AI Hardware Roars Back: Is the Next Leg of the AI Rally Here?

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Lumentum Q4 FY2026 earnings conference call

Key Takeaways (AI-Generated)

Financial Performance

- Revenue surged 109% year-over-year to $1.01 billion, marking 8th consecutive quarter of growth

- Non-GAAP gross margin crossed 50% threshold, up 250 basis points sequentially

- Non-GAAP operating margin expanded to 36.6%, up 440 basis points sequentially

- Non-GAAP EPS of $3.23 exceeded prior expected range significantly

Business Highlights

- Achieved record 800 gig shipments and initiated production of next-generation 1.6T modules

- Successfully navigated supply chain constraints while ramping internal manufacturing shipments

- Delivered record-breaking quarter for EMLs with 200 gig accounting for 25% revenue

- Received first external light source module purchase order for 2027 delivery

Financial Guidance

- Q1 fiscal 2027 revenue guidance of $1.225-$1.275 billion representing 130%+ year-over-year growth

- Q1 non-GAAP operating margin projected at 39.5%-40.5% range

- Q1 diluted net income per share guidance of $4.05-$4.35

- Expects four-fold increase in pump laser shipments over next several quarters

Opportunities

- NPO opportunity is completely additive, significantly increasing optical TAM across engagements

- Developing mid-power and high-power laser chips for NPO applications with accretive margins

- Secured multiple long-term customer agreements for pump lasers offsetting capital expenditures

- Expanding manufacturing capacity and qualifying new process flows on newest tools

Risks

- Supply chain constraints for certain components capped shipments below total market demand

- Chinese-based companies entering market with new indium phosphide fabs pose competitive threat

Full Transcript (AI-Generated)

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 *1 on your telephone keypad. To withdraw your question, press *1 again. At this time, I would like to turn the conference call over to Kathy TA, Vice President of Investor Relations. Miss TA, please go ahead.

Kathy TA

Thank you, Matthew, and welcome to Lumentum's fiscal fourth quarter and full year 2026 earnings call. This is Kathy TA, Vice President of Investor Relations. Joining me today are Michael Hurlsten, President and Chief Executive Officer, Wajid Ali, Executive Vice President and Chief Financial Officer and Wupen Yuan, 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 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.

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. 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 Hurlsten

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 8th 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 800 gig shipments while initiating production of our next generation 1.6T modules. 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 2150 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 a 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. I'd like to address some recent market noise around co-packaged and near packaged optics.

First, our lead CPO customer's 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 ultra high power laser chips in the second-half of calendar 2027 ahead of customer scale up deployments in calendar 2028.

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 order for delivery by the second-half of calendar 2027.

Second, the rest of our customer base is currently prioritizing near packaged architectures as the 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.

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: 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 milliwatt, 150 milliwatt and 400 milliwatt output levels.

Looking ahead, CPO continues to be viewed as the natural end state on the technology road map, 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 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 geopolitical and regulatory constraints favor smaller, more modular builds. These two factors, among others, are substantially increasing the demand for 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. Both in scale across deployments, we have secured multiple long term customer agreements that help offset our planned capital expenditures. We continue to expect a four fold 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 100 gig per lane devices. Momentum for our 200 gig EMLs is also accelerating rapidly, now accounting for over 25% of total EML revenue. 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 200 gig 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 and 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 26 and into 2027. To capture the coming 200 gig and 300 gig lane speed opportunities, we are expanding capacity across our 2 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 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 30% sequential and 123% year over year increase. Both cloud transceivers and OCS were major drivers of the revenue growth quarter over quarter, while pockets of supply chain tightness for certain components capped 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 800 gig 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 sustained through calendar 2027. This momentum is anchored by our lead Tier 1 hyperscale customers whose strong rollouts of custom AI clusters are driving a rapid transition from 800 gig to 1.6T technology 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 road map for OCS has also come into better view. We are now planning higher and lower port count products, including specialized in-tray offerings. Rounding out our systems category performance, industrial lasers and cable access strengthened quarter over quarter. Within industrial lasers, we are seeing increased adoption of our ultra fast lasers targeting high density PCB via drilling that supports advanced 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 a 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 in 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 Ali.

Wajid Ali

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.

Turning to our non-GAAP results, fourth quarter gross margin was 50.4%, which was up 250 basis points sequentially and up 1260 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 2160 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. 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 $0.3 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. 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 27, 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 27 to be in the range of $1.225 billion to $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% to 40.5% and diluted net income per share to be in the range of $4.05 to $4.35 at the midpoint. This operating margin represents an expansion of more than 2100 basis points year over year. Our non-GAAP EPS guidance is based on a non-GAAP 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 TA

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 *1 on your telephone keypad. To withdraw your question, press *1 again, please stand by while we compile the Q&A roster. Your first question comes from the line of Joseph Cardoso with JP Morgan. Your line is now open. Please go ahead.

Joseph Cardoso

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 already well running well ahead of your high end of margin targets here. You know, 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? And I think you even mentioned scale OCS as well. Just curious in terms of how we should be thinking about the next set of targets here.

Michael Hurlsten

Hey, Joe, this is Michael. You know, first, thanks for your continued support. You know, look, we'll come out with some new financial targets probably at the next OFC. We're obviously running well ahead on almost every metric on revenue, on margin, on operating margin, we seem to be doing quite a bit better. And you're right, look, I think there are some new things that we didn't factor into our discussion at OFC NPO. We spend a bit of time on the prepared remarks on NPO CW lasers. We think that that's an incremental opportunity for us that probably not spend a lot of time on before.

And you're right, OCS I think is we've discussed, but it seems to be doing a bit better than expected. So, you know, we feel like we're executing, we're trying to keep our head down and run. And obviously, you know, adding nearly $250 million incrementally into the guide is pretty impressive. And you know, we think we have the opportunity to do that more as we look out in future quarters.

Joseph Cardoso

Yep, got it there. And then maybe just a follow up and specifically on the NPO, curious if you could provide any further details. There's, you know, specifically how you're thinking about the timing here, just given that it does sound like some of these opportunities are forming a little bit earlier than expected. And I know you talked about the different, you know, form factors or the different kind of content opportunities as it relates to the laser opportunities there. But anyway to kind of flesh out like where you guys are seeing maybe the architecture of choice by your customers and is that biased in any direction and how we should think about content as it relates to maybe your large customer on the CPO guide relative to the ultra high power laser. Thank you.

Michael Hurlsten

Yeah, I'm gonna say a couple of things and then actually ask Wupen to comment a little bit on the differentiation in mid power. You know, 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'd expect to start shipping in high volume for scale up. We're already of course shipping for scale out, but for scale up we expect to be shipping in the second-half of calendar 27 for their deliveries in 28.

Our leading customers on NPO plus or minus probably maybe minus a quarter are in that zip code. The first couple of those are more is 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. So I would say that you know the ones that we have the best line of sight on and they're 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 powered lasers that are going inside the OE lot of things going on there in terms of differentiation. You want to give 2 seconds on that?

Wupen Yuan

Yeah, definitely. Thanks Michael. So definitely the to do the kind of the NPO optical engine, right. Imagine each NPO's at about 6.4T of bandwidth, which is really equivalent to four times that of 1.6T module. The level of integration and the power density that's required and efficiently required to fit everything into a small optical engine is immense. Therefore, you need a really the best laser technology and the best efficiencies in order to really fit everything in a small package.

So the main terms of energy here really is to leverage our 400 milliwatt kind of design principle and leverage the higher efficiencies of the intrinsic design process and scale it to an application right around 150 to 200 milliwatt range that enables the application. This is actually based on our high power technology that we uniquely position to address this market and we believe that by late 27, you know 2028 time frame that NPO will hit the market to enable our people skilled up and this becomes an interesting opportunity for us to increase our laser business. Thanks Joe.

Joseph Cardoso

Thank you Michael. Thank you Wupen. 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

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? And then I've got a quick follow up.

Michael Hurlsten

Yeah, thanks Simon. Look, we did reprice a little bit. I think you know, most of our sort of 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 you know, think that that still has some room to play through. But I'd say the long pole this quarter was more on mix right, where we were shipping a lot of 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

Great, appreciate that. And 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 Hurlsten

Yeah, look, I mean, I think we're hearing the same thing. We obviously haven't seen any impact on our numbers as yet and I don't expect there to be any impact. We think we have differentiation obviously on the EMLs. We're very strong there and these high mid power lasers that are necessary for NPO and CPO get very strong differentiation there. And then 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. And so as a result, we are able to command a nice price premium that we'd expect to sustain, you know, as these Chinese, if these Chinese guys come online. I, you know, I caution people also, I think people are some of these Chinese laser suppliers are, you know, not delivering in the market today. So they have every there's no recourse when they throw out these big numbers. We have not seen anything like that to date in terms of their output.

Simon Leopold

Thank you very much.

Michael Hurlsten

Thanks, Simon.

Operator

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

Mike Genovesi

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. So could you just confirm that? But 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 get a triple digit quarter?

Michael Hurlsten

Yeah, Mike, you know again, first I want to thank you for the support of the company and really following our details really well. Yeah, you got it right. So in the guide, which is the first quarter, we'd expect our first triple digit OCS revenue quarter. You know we'd expect to be meaningfully above the three digit mark. We're executing well on OCS as I said. And then for ultra high-powered lasers, we have said, hey, we'd expect by the end of the year to be sort of in the 50 million mark. I think the third quarter is when you'd see the first triple digit quarter for ultra high-powered lasers.

So we are executing, we're shipping today. We had a good shipments in this in the reported quarter before. We'd expect that to build somewhere in the the 50 million range by the end of the calendar year. And then it's a really meaningful impact in fiscal Q3.

Mike Genovesi

Great, perfect. And then finally for Greensboro, just any is there any update on the expectation for sort of, you know, half of the capacity of Greensboro being there in calendar 28, the other half in calendar 29? Is that still the schedule? And I know it's early, but any kind of color you could give us in the progress? That would be great. Thank you.

Michael Hurlsten

Yeah, look, progressing super well. I'm actually very pleased that the team that we got in Greensboro is first race. As you know we inherited a fully functioning fab. So they 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, you know, revenue 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 end of 29. So really no change in that. Mike, thanks for taking the questions.

Mike Genovesi

Thank you so much, Mike.

Operator

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

Papacilla

Thank you. 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, I know this quarter you mentioned it triple digit, but if you can refresh us on the 400 million plus OCS guide for the second-half of 2026. Are you running well ahead of it or just any update on that side? And perhaps tied to that, how should you think about your key OCS customers build versus buying from you calculus? Do you expect momentum to eventually absorb most of their internal programs? If so? Any timeline in mind?

Michael Hurlsten

Yeah, Papa, look, you know what I'd say is we're definitely tracking to the 400 million. I would not say tracking ahead. I mean we've definitely as you know had some problems early on in the ramp with supply chain. We're out of that now. I think we're executing as I said to plan, we are plus or minus about where I'd expect, I would have expected to be for the guy, right. So that contributes takes the dent out of the 400 million and that leaves us some room to run in the fourth quarter, 4th calendar quarter, you know, relative to one customer that you know apparently has an internal source of supply.

We are I think executing extremely well. I don't think we, I think they'll continue to use an internal version, but I think as they ship more and more OCSs, we will absorb the vast majority of that. So I would expect, you know, sometime in early 27 that we crossover and be the number one supplier and actually have momentum from there in terms of our OCS shipments. So we, you know, we're 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, like on software and things like that, we're at expected to us to have more difficulty. Papa, we've done well. So I think our customers in general, if you talk to them would say we've been an incredibly strong supplier.

Papacilla

No, that's great to hear. And Michael, for my follow up, just curious on the any update on the supply demand kind of imbalance? I believe last quarter you mentioned 30% plus. Where are we now and how do you see that improving or how do you see that going into fiscal 27 and beyond?

Michael Hurlsten

Yeah, so I would say on EML probably no change, right. So 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, right? High-powered lasers, you know, again there's been a lot of noise in the system on what's happening on various co-packaged in your package opportunities. We are way behind our shipments unfortunately on high-powered lasers. So we 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 relative to our ability to supply.

Wajid Ali

Yeah, I think just to clarify, right. Yeah, just clarify. Our execution of the ramp is on track, right. We're further behind because our the demand has accelerated that as Michael said in the prepared script.

Papacilla

Yeah. No, that's very helpful. Thank you.

Michael Hurlsten

Hey, Papa, Thanks a lot.

Papacilla

Thank you, Papa.

Operator

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

Christopher Rowland

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

Michael Hurlsten

Yeah, Chris, yeah, No, we again first, you know, appreciate how much time you're spending on the company. Yeah, we've got our first ELS module order right, which yeah, from an ASP standpoint is meaningfully higher than the set of lasers that we ship in. So we're very excited about the revenue opportunity, you know, small to start, right. And we said that we'd be shipping, you know, sometime mid year early second-half of 27 to be honest 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. So we're trading a little bit of margin to get some revenue bump. We think, you know, 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 Yuan

And also just a bit to add, right. You can 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. So this is really a very first step for us to take to, you know, 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 Rowland

Excellent. Thank you Wupen and thank you Michael. Maybe as a follow on, I think Michael, you've talked about I think it's the 1.6T cycle or 200 gig 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? And can you kind of 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 Hurlsten

OK, Chris. Yeah, good question and I'll give some commentary and then have Wupen comment as well. So one, you know, no slow down in our EML demand. I mean we are, I think it was Papa that asked a minute ago. We see still a significant supply demand imbalance on our CW, our EMLs. As Kathy put in the prepared remarks, we're still very much on track to increase our EML output year over year. But even at the end of the year, we'd expect to be significantly behind demand. So no slow down at all in the demand that we're seeing from EML.

We acknowledge and we've 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. Of course, we've 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'd expect to see EMLs come back in a meaningful way.

What I comment is, you know, a little bit of a shift in stance is that we are allocating some of our output now because we're actually doing quite a bit better in Japan than we expected in terms of output. And So what we're doing as part of that is allocating some of this excess output to CW lasers and we're now shipping CW lasers in a relatively meaningful way in this 200 gig per lane silicon photonics opportunity.

What's also changed for us is we have significantly reduced the die size of our CW laser. So before when you and I talked, we said, hey, probably from a margin standpoint, EML is better. Now we've brought things much more in line. CW lasers are smaller, they're better performing. We are commanding a significant price premium, as I said to in a previous question, against what we view as the market price because of the performance of these lasers. And as such, the margin opportunity is still better on EMLs, but that gap has closed considerably I think since the last time we talked.

Do you want to talk a little bit about the dynamic that you're seeing on CW and EML?

Wupen Yuan

Yeah, Michael. Yeah, I think that was all very accurate, right. Just a couple of things to add to that. Number one, if you look at the allocation today there's a lot of 200G per lane volume that's on 800G. And then in that we actually see a much higher EML share versus CW laser share. So, so Michael talked about dynamics. I think this will both continue. EML will remain a very important player, 100G per lane, but as 1.6T ramps up, I think we will see more CW lasers.

As Michael talked about our new design of 200G CW laser is much more efficient, therefore smaller, give us a much better gross margin profile. Another thing also of note dynamics here is that in a constrained environment we also see customers behavior as wherever they can get the laser source, they will use that solution to support their build out. So the dynamics of EML server lasers is not only a technical one, but also a supply versus demand situation.

Christopher Rowland

Thanks for the transparency and again, Congrats on the update, Chris.

Michael Hurlsten

Thank you. Appreciate everything.

Christopher Rowland

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

Yeah, hi, Michael and Wajid, a good quarter and guide here. Just a quick question on the 200 gig per lane EML and CW, looks like that's ramping very nicely. Is it fair to assume both the 200 gig EML and CW laser should be accretive to your margins? And when you see this 1.6T crossover looks like it's already greater than 25% revenues, but when do you see that crossing over with 800G I guess and I follow.

Michael Hurlsten

Yeah, Vijay Rakesh, good to hear from you my friend. Look, I no change really in the forecast on the crossover. What we said is and I think you're referring to 200 gig per lane lasers. We have said that for us, we'd expect 200 gig EMLs to be the majority volume shipments by the middle of 2027. We just said in the very remarks that now 200 gig per lane EMLs are 25% of our mix. We 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, yeah, you're right, lasers are one of our better businesses and the lasers are more than our corporate accretive, whether it's CW or EML. And 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

Got it, thanks, very helpful. And then on the operating leverage side, what it looks like solid improvement there year on year, year audio 40% target. How should we look at how should we think about it as you go through fiscal 27? Thanks.

Wajid Ali

Yeah, thanks Vijay. So you know the guideline that we have given at $2 billion of revenue was 38 to 42%. Like Michael said in his prepared remarks, we're already at the midpoint of that at much lower revenue levels. And so with gross margins improving as we approach $2 billion, we'll see some improvement on the operating margin line as well that corresponds to those gross margin improvement. So you know, think of the 42% outlier more as a midpoint with the range probably moving up 100 to 200 basis points versus what we showed at OFC.

Vijay Rakesh

All right, thank you.

Michael Hurlsten

Thanks so much, Vijay.

Operator

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

George Notter

Hi guys, thanks very much. Congrats on all the success here. I guess I wanted to ask about, you know, indium phosphide substrate supply. I was really intrigued by the deal you guys signed in the quarter with AXT because I think a quarter ago you actually said that you were doing pretty well on indium phosphide substrate. And so feels like there's a bit of a change here. I guess I'm wondering like what you guys are seeing longer term here in terms of your need for more indium phosphide substrate. And you know, 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 Hurlsten

Hey, George. Yeah, look, I would agree. I mean, I think what we tried to hint to in a previous question is the ultra high-powered laser demand has surprised. This and that cuts across you know a couple of customers. So what we're 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 CW lasers to go into our scale out products. We felt pretty good, right, as you said, but I think we've 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've been a great partner. Wupen's worked with them for a good number of years and we think, you know, we're going to need their help just given the surge in demand. So that's what drove that deal. You know, if this vector continues, we're probably going to need to look for more help on substrate. We feel we're good at this moment. We're probably pretty comfortable just given our lead arrangement with a Japanese supplier and now the announced deal with AXT. But you know, given the rate of change in the demand vector that we're seeing that may not be true a quarter or two from now either.

George Notter

Got it. And then do you think it's likely that we could see you sign some LTAs for more of the capacity in Greensboro, is that is that a possibility? Thanks.

Michael Hurlsten

Yeah, 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. Is that everybody starts to look to adopt near packaged or co-packaged solutions. And so, you know, 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

Thank you.

Michael Hurlsten

Thanks so much, George.

George Notter

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

Hey guys, thanks for taking the question and great to be on the call. My first is on the NPO side where we 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 intercept an existing ramp a lot? If you were to see, you know, 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 Hurlsten

Yeah, Tom, super to speak to you again. We really appreciate this chat as always, Tom, as always. Look, I think what we're seeing now is an inflection in the ASIC 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 they're 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, you know really seeing silicon in mid 27 toward the end of 27 and early 28, all those new silicon solutions yeah GPUs XPUs TPUs all seem to be driving SerDes speeds that are consistent with the adoption of NPO or CPO Wupen. I mean any color you can add for Tom?

Wupen Yuan

No, thank you Michael. I think that's very accurate really. I don't think Tom, we're not seeing the kind of the retrofit of NPO onto the current XPUs we're seeing really like this Michael talk about there is a broad momentum towards the 28 kind of the 28 ramp of NPO and CPO and really driven by optical scaled up. So it's not, this is beyond just the XPU itself. This is also goes into a rack based multi rack system that requires optical scaled up, right. And therefore, we believe this might be a new processor, new racks. And it's 2028. And for our people's product, you know from the industries evolution on the.

Tom O'Malley

Super helpful and 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 and when do you see that intersecting in terms of that technology hitting the market? Thank you very much.

Michael Hurlsten

Yeah, Tom additive, right. So it's you know, anything that Kathy's presented at OFC it's above and beyond that. It's a very new set of opportunities. You come to find out there are a number of different folks that are looking at this kind of approach and it's all very additive. It would hit for us 28 time frame. Tom, it's not something that's super imminent, but it's imminent enough that we're working on it aggressively. It requires a lot of redesign on our from our engineers.

But you look, we're the only guy shipping. I mean, I know a lot of people are talking about OCS a lot of start-ups, you know for us to be now at $100 million and beyond types of quarters, we're the only ones that have a track record outside of a contract manufacturing relationship with a large OCS users. So we're really the only merchant supplier today of OCS. And by virtue of that, we're going to get every single call and have the first look I think at every single opportunity out there.

Tom O'Malley

Great results. Thanks again.

Michael Hurlsten

Thanks, Tom.

Tom O'Malley

Thanks so much, Tom.

Operator

And 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

Yeah, great. Thanks for sneaking me in here. Michael, maybe just to drill into the pump laser commentary a bit, you're growing quite nicely. I think you said 80% year over year for the second consecutive quarter and the four fold increase coming still effectively sold out. Can you talk a little bit about where you are in the Roseorchard ramp and what exit capacity looks like? And then you talked about some long term supply agreements that you're putting into place for scale across. Can you characterize maybe high level with structure of those agreements are and the duration?

Michael Hurlsten

Yeah, Ruben best for last, we really always appreciate your questions. I think, you know, this is an area of incredible strength for us, right, which really I think is under appreciated. We have a very large market share here. And what we've done is, you know, really worked hard with for example, a lot of the NEMs, the network equipment manufacturers to form strategic partners. And we're super pleased with how people have come to work with us on helping offset some of the CapEx that we have to put out to ramp in Roseorchard. You got it right.

And to then bring that into our Tucson manufacturing for packaging and test, we formed a series of arrangements that for the most part are three-year arrangements. And those arrangements, you know, as our normal arrangements have pricing built into them. There are pricing levers that we can exercise if certain conditions are met. So we think we have some room there on the price line. But you know, these are giving us a lot of surety in terms of that demand not evaporating. And in most instances I think they're take or pay we'll pay any comments to in the middle of that.

But we feel really, really good about where we're sitting. Ruben on the pumps again, you know rough order we're somewhere between 70-80% share and we believe we have a technology road map that our customers want to engage in that will afford us the opportunity to work on price to further increased output. But this is a darn exciting area for us. We've been any additional color?

Ruben Roy

Great, thank you. That's great. 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 there discussions, engagements, you know that type of thing associated with some of the open or standards based NPO, you know kind of? The yeah, I guess the standard based NPO versus custom and I'm asking, I'm just wondering if you know there's a better alternative for you given your technology and positioning, does it matter?

Michael Hurlsten

Look, I and I'll have Wupen comment just in the interest of time. I mean there are OCP OCI, right different standards that are coming out that are talking about the way 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. So the standards based approach is opens up optical TAM. But we are engaged to be honest with you in both, right, there are a lot of custom very specific the types of implementations that our customers are driving to and we are that's really going to be our first wave of NPO engagement. Wupen any color?

Wupen Yuan

No, the color. I think just the to the extent what Michael just talked about, right, there's actually 2 two things. One is that today, right, the physical level, the optical level, they're all so-called fast and narrow, 200 gig per lane, massive lanes. And the next generation right, as Michael talked about would be like OCI, MSA based, right. So that's on the optical side. But on the form factor side is, is very much proprietary, right. Everybody has a different design. Again, we talked about earlier mass to their rack design, their system design and that actually is different from customer to customer, right. So again, optically they are kind of standard based, but then on the implementation side, there are difference between different customers.

Ruben Roy

Excellent, thank you.

Michael Hurlsten

Thanks so much, Ruben.

Ruben Roy

Thank you for your questions.

Kathy TA

I will now turn the call back to Kathy for closing remarks. 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. This concludes today's call.

Operator

Thank you for attending. You may now disconnect.

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