Lumentum Holdings Inc. Common Stock 2026 Q4 Earnings Call

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

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.

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

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

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 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 were recently given our first external light source, or ELS, module purchase for delivery by the second half of calendar 2027. Second, the rest of our customer base is currently prioritizing near-packaged architectures as an intermediate step to the eventual adoption of CPO. The NPO opportunity is completely additive for us, significantly increasing the optical TAM. We're seeing strong NPO momentum across multiple high-velocity engagements using our differentiated laser chips. Even our largest CPO customer is looking at NPO for specific new use cases, further increasing the optical TAM at that account.

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

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

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

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

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

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