Lumentum Holdings Inc. (LITE) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Lumentum Holdings Fourth Quarter and Fiscal Year 2026 Earnings Call. [Operator Instructions] Please also note, today's event is being recorded for replay purposes. [Operator Instructions]. 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.

Thank you, Matthew, and welcome to Lumentum's Fiscal Fourth Quarter and Full Year 2026 Earnings Call. This is Kathy Ta, Lumentum's Vice President of Investor Relations. Joining me today are Michael Hurlston, President and Chief Executive Officer; Wajid Ali, Executive Vice President and Chief Financial Officer; and Wupen Yuen, President, Global Business Units. Today's call will include forward-looking statements, including, without limitation, statements regarding our future operating results, strategies, trends and expectations for our products and technologies, that are being made under the safe harbor of the 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 28, 2026, and in our most recent 10-K for the fiscal year ended June 27, 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 form 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.

Thank you, Kathy, and good afternoon, everyone. Lumentum is positioned at the heart of a secular industry shift. As AI compute workloads increased 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 sell across product lines. Revenue surged 109% year-over-year to $1.01 billion, marking our eighth consecutive quarter of top line growth. Additionally, we are maintaining revenue velocity as we saw our third consecutive quarter of greater than 20% sequential growth notable as the compare point is getting ever larger. While we experienced 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 2,150 basis points year-over-year. These results prove 2 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 1 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 customers' production plans remain very much on track and their demand signal has increased since our last update. Our visibility into the timing of CPO scale-up deployments is also sharpened. We remain confident in a demand ramp for our ultra high-power laser chips in the second half of calendar 2027 ahead of customer scale up deployments in calendar 2028. 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 have recently given our first external line source or ELS module purchase for delivery by the second half of calendar 2027. Second, the rest of our customer base is currently prioritizing near-packaged architectures as an intermediate step to the eventual adoption of CPO. The NPO opportunity is completely additive for us, significantly increasing 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 XPO accelerator, training power and costs for simplicity and optical scale-up applications. Customers are evaluating 2 types of laser chips for NPO. In 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 inherent 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 to define 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 tenth consecutive quarter, and we were up over 130% year-over-year. Pump laser shipments surged more than 80% year-over-year, and we will remain effectively sold out for the foreseeable future despite our rapid capacity expansion. Expanding, inferencing and training applications are driving full rate connectivity between data centers, while political and regulatory constraints favor smaller, more modular builds. These 2 factors among others are substantially increasing the demand for our pump laser solutions. To put this in perspective, for one major hyperscaler, the network capacity connecting just 2 AI data center sites could double the total global backbone capacity they built over the entirety of the last decade. To support the growth and scale across deployments, we have secured multiple long-term customer agreements that helped offset our planned capital expenditures. We continue to expect a fourfold increase in our pump laser shipments over the next several quarters to meet this escalating demand. Turning to laser chips. We delivered another record-breaking quarter for EMLs, primarily driven by strong demand for 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 aligned 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 at scale to a very tight set of specifications, which enables superior yields in transceiver manufacturing. Importantly, these new CW laser products will deliver margins that are accretive to our long-term financial targets. Looking ahead, we expect demand for both EML and CW lasers to grow significantly through the second half of calendar '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 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 a 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 sustain 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 in industrial lasers and cable access strengthened quarter-over-quarter. Within industrial lasers, we are seeing increased adoption of our ultrafast lasers targeting high-density PCB via drilling that supports advanced AI XPU boards and 1.6T optical modules. Looking ahead to Q1. We expect to set another quarterly record and as stated earlier, reach our $1.25 billion revenue target more than one quarter ahead of the plan outlined at the last OFC. We anticipate that approximately half of the sequential growth will stem for 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 of about 1.6T transceivers and accelerating OCS deliveries. Now I'll hand the call over to Wajid. Mr. 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 1,260 basis points year-on-year due to better manufacturing utilization, favorable mix and increased pricing on select products. Fourth quarter non-GAAP operating margin was 36.6%, which was up 440 basis points sequentially and up 2,160 basis points year-on-year. We continue to invest in critical R&D programs serving cloud and AI customers while maintaining the rigorous cost controls necessary to optimize our business model. Fourth quarter non-GAAP operating profit was $368.8 million and adjusted EBITDA was $406.4 million. Fourth quarter non-GAAP operating expenses totaled $138.1 million or 13.7% 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 $0.43 billion to $2.74 billion, with the decrease primarily driven by convertible debt conversions. Our inventory levels increased by $59 million sequentially to support the expected growth in our cloud and AI related revenue. In Q4, we spent $167 million in CapEx, primarily focused on manufacturing capacity to support cloud and AI customers. Turning to revenue details. Components revenue of $649.4 million increased 22% sequentially in Q4 and 103% year-on-year. 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 2,100 basis points year-over-year. Our non-GAAP EPS guidance is based on a non-GAAP and annual effective tax rate of 16.5%. These projections assume shares used for non-GAAP diluted earnings of approximately 102 million. With that, I'll turn the call back to Kathy to start the Q&A session. Kathy?

Thank you, Wajid. [Operator Instructions]

[Operator Instructions] Your first question comes from the line of Joseph Cardoso with JPMorgan.

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

Joe, this is Michael. Firstly, thanks for your continued support. 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 OFS. NPO, we spent a bit of time on the -- in the prepared remarks on NPO. CW lasers, we think that that's an incremental opportunity for us that we would probably not spend a lot of time on before. And you're right, OCS, I think, as we've discussed, but it seems to be doing a bit better than expected. So we feel like we're executing. We're trying to keep our head down and run and obviously adding nearly $250 million incrementally into the guide is pretty impressive, and we think we have the opportunity to do that more as we look out in future quarters.

Got it. Fair. And then maybe just a follow-up and specifically on the NPO. Curious if you could provide any further details there, specifically how you're thinking about the time 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 form factors or the different kind of content opportunities as it relates to the laser opportunities there. But any way to kind of flesh out 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 at least relates to maybe your large customer on the CPO side relative to the ultra high power laser.

Yes. I'm going to say a couple of things and then actually ask Wupen to comment a little bit on the differentiation in mid-power. Certainly, the timing of these opportunities is plus or minus what we have talked about for our lead CPO customer. Our lead CPO customer, we just said in the prepared remarks, we would expect to start shipping in high volume for scale-up. We're already, of course, shipping for scale-out. 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 the ones that we have the best line of sight on and that are sooner are more of the high-powered laser type, very consistent with what we've been talking about for our largest CPO customer. With that said, I wanted Wupen, maybe to give a few seconds of color because I think there's a little bit of a mischaracterization. We think that these mid-power lasers that are going inside the OE, lot of things going on there in terms of differentiation. Do you want to give 2 seconds on that?

Yes, definitely. Thanks, Michael. So definitely, the -- it is the -- to do the kind of the NPO optical engine, imagine these NPOs set at about 6.4T of bandwidth, which is really equivalent to 4x that of a local CC module. The level of integration and the power density that's required and efficiency required to fit everything to a small optical engine is immense. Therefore, you need really the best laser technology and the best efficiencies in order to really fit everything in a small package. So Lumentum's advantage here really is to leverage our 400-milliwatt kind of design principle and leverage the high efficiencies of the intrinsic design process and scale it to an application, right, around 150, 200-milliwatt range, that enables that application. This is actually based on our ultra-high power technology that we uniquely positioned to address this market, and we believe that by late 2027-2028 timeframe, that NPO will hit the market to enable optical scale-up, and this becomes an interesting opportunity for us to increase our laser business.

Your next question comes from the line of Simon Leopold with Raymond James.

First thing I wanted to try to ask is, to what extent we're 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.

Yes. Thanks, Simon. Look, we did reprice a little bit. I think 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 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 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 gross margin line side.

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?

Yes. 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 EMLs. We were very strong there. And these high and mid power lasers that are necessary for NPO and CPO, again, 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 as these Chinese -- if these Chinese guys come online. I caution people also -- I think people are -- some of these Chinese laser suppliers are not delivering in the market today. So they have very -- 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.

Your next question comes from the line of Mike Genovese with Rosenblatt Securities.

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'd get triple-digit quarter?

Yes, Mike, again, first, I want to thank you for the support of the company and really following our details really well. Yes, you've got it right. So in the guide, which is the first quarter, we expect our first triple-digit OCS revenue quarter, we'd expect to be meaningfully above the 3-digit mark. We're executing well on OCS, as I said. And then for ultra-power lasers, we have said, hey, we expect by the end of the year to be sort of in the $50 million mark. I think the third quarter is when you'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, Q4. We'd expect that to build somewhere in the $50 million range by the end of the calendar year, and then to really meaningful impact in fiscal Q3.

Great. Perfect. And then finally, for Greensboro. Just any -- is there any update on the expectation for sort of 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 on the progress there would be great.

Yes. Look, progressing super well. I'm actually very pleased that the team that we got in Greensboro is first rate. As you know, we inherited a fully functioning fab. So the switch that we need to throw is to convert it from gallium arsenide indium phosphide. That is well underway. Some of the long haul items, reactors and things like that, our team has gotten out in front of. I think we continue to say revenue -- first revenue out of that in early 2028 and ramping through calendar 2028 into kind of a full pitch by the end of '28 and into '29. So really no change in that, Mike.

Your next question comes from the line of Papa Sylla with Citi.

Congrats on the strong results as well. Michael, I was kind of double clicking on the OCS. I was hoping perhaps you can refresh us. I know this quarter, you mentioned it hit triple digits, but if you can refresh us on the $400 million 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 we think about your key OCS customers build versus buying from you calculus? Do you expect Lumentum to eventually absorb most of their internal programs? If so, any timeline in mind?

Yes, Papa, look, what I'd say is we're definitely tracking to the $400 million. I would not say tracking ahead. I mean, we 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 would have expected to be for the guide, right? So that contributes -- takes a dent out of the $400 million and that leaves us some room to run in the fourth quarter -- fourth calendar quarter. Relative to one customer that 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 sometime in early '27 that we cross over and be the #1 supplier and actually have momentum from there in terms of our OCS shipments. So we 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, where I had expected 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, incredibly strong supplier.

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?

Yes. 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, again, there's been a lot of noise in the system on what's happening on various co-packaged and near-packaged opportunities. We are way behind. 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. The demand signals increased and we are very much further behind relative to our ability to supply.

Yes. I think just to clarify -- yes, just to 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.

Your next question comes from the line of Christopher Rolland with Susquehanna.

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 just lasers and for the full module?

Yes, Chris. Yes. No, we -- again, first, appreciate how much time you're spending on the company. Yes, we've got our first ELS module order right? Which 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, small to start, right? And we said that we'd be shipping sometime midyear, early second half of '27 to be honest, a little bit later. We felt like we'd see more opportunity on sort of scale-out applications than we have to date. But we're very pleased to be participating in the early phases of scale up with both lasers and now with the ELS module. As I said a minute ago, the ELS module meaningfully higher from an ASP standpoint, but the margins are not quite as good. Above corporate average, but not quite as good as the lasers. So we're trading a little bit of margin to get some revenue bump. We think -- 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.

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