 million in OCS revenue. Could you please confirm that?
Also, when might ultra-high-power CW scale-up lasers generate more than $100 million in quarterly revenue?
CEO: Mike, first, thank you for your support of the company and for continuing to follow the details of our business closely.
Your understanding is correct. The company expects quarterly OCS revenue to exceed $100 million for the first time in the first fiscal quarter, and it will be materially above that level. The company has executed extremely well in the OCS business.
For ultra-high-power lasers, we previously expected revenue to reach approximately $50 million by year-end. We expect quarterly revenue to exceed $100 million for the first time in the third quarter of fiscal 2027.
The company is executing well and has already begun shipping. We also delivered a solid level of shipments in the recently reported fourth fiscal quarter. We expect related revenue to grow to approximately $50 million by the end of this calendar year and begin having a truly material impact on results in the third quarter.
Analyst: One final question on the Greensboro facility. The company previously expected approximately half of the capacity to come online in 2028 and the other half in 2029. Is that still the timeline? Although it is still early, please provide an update on progress.
CEO: Progress is going very well. The Greensboro team is excellent, and I am very pleased with its performance.
As you know, the company took over a fully operational wafer fab. The primary conversion we need to complete is transitioning the manufacturing process from gallium arsenide to indium phosphide, and that work is progressing smoothly.
The team has also started work well in advance on reactors and other equipment with long lead times.
The company still expects to begin generating revenue from the facility in early 2028, followed by a continued ramp throughout 2028, reaching full production toward the end of 2028 and into 2029. Therefore, there has been no material change to the timeline.
Analyst: Thank you.
OCS Revenue Target and Supply-Demand Gap
Operator: The next question comes from Papa Sylla of Citi.
Analyst: Thank you, and congratulations on the strong results.
Michael, I would like to understand the OCS business in greater detail. The company said quarterly revenue will exceed $100 million. Could you provide an update on the target for OCS revenue to exceed $400 million in the second half of 2026? Is the company now materially ahead of that target, or is it broadly on track?
Relatedly, how does the company’s major OCS customer weigh internal production against purchasing from Lumentum? Do you expect Lumentum ultimately to capture most of its internal programs? If so, approximately when would that occur?
CEO: The company is certainly progressing toward the $400 million target, but I would not say it is materially ahead.
As you know, the company encountered some supply-chain issues during the initial capacity ramp. Those issues have now been resolved, and the business is executing according to plan.
Current progress is broadly consistent with my previous expectations for guidance. Third-quarter revenue already accounts for part of the $400 million target, and there is still room for further growth in the fourth quarter.
For the customer with an internal source of supply, the company is currently executing very well. I believe it will continue using its internal version, but as OCS shipments continue to increase, Lumentum will capture the vast majority of the demand.
I expect the company to surpass the internal source and become that customer’s largest supplier by early 2027, after which OCS shipments will continue to strengthen.
The company also continues to ship to several different customers, and overall execution is back on track.
The company has performed particularly well in areas such as software that could otherwise have been more challenging. Based on discussions with customers, they generally view Lumentum as an exceptionally reliable, high-performing supplier.
Analyst: That is encouraging to hear. A follow-up on the supply-demand imbalance: The company said last quarter that the shortfall exceeded 30%. Where does that stand now? How will the situation improve as we move into fiscal 2027 and beyond?
CEO: There may be no change for EMLs. The supply-demand gap has not widened further, but it has not narrowed either. The company’s EML shipments remain below customer demand.
What has truly exceeded our expectations is high-power lasers.
There has been extensive market discussion around various co-packaged and near-packaged opportunities, but unfortunately, the company’s current ability to ship high-power lasers remains far below demand.
If there is one area that has changed materially since our last discussion, it is high-power lasers. Demand signals have strengthened further, and the gap between the company’s supply and demand has widened materially.
Wupen: To clarify, the company’s capacity ramp itself remains on schedule. The supply-demand gap has widened because demand has accelerated even faster, as Michael noted in the prepared remarks.
Analyst: Understood. That is very helpful. Thank you.
External Laser Source Modules
Operator: The next question comes from Christopher Rolland of Susquehanna.
Analyst: The quarterly results were outstanding. Thank you for taking my questions.
The press release indicates that the company may be selling not only the lasers required for external laser sources, but also complete external laser source modules. Could you provide more detail on this opportunity and the economics of a complete module relative to standalone lasers?
CEO: Chris, thank you for devoting so much time to researching the company.
The company has secured its first order for external laser source modules. In terms of average selling price, the complete module is priced materially higher than the group of lasers contained within it.
We are very excited about this revenue opportunity, although the initial scale will not be large. The company expects to begin shipments around mid-2027 to early in the second half of 2027.
Frankly, we had previously expected the company to see more opportunities in scale-out applications first, but those opportunities are currently smaller than previously anticipated. The company is now pleased to participate in the early stages of scale-up deployments through both lasers and laser source modules.
As just noted, the average selling price of a laser source module is materially higher. Its margin is slightly lower than that of standalone laser sales, but remains above the company average.
Therefore, the company is effectively sacrificing a small amount of margin in exchange for greater incremental revenue. Simon asked earlier about gross margin. The company believes there are enough other gross-margin drivers to support further revenue acceleration while maintaining the upward trend in gross margin.
Wupen: Let me add one point.
The company positions its external laser source modules to assist customers that lack the capability to handle laser chips independently. This is the company’s first step: supplying one customer initially and then expanding from that foundation.
The company can help more end customers use external laser sources, thereby supporting their CPO and NPO systems.
Analyst: Thank you, Wupen, and thank you, Michael.
Market Structure for CW Lasers and EMLs
Analyst: As a follow-up, Michael, you previously discussed the development of the 1.6T cycle, or 200G per lane, suggesting that CW lasers might enter the supply chain earlier and account for a larger share of optical-module shipments.
How is that progressing? Is the CW business growing faster than the company initially expected?
Also, how do the economics of CW lasers differ from those of EMLs? EMLs also include modulators, so their content value should be higher.
CEO: That is a very good question. Let me provide some context, and then I will ask Wupen to add his perspective.
The company has seen no slowdown whatsoever in EML demand. As mentioned in response to Papa, there remains a significant gap between supply and demand.
The company remains on track to deliver year-over-year EML production growth in accordance with the plan outlined in the prepared remarks. Even by year-end, we expect supply to remain materially below demand.
Therefore, the company is seeing absolutely no slowdown in EML demand.
At the same time, the company acknowledges, as it has previously stated, that CW lasers are expected to account for a meaningful portion of optical-module production. Silicon photonics is a viable solution for 1.6T products.
The company has also previously noted that when the industry advances to 3.2T, some of the advantages of silicon photonics will diminish, at which point EMLs are expected to resume significant growth.
Where the company’s position has changed slightly is that output from the Japan facility has been materially better than expected, allowing some additional capacity to be allocated to CW lasers.
The company is now shipping CW lasers into the 200G-per-lane silicon photonics market at a fairly meaningful scale.
Another change is that the company has materially reduced the die size of its CW laser chips.
In previous discussions, the company believed EML margins could be materially better than CW laser margins. The two are now much closer. The new CW lasers are smaller and deliver better performance, and the company can command a significant premium to market prices based on the performance of these products.
The margin opportunity for EMLs remains better, but the gap between the two has narrowed materially compared with the last earnings call.
Wupen, please discuss the market changes for CW lasers and EMLs.
Wupen: Michael’s comments are very accurate. Let me add a few points.
There are already fairly substantial shipments of 200G-per-lane products, including 800G products. In this part of the market, the company is actually seeing a materially higher share for EMLs than for CW lasers.
Both solutions will continue to develop, and EMLs will continue to play a very important role in the 200G-per-lane market. However, as the market scales, it will also adopt more CW lasers.
As Michael noted, the new generation of CW laser designs is more efficient, resulting in smaller chip sizes and better gross-margin performance.
In addition, customers are exhibiting another behavior in the current supply-constrained environment: if they can secure a particular type of laser light source, they will adopt the corresponding technology solution to support their own buildouts.
Therefore, shifts in the market between the two types of lasers are driven not only by technological factors, but also by supply and demand conditions.
Analyst: Thank you for your candor, and congratulations on the company’s latest progress.
200G-per-Lane Products and Operating Leverage
Operator: The next question comes from Vijay Rakesh of Mizuho.
Analyst: Hello, Michael and Wajid. The quarterly results and guidance were both excellent.
I wanted to ask about per-channel 200G EMLs and CW lasers. Both product categories appear to be ramping smoothly. Is it fair to assume that both per-channel 200G EMLs and CW lasers will be accretive to the company’s margins?
Also, when does the company expect 1.6T to surpass 800G? Per-channel 200G products currently appear to contribute more than 25% of revenue.
CEO: Rakesh, great to speak with you again.
There has been no material change in the crossover timing forecast. I believe you are referring to per-channel 200G lasers.
The company previously expected per-channel 200G EMLs to represent the majority of shipments by mid-2027. As noted in the prepared remarks, per-channel 200G EMLs currently account for 25% of the EML product mix and are expected to reach 50% or more of shipments by mid-2027.
Progress remains consistent with that target, with no significant change.
Overall, your assessment is correct. Lasers are among the company’s more profitable businesses, and both CW lasers and EMLs carry margins above the corporate average.
As mentioned earlier in response to Chris, by reducing the CW laser die size, the company has significantly narrowed the margin gap between EMLs and CW lasers. EML margins remain higher, but the gap has narrowed considerably.
Analyst: Understood. Very helpful.
Wajid, one more question on operating leverage. The company’s operating margin improved significantly year over year. How should we think about the path toward the 40% target in fiscal 2027?
CFO: Thank you, Vijay.
The company previously set a target of a 38% to 42% operating margin when quarterly revenue reaches $2 billion.
As Michael noted in the prepared remarks, the company is currently generating revenue well below $2 billion, yet its operating margin has already reached the midpoint of that range.
As revenue approaches $2 billion, gross margin should continue to improve, with operating margin rising accordingly.
Rather than viewing 42% as the upper end of the range, it should be viewed as the new midpoint. Relative to the range the company presented at OFC, the future operating-margin target range could shift upward by 100 to 200 basis points overall.
Analyst: Okay, thank you.
Indium Phosphide Substrate Supply and Greensboro Capacity
Operator: The next question comes from George Notter of Wolfe Research.
Analyst: Hello, everyone. Thank you for taking my questions, and congratulations on these results.
I wanted to ask about indium phosphide substrate supply. The agreement the company signed with AXT this quarter was particularly noteworthy because, just one quarter ago, the company said its indium phosphide substrate supply position was sound. Something now appears to have changed.
How has the company’s long-term demand for indium phosphide substrates changed? If this trend continues, is the company also accelerating the utilization of remaining capacity at the Greensboro facility?
CEO: George, your assessment is correct.
As noted earlier in response to other questions, demand for ultra-high-power lasers has exceeded the company’s expectations, and that demand growth is coming from multiple customers.
Over the past three months, the company has been working to secure additional substrate supply.
Based on the underlying demand the company had previously seen for ultra-high-power lasers, as well as demand for EMLs and CW lasers used in scale-out products, the company originally believed its supply position was sound.
However, as you noted, the company subsequently saw demand increase significantly. In response, it secured additional substrate supply support from AXT.
AXT is an excellent partner, and Wupen has worked with the company for many years. Given the rapid growth in demand, the company believed it genuinely needed AXT’s support, which is why it signed the agreement.
If demand continues along its current trajectory, the company may need to secure even more substrate supply. For now, given its relationships with major Japanese suppliers and the announced AXT agreement, the company is reasonably confident in its current supply position.
However, given how rapidly demand is changing, the current level of supply could again become insufficient in one or two quarters.
Analyst: Could the company potentially sign long-term agreements covering additional Greensboro capacity?
CEO: The company is working on that.
We have consistently made clear that Greensboro still has available capacity and room for expansion. Wupen has already engaged with multiple customers to discuss how to meet their laser requirements.
As customers begin evaluating near-packaged or co-packaged solutions, these requirements are changing almost by the hour.
I expect the company to announce some new partnership arrangements related to Greensboro over the next few quarters, involving greater utilization of the facility’s capacity.
Analyst: Thank you.
NPO, CPO, and Scale-Up OCS
Operator: The next question comes from Tom O’Malley of Barclays.
Analyst: Thank you for taking my questions.
My first question is about NPO. The prepared remarks discussed this technology in considerable detail.
Based on the ASIC and GPU roadmaps, does NPO need to launch alongside a next-generation chip, or can it also be introduced into an existing product that has already begun ramping?
For example, if a large customer begins scaling a product early next year that initially uses only electrical interconnects, could the company subsequently provide an NPO solution for it? The timing consideration is important.
CEO: Tom, great to speak with you again.
What the company is currently seeing is an inflection point in ASIC performance and transmission speeds, which is driving demand for NPO and CPO.
For TPUs, XPUs, or GPUs already shipping today, I do not believe they support transmission speeds high enough to add an NPO or CPO solution directly. If I understand correctly, that is what you are asking.
As new generations of products launch—particularly as new chips begin emerging in mid-2027 and are gradually deployed from late 2027 into early 2028—the next generation of GPUs, XPUs, and TPUs all appear likely to support transmission speeds sufficient to drive NPO or CPO adoption.
Wupen, would you like to add anything?
Wupen: Michael’s assessment is very accurate.
We are not seeing a trend toward retrofitting NPO onto current product models. What we are seeing is a broad industry movement aimed at deploying NPO and CPO around 2028, driven primarily by the need for optical scale-up connectivity.
This is not only about the XPU itself; it also involves rack-based, multi-rack systems, which require optical scale-up connectivity.
We therefore believe new processors and new rack architectures will emerge at that time. From an industry-evolution perspective, 2028 will be an important milestone for optical scale-up connectivity.
Analyst: My other question is about scale-up OCS. Is the competitive landscape and timing here similar to the existing OCS business?
Is this opportunity already included in the current total addressable market, or is it incremental? When does the company expect the related technology to enter the market?
CEO: This is an incremental market.
Any newly emerging opportunity beyond those Kathy presented at OFC is additional and incremental. This is a very new set of opportunities, and the company understands that multiple customers are evaluating this type of solution.
This opportunity is expected to begin affecting the company around 2028. It is not imminent, but it is now close enough that the company is investing actively.
The relevant products require substantial redesign work by the engineering team.
Many companies and startups are discussing OCS, but Lumentum is the only supplier already shipping products. The company’s quarterly OCS revenue is approaching and set to exceed $100 million, and it has achieved this without relying on a contract-manufacturing relationship with a large OCS user.
The company is therefore effectively the only independent commercial OCS supplier today. Given that position, the company receives calls from almost every relevant customer in the market and expects to gain early access to each new opportunity.
Analyst: Excellent results. Thank you again.
Long-Term Agreements for Pump Lasers
Moderator: Thank you, Tom. We have time for one final question.
Operator: The final question comes from Ruben Roy of Stifel.
Analyst: Thank you for fitting in my question.
Michael, I wanted to better understand the pump-laser business. Growth has been exceptionally strong, with the company appearing to deliver approximately 80% year-over-year growth for the second consecutive quarter, while still expecting fourfold growth and remaining essentially sold out.
Could you discuss the current stage of the capacity ramp and the company’s actual capacity?
The company also mentioned that it has signed some long-term supply agreements for scale-up applications. Could you provide a high-level overview of the structure and duration of these agreements?
CEO: Ruben, we saved the best for last. We always value your questions.
Pump lasers are a business in which the company has an exceptionally strong position, but the market may still underestimate this. The company has a very high market share.
The company has been working to establish strategic partnerships with many networking-equipment manufacturers. These partners are willing to help share some of the company’s capital expenditures, which we are very pleased about.
The company needs to invest substantial capital to expand capacity at Rose Orchard and then send the products to its Thailand facility for packaging and testing.
The company has signed a series of agreements, most of which have three-year terms. These agreements are similar to the arrangements the company typically uses and already include pricing provisions. When specific conditions are met, the company can activate the relevant price-adjustment mechanisms, leaving some potential for further pricing upside.
These agreements also significantly increase demand visibility, giving the company greater confidence that the associated demand will not suddenly disappear. Most of the agreements are take-or-pay arrangements.
Overall, the company is very confident in its current position.
Returning to pump lasers, the company’s current market share is approximately 70% to 80%. The company believes its existing technology roadmap is precisely the direction customers want to participate in, creating opportunities for the company to further adjust pricing and expand output.
This is an exceptionally exciting business.
Standards-Based and Custom NPO Solutions
Analyst: Thank you, Michael. Very helpful.
One final brief follow-up on NPO. Of the projects in which the company is currently participating, how many involve open or standards-based NPO?
Given the company’s technology and market positioning, is either standards-based NPO or a custom solution more advantageous for Lumentum? Does the distinction matter?
CEO: Given the time, I will provide a brief overview and then ask Wupen to add his perspective.
Some standards are currently emerging to define the interface between ASICs and optical engines. This is a positive development for the company because it can open opportunities in markets such as switch chips that may previously have been inaccessible.
Standards-based solutions can expand the addressable market for optical components. Frankly, the company is participating in both standards-based and custom projects.
Many customers are pursuing highly customized, system-specific implementations. The company’s first wave of NPO projects will primarily come from these custom solutions.
Wupen, please add your perspective.
Wupen: I would add one point. There are actually two levels here.
First, at the physical and optical level, current solutions generally use high-speed, narrow-linewidth per-channel 200G technology and include a large number of channels. The next generation may adopt standards frameworks such as OCI and NSA. The optical layer is therefore moving toward standardization.
Second, at the form-factor and system-implementation level, solutions remain highly proprietary. Each customer has a different design that must be matched to its own rack and system architecture.
The optical layer can therefore be considered standards-based, but the specific implementation still differs significantly among customers.
Analyst: Great, thank you.
IV. Closing Remarks
Moderator: Thank you, Ruben, and thank you all for your questions.
This concludes our Q&A; session. We look forward to continuing our discussions with you at investor conferences and other events during the remainder of the quarter.
Thank you all for joining today’s call.
Operator: This concludes today’s conference call. Thank you for participating.