Lumentum Q4 2026 Earnings Call Transcript

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Provided by Quartr
August 11, 2026

Key Takeaways

  • Positive Sentiment: Revenue surged 109% year over year to $1.01 billion in fiscal Q4, while non-GAAP gross margin reached 50.4% and operating margin expanded to 36.6%. Management attributed the performance to strong AI-driven demand, favorable mix, improved utilization, and operating leverage.
  • Positive Sentiment: Fiscal Q1 2027 revenue guidance is $1.225 billion–$1.275 billion, with the midpoint reaching Lumentum’s $1.25 billion target more than one quarter ahead of schedule. The company expects 39.5%–40.5% non-GAAP operating margins and $4.05–$4.35 in non-GAAP EPS.
  • Positive Sentiment: Demand is accelerating across optical connectivity products, including record 800G shipments, initial 1.6T transceiver production, and OCS growth toward the company’s first triple-digit quarterly revenue. Management expects 1.6T adoption to intensify through calendar 2027 and believes it has a market-share advantage in complex designs.
  • Positive Sentiment: Lumentum sees substantial incremental opportunities in near-packaged optics (NPO), co-packaged optics (CPO), high-power lasers, and external light-source modules. It expects high-volume CPO-related scale-up shipments in the second half of calendar 2027 ahead of customer deployments in 2028, while NPO engagements may begin around a quarter earlier.
  • Negative Sentiment: Capacity remains a constraint despite aggressive expansion, with EML and high-power laser shipments still below customer demand and pump lasers effectively sold out. The company is increasing capital expenditures, securing additional indium-phosphide substrate supply, and noted that a debt-equitization transaction reduced convertible debt by $1.1 billion but created a one-time $7.8 billion non-cash GAAP charge.
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Earnings Conference Call
Lumentum Q4 2026
00:00 / 00:00

Transcript Sections

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Operator

Good day, everyone, and welcome to the Lumentum Holdings' fourth quarter and fiscal year 2026 earnings call. All participants will be in a listen-only mode. Please also note today's event is being recorded for replay purposes. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. At this time, I would like to turn the conference call over to Kathy Ta, Vice President of Investor Relations. Ms. Ta, please go ahead.

Kathy Ta
Kathy Ta
VP of Investor Relations at Lumentum

Thank you, Matthew, and welcome to Lumentum's fiscal fourth quarter and full year 2026 earnings call. This is Kathy Ta, Lumentum's Vice President of Investor Relations. Joining me today are Michael Hurlston, President and Chief Executive Officer; Wajid Ali, Executive Vice President and Chief Financial Officer; and Wupen Yuen, President, Global Business Units. Today's call will include forward-looking statements, including, without limitation, statements regarding our future operating results, strategies, trends, and expectations for our products and technologies that are being made under the safe harbor of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations.

Kathy Ta
Kathy Ta
VP of Investor Relations at Lumentum

We encourage you to review our most recent filings with the SEC, particularly the risks described under Risk Factors and elsewhere in our 10-Q for the fiscal quarter ended March 28th, 2026, and in our most recent 10-K for the fiscal year ended June 27th, 2026, to be filed by Lumentum with the SEC. The forward-looking statements provided during this call are based on Lumentum's reasonable beliefs and expectations as of today. Lumentum undertakes no obligation to update or revise these statements except as required by applicable law. Please also note that unless otherwise stated, all financial results and projections discussed in this call are non-GAAP. Non-GAAP financials have inherent limitations and are not to be considered in isolation from, or as a substitute for or superior to, financials prepared in accordance with GAAP.

Kathy Ta
Kathy Ta
VP of Investor Relations at Lumentum

You can find a reconciliation between non-GAAP and GAAP measures and information about our use of non-GAAP measures and factors that could impact our financial results in our press release and our filings with the SEC. Lumentum's press release with the fiscal fourth quarter and full year 2026 results and accompanying supplemental slides are available on our website at investor.lumentum.com. We encourage you to review these materials carefully. With that, I'll turn the call over to Michael.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Thank you, Kathy, and good afternoon, everyone. Lumentum is positioned at the heart of a secular industry shift. As AI compute workloads increase in both speed and bandwidth, data center architects are turning to optical links as a primary means of connectivity. Our fourth quarter results reflect the early stages of this transition. Driven by broad-based momentum across our scale-out and scale-across product lines, revenue surged 109% year-over-year to $1.01 billion, marking our eighth consecutive quarter of top-line growth. Additionally, we are maintaining revenue velocity as we saw our third consecutive quarter of greater than 20% sequential growth, notable as the compare point is getting ever larger. While we experience broad-based success, some of our previously highlighted growth drivers are just starting to layer in. Notably, in cloud transceivers, we achieved record 800G shipments while initiating production of our next-generation 1.6T modules.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

In OCS, we successfully navigated supply chain constraints to meet steep customer demand, ramping internal manufacturing shipments according to plan. In addition to strong top-line performance, non-GAAP gross margin crossed 50%. We had originally targeted this threshold at a $2 billion quarterly run rate, so this milestone came quite a bit sooner than expectations. We expect gross margin expansion to continue, driven by product mix and tight operational execution. Non-GAAP operating margins expanded by more than 2,150 basis points year-over-year. These results prove two things: our differentiated technology commands premium value, and our operating model delivers outsized leverage. Driven by sharp acceleration in AI revenue, the midpoint of our Q1 revenue guidance reaches our $1.25 billion target more than one quarter ahead of schedule. Additionally, our Q1 non-GAAP operating margin guidance exceeds the high end of our target model that we associated with this revenue level.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

I'd like to address some recent market noise around co-packaged and near-packaged optics. First, our lead CPO customers' production plans remain very much on track, and their demand signal has increased since our last update. Our visibility into the timing of CPO scale-up deployments has also sharpened. We remain confident in a demand ramp for our ultra-high-power laser chips in the second half of calendar 2027, ahead of customer scale-up deployments in calendar 2028.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Because the first phase of scale-up optical connections will span across compute racks within the cluster, this demand ramp applies to any topology larger than one rack. Adding to our confidence, we were recently given our first external light source, or ELS, module purchase for delivery by the second half of calendar 2027. Second, the rest of our customer base is currently prioritizing near-packaged architectures as an intermediate step to the eventual adoption of CPO. The NPO opportunity is completely additive for us, significantly increasing the optical TAM. We're seeing strong NPO momentum across multiple high-velocity engagements using our differentiated laser chips. Even our largest CPO customer is looking at NPO for specific new use cases, further increasing the optical TAM at that account.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

These architectural shifts represent a major market inflection that plays directly to our core strengths as a premier laser chip manufacturer, benefiting us as optics begin to penetrate the copper domain. NPO offers a faster time-to-market option by placing optical engines on the board right next to the XPU accelerator, trading power and cost for simplicity in optical scale-up applications. Customers are evaluating two types of laser chips for NPO: a mid-power laser integrated directly with the optical engine, and a high-power laser used in an external light source module. Our mid-power lasers inherit the reliability and engineering of our flagship high-power platform. Our family of NPO and CPO lasers utilizes common design and process know-how to achieve industry-leading efficiency across 120 mW, 150 mW, and 400 mW output levels.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Looking ahead, CPO continues to be viewed as the natural end state on the technology roadmap, placing optics directly on the substrate or interposer for maximum power efficiency through foundry-level advanced packaging. Now, let's look closer at the metrics that defined our fourth quarter, starting with the components product category. Components revenue for the fourth quarter was $649 million, reflecting 22% sequential and 103% year-over-year growth increases. Our laser portfolio continues to demonstrate strong momentum across every vector. Shipments of our narrow linewidth laser assemblies grew sequentially for the 10th consecutive quarter, and we were up over 130% year-over-year. Pump laser shipments surged more than 80% year-over-year, and we will remain effectively sold out for the foreseeable future despite our rapid capacity expansion. Expanding, inferencing, and training applications are driving full-rate connectivity between data centers, while political and regulatory constraints favor smaller, more modular builds.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

These two factors, among others, are substantially increasing the demand for our pump laser solutions. To put this in perspective, for one major hyperscaler, the network capacity connecting just two AI data center sites is double the total global backbone capacity they built over the entirety of the last decade. To support the growth and scale across deployments, we have secured multiple long-term customer agreements that help offset our planned capital expenditures. We continue to expect a fourfold increase in our pump laser shipments over the next several quarters to meet this escalating demand. Turning to laser chips, we delivered another record-breaking quarter for EMLs, primarily driven by strong demand for 100G per-lane devices. Momentum for our 200G EMLs is also accelerating rapidly, now accounting for over 25% of total EML revenue.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Simultaneously, we are expanding our laser chip strategy to capture broader market opportunities in ways that align with our financial model. A key example is our CW laser chip for 200G-per-lane applications, which delivers high yield, proven reliability, and industry-leading performance in a compact form factor to a multitude of customers. Internal deployment of these lasers reinforces what our customers regularly confirm. We have a distinctive ability to deliver at scale to a very tight set of specifications, which enables superior yields in transceiver manufacturing. Importantly, these new CW laser products will deliver margins that are accretive to our long-term financial targets. Looking ahead, we expect demand for both EML and CW lasers to grow significantly through the second half of calendar 2026 and into 2027.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

To capture the coming 200G and 300G lane speed opportunities, we are expanding capacity across our two indium phosphide wafer fabs in Japan, qualifying both CW and EML process flows on our newest tools as they come online. Even as we allocate additional capacity to CW lasers, we remain on track to deliver over 50% EML unit growth by the December 2026 quarter compared to the year-ago quarter. Wrapping up our components commentary, we have visibility to an expanding set of 3D sensing applications. These new opportunities are expected to drive global growth in upcoming product cycles with our primary customer. Now, I will move to our systems product category. Systems' fourth quarter revenue reached $357 million, representing a 30% sequential and 123% year-over-year increase. Both cloud transceivers and OCS were major drivers of the revenue growth quarter-over-quarter.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

While pockets of supply chain tightness for certain components cap shipments below total market demand, our factories executed to our aggressive plan for both product lines. The bulk of our cloud transceiver shipments in the quarter were at 800G speeds, and we began shipping 1.6T transceivers as planned. Meanwhile, profitability across our transceiver lines continues to improve, driven by gains in both yield and capacity utilization, as well as the initial rollout of higher ASP 1.6T transceivers. Our visibility into future cloud transceiver demand is clearer than ever. In fact, we expect the 1.6T transceiver uptake to intensify starting in fiscal Q1 and sustain through calendar 2027. This momentum is anchored by our lead Tier 1 hyperscale customers, whose strong roll-outs of custom AI clusters are driving a rapid transition from 800G to 1.6T technology.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Through the use of improved design engineering techniques, we appear to be first to market in many instances, ahead of larger competitors, giving us a market share advantage that we should be able to maintain through the cycle. The degree of difficulty with 1.6T designs, again, is playing to our strengths, as our signal integrity team is widely acknowledged as the best in a competitive field. Turning to OCS, our internal manufacturing expansion is progressing smoothly. After doubling shipments from fiscal Q3 to Q4, our guidance includes our first triple-digit OCS revenue quarter. The demand signal for 2027 continues to be incredibly strong, and we have started the initial work to add capacity with contract manufacturers, as well as continuing to increase output in our internal factories. Since our last call, the roadmap for OCS has also come into better view.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

We are now planning higher and lower port count products, including specialized in-tray offerings. Rounding out our systems category, performance in industrial lasers and cable access strengthened quarter-over-quarter. Within industrial lasers, we are seeing increased adoption of our ultrafast lasers, targeting high-density PCB via drilling that supports advanced AI XPU boards and 1.6T optical modules. Looking ahead to Q1, we expect to set another quarterly record and, as stated earlier, reach our $1.25 billion revenue target more than one quarter ahead of the plan outlined at the last OFC. We anticipate that approximately half of the sequential growth will stem from our components portfolio, driven by continued expansion and scale-out and scale-across applications. The other half will be powered by the ongoing ramp of our systems portfolio, 1.6T transceivers, and accelerating OCS deliveries. Now, I'll hand the call over to Wajid. Mr. Ali?

Wajid Ali
Wajid Ali
EVP and CFO at Lumentum

Thank you, Michael. Fourth quarter revenue of $1.01 billion was at the high end of our guidance range, and non-GAAP EPS of $3.23 was well above our prior expected range, demonstrating the leverage of our business model. GAAP gross margin for the fourth quarter was 47.4%, and GAAP operating margin was 27.8%. Both metrics exemplify the company's exceptional performance. As disclosed previously, in the fourth quarter, we proactively equitized a portion of our convertible notes, which were in the money following the appreciation of our stock over the past year. This action reduces our debt by $1.1 billion, or approximately 35% of our outstanding convertible debt. This transaction resulted in a one-time, non-cash GAAP charge of $7.8 billion, bringing our fourth quarter GAAP net loss to $7.2 billion.

Wajid Ali
Wajid Ali
EVP and CFO at Lumentum

Turning to our non-GAAP results. Fourth quarter gross margin was 50.4%, which was up 250 basis points sequentially and up 1,260 basis points year-on-year due to better manufacturing utilization, favorable mix, and increased pricing on select products. Fourth quarter non-GAAP operating margin was 36.6%, which was up 440 basis points sequentially and up 2,160 basis points year-on-year. We continue to invest in critical R&D programs serving cloud and AI customers while maintaining the rigorous cost controls necessary to optimize our business model. Fourth quarter non-GAAP operating profit was $368.8 million, and Adjusted EBITDA was $406.4 million. Fourth quarter non-GAAP operating expenses totaled $138.1 million, or 13.7% of revenue, an increase of $11.9 million from the third quarter and an increase of $28.8 million from the same quarter last year in support of expanding cloud and AI opportunities. Q4 non-GAAP SG&A expenses were $50.6 million.

Wajid Ali
Wajid Ali
EVP and CFO at Lumentum

Non-GAAP R&D expenses were $87.5 million. Total interest and other income net was $22 million on a non-GAAP basis. Fourth quarter non-GAAP net income was $326.3 million, and non-GAAP net income per share was $3.23. Our diluted weighted shares for the fourth quarter were 101.1 million on a non-GAAP basis. I will now turn to the balance sheet. During the fourth quarter, our cash and short-term investments decreased by $0.43 billion to $2.74 billion, with the decrease primarily driven by convertible debt conversions. Our inventory levels increased by $59 million sequentially to support the expected growth in our cloud and AI-related revenue. In Q4, we spent $167 million in CapEx, primarily focused on manufacturing capacity to support cloud and AI customers. Turning to revenue details. Components revenue of $649.4 million increased 22% sequentially in Q4 and 103% year-on-year.

Wajid Ali
Wajid Ali
EVP and CFO at Lumentum

Systems revenue of $356.9 million increased 30% sequentially in Q4 and 123% year-on-year. Now, let me move to our guidance for the first quarter of fiscal year 2027, which is on a non-GAAP basis and is based on our assumptions as of today. We anticipate net revenue for the first quarter of fiscal year 2027 to be in the range of $1.225 billion-$1.275 billion. The $1.25 billion midpoint reflects more than 130% year-over-year growth, setting yet another all-time quarterly revenue record for Lumentum. We project first quarter non-GAAP operating margin to be in the range of 39.5%-40.5% and diluted net income per share to be in the range of $4.05-$4.35. At the midpoint, this operating margin represents an expansion of more than 2,100 basis points year-over-year.

Wajid Ali
Wajid Ali
EVP and CFO at Lumentum

Our non-GAAP EPS guidance is based on a non-GAAP and annual effective tax rate of 16.5%. These projections assume shares used for non-GAAP diluted earnings of approximately 102 million. With that, I'll turn the call back to Kathy to start the Q&A session. Kathy?

Kathy Ta
Kathy Ta
VP of Investor Relations at Lumentum

Thank you, Wajid. To allow as many people as possible an opportunity to ask questions, please keep to one question and one follow-up. Now, Matthew, let's begin the Q&A session.

Operator

We will now begin the question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. Please stand by while we compile the Q&A roster. Your first question comes from the line of Joseph Cardoso with JPMorgan. Your line is now open. Please go ahead.

Joseph Cardoso
Joseph Cardoso
Analyst at JPMorgan

Hi, good afternoon, guys. Congrats on the results here, and thanks for the question. Maybe for the first one, obviously, you highlighted you're tracking to hit the $1.25 billion revenue target a quarter early and are already running well ahead of your high end of margin targets here. Just given both the stronger demand and maybe the more favorable mix, how should we be thinking about the read-through to the next set of financial targets, particularly given what looks like incremental opportunities forming relative to the framework, including ELS, NPO engagements? I think you even mentioned scale up OCS as well. Just curious in terms of how we should be thinking about the next set of targets here.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Hey, Joe. This is Michael. Firstly, thanks for your continued support. Look, we will come out with some new financial targets probably at the next OFC. We are obviously running well ahead on almost every metric, on revenue, on margin, on operating margin. We seem to be doing quite a bit better. You are right, look, I think there are some new things that we did not factor into our discussion at OFC. NPO, we spent a bit of time in the prepared remarks on NPO. CW lasers, we think that that is an incremental opportunity for us that we have probably not spent a lot of time on before. You are right, OCS I think is, we have discussed, but it seems to be doing a bit better than expected.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

We feel like we are executing, we are trying to keep our head down and run, and obviously, adding nearly $250 million incrementally into the guide is pretty impressive. We think we have the opportunity to do that more as we look out in future quarters.

Joseph Cardoso
Joseph Cardoso
Analyst at JPMorgan

Got it. Fair. Then maybe just a follow-up specifically on the NPO. Curious if you could provide any further details there, specifically how you are thinking about the time here, just given that it does sound like some of these opportunities are forming a little bit earlier than expected. I know you talked about the different form factors or the different kind of content opportunities as it relates to the laser opportunities there. But any way to kind of flesh out where you guys are seeing maybe the architecture of choice by your customers, and is that biased in any direction? How we should think about content as it at least relates to maybe your large customer on the CPO side relative to the ultra-high power laser. Thank you.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

I am going to say a couple of things and then actually ask Wupen to comment a little bit on the differentiation in mid-power. Certainly, the timing of these opportunities is plus or minus what we have talked about for our lead CPO customer. Our lead CPO customer, we just said in the prepared remarks, we would expect to start shipping in high volume for scale-up. We are already, of course, shipping for scale-out. But for scale-up, we expect to be shipping in the second half of calendar 2027 for their deliveries in 2028. Our leading customers on NPO, plus or minus, probably maybe minus a quarter, are in that ZIP code.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

The first couple of those are the same kind of ELS high-powered laser, and then maybe followed by a couple that are integrated where the optical engine of a mid-power laser is integrated inside the optical engine, and it's all one unit. I would say that the ones that we have the best line of sight on and that are sooner are more of the high-powered laser type, very consistent with what we've been talking about for our largest CPO customer. With that said, I wanted Wupen maybe to give a few seconds of color because I think there's a little bit of a mischaracterization. We think that these mid-power lasers that are going inside the OE, lot of things going on there in terms of differentiation. You want to give two seconds on that?

Wupen Yuen
Wupen Yuen
President of Global Business Units at Lumentum

Definitely. Thanks, Michael. So definitely to do the NPO optical engine, imagine each NPO set at about 6.4T of bandwidth, which is really equivalent to four times that of a local CC module. The level of integration and the power density that's required and efficiency required to fit everything into a small optical engine is immense. Therefore, you need really the best laser technology and the best efficiencies in order to really fit everything in a small package. So Lumentum's advantage here really is to leverage our 400 mW kind of design principle and leverage the high efficiencies of the intrinsic design process and scale it to an application around 150 mW-200 mW range that could enable the application. This is actually based on our also high-power technology that we're uniquely positioned to address this market.

Wupen Yuen
Wupen Yuen
President of Global Business Units at Lumentum

And we believe that by late 2027, 2028 timeframe, that NPO will hit the market, enable optical scale-up, and this become an interesting opportunity for us to increase our laser business.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Thanks, Joe.

Kathy Ta
Kathy Ta
VP of Investor Relations at Lumentum

Thank you, Joe.

Joseph Cardoso
Joseph Cardoso
Analyst at JPMorgan

Thank you, Michael. Thank you, Wupen.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Thank you.

Operator

Your next question comes from the line of Simon Leopold with Raymond James. Your line is now open. Please go ahead.

Simon Leopold
Simon Leopold
Analyst at Raymond James

Thanks for taking the question. First thing I wanted to try to ask is, to what extent were you able to reprice backlog with your customers, and how did that affect this quarter's gross margin as well as your gross margin outlook? Then I've got a quick follow-up.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Thanks, Simon. Look, we did reprice a little bit. I think most of our LTAs are more forward-looking in terms of the price impact. We saw some benefit, as Wajid said in his prepared remarks, on the gross margin line on pricing. We think that still has some room to play through. I'd say the long pole this quarter was more on mix, where we were shipping a lot more of our high-mix components, and I think as we said, we'd expect that to continue to play through as well. So we think we have some room to run on the gross margin line, Simon.

Simon Leopold
Simon Leopold
Analyst at Raymond James

Great. Appreciate that. The other thing I've been hoping to ask you about is we've been hearing more about Chinese-based companies coming to market with new indium phosphide fabs. What's your take on this developing and future competition? Thank you.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Look, I think we're hearing the same thing. We obviously haven't seen any impact on our numbers as yet. I don't expect there to be any impact. We think we have differentiation, obviously, on EMLs. We're very strong there. These high and mid-power lasers that are necessary for NPO and CPO, again, very strong differentiation there. Even in CW, we've been surprised at our ability to price up, given what we said in the prepared remarks, that customers are seeing far better yields given our ability to deliver consistent performance on our lasers. They just simply don't deviate. The width of the spec is very narrow, and that results in far better transceiver yields for the customers that we've actually started shipping CW lasers to.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

As a result, we are able to command a nice price premium that we expect to sustain, if these Chinese guys come online. I caution people also, I think some of these Chinese laser suppliers are not delivering in the market today, so there is no recourse when they throw out these big numbers. We have not seen anything like that to date in terms of their output.

Kathy Ta
Kathy Ta
VP of Investor Relations at Lumentum

Thank you, Simon.

Simon Leopold
Simon Leopold
Analyst at Raymond James

Thank you very much.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Thanks, Simon.

Operator

Your next question comes from the line of Mike Genovese with Rosenblatt Securities. Your line is now open. Please go ahead.

Mike Genovese
Mike Genovese
Analyst at Rosenblatt Securities

Great. Thanks. Hey, really good to see the guide for a triple-digit OCS revenue quarter, I think in the current quarter, I think is what you said. Could you just confirm that? Also, the question is, any comment on when we could expect to see that happen for ultra-high powered CW scale-out lasers where we would get a triple-digit quarter?

Wajid Ali
Wajid Ali
EVP and CFO at Lumentum

Mike, again, first, I want to thank you for the support of the company and really following our details really well. You got it right. So in the guide, which is the first quarter, we would expect our first triple-digit OCS revenue quarter. We would expect to be meaningfully above the three-digit mark. We are executing well on OCS, as I said. Then for ultra-high powered lasers, we have said, hey, we expect by the end of the year to be sort of in the $50 million mark. I think the third quarter is when you would see the first triple-digit quarter for ultra-high powered lasers. So, we are executing, we are shipping today. We had good shipments in the reported quarter, Q4. We would expect that to build somewhere in the $50 million range by the end of the calendar year, and then to really meaningful impact in fiscal Q3.

Mike Genovese
Mike Genovese
Analyst at Rosenblatt Securities

Great. Perfect. Then finally for Greensboro, is there any update on the expectation for half of the capacity of Greensboro being there in calendar 2028, the other half in calendar 2029? Is that still the schedule? I know it is early, but any kind of color you could give us on the progress there would be great. Thank you.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Look, progressing super well. I am actually very pleased that the team that we got in Greensboro is first rate. As you know, we inherited a fully-functioning fab. The switch that we need to throw is to convert it from gallium arsenide to indium phosphide. That is well underway. Some of the long pole items, reactors, and things like that, our team has gotten out in front of. I think we continue to say first revenue out of that in early 2028, and ramping through calendar 2028 into kind of a full pitch by the end of 2028 and into 2029. So really no change in that, Mike.

Mike Genovese
Mike Genovese
Analyst at Rosenblatt Securities

Great. Thanks for taking the questions.

Kathy Ta
Kathy Ta
VP of Investor Relations at Lumentum

Thank you so much, Mike.

Operator

Your next question comes from the line of Papa Sylla with Citi. Your line is now open. Please go ahead.

Papa Sylla
Papa Sylla
Analyst at Citi

Thank you for taking my question and congrats on the strong results as well. Michael, I was kind of double-clicking on the OCS. I was hoping perhaps you can refresh us. I know this quarter you mentioned it hit triple-digits, but if you can refresh us on the $400+ million OCS guide for the second half of 2026. Are you running well ahead of it? Just any update on that side. Perhaps tied to that, how should we think about your key OCS customers build versus buying from your calculus? Do you expect Lumentum to eventually absorb most of their internal programs? If so, any timeline in mind?

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Papa, look, what I would say is, we are definitely tracking to the $400 million. I would not say tracking ahead. We have definitely, as you know, had some problems early on in the ramp with supply chain. We are out of that now. I think we are executing, as I said, to plan. We are plus or minus about where I would have expected to be for the guide. So that takes a dent out of the $400 million, and that leaves us some room to run in the fourth calendar quarter. Relative to one customer that apparently has an internal source of supply, we are, I think, executing extremely well. I think they will continue to use an internal version, but I think as they ship more and more OCSs, we will absorb the vast majority of that.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

I would expect, sometime in early 2027 that we cross over and be the number one supplier and actually have momentum from there in terms of our OCS shipments. So definitely, I think we surprised the customers. We are continuing to ship to a number of different customers. Our execution back on track, but most importantly on software and things like that, where I had expected us to have more difficulty, Papa, we have done well. So I think our customers in general, if you talk to them, would say we have been an incredibly strong supplier.

Papa Sylla
Papa Sylla
Analyst at Citi

No, that is great to hear. Michael, for my follow-up, just curious, any update on the supply-demand kind of imbalance? I believe last quarter you mentioned 30%+. Where are we now, and how do you see that improving, or how do you see that going into FY 2027 and beyond?

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

I would say on EML, probably no change. I don't think that it's gone up, but it hasn't come down. We're still shipping behind customer demand on EML. I think what surprised us is high-powered lasers. High-powered lasers, again, there's been a lot of noise in the system on what's happening on various co-packaged and near-packaged opportunities. We are way behind in our shipments, unfortunately, on high-powered lasers. If one vector has really changed since the last time you and I talked, I'd say it's your high-powered lasers, and we are very much further behind. The demand signal has increased, and we are very much further behind relative to our ability to supply.

Wupen Yuen
Wupen Yuen
President of Global Business Units at Lumentum

I think just to clarify-

Papa Sylla
Papa Sylla
Analyst at Citi

That would help.

Wupen Yuen
Wupen Yuen
President of Global Business Units at Lumentum

Just to clarify, our execution of the ramp is on track. We're further behind because the demand has accelerated. That, as Michael said in the prepared script.

Papa Sylla
Papa Sylla
Analyst at Citi

That's very helpful. Thank you.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Hey, Papa, thanks a lot. Appreciate it.

Kathy Ta
Kathy Ta
VP of Investor Relations at Lumentum

Thank you, Papa.

Operator

Your next question comes from the line of Christopher Rolland with Susquehanna. Your line is now open. Please go ahead.

Christopher Rolland
Christopher Rolland
Analyst at Susquehanna

Hey, guys, fantastic quarter, and thanks for the question. My question, in your press release, it sounds like you are selling not just ELS lasers, but perhaps ELS modules as well. I was wondering if you could speak a little bit more about that opportunity, and what the economics look like beyond just lasers and for the full module.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Chris, we, again, first appreciate how much time you're spending on the company. We got our first ELS module order, which from an ASP standpoint is meaningfully higher than the set of lasers that we ship in. We're very excited about the revenue opportunity. Small to start. We said that we'd be shipping sometime mid-year, early second half of 2027, to be honest. A little bit later. We felt like we'd see more opportunity on sort of scale-out applications than we have to date. But we're very pleased to be participating in the early phases of scale up with both lasers and now with the ELS module. As I said a minute ago, the ELS module, meaningfully higher from an ASP standpoint, but the margins are not quite as good. Above corporate average, but not quite as good as the lasers.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

We're trading a little bit of margin to get some revenue bump. I think Simon asked earlier in the call, we think we have enough drivers on the margin side that we can keep the margin vector moving, but help our revenue acceleration.

Wupen Yuen
Wupen Yuen
President of Global Business Units at Lumentum

Also just to add. If you recall that we've positioned our ELS module to be really enabling the customers who don't know how to deal with individual laser chips. This is really a very first step for us to take to ship to one customer and then go from there. We enable other end users to use the ELS to enable their CPO and NPO systems.

Christopher Rolland
Christopher Rolland
Analyst at Susquehanna

Excellent. Thank you, Wupen, and thank you, Michael. Maybe as a follow-on, I think, Michael, you have talked about, I think it is the 1.6T cycle or 200G-per-lane, and perhaps CW and SiPho working into the supply chain maybe earlier, and being a larger part of transceiver shipments ultimately. I guess, first of all, where are we on that? Is this on the SiPho CW side accelerated even faster than you originally spoke about? Can you describe the difference in economics for you between CW lasers and EMLs, which would be, I think, larger because they contain the modulators as well? That would be great.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Chris, good question, and I will give some commentary and then have Wupen comment as well. One, no slowdown in our EML demand. I think it was Papa that asked a minute ago, we see still a significant supply-demand imbalance on our EMLs. As Kathy put in the prepared remarks, we are still very much on track to increase our EML output year-over-year, but even at the end of year, we would expect to be significantly behind demand. So no slowdown at all in the demand that we are seeing from EML. We acknowledge, and we have said this before, that we would expect and are seeing CW lasers take a significant portion of transceiver output. Silicon photonics is a viable solution at 1.6T.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Of course, we have also said, and it also seems to be bearing out that as we think about 3.2T, silicon photonics loses some of its advantages, and we would expect to see EMLs come back in a meaningful way. What I comment is, a little bit of a shift in stance is that we are allocating some of our output now because we are actually doing quite a bit better in Japan than we expected in terms of output. What we are doing as part of that is allocating some of this excess output to CW lasers, and we are now shipping CW lasers in a relatively meaningful way in this 200G-per-lane silicon photonics opportunity. What has also changed for us is we have significantly reduced the die size of our CW laser.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

So before when you and I talked, we said, hey, probably from a margin standpoint, EML is better. Now, we have brought things much more in line. CW lasers are smaller. They are better performing. We are commanding a significant price premium, as I said to you in a previous question, against what we view as the market price because of the performance of these lasers. As such, the margin opportunity is still better on EMLs. But that gap has closed considerably, I think, since the last time we talked. Wupen, you want to talk a little bit about the dynamic that you are seeing on CW and EML?

Wupen Yuen
Wupen Yuen
President of Global Business Units at Lumentum

Michael, I think all were accurate. Just a couple of things to add to that. Number one, if you look at the application today, there is a lot of 200G-per-lane volume that is on 800G. In that, we actually see a much higher EML share versus CW laser share. Michael talked about dynamics. I think this will both continue. EML will remain a very important player in 200G-per-lane. As 1.6T ramps up, I think we will see more scheduled lasers. As Michael talked about, our new design of 200G CW laser is much more efficient, therefore smaller. It gave us a much better gross margin profile.

Wupen Yuen
Wupen Yuen
President of Global Business Units at Lumentum

Another thing also of note, really, dynamics here is that in a constrained environment, we also see customers' behavior as wherever they can get a laser source, they will use that solution to support their build-out. The dynamics of EML CW lasers is not only a technical one, but also a supply-versus-demand situation.

Christopher Rolland
Christopher Rolland
Analyst at Susquehanna

Thanks for the transparency. Again, congrats on the update.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Chris, thank you.

Kathy Ta
Kathy Ta
VP of Investor Relations at Lumentum

Thank you, Chris.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Appreciate everything.

Kathy Ta
Kathy Ta
VP of Investor Relations at Lumentum

Thank you, Chris.

Operator

Your next question comes from the line of Vijay Rakesh with Mizuho. Your line is now open. Please go ahead.

Vijay Rakesh
Vijay Rakesh
Analyst at Mizuho

Hi, Michael and Wajid. Good quarter and guide here. Just a quick question on the 200G-per-lane EML and CW. Looks like that's ramping very nicely. Is it fair to assume both the 200G EML and CW laser should be accretive to your margins? When do you see this 1.6T crossover? Looks like it's already greater than 25% revenues, but when do you see that crossing over with data rate, I guess? And a follow-up.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Mr. Rakesh, good to hear from you, my friend. Look, no change really in the forecast on the crossover. What we said is and I think you're referring to 200G-per-lane lasers. We have said that for us, we'd expect 200G EMLs to be the majority volume shipments by the middle of 2027. We just said in the prepared remarks that now at 200G-per-lane, EMLs are 25% of our mix. We'd expect it to be 50% or more of volume by mid-year of 2027. So we seem to be tracking to that. No real change in that. I think generally speaking, you're right. Lasers are one of our better businesses, and the lasers are corporate accretive, whether it's CW or EML.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

As I said to Chris a minute ago, we've closed the margin gap quite considerably since our last call on EMLs versus CW by shrinking the die size of the CW laser. So EMLs are still better, but we've closed the margin gap quite considerably.

Vijay Rakesh
Vijay Rakesh
Analyst at Mizuho

Got it. Thanks. Very helpful. On the operating leverage side, Wajid, looks like solid improvement there year-on-year. You're already at your 40% target. How should we think about it as we go through fiscal 2027? Thanks.

Wajid Ali
Wajid Ali
EVP and CFO at Lumentum

Thanks, Vijay. The guideline that we had given at $2 billion of revenue was 38%-42%. Like Michael said in his prepared remarks, we are already at the midpoint of that at much lower revenue levels. And so with gross margins improving as we approach $2 billion, we will see some improvement on the operating margin line as well that corresponds to those gross margin improvements. Think of the 42% outlier more as a midpoint, with the range probably moving up 100-200 basis points versus what we showed at OFC.

Vijay Rakesh
Vijay Rakesh
Analyst at Mizuho

Thank you.

Kathy Ta
Kathy Ta
VP of Investor Relations at Lumentum

Thanks so much, Vijay.

Operator

Your next question comes from the line of George Notter with Wolfe Research. Your line is now open. Please go ahead.

George Notter
George Notter
Analyst at Wolfe Research

Hi, guys. Thanks very much. Congrats on all the success here. I guess I wanted to ask about your indium phosphide substrate supply. I was really intrigued by the deal you guys signed in the quarter with AXT. I think a quarter ago, you actually said that you were doing pretty well on the indium phosphide substrate. It feels like there is a bit of a change here. I guess I am wondering what you guys are seeing longer term here in terms of your need for more indium phosphide substrate. As I extrapolate that, can I look at Greensboro, and are you making more progress towards filling the rest of that facility looking forward? Thanks a lot.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Hey, George. Look, I would agree. I think what we tried to hint to in a previous question is the ultra-high-powered laser demand has surprised us, and that cuts across a couple of customers. So what we are trying to do, I think, really in the last three months is secure even more substrate supply. We were doing well. We felt like we had, given the baseline of demand that we were seeing from ultra-high powered, and then, of course, the EMLs and CW lasers that go into our scale-out products, we felt pretty good, as you said. But I think we have seen a pretty big surge in demand, as we said, and in order to respond to that, we went out and we found additional substrate help from AXT. They are a great partner.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Wupen has worked with them for a good number of years, and we think we are going to need their help just given the surge in demand. So that is what drove that deal. If this vector continues, we are probably going to need to look for more help on substrate. We feel we are good at this moment. We are probably pretty comfortable just given our lead and arrangement with a Japanese supplier and now the announced deal with AXT. But given the rate of change in the demand vector that we are seeing, that may not be true a quarter or two from now either.

George Notter
George Notter
Analyst at Wolfe Research

Got it. Do you think it is likely that we could see you sign some LTAs for more of the capacity in Greensboro? Is that a possibility? Thanks.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Look, we're looking to do that. I think we've sort of reported consistently that we have capacity in Greensboro. We have room there, and Wupen has been out talking to a number of customers about helping them with their laser demands, which are, again, changing minute by minute as everybody starts to look to adopt near-packaged or co-packaged solutions. I would expect that we'd have some things to talk about over the next couple of quarters relative to new arrangements in Greensboro that speak to more of this capacity we have there.

George Notter
George Notter
Analyst at Wolfe Research

Thank you.

Kathy Ta
Kathy Ta
VP of Investor Relations at Lumentum

Thanks so much, George.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Thanks, George.

Operator

Your next question comes from the line of Tom O'Malley with Barclays. Your line is now open. Please go ahead.

Tom O'Malley
Tom O'Malley
Analyst at Barclays

Hey, guys. Thanks for taking the question and great to be on the call. My first is on the NPO side where you spent a little more time in the preamble talking about the technology. I was curious, when you look at ASIC and GPU roadmaps, when you see the intersection of NPO, does that need to be with a new generation of silicon? Or can you intersect an existing ramp, a la if you were to see a big customer today ramping in the beginning of next year? Were you able to ship NPO solutions where they originally started off as electrical-only solutions? Just for the timing aspect of your ramp, that'd be super helpful.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Tom, super to speak to you again. We really appreciate this chat as always, Tom. Look, I think what we're seeing now is an inflection in the ASICs and in the SERDES speed, and that's driving the need for NPO and CPO. I don't know, and Wupen can comment a little bit on this, I don't think there are existing TPUs, XPUs, GPUs that are shipping that have a fast enough SERDES speed that we could suddenly plop in an NPO or CPO solution, which I think is what you're asking. But as these new generations come online, really seeing silicon in mid-2027, toward the end of 2027, and early 2028, all those new silicon solutions, again, GPUs, XPUs, TPUs, all seem to be driving SERDES speeds that are consistent with the adoption of NPO or CPO.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Wupen, any color you can add for Tom?

Wupen Yuen
Wupen Yuen
President of Global Business Units at Lumentum

Thank you, Michael. I think that is very accurate. Really, I do not think, Tom, we are not seeing the kind of the retrofit of NPO onto the current XPUs. What we are seeing really, like as Michael talked about, there is a broad momentum towards the 2028 RAM of NPO and CPO, and driven by optical scale-up. This is beyond just the XPU itself. This also goes into a rack-based multi-rack system that requires optical scale-up. Therefore, we believe there is going to be a new processor, new racks, and there is a 2028 event for optical scale-up from the industry's evolution point of view.

Tom O'Malley
Tom O'Malley
Analyst at Barclays

Super helpful. On the other side of things, on OCS, you talked about in-tray OCS. I was curious, is the competitive dynamic there similar for you guys, in terms of the timing? Is that in your current TAM, or would that be additive to the TAM? When do you see that intersecting, in terms of that technology hitting the market? Thank you very much.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Tom, additive. So anything that Kathy has presented at OFC, it is above and beyond that. It is a very new set of opportunities. We have come to find out there are a number of different folks that are looking at this kind of approach, and it is all very additive. It would hit for us 2028 timeframe, Tom. It is not something that is super imminent, but it is imminent enough that we are working on it aggressively. It requires a lot of redesign from our engineers. But look, we are the only guy shipping. I know a lot of people are talking about OCS, a lot of startups. For us to be now at $100 million and beyond types of quarters, we are the only ones that have a track record outside of a contract manufacturing relationship with a large OCS user.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

So we are really the only merchant supplier today of OCS, and by virtue of that, we are going to get every single call and have the first look, I think, at every single opportunity out there.

Tom O'Malley
Tom O'Malley
Analyst at Barclays

Great results. Thanks, guys.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Thanks, Tom.

Kathy Ta
Kathy Ta
VP of Investor Relations at Lumentum

Thanks so much, Tom. Matthew, it looks like we have time for just one more question.

Operator

Great. Your next and final question will come from the line of Ruben Roy with Stifel. Your line is now open. Please go ahead.

Ruben Roy
Ruben Roy
Analyst at Stifel

Great. Thanks for sticking me in here. Michael, maybe just to drill into the pump laser commentary a bit. You are growing quite nicely. I think you said 80% year-over-year for the second quarter and fourfold increase coming, still effectively sold out. Can you talk a little bit about where you are in the Rose Orchard ramp and what exit capacity looks like? Then you talked about some long-term supply agreements that you are putting into place for scale across. Can you characterize, maybe high level, what the structure of those agreements are and the duration?

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Ruben, best for last. We really always appreciate your questions. I think this is an area of incredible strength for us, which really I think is underappreciated. We have very large market share here, and what we have done is really worked hard with, for example, a lot of the NEMs, the Network Equipment Manufacturers, to form strategic partners. We are super pleased with how people have come to work with us on helping offset some of the CapEx, and it is considerable that we have to put out to ramp in Rose Orchard, you got it right, and to then bring that into our Thailand manufacturing for packaging and test. We formed a series of arrangements that, for the most part, are three-year arrangements. Those arrangements, as our normal arrangements, have pricing built into them. There are pricing levers that we can exercise, if certain conditions are met.

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

We think we have some room there on the price line, but these are giving us a lot of surety in terms of that demand not evaporating. In most instances, I think they are take or pay. Wupen, you can comment since you have been middle of that. But, we feel really, really good about where we are sitting, Ruben, on the pumps. Again, rough order, we are somewhere between 70% and 80% share. We believe we have a technology roadmap that our customers want to engage in that will afford us the opportunity to work on price to further increase output. But, this is a darn exciting area for us. Wupen, any additional color?

Ruben Roy
Ruben Roy
Analyst at Stifel

Great. Thank you. That is great.

Ruben Roy
Ruben Roy
Analyst at Stifel

Thanks, Michael. That's really helpful. For the last 30 seconds here, a lot of discussion on NPO. My quick follow-up on that is, are the discussions, engagements, that type of thing, associated with some of the open or standards-based NPO? I guess the standards-based NPO versus custom. I'm just wondering if there's a better alternative for you, given your technology and positioning. Does it matter at all?

Michael Hurlston
Michael Hurlston
President and CEO at Lumentum

Look, I'll have Wupen comment just in the interest of time. There are OCI, different standards that are coming out that are talking about the interface between the ASIC and the optical engine, for example. That's great for us because that opens up switch opportunities, for example, that may not be open to us before. The standards-based approach opens up optical TAM. We are engaged, to be honest with you, in both. There are a lot of custom, very specific types of implementations that our customers are driving to, and that's really going to be our first wave of NPO engagement. Wupen, any color?

Wupen Yuen
Wupen Yuen
President of Global Business Units at Lumentum

Maybe a little bit color. I think just to extend what Michael just talked about. There's actually two things. One is that today, the physical level, the optical level, they're all so-called fast and narrow, 200G-per-lane, massive lanes. The next-generation, as Michael talked about, will be OCI/MSA based. So that's on the optical side. But on the form factor side is very much proprietary. Everybody has a different design. Again, we talked about earlier, matched to their rack design, their system design, and that actually is different from customer to customer. Again, optically, they are standards-based, but on the implementation side, they are different between different customers.

Ruben Roy
Ruben Roy
Analyst at Stifel

Excellent. Thank you.

Kathy Ta
Kathy Ta
VP of Investor Relations at Lumentum

Thanks so much, Ruben.

Operator

Thank you for your questions. I will now turn the call back to Kathy for closing remarks.

Kathy Ta
Kathy Ta
VP of Investor Relations at Lumentum

Thank you, Matthew. That is all the time we have for questions, and we look forward to connecting with you at upcoming investor conferences and meetings throughout the quarter. With that, I'd like to thank you for joining us today.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.

Executives
    • Kathy Ta
      Kathy Ta
      VP of Investor Relations
    • Michael Hurlston
      Michael Hurlston
      President and CEO
    • Wajid Ali
      Wajid Ali
      EVP and CFO
    • Wupen Yuen
      Wupen Yuen
      President of Global Business Units
Analysts
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