Lumentum Holdings Q3 FY2026 Earnings Call - Record Revenue and Margin Expansion Driven by Unabated AI Optical Demand

Operator: Good day, everyone, and welcome to the Lumentum Holdings third quarter 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 1 on your telephone keypad. To withdraw your question, press star 1 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, Vice President, Investor Relations, Lumentum Holdings: Thank you, Kathy Ta. Welcome to Lumentum’s third quarter fiscal 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 Wu Pengyuan, 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, particularly the risks set forth in our SEC filings under risk factors and elsewhere.

We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-Q for the fiscal quarter ended December 27, 2025, and in our most recent 10-Q for the fiscal quarter ended March 28, 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.

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 third quarter results and accompanying supplemental slides are available on our website at www.lumentum.com under the Investors section. We encourage you to review these materials carefully. With that, I’ll turn the call over to Michael.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Thank you, Kathy. Good afternoon, everyone. Lumentum delivered an exceptional third quarter with revenue growing 90% year-over-year to a record $808 million. Top line growth was primarily driven by our transceiver business and laser chips. Our revenue growth was impressive. Our non-GAAP operating margin was more so, expanding by over 2,100 basis points year-over-year, fueled by a rich product mix and strong operating leverage. The margin expansion was primarily driven by our industry-leading scale-out portfolio, but another part of the story was our broad array of scale-across products. As hyperscalers exhaust the power and space limits of individual data center buildings, they are shifting to distributed architectures that link compute domains across disparate geographies. These scale-across networks require high bandwidth synchronization across multiple data centers.

To enable this, we provide critical hardware components that provide high-density optical interconnects while meeting aggressive power and performance targets. Our pump lasers allow scale-across architectures to amplify the light signal over 4, 8, or 16 fiber pairs simultaneously. Complementing this, our narrow linewidth lasers assemblies provide the precision required for 1.6T speeds and a higher order modulation, all within highly compact pluggable form factors. To manage all this traffic, our wavelength selectable switches, or WSS, function as the optical traffic cops. WSS keeps traffic in the optical domain, bypassing the latency of electrical buffers while enabling the high port counts essential for massive fiber routing between data center buildings. Looking forward, our emerging multi-rail technologies will be vital for the increased parallelism required by the massive fiber counts in scale-across networks.

While we have spent the last few calls detailing our revenue growth drivers, it is important to outline the considerable role the scale-across portfolio will play in our ability to expand gross and operating margins. We expect this part of our business to grow appreciably and with the supply-demand imbalance likely improve profitability at the same time. Let’s look closer at the metrics that define our third quarter, starting with the components product category. Components revenue for the quarter was $533 million, reflecting a 20% sequential increase and 77% year-over-year growth. Shipments of our narrow linewidth laser assemblies grew for the ninth consecutive quarter, rising over 120% year-over-year, while pump laser shipments grew 80% year-over-year.

These components remain effectively sold out for the foreseeable future. We are actively working to secure long-term agreements that will help offset anticipated capital expenditures. Turning to laser chips, we achieved another quarterly company record in EML shipments. Led by 100 gig lane speeds, 200 gig EML revenue more than doubled sequentially. We continue to ship CW lasers to 800 gig transceiver manufacturers, and starting in fiscal Q3, we began supplying CW lasers for internal use in our cloud transceiver business. Our wafer fab capacity in Japan remains at a premium and is fully allocated to meet surging customer demand.

We ship twice the number of laser chips as we did in the same quarter last year. We are on track to achieve more than 50% growth in EML units by the December quarter of 2026 as compared to the December quarter of 2025. Our ultra-high power laser chip manufacturing ramp for CPO applications is also proceeding according to plan. We achieved sequential growth this quarter and are on schedule to both deliver meaningful revenue on our December quarter and fulfill the multi-hundred million dollar purchase order slated for the first half of calendar year 2027. In addition, our development work continues with multiple CPO customers through collaborations that leverage our laser chip technologies within a pluggable turnkey ELS module solution.

In mid-March, we announced our acquisition of a fifth indium phosphide fab in Greensboro, North Carolina, which provides the capacity needed for years of future growth. At our grand opening ceremony held just days ago, we highlighted our commitment to US manufacturing and the significant job creation we expect to generate in the state. We onboarded the plant’s team, and plans to convert the facility from gallium arsenide to indium phosphide are well underway. Another positive note is that we expect to take advantage of a significant number of the tools that already exist in our Greensboro site. Now I’ll move to our systems product category. Systems revenue reached $275 million, representing a 24% sequential and 121% year-over-year increase.

Cloud transceivers accounted for the lion’s share of this growth, increasing over 40% sequentially as we successfully leveraged our expanded manufacturing footprint in Thailand. In addition, we are poised to ramp 1.6T speed transceiver shipments in fiscal Q4 with a portion of this volume leveraging our own CW lasers. We are improving transceiver profitability through better yields and lower scrap rates. Despite these gains, supply constraints on critical components keep our shipments well below customer demand. In OCS, the multi-year, multi-billion dollar purchase agreement we recently announced ensures sustained long-term growth. Our OCS ramp is largely on track, although our pace and slope are gated by the supply chain. We are experiencing considerable tightness in this product area, due largely to the significant step up in requested output.

On the other hand, the number of new opportunities we’re seeing for optical switches is putting tension on our roadmap, and we’re having to make choices across the company in order to service them. Rounding out our systems business, performance industrial lasers and cable access remains muted. Industrial lasers were approximately flat sequentially, while cable access shipments declined on quarter due to customer and timing factors. Looking ahead to Q4, we expect to set another quarterly revenue record. We anticipate that over half of the sequential growth will stem from our components business. The remainder will be driven by the continued ramp of our systems portfolio, primarily through high-speed transceivers and additional contributions from OCS. Our current numbers and guidance reflect continued success in EML lasers and our scale-across components. We are seeing improved performance in our cloud modules business, which has grown significantly across the last few quarters.

In addition, while we’re seeing initial contributions from both scale-out CPO and OCS, they are still relatively modest. Furthermore, our largest single growth driver, scale-up CPO, is still very much in its infancy. Taken together, this gives us confidence that we are very much on track to reach our $2 billion quarterly revenue goal as we articulated at our OFC event. Now I’ll hand the call over to Wajid Ali.

Christopher Rolland, Analyst, Susquehanna2: Thank you, Michael. Third quarter revenue of $808.4 million was above the midpoint of our guidance range, non-GAAP EPS of $2.37 was above our prior expectation range, demonstrating the leverage of our business model. GAAP gross margin for the third quarter was 44.2%. GAAP operating margin was 21.6%. GAAP net income was $144.2 million, the GAAP net income per share was $1.50. Turning to our non-GAAP results, third quarter gross margin was 47.9%, which was up 540 basis points sequentially, up 1,270 basis points year-over-year, due to better manufacturing utilization across the majority of our product lines, increased pricing on select products, and favorable product mix. The improvement in product mix was primarily driven by growth in data center laser chips.

Third quarter non-GAAP operating margin was 32.2%, which was up 700 basis points sequentially, and up 2,140 basis points year on year, primarily driven by revenue growth in components products. While continuing to invest in critical R&D programs serving cloud and AI customers, we have maintained the rigorous cost controls necessary to optimize our business model. Third quarter non-GAAP operating profit was $260.7 million, and adjusted EBITDA was $293.5 million. Third quarter non-GAAP operating expenses totaled $126.2 million, or 15.6% of revenue, an increase of $11.3 million from the second quarter, and an increase of $22.8 million from the same quarter last year in support of expanding cloud opportunities. Q3 non-GAAP SG&A expense was $47.8 million. Non-GAAP R&D expense was $78.4 million. Interest and other income was $9.6 million on a non-GAAP basis.

Third quarter non-GAAP net income was $225.7 million, and non-GAAP net income per share was $2.37. Our diluted weighted shares for the third quarter was 95.2 million on a non-GAAP basis. Turning to the balance sheet, during the third quarter, our cash and short-term investments increased by $2.02 billion to $3.17 billion, with the increase primarily driven by NVIDIA’s direct investment in Lumentum. Our inventory levels increased by $62 million sequentially to support the expected growth in our cloud and AI-related revenue. In Q3, we spent $125 million in CapEx, primarily focused on manufacturing capacity to support cloud and AI customers. Turning to revenue details, components revenue of $533.3 million increased 20% sequentially in Q3 and 77% year-on-year.

Systems revenue of $275.1 million increased 24% sequentially in Q3 and 121% year-on-year. Let me move to our guidance for the fourth quarter of fiscal 2026, which is on a non-GAAP basis and is based on our assumptions as of today. We anticipate net revenue for the fourth quarter of fiscal year 2026 to be in the range of $960 million to $1.01 billion. The $985 million midpoint would represent another new all-time quarterly revenue record for Lumentum. We project fourth quarter non-GAAP operating margin to be in the range of 35%-36%, and diluted net income per share to be in the range of $2.85 to $3.05. Our non-GAAP EPS guidance is based on a non-GAAP annual effective tax rate of 16.5%.

These projections also assume shares used for non-GAAP diluted earnings of approximately 102 million shares. With that, I’ll turn the call back to Kathy to start the Q&A session. Kathy?

Kathy Ta, Vice President, Investor Relations, Lumentum Holdings: Thank you, Wajid Ali. To allow as many as possible an opportunity to ask questions, please keep to one question and one follow-up. Let’s begin the Q&A session.

Operator: Your first question comes from the line of Samik Chatterjee with J.P. Morgan.

Kathy Ta, Vice President, Investor Relations, Lumentum Holdings: Go to Ryan.

Operator: Thank you. Our next question comes from the line of Ryan Koontz with Needham & Company. Your line is now open. Please go ahead.

Ryan Koontz, Analyst, Needham & Company: Great. Thanks. Can you hear me?

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Yes, we can.

Christopher Rolland, Analyst, Susquehanna2: Yes.

Ryan Koontz, Analyst, Needham & Company: We do. Great. Maybe let’s start with, you know, your strength in EMLs and laser supply. Clearly, demand is not a concern here, and you guys have just done an incredible job of executing. You know, what are the dynamics both on the supply side as well as your ability to ramp production? Maybe give some color on kind of where you are in meeting demand, you know, what the gap looks like, as well as, you know, what are some of the puts and takes that you’re battling with on a quarter-to-quarter basis?

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Hey, Ryan. Thanks for the question. Look, I think we’re still chasing behind relative to demand. We are steadily increasing supply. I think we just gave the benchmark that we’d expect our supply line to increase 50% on year, meaning as measured from December quarter to December quarter. We’re actually stepping up our supply in a pretty significant way. That being said, as we’ve said kind of over and over again, we continue to lag demand. The supply-demand imbalance is probably even higher than we reported in our last call, somewhere greater than 30%. I think last time we gave a metric of 25%-30%. We still seem to be behind significantly.

We had conversations today with customers, you know, significant customers looking to really up their demand, and get output from us, and we simply can’t service that. We are stepping up and doing everything we can to step that up. I think you know that story pretty well, we continue to lag demand.

Ryan Koontz, Analyst, Needham & Company: Is that largely in your own control? Sorry, Michael, but, largely in your own control in terms of executing against that and getting the equipment you need, or do you have input that is a big challenge?

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Yeah, right now it’s largely within our own control. Some of these, for example, substrate shortages that’s been reported out, you know, I think you know our story better than most, and that is that we’ve executed some long-term agreements that we feel leave us in pretty good shape on substrates. That being said, I mean, the number of lasers that we’re gonna have to output, for example, at 2027 is really a massive step up, just given the scale out and scale up demands that we’re seeing in that timeframe. It’s certainly near term, it’s mostly on us. I think as we head into 2027, we’re gonna continue to have to work the substrates.

I think we have that mostly under control, but, you know, we’ve got a lot of work to do to sort of catch up to demand at this point.

Ryan Koontz, Analyst, Needham & Company: That’s great. Maybe on the scale-across part, you really highlighted that as, you know, I think something that’s a market opportunity is probably less appreciated with Lumentum. Obviously, you’ve got kind of the components there among lasers, and you talked about the multi-rail opportunity. Can we expand on that in terms of, you know, where you fit in that supply chain, in that value chain, and then how big you size that opportunity as it moves to multi-rail, you know, amplification, high densification? Thanks.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Look, it’s a significant opportunity. I think we chose this call to talk about it because I think it’s a significant contributor to our margin enhancement. We’ve focused very much on sort of the four main growth drivers. I think you know those well, the transceiver business, OCS, optical scale-out, and optical scale-up. We spend less time, I think, on our scale-across components, and they are actually big contributors to the gross margin line. As we look out right now, we are probably more constrained in this area than even EMLs, particularly on things like pump lasers, narrow linewidth lasers for sure. Both of those are going into the coherent sub-assemblies that drive a lot of the scale-across activity, the synchronization and high-bandwidth that we mentioned in the pre-prepared remarks.

A multi-rail increases that content, right? You got more pumps that need to go into those. We are focused right now on ramping our pump capacity. We expect to make pretty appreciable step-ups, at the right time we’ll give you some color around that. Those numbers are going up from an output perspective, actually, to a much greater degree than even our EML output. We would expect to output a lot more of these here in the near term because there’s a little bit less constraint on the fab that puts these out, so we have a little more ability to inflate that line. Wupen Yuen, any more on the sort of the multi-rail and how you think about it?

Christopher Rolland, Analyst, Susquehanna3: Couple things, right? First of all, the pump lasers actually goes into the optical amplifiers, right? At the, we call it inline amplifiers at the sites. That’s where, you know, a lot of the traffic and the density has to really increase, right? To get the traffic through. That’s one big areas of growth. Frankly, the multi-rail opportunities are huge. You know, with all the special clients that Michael talked about just now, you know, our view actually is that the multi-rail could be even bigger than that.

We don’t yet have a full quantification. We’ll share that when we are more ready. We believe there’s a huge opportunity for Lumentum and it can grow our business and gross margins.

Ryan Koontz, Analyst, Needham & Company: That’s great, guys, really appreciate it. Thank you.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Thanks, Ryan. Thanks, Ryan.

Operator: Our next question comes from the line of Samik Chatterjee with JPMorgan.

Christopher Rolland, Analyst, Susquehanna0: Hey guys, can you hear me now?

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: We can hear you now. Yep. Samik, you figured out the mute button. Good. We knew you were a smart guy.

Christopher Rolland, Analyst, Susquehanna0: Still learning, Michael. Maybe, maybe on OCS, I know you mentioned sort of multiple customers that you’re still working with, and you had the customer announcement at OFC. Can you just talk about sort of where maybe the engagements are in terms of how close you are to finalizing additional sort of award wins on the OCS front and do you see some of the wins being sizable compared to the what you announced at OFC? How should we think about the additional wins that you can sort of lock in, and how should we size them relative to the win that you announced at OFC? I have a follow-up. Thank you.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: I mean, I think, look, we continue to work with the 3 customers that we’ve been talking to. 2 of those 3 are making up the majority of the volume, as we’ve been saying. I think that we are really making progress now on sort of additional wins. I think it’s too early to call when we would be able to talk to those, but I would say that they’re quite sizable. We really are, as I said in the remarks, working the roadmap to add differentiation, different port counts, different configurations to service these multiple opportunities, and these multiple opportunities are substantial. They’re on the order of what we’ve talked to relative to, you know, this backlog that we’re seeing for 2027. It is our biggest area.

Wupen Yuen and the engineering teams are working aggressively to drive those new designs.

Christopher Rolland, Analyst, Susquehanna0: Got it. Got it. Okay. Great. For my follow-up, maybe I can ask you on the revenue guide a bit. You did deliver, when I look quarter-over-quarter, like a $140 million increase, and you’re expecting that to accelerate as you get into the June quarter, which is in the backdrop of sort of the supply constraints that you’re also dealing with. Maybe if you can just sort of highlight which of the areas you see accelerating compared to the March quarter itself as you go into June, and where are the supply constraints maybe impacting you more than others, if you can sort of highlight that. Thank you.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Yeah. I think in the guide is contemplated obviously sort of the basic business, meaning EMLs we’d expect to go up, we’d expect the scale-across components to go up. We continue to increment OCS so that will go up. Really the big story is transceivers, right? That is going to be quite strong. You know, I think it’s impressive to note that, as you and I have talked about, our margins there are relatively challenged, but we expect to see margin improvement in the face of a growing transceiver business. I think that’s important to highlight. As we go into the back half of the year, you know, that’s when you’re going to start seeing big, much bigger contributions from OCS.

In the fourth calendar quarter, you’re gonna see more contributions from the scale-out CPO. There’s a lot of things that begin to layer in, but specific to your question in the guide, I think the big headline is gonna be transceivers. We appear to be ahead on 1.6T. We seem to be executing relatively well. I think Wupen Yuen and the team have done a really good job turning around our designs. Our constraint is gonna be on transceivers. We could ship quite a bit more in the guide, actually quite a bit more this quarter, in the quarter we just completed. Certainly quite a bit more in the guide had we not the supply constraints that we see. As we detailed, there’s, you know, electrical components are driving that. Laser diodes are in that mix, right?

Which is necessitating the switch to our internal laser diodes. There’s quite a few things that are contributing there. The main headline is we’re under shipping demand there quite significantly.

Christopher Rolland, Analyst, Susquehanna0: Got it. Great. Thank you. Thanks for taking my questions.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Yeah. Thanks, Samik.

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

Christopher Rolland, Analyst, Susquehanna1: Hi. Thanks, Michael and Rajeev. Just a question back to the pump lasers side on a scale-across. Just wondering, you know, given that demand pickup obviously, looks like those will need pretty ultra-high power lasers as well. Just wondering, what is the mix of demand you’re seeing going to scale-across? Does that imply, you know, given that significant pickup in demand with that and 1.6T that you continue to see this supply-demand imbalance of 30% as you go through into next year as well? A follow-up.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Yeah. Vijay, I mean, couple things I’d say. One, you know, the constraints on lasers, pumps are probably the biggest that we are rather somewhat unanticipated. I mean, we haven’t talked to you about this in the last couple of quarters, but it’s somewhat unanticipated. It’s hit us relatively suddenly. I don’t think we’ve given a number of the supply-demand imbalance, but it’s certainly greater than that 30% number. We are significantly under shipping demand, and we’re having to make choices as to who we support. We’re trying to be as fair and reasonable as possible, but we are having to make choices as to how we allocate our pump demand. That being said, you know, I think we’re trying to ramp capacity here quickly.

We have a plan to ramp capacity over the next four quarters. That’s coming out of our local facility here in the U.S., our Rose Orchard facility. You know, we think we have room there to build some significant capacity. You know, we’re obviously spending a lot of money on CapEx to try to enable that, as Wajid highlighted. Hopefully that caught the gist of your question, Vijay.

Christopher Rolland, Analyst, Susquehanna1: Yeah, sure. Just a quick follow-up too. Back on the OCS side, you know, obviously it looks like Google is now talking the TPU v8 inference rack with 1,152 TPUs and the training rack with like 130,000 TPUs. Does that drive your OCS, should drive a pretty nice uptick there back to the, like the, 300-radix or the 500-radix OCS racks into next year, right? Looks like even Anthropic now announcing a massive potential. Not Anthropic, but looks like there’s some information actually noting Anthropic could do $200 billion with Google. Positive for you guys, but just wondering how you’re looking at OCS into 2027, 2028. Thanks.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: I mean, you know, we’re not sort of commenting on specific customers and specific customer architectures. You know, based on what we know, I would say that Google is obviously doing very well in the market. I would say that Google is driving a lot of demand on our business, right? They’re certainly one of our largest customers, and we’ve benefited greatly from that relationship. As we know it, as we understand it, the sort of the difference in V7 and V8 in terms of OCS pull is a little bit, it’s incremental. It’s not that big. We would expect, as you are correctly saying, hopefully we can get engaged.

I think it would drive significant upside for us just given the expansion of their business as they look at v8.

Christopher Rolland, Analyst, Susquehanna1: Got it. Thank you.

Christopher Rolland, Analyst, Susquehanna2: Thank you, Vijay.

Operator: The next question comes from the line of Meta Marshall with Morgan Stanley. Your line is now open. Please go ahead.

Meta Marshall, Analyst, Morgan Stanley: Great, thanks. Maybe a couple questions just on, you know, you expecting to supply some of the CW lasers into the transceivers into the next quarter. Just any kind of further commentary there on just the path and progression of kind of the insourcing of your own lasers into that piece of the transceiver portfolio. Then maybe just as a follow-up, just any kind of disclosure we could have in terms of, you know, obviously a great step-up in the gross margins, just on kind of like rough mix of pricing yield mix and kind of the contributions there. Thanks.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: I mean, I would say, Meta, maybe to the second question on mix, it’s sort of all of the above. I think, you know, the headline has been better factory absorption. I mean, that helps. I think our mix, and we’ve made some big decisions here throughout the last year to drop certain product lines that are not margin beneficial. We really worked on the portfolio to a great degree, and I think that’s helped considerably. Of course there is price increases. Obviously, pricing with this kind of supply-demand imbalance is something that we consider. It’s something that where we see biggest area of constraints, we have applied, and we continue to think about applying. We think there’s, you know, continued room, right?

Gross margin is something that as a management team we have focused on tremendously. You know, look, I think people who’ve followed my history know that gross margin is super important. Although we’re trailing what we’ve done in our previous instantiations, I do think there’s a lot of room for improvement on the gross margin line. Relative to the insourcing of the lasers, you know, that’s something that’s driven by the margin, right? We are forced to do that probably faster than that forecast oscillated, as you know. I mean, you follow our story extremely closely. We had initially forecasted sometime in calendar Q2 we’d be introducing the lasers, and then we backed off just seeing so much tension on the EML line.

Now we’ve seen a little bit of tension in our own supply line, externally to get lasers from the external market, CW lasers. As such, now we’ve allocated more of our fab capacity to CW lasers. I think in our mix, you know, roughly as we think about it in the guide, it would be about 20% of our modules would have our own CW lasers. It’s still minority, but we’d expect to step that up through time. And see some of the associated margin benefit as a result. Great. Thanks. Thanks, Mia.

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

Papa Sylla, Analyst, Citi: Thank you. Congrats on the very strong results. Michael, I guess one, a little bit longer term question kind of on the CPO/scale-up opportunity. It seems like even at, kind of, potentially you mentioned kind of the longer term target, and most of it may be more ultra-high power lasers. At a high level, it seems like there is also a real opportunity into becoming more kind of vertical and doing some more ELS type

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Hey, Papa, I don’t know. Hopefully it’s not us, at least your line seems to be cutting out a bit. I didn’t catch the last part of your question. Sorry for that. Hopefully it’s not us.

Papa Sylla, Analyst, Citi: Is it better now?

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: It’s better now.

Operator: It’s better now.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: We can hear you.

Papa Sylla, Analyst, Citi: Yeah, sorry about that. Yeah, I was just asking on just the opportunity around the kind of CPO kind of market. Most of it seems like you are mostly around the ultra-high power lasers looking into maybe the second half of the year end 2027. I’m just curious on the opportunity around kind of being more vertically integrated as well, kind of providing more ELS type of product. I’m curious if you are also getting engagement from the same customers you are providing ultra-high power lasers opportunities.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Yeah, great question, Papa, I, of course, I continue to thank you for following the company. Look, I think that on ELS we definitely have a very significant opportunity, and it’s, you know, we’ve only talked about opportunity there. I think we’re getting ever closer to being able to convert and start thinking about that as part of our numbers. As we’ve outlined on previous calls, what I would say with ELS in particular is the non-primary customer engagements are largely driven by ELS. Simply, the engineering teams there are less familiar with optics, although frankly everybody’s becoming a lot more conversant on optics. Our currency to engage those customers, at least initially, will be the ELS.

Again, we’ve not really talked about as yet any significant wins there. I feel that’s just around the corner, quite frankly, and it’s something that, you know, at the right time we’ll be able to articulate more deeply. In particular, as we expand the CPO horizon, we are gonna need that vertical integration strategy that you asked in your question.

Papa Sylla, Analyst, Citi: Got it. That’s very helpful. For my follow-up, it might be for you again, Michael, as well. On the supply front, EML capacity, it seems like across the board demand continues to be very strong despite the very strong effort you’re making on raising supply. We are also hearing a lot of competitors also providing very large growth numbers. I’m just curious on the risk of oversupply, if any. I guess, where would you put that risk? Is it still very low at this point?

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: I mean, I feel it’s low. We are, you know, engaging all sorts of transceiver customers right now. Wupen’s team is out doing that actually as we speak. I just got a report in this morning from our sales leader. The discussion is very, very much around, you know, extending the long-term agreements that we already have. If there was an expectation from our customers that they’d see an oversupply of any kind of laser, whether it be EML or CW laser, I just think there’d be a lot more reticence to engage in the kind of conversations we’re having. Yes, we’re hearing the same things. I mean, we know that everybody is trying to add supply. The reality on the ground now seems to be quite a bit different.

We definitely have some pricing flexibility, which would indicate that that supply-demand imbalance isn’t gonna be solved for a while, and we certainly are engaging and extending some of these long-term agreements that we currently have.

Papa Sylla, Analyst, Citi: Got it. That’s very helpful. Thank you so much.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Thanks, Papa. Thanks, Papa.

Operator: The next question comes from the line of Ruben Roy with Stifel. Your line is now open. Please go ahead.

Sahed, Analyst, Stifel: Hey, guys. This is Sahed sitting in for Ruben Roy. Maybe just, Michael, tagging on to the LTAs that you’re mentioning there. You know, even on the scale-across portfolio, you sort of outlined that, you know, it’s pump lasers, narrow linewidth lasers, WSS. These are not only supply constrained, but real margin levers for you guys, distinct from the four growth levers. You know, nine consecutive quarter of narrow linewidth at, I think you said 120% year-on-year, and pump lasers at 80%. That’s impressive, and you’re still describing this as sort of an unanticipated bump up. You know, you’re talking about these LTAs. Maybe we can dive a little deeper there.

You mentioned that the long-term agreements being negotiated are helping in some sense to offset CapEx, and I think that was with scale-across, but it sounds like more broadly. Could you maybe give us a sense of the structure? Are these, you know, prepayment style commitments, maybe similar in maybe spirit, I would say, to the NVIDIA agreement, or are they take or pay capacity reservations or are they, you know, volume commitments tied to ASP floors? How should we be thinking about, you know, the CapEx, whether build, buy, offshore, these agreements are effectively underwriting? I’ll stop there, and I have one other.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Yeah, look, I mean, it’s all of the above. We’re in active discussions right now on our pumped lasers. Again, we have sort of a finite amount of capacity, and we’re being asked to put on considerably more. You know, we are talking to the major customers around trying to help, right? Put some skin in the game around the CapEx that we’re gonna try to lay out. One, that can entail prepayment, that can entail take or pay, that can entail price increases and, you know, Wupen’s team is in active negotiation with all of the scale-across suppliers on how that looks.

You know, again, as I say, we’re, we have some really big customers and important historical customers of ours that have been involved in that, and we want to treat them, obviously, as fairly as we can. It’s really coming down to, you know, how these discussions play out as to how, I think, Wupen Yuen and his team think about the allocation.

Sahed, Analyst, Stifel: Understood. Thank you. for the second, you know, as I read through the print, you know, the beat was really a margin beat, and, you know, system sales as you’re mentioning was a driver and seems to be so, and this is happening all while sort of the capacity story is happening and new programs are ramping. as we look to the next quarter, I think the margin story kind of gets a little washed out with the diluted shares jumping up. Maybe could you help frame the waterfall dynamics on margins right now?

I mean, you set out the targets that you did during OFC. I think this sort of ties into, I believe Meta asked a question around this as well. You know, the waterfall dynamics may be more across a matrix of product mix and the program ramps within those segments. You know, how CapEx is dragging on that, again, on the build, buy, offshore sort of dynamic and then maybe also on the volume versus ASP conversation that is becoming more and more prevalent amid, you know, this supply constraint.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Yeah, look, I mean, as we said, there are many, many contributing factors to our margin improvement. I think we’ve had a big step up. It’s an area of focus for us. I think we’re gonna continue to work the margin line. It obviously comes from mix, and we keep making mix decisions every single day, allocating toward the most margin-rich parts of the portfolio. It comes from factory utilization, right? We’ve historically been underutilized, and we’re just now getting our utilization up to where it needs to be. As we’ve outlined, we have some of our fabs that are still underutilized. Some of the for example, our fab in the United Kingdom, that now Wu Pen has put products in that we expect to see a margin-contributing output from them and fixing some of the underutilization.

Then, as we said, there is some price dynamics that are working in our favor. We think there’s a lot of room on the margin line. We gave a long-term target. We feel very comfortable with that. I think there’s, you know, room from here to continue to really step up margin. We’ve been surprised, to a certain extent, by how quickly we’ve been able to move up that margin line. Again, people that know my history know that we had, you know, 30% type moves in my last company, so it’s not a total surprise that you’d be seeing this kind of step up on the margin line.

Sahed, Analyst, Stifel: Thank you, guys.

Christopher Rolland, Analyst, Susquehanna2: Thanks, Sahed.

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

Christopher Rolland, Analyst, Susquehanna: Thanks for the question. Michael, I am familiar with the margin focus you have. My question is actually, I think in your prepared remarks, you might have also mentioned some constraints around OCS. I guess, first of all, I wanted to dig a little bit more into that, but also, at OFC, there were some Chinese competitors showing off some OCS boxes. I was wondering if you could speak to competition there, whether you think it’s viable or whether you think the kind of, MEMS market might be yours for quite some time.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Yeah, Chris, no, I appreciate that. Look, one, I, my colleague to the right, Wajid Ali, is personally responsible for getting the supply chain right on OCS. We’ve assigned that to one of the most important people in the company. It’s a challenge. Look, I mean, it’s a big step up, right? We’ve gone in many instances really from zero to, you know, a significant number very, very quickly. We, you know, we think we have things under control. We’ve outlined this sort of $400 million that we can ship in the back half of the year. We think we have that under control. As we look into 2027, that number continues to step up. You know, we think we have that under control, but we are definitely on a tightrope on this product line, right?

It’s probably our biggest ramp, you know, now, like honestly, pump lasers, CPO, all of these things are keeping us awake. The big three ramps are these pumps, right? OCS and the high-powered lasers. We’ve got a lot of work on our hands, and the biggest single tightrope that we’re walking probably is OCS. I think relative to competition, you know, we feel pretty good about our position. We really do. I think we feel like we’re in a very, very strong position. That’s not gonna last forever, right? We know that. I think certainly in the next year, it’s hard for me to imagine anybody is gonna be able to ship one of these very innovative solutions. We are also, you know, not standing still. We are working on cost reducing.

We are working on some innovative solutions in our OCS, which increases the complexity of the decisions that I was outlining relative to what Wupen is facing, right? Meanwhile, we are trying to focus on new architectures that would keep us in a leading position with MEMS, right? We do believe that that’s the right technology for us long term, but we do believe that there’s costs we can take out, simplifications we can make to continue to compete with these very innovative solutions.

Christopher Rolland, Analyst, Susquehanna: Excellent. I do know you have your hands full with those three very large opportunities, but are there some more adjacencies for you guys to pursue? I think at OFC, you talked about maybe full module design and assembly. I don’t know if this would involve silicon photonics chips, you know, PICs, EICs, etc. Are there any other adjacencies or components that you may be able to absorb or organically create that you can bring into the organization as you look forward?

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Look, there’s a ton of stuff that goes into these transceivers or into a CPO-based solution that today we don’t ship, right? PICs, photodiodes, right? Laser drivers. There’s a ton of stuff, to your point. We’re looking at all of these areas. I mean, I think we have roadmaps that contemplate all sorts of different things around our strength in lasers, I think there is quite a bit more that we can do around that. A previous questioner asked, I’d say again on ELS, which is a vertically integrated module that your question sort of led to, we believe that there’s significant opportunity there, right? We think that we can integrate up and take more of the dollars by generating a vertically integrated ELS.

I think as we engage on CPO, we’re finding that to be a more convincing and shorter path to market than is just supplying lasers.

Christopher Rolland, Analyst, Susquehanna: Thank you, Chris.

Kathy Ta, Vice President, Investor Relations, Lumentum Holdings: Thank you, Michael.

Operator: The next question comes from the line of Vivek Arya with Bank of America Securities. Your line is now open. Please go ahead.

Mike Limani, Analyst, Bank of America Securities: Hi, this is Mike Limani on for Vivek Arya. Thanks so much for taking our questions. My first question is on the transceiver business. Number 1, how large would it have been if you had been able to address all the demand that you saw in the quarter? If you could peg that number relative to the 30% overall imbalance you gave for the entire company. On 1.6T specifically, you talked about how, you know, the margin structure is still a bit challenged and is a work in progress. You know, as we move into 1.6T, what we’re hearing from many of the suppliers in the ecosystem is that the margins are just significantly better, maybe led by pricing.

To what extent does that transition that’s happening in the next quarter or 2, help your margin structure for transceivers? Thank you.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: On the first one, I don’t think that we’ve given a figure of merit around our own transceiver imbalance. It was significant. We had a lot of demand that was placed on us, and we simply weren’t able to ship due to largely due to supply constraints. The 30% number that I gave is on our EMLs, right? It’s a supply and imbalance. It’s not relative to our whole business. It’s on that particular line of business. I would say here, you know, the supply demand imbalance on our own transceivers was somewhere in that zip code, but it was definitely appreciable, although I don’t know that we’ve calculated that.

I think the second part of your question, you know, What was it?

Kathy Ta, Vice President, Investor Relations, Lumentum Holdings: 1.6T

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: 1.6T, yeah.

Kathy Ta, Vice President, Investor Relations, Lumentum Holdings: Margins.

No, no doubt, right. The margins are definitely better. I would say that too. When I said the margins are challenging, our transceiver business, as we’ve outlined over and over again, is definitely a challenge for us on the margin line. I think we are underperforming peers. We have room to grow. We’re getting better. I think we’ve certainly gotten the lead in terms of design, and now in terms of margin I think we’re improving. We still trail. That being said, to your point, 1.6T definitely better structurally from a margin standpoint is definitely better than 800 gig. There’s definitely, we will see step up in our margin line. We have room as a unique Lumentum entity to do better, and we will do better.

Thank you, Michael.

Mike Limani, Analyst, Bank of America Securities: Thank you. For my follow-up, on OCS specifically, you know, you said you’re still constrained. Maybe that’s more, you know, due to your current output right now relative to demand. How do you think about engaging with more contract manufacturers? I know you mentioned that at OFC, where are you in that process? Maybe not just for OCS, for other product areas as well. Within OCS specifically, how do you think, given the demand you’re seeing from multiple customers, maybe multiple different applications and multiple types of products between, you know, medium Radix, high Radix products, how do you think about prioritizing all those different sources of demand, right, or applications based on your own competitiveness or share? Thank you.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Yeah. Look, I’m gonna answer the first part of it, right, just in the interest of time and to get some more questions. I think one of the, you know, levers we do have is contract manufacturing. We have historically insourced everything, and we found that working with good contract manufacturers, of which there are several, we could actually improve our margins. As we have started to shift, and we’re early in those innings, back to a contract manufacturing base, we would actually expect to see improvement in our margins. The margins that we pay to those contract manufacturers are more than offset by the efficiency and cost benefit that they can drive on common components. That ends up being a lever for us.

Kathy Ta, Vice President, Investor Relations, Lumentum Holdings: Great. Thank you, Michael. Kathy Ta, I think we have time for one more question.

Operator: Thank you. Our last question comes from the line of Ananda Baruah with Loup Capital. Your line is now open. Please go ahead.

Ananda Baruah, Analyst, Loup Capital: Thank you guys for taking the question. Really appreciate it. I guess I have to say apologies if this has already been asked. Hopefully it hasn’t been. Michael, you announced, I think it was last week, the opening of the Greensboro, new Greensboro facility that you recently purchased. I think it was also in the press release that capacity was new, and I think just as a clarification, is it also incremental to the revenue projections that you gave it at OFC? Could you clarify that? Also, what’s a good way to think about the capacity potential coming out of Greensboro? Appreciate that. Thanks.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: I mean, look, that is not in our numbers, right? It is very, very significant. I think what we’ve said is that we will have a massive supply demand imbalance on CPO. It’s gonna be very, very significant. We’ve seen multi-billion dollar orders that we’ve characterized on previous calls come in mostly on scale-out. We expect the scale-up to be, you know, significantly more than that in terms of revenue opportunity. I think it’s gonna be, you know, somewhere greater than $5 billion of incremental revenue that we can add if we execute properly. What I would say is the Greensboro fab is not gonna come online until 2028. We’ve sort of set expectation that it’s sort of in early 2028 line we start to be adding that incremental revenue.

We’re still, you know, 6 or so quarters away from seeing significant contribution from Greensboro.

Ananda Baruah, Analyst, Loup Capital: Got it. Super helpful. I appreciate it. I’ll keep it there. Thank you, guys.

Michael Hurlston, President and Chief Executive Officer, Lumentum Holdings: Okay. Thanks, Ananda.

Kathy Ta, Vice President, Investor Relations, Lumentum Holdings: Thank you so much, Ananda.

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

Kathy Ta, Vice President, Investor Relations, Lumentum Holdings: Thank you, Melissa. That is all the time we have for questions. We look forward to connecting with you at upcoming investor conferences and meetings throughout this next 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.