Lumentum Holdings, Inc. Aktie

Good morning, everybody. For those of you who don't know me, my name is Darlene Pasquill, and I run the Americas Equity division at Mizuho. On behalf of myself and others on Mizuho's leadership team, Jerry Rizzieri, our President and CEO and Head of the Corporate Investment Bank as well as Michal Katz, both of whom I'm sure will be wandering around shortly. Michal runs our investment and corporate banking. It's a pleasure from us to welcome you to New York City into the Conrad Hotel. It's an electric time to be in New York City. For those of you who might have had the experience of being at Penn Station last night, it was certainly very electric. We're looking for a better outcome on Wednesday night, but it was a great night to be out.

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Over the next 2 days, we'll have almost 500 investors who engage with us in one-on-one meetings, keynote addresses, fireside chats and also thematic panels. We designed this agenda to add value to deepen how you think about technology and shopping your conviction in your investments and strengthen relationships. We also invite you to join us this evening at 5:00. We have drinks on the main floor. So please do stay if you have the time, it's great networking.

Now to get this underway, I'm pleased to turn the microphone over to Vijay Rakesh, who's our Managing Director and our senior semiconductor and quantum computing research analyst, who will introduce our keynote speaker, Michael Hurlston, CEO of Lumentum. So with that, welcome Vijay and Michael to the stage.

Thanks, Darlene. Thank you, everybody, for joining us today at the Mizuho 2026 Global Tech Conference. And thank you, Michael, for joining us. Obviously, a big year for you. Just want to give you a quick preamble. I think Lumentum, obviously, is the key driver for the AI data center industry today. You are spearheading the whole photonics transformation in the data center. And I think as you look at the optical networking side, that's one of the biggest transformations in the data center industry today.

So I think as you look at where Lumentum sits, you are supplying some of the key lasers and optical engines for this entire data center transformation globally. And as they say, electrons do the work, photons do the show, right? And I have a couple of other catchy lines for you. As they say at Lumentum, I guess, the future moves with the speed of light, right? But with that, I had a distinct pleasure of introducing CEO of Lumentum, Michael Hurlston. Please join me in welcoming. Thank you.

So obviously, as you look at Lumentum, it's been a massive year. I think your market cap last year at this time was about $7 billion. Now you have $70 billion, you have grown 10x. It's been just an incredible run. Did you see that?

Wow, that's a tough one.

Not an easy one.

No, I didn't see this. I think it's unusual. CEOs, as you likely know, have kind of two outcomes in life. They're either fired or they retire. So I was lucky enough to join the company as a sitting CEO, which almost never happens. And I think when the Board showed the forecast to me, I said, I'll derate that by about 50%, I should have multiplied it by about 8.

But it's well deserved. I think you guys have almost quadrupled or went up 5x since we initiated on you guys back in November, December, so well done. I mean, as you look at Lumentum, you are growing 80%, 90% in the top line. That's massive growth. I mean that's what you have grown in the last couple of years. You have laid out a massive fiscal '28 June, somewhere at the $8 billion top line, you're running somewhere in the $5 billion, $6 billion here. You've laid out a massive TAM of $90 billion and you have just $8 billion now. So it's almost like there's so much growth ahead of you. Maybe you can start off talking about how you see the big vectors of growth for you in photonics in the data center, whether it's scale out, scale up, OCS, and then we can probably parse through all of them.

Look, Darlene, was talking about in her opening remarks that we're in the middle of an exciting time, and she's absolutely right. It's an AI super cycle. But within that AI super cycle, as you're saying, it's a photonic super cycle. I mean we've never seen anything like this in the optics industry. I think the highest revenue quarter that Lumentum had in its history was about $500 million, and we're poised to go over $1 billion this quarter, so double the highest quarter ever. And I think there's so much runway ahead, as you're pointing to.

The growth drivers for the company are vast and varied, and really none of them are hitting yet, right? So really, the best is yet to come in terms of optical scale up, optical scale out, optical circuit switches, none of which really you see in the numbers yet. So I think we've got a lot of runway. You initiated coverage on us and we were very pleased with that. We've gone up, but I think we've got a lot of runway and a lot of gas in the tank from here.

Yes, absolutely. And as you mentioned, there is so much ahead of you. I mean, right now, as you look at -- if I were to take a couple of segments there, especially on scale out, what you supply is one of the, what's called, electromodulated lasers, EML, it's a mouthful, but I'll try. But you obviously dominate that market. And as you go from 800 gig today to 1.6T year to 3.2T, that content goes up massively. And you dominate that market globally, you supply to many of the other peers in that market. Maybe talk to us about how you see that growth, how do you see that picking up? How do you see the capacity that you're adding in those areas?

Yes. Look, super question, Vijay. If you look at our scale-out business, there's 2 components to it. There's actually probably 3 components. There's the EMLs that we supply to everybody else. And right now, the majority of those EMLs are 100-gig per lane, meaning it's 800-gig transceivers that are getting manufactured based on those EMLs. We see a transition now to 1.6T, led by NVIDIA and Google. They have taken the lead on 1.6T. And now we're supplying 200-gig EMLs to that market. And that ASP is roughly double. So it's a huge tailwind for us as we start working through that transition. That's the first thing.

Then the second thing is, of course, in the scale-out, we supply transceivers. And you and I have spoken a number of times about the transceiver business, probably not our best business, but all of a sudden, it's a business that's growing really well, right? We have one main customer that's done very, very well in the market. They're picking up a ton of share. And they're deploying 1.6T right now. So we have done very, very well with them. And then we have a second customer that's been really a positive surprise for us. So our scale-out transceiver business is doing quite well.

And then the third thing is the scale out as it relates to the CPO switches, right? And so we have a business there that's very unique, a high-powered laser that we supply to NVIDIA. That partnership has been announced and discussed. They obviously invested some money in the company. And that scale-out business has been surprisingly strong. We've talked about in the fourth quarter of this year, seeing somewhere between $50 million and $100 million incremental revenue coming from our scale-out CPO and sort of the sum total of that scale-out business leads to a lot of optimism. I mean, all 3 things are beginning to hit. You don't see anything from us yet in scale out CPO. You don't see a lot from us yet in the 1.6T transceivers. So those 2 things are going to layer on to a base business that's already pretty strong.

Yes, well said. I think just to put that in perspective, I think most of the interconnect market today is copper, but you are starting to see that transition to optical. But you are benefiting not just from the number of data centers coming on, but even as bandwidth goes up, that content goes up double, ASP goes up double. So you have 2 big tailwinds there from both unit and ASP going up, plus just increasing penetration within that.

Maybe if you look at the scale-up side -- sorry, scale-out side, how do you see -- what actually drives your dominant position there? How do you differentiate? What gets you the leadership there? Because you pretty much own that space. I mean you supply pretty much every other supplier of EML, you supply the lasers there.

Yes. It starts with our laser business. And so if you think about lasers, it's really interesting. It's not as a Broadcom or an NVIDIA would talk about where you have a process coming from TSMC, a manufacturing process, and then you have a design. And the two things are actually somewhat divorced from each other. You run a design, you run that separately in some cases, to the process. With lasers, that's not the case. The two things are totally intermingled. You have a process and you have a design and the two things sort of work hand in hand, and there's a lot of iteration that goes into that. So our laser design really separates us out.

We have lasers, particularly at higher power levels, that other people simply can't get to with the reliability and with the performance, and that makes us very difficult to compete with. EMLs are also very difficult to make. They are an area where we're able to differentiate because they deliver very high quality, and our customers report the transceivers that they're able to build using our EML lasers yield much higher. So we really have a big differentiator, I think, a moat with that laser business.

Got it. And I mean you're growing at a pretty envious 80%, 90% top line, but that's just scale out. You have a scale-up market ahead of you that's arguably 5x to 10x the size of the scale-out market. So maybe talk to that, when you see that start to come together because that's going to turbocharge your growth, and that's just coming on second half of next year. But maybe you can talk to like what you're seeing there, what are the trends there and how you can differentiate?

Yes, you're absolutely right. You said a minute ago that we're in this cycle where you see copper replacement. This is really where it is. It's in scale up, right? So scale up is where we see an opportunity for the optical industry, and arguably we're the leader in the optical industry, to take our technology and put it in racks and in clusters. So everything we've talked about so far, when you talk about scale out, you're going from a cluster of compute out to what we call a scale-out switches.

This is something completely new, where we're going inside the cluster, and we have connections that run either cross-rack, between racks, or now, in many cases, we're seeing inside the rack itself with an emerging NPO opportunity, near-packaged optics, that you and I haven't talked about. But the sum total of that, the magnitude is far greater than scale out, even in the first instantiation, which we would expect for us to start shipping in the second half of '27, and for you to see scale-out products -- scale up optical products in the market in the first part of 2028. So it's very soon. I mean we're working together now very much with customers, who are designing their CPO systems, scale-up CPO systems, and now NPO, the near-packaged optics, which, again, you and I haven't spent a lot of time on, but we see that as even a bigger opportunity for us here in the near term.

Got it. I want to go quickly to the CPO side, since we almost got to that topic. Obviously, when you're looking at CPO, you have one big customer there, I mean there's not a lot of people on the AI data center side, it's NVIDIA, it's Google, which pretty much dominate that landscape. And you are a sole supplier to one of the leaders there. I think, obviously, you're supplying to NVIDIA. But maybe you can talk to what you're seeing in CPO, what are the risks there? And how you see that pipeline coming together?

I think CPO is technically quite difficult, right? So there's a lot that goes into it. And we've had to shape our technology through multiple years to get this to work to a degree that NVIDIA can get things to yield and they can effectively ship a co-package solution. So co-package means that there's a substrate, right? And their device sits on that, in this case, let's say, a switch chip. And then our -- the photonic solution is right there on the substrate.

But in some of these instantiations, you have an external light source. So there's actually little fiber runs that go out to what looks like a pluggable, similar to what we'd see in transceivers that actually sits on the faceplate. And that's how I think NVIDIA is thinking about their co-packaged optics solution. So there's a lot that goes into that. We think that they really worked out a lot of the technical kinks on scale out and now they can move it into a scale-up situation, which we're super excited about.

Got it. So I think, as you mentioned, one of the reasons why people are going to co-packaged optics is to maybe reduce the latency, reduce the number of components, reduce the power consumption, which all makes this whole thing go turn a whole lot faster, I guess. But maybe outside of the big leader there, are you seeing CPO -- interest in CPO coming from other customers as well are you seeing other big ASIC guys also jumping on the CPO bandwagon because it's going to be a massive trend in terms of how this industry transforms from all the different cabling and all that to little CPO packages that screen the whole connectivity.

What we see -- we certainly see some CPO. But what I think is important to understand is there's a second technology that's being discussed, which is near-packaged optics. Near-packaged optics means now I have that substrate with the same chip semiconductor solution. And then just off it, outside the substrate, you put what we call an optical engine. That optical engine may have the laser in it. So different to this faceplate idea that we just discussed with the ELS or it may actually employ an ELS. What we've seen probably in the last 2 months, really since our last earnings, is a marked shift in interest from others, I mean non-NVIDIA-class customers, around NPO. They're trying to solve the same problem.

At 1.6T, 200 gig per lane, you have some difficulty with copper. It simply can't go over any sort of reasonable distance, even with retime copper. So you've got to start thinking about optics. And what we see now is you saw yesterday, one major hyperscaler made an announcement with Corning, right? I think you talked about that. That is really indicative of how that guy is thinking about near-packaged optics, how they're thinking about employing a heavier degree of optics in the back plane.

We think even though you probably have lower volumes generally with the hyperscalers who are doing their own ASICs or with other chipset folks that are trying to compete with NVIDIA, but the number of lasers that they would want to deploy because they're going much more aggressively to an optical backplane, the number of lasers they want to deploy is actually larger. So we're looking in the face suddenly of an opportunity that's really started to snowball.

And that's Amazon with Corning, I guess. I think as you -- NPO has not even started yet. I mean, it's more like, let's say, next year, as you mentioned. CPO has been talked about, but it looks like you're thinking NPO probably gets pulled in because that's going to be a little bit easier to do than CPO. How would you size that market, I guess, because it's a couple of hundred million in CPO revenues for you this year, next year. But I think some of your peers have talked about a $15 billion CPO market. I'm wondering, NPO could be size something similar. How do you see that? Where do you see that fit in?

Look, what's interesting about it is from a number of racks, we're probably talking smaller, but from a number of optical lanes, it's actually bigger because they're going all in, right? They're saying, look, in order for us to leapfrog, let's say, NVIDIA, we're going to have to move quickly and have more 1.6T lanes going down the back plane of the rack. And in that context, you're going to have to use a lot more optical engines. So the size of it looks like it's frankly bigger than even the CPO opportunity that you and I have talked about.

Got it. I mean inherent to all these scale out, scale up and whole NPO, near-packaged optics, and co-packaged optics, the heart of that is the laser. And I think we always come to this point where supply is tight. We need to add capacity. I know NVIDIA put $2 billion in you guys. You're building out the Greensboro fab. But with some of these new opportunities that are coming on, can you talk to how that ramp is going from 3-inch, 4-inch today to 6-inch? Obviously, it looks like your customers want their supply yesterday, right? I mean, they want to see or line of sight to how that capacity is coming on, et cetera. Maybe you can talk to what's happening there? How comfortable you feel with the ramps, et cetera?

Look, it's putting a lot of pressure on the organization, right, for people that have been around optics...

Good pressure.

It's good pressure. Maybe it's like the pressure Darlene puts on you, it's good pressure.

We'll talk about it another day.

So the optical industry, if you look at it, you used to think in scales of thousands, right? If you think about when we were serving AT&T and Verizon and these optical providers that built the Internet backbone, right, it's really units of thousands. And now we're getting into units of hundreds of millions. So it's multiple orders of magnitude in terms of how the industry, not just Lumentum, but the industry has thought about producing these things.

And our fabs are definitely straining, right? We've gone from, again, very small number of shipments to massive, massive numbers, and it's still not enough. We're undershipping demand by more than 30%, our estimate on EMLs and sort of this very early phase of co-packaged optics -- scale-out co-packaged optics. We're bringing a ton of supply online. We've just bought this fab in Greensboro and we spent a lot of time in North Carolina, and we think that can generate $5 billion of incremental revenue. I think that's the number that Kathy has put out there, and that seems right.

So with all of that said, at the end of that journey, we actually feel like we're going to be further behind. As fast as we're adding supply, as fast as our competitors are adding supply, the demand is going up. You're just in the middle of this optical supercycle, where the number of optical lanes is going from zero to some massive number in a short period of time to try to intersect this 1.6T transition.

Yes. And so as you bring on your 6-inch, how much capacity does it add? Are you seeing customers start to talk to you about maybe getting better visibility, long-term agreements? How is that conversation going?

Look, I mean, again, sort of if you look at the demand on our CPO products, you would argue that 100% of the capacity, including the 6-inch line in Greensboro is spoken for. So as we now think about how do we add these new NPO opportunities, extremely challenging. So we're obviously trying to squeeze as much as we can out of the fab assets that are there. We're unique in operating 5 fabs. And as you correctly said, we're probably by far and away the leader in this laser market, both in terms of product quality, product performance, but also sheer output, right? When we talk about adding 10%, that's a big number.

And so what we're trying to do right now is get the most out of these existing fab assets and then boot Greensboro up. As I said, we're still going to be significantly behind. So the industry is going to have to find a path, right, because there's just a lot of optical demand and simply not enough supply.

Beyond the indium phosphide capacity that you're adding, is there a constraint in the supply chain on the substrate side? You get a lot of your substrates from the U.K. and Japan, JX and IQE a little bit. Can you talk to -- is there a supply constraint there? Are you qualifying more suppliers?

No, again, it's a question that we get a lot, and I think you asked it of us after the earnings call. We're uncomfortably comfortable right now with our substrate position. For sure, again, with our numbers escalating like this, we are going to have tension in the system. I mean there's just -- it's just unavoidable. When we talked after the last earnings call, we felt like we were well covered with our primary supplier. We've done a long-term agreement with them, and we felt like, okay, we're pretty well covered. Numbers have gone up considerably since then.

So I'd say, no, we're not well covered anymore. We're going to have to find alternate sources of supply. One of the issues right now is the substrates are controlled by the Chinese government. So outside of a couple of Japanese suppliers, there are a preponderance of suppliers coming from China. And the Chinese seem to be adding supply faster than the Japanese. And so you have to now find a workaround. We're a little bit uniquely situated.

You kind of drew to it in your question in that you can -- we can have substrates go from China to the United Kingdom. And in so doing work around some of the licensing and restrictions, restrictive environment, so we're uniquely positioned in that way. But make no mistake, it's something we're working on. It's definitely become a little bit tighter than since the last time we chatted.

Got it. And so as you look at that supply chain, you mentioned China. Is there a risk that there are domestic suppliers there? Obviously, one of the things that we hear is your laser, you do some secret sauce in it. So the performance on the laser is just phenomenal. But the question is, is there a competitive threat or risk from China where they can copy or since they have that resource, is there any IP or a moat there that protects you from these China suppliers?

Look, and I saw it in your questions, I thought your thinking on the question was right. Chinese supply is definitely there, even with lasers. But where it's -- for the most part, its pigeon hold is the CW laser. So if you look at the stack up, you probably have the most difficult thing to do are these ultra-high-powered lasers that go into co-packaged optics. Then you have the near-packaged optics lasers, then you have EMLs and at the bottom of the stack are CW lasers, which are an increasingly important part of the demand side but we don't make many CW lasers.

We've sort of skated outside of that zone because it is a bit more of a competitive environment. And we definitely can see Chinese suppliers coming in there. We still think we have advantage. We still think the performance advantage we offer, the reliability we offer, the yield that we offer is there. And look, it's difficult for some of these Chinese guys, who have been supplying themselves now to go into the open market. So we don't think it's fait accompli. But again, for our position, probably not as much a threat as it might be for somebody else.

Got it. But, I guess, The eML itself is growing pretty nicely. So I mean, CW will grow too, but...

Yes, you and I discussed it. Our view in the transceivers now, right, so the first leg, the current leg of scale out, the majority of 1.6T shipments today are all EML. It's almost all EML, outside actually, interestingly enough, the transceivers we make, which are silicon photonics or CW laser-based. We do anticipate a shift to silicon photonics, right? But even in that shift, we believe the number of EMLs is going to go up cycle over cycle.

Got it. Just one last question on the laser side before we move on because I think we have beaten lasers quite a bit, I guess. On the CPO side and the NPO side, you mentioned obviously, NVIDIA is there. Are you seeing most of the other CSPs also start working, especially on the ASIC side trying to incorporate a CPO, NPO roadmap? Is that a fair assumption?

Yes. I think for the same reasons that we've seen NVIDIA shift laws of physics, right? If you are trying to transmit data at 1.6T at 200 gig per lane over any distance, copper has its challenges, right? It doesn't mean copper goes away, but certainly longer runs of copper are going to have their challenges. And so what we see as other ASICs are running at 200 gig SerDes and 200 gig per lane, they are going to have to deploy optics. And what we see is more of this NPO coming online. It's a little easier to deploy. Some performance hit, but the laws of physics still apply as they're trying to bring on their custom TPUs. And we say other ASIC guys that might be competing with NVIDIA really considering how do I leapfrog and part of that leapfrog strategy is a heavy degree of optics in the backplane.

Got it. And just to tack on that, I mean one of the things you see on the laser side is, you need a single laser for every wavelength, for every channel. So that drives as you need more bandwidth, you need more lasers, et cetera. Is there a way -- do you see comb lasers coming in, meaning you can split the laser into multiple narrower wavelengths, and so then you don't need additional lasers. You can use a single laser, but use kind of a greater -- grating to kind of split up that single laser into multiple wavelengths. Do you see that or is that still kind of out there?

Yes, I mean, look, it would certainly understand the way that technology works. I think the problem of it, any time you're going to take an optic through another optic, there's going to be some inherent loss. And so our view and what we actually see in some of this NPO is now deploying different wavelengths to try to pack more data. So if you look at a system, if you have 1 wavelength per fiber, okay, that's 1x the data. If I'm able to actually get multiple different wavelengths into a single fiber, which is effectively what you would do with the comb.

Another approach is without the loss, without passing an optic through another optic is now make a set of lasers that actually emit different frequencies. And so we call this a DWM approach, a dense wave division multiplexing. You're basically shooting now multiple frequencies into the fiber, and it accomplishes the same thing without the loss, right? So what we do see, Vijay, and I thought your question was I was reading it in preparation was a good one. What we see now is as these NPO opportunities come online, more of them are considering a DWDM, again, to try to leapfrog, more data per fiber and if they're able to do that, they think they can offer differentiation against some of these initial CPO types of products.

Got it. Fantastic. I want to move to other markets that you serve, which is the optical compute switch. I don't have a timer here guys, oh there you go, I see it up there. It's too far. So on the optical compute switch, that sounds an area where you dominate as well. I think the big player there is Google, everybody knows it. You guys are a big supplier there. And I think you've given out $400 million for next year, somewhere like that. But obviously, your size at that market, $4 billion, 10x that market.

If you can talk through what you're seeing there on the optical compute switch side? You have talked about multiple other CSPs also looking at it potentially, I think, might be Amazon, Microsoft -- AWS, Microsoft all these guys. Maybe talk to how you see that market evolving.

I mean, look, sort of in a backward look, right, the majority of our shipments actually have been to a spine switch replacement type application. So we are shipping to multiple customers. We're shipping in reasonable volume to 2, right, one of which is the spine switch replacement type of opportunity. Kathy was talking to me in the car. I think we've actually sized the TAM more like $10 billion, and we see that opportunity actually growing, not decreasing. You have this idea of Google deploying the OCS, optical circuit switch, but OCS in as scale-up topology.

So the way they're able to deploy OCS sort of negates all this conversation we've just been having about CPO and NPO. Their architecture is very elegant. And by deploying the OCS, and it's used in sort of the scale-up type of configuration, they have much shorter optical runs, more shorter copper runs as a result. And so they really don't need to deploy CPO and NPO.

But what we're seeing on the OCS side is an emerging opportunity, we think, is the biggest yet. And that is to deploy an OCS in the rack itself, 1 per rack, a smaller, narrower circuit switch, meaning from a pipe perspective. And the use case here is the racks, the GPUs have a loading problem at times, they can have a failing problem at times. And if you're running these big inferencing models, which is now what everybody is talking about, if you direct traffic to a GPU that's failing, you're going to lose millions of dollars in a compute run, right? You just don't want that to happen.

And so what people are considering is, look, how do we create resiliency in our racks, in our clusters and be able to route traffic to the least loaded GPUs, and an easy and elegant way to do that is with one of these OCSs. So where we've built into this massive TAM is considering a lot of these new and emerging applications outside optical scale up, this one big use case, outside these optical circuit switches we see in the spine layer and the sum total of that leads to some pretty interesting numbers.

Yes. I think more like a failover, I guess.

It's a failover, yes, exactly, right? Creating resiliency, some redundancy in the system, yes.

And just a little bit of selfish motion here. We raised our Google TPU numbers yesterday. So we now see it growing more than double next year. And from about 4 million this year to of 10 million next year and 30 million in 2028. So that's a massive ramp in TPUs. And I would assume maybe Kathy will go back and do some math and figure out what the OCS implications are, just kidding, but great. I mean I think as you look at optical compute switch, what you guys deliver is what's called MEMS OCS.

And maybe if you can set the table on how MEMS OCS differs from some of the other modalities out there in terms of whether it's LED OCS or piezoelectric? Why did Google finally decide to go to MEMS? And you're seeing other CSPs also get on the same MEMS optical compute switch, which is what you do, and that will probably continue to grow a lot faster.

Look, I think that first of all, going back to Google, they are manufacturing their own MEMS-based switch today. So they designed it. They actually have some brilliant optical engineers, and they design that optical circuit switch. They're deploying it in tremendous numbers, right? And certainly, there's an opportunity, we think, for us to be a third-party merchant supplier and eventually take all of that. I mean, does it make sense for Google to manufacture OCS? I'm not sure that's a business they want to be in. But we feel like there's a really distinct opportunity.

The important thing to note is their switch is MEMS based. And so MEMS is sort of the de facto standard in switching. Why? Well, it's a mirror, it deploys a mirror. And what you want to have, first and foremost, in switching is no loss. And if I'm just shining light from a mirror and directing it from one port to another, there's no loss. If you have piezoelectric, you have LCOS or some of these other things, there's loss in the system. And you really can't have that. That's an issue.

The knock on MEMS-based solutions has been the reliability because you have a moving mirror. It's actually a mechanical device that has to move to move the light from one port to another. What we've said is our WSS solution, as you know, that has been in the ground for 20 years and forming the backbone of the United States Internet, that's also MEMS based. And so if you have Verizon or AT&T that has to go dig up something out of the earth, that's a problem. So we better have reliability built in. We think we figured out the reliability a long, long time ago. And that's why we're having great, great success with our MEMS based approach.

And is that what is being adopted by other CSPs, too? Is that primarily the reasoning for why other CSPs might be looking at MEMS rather than some of the other computing -- optical compute switch?

Yes, that's right, Vijay. I mean it's 100%. It's about the loss, right? You just don't want to introduce another loss element in the system if you can avoid it, right? You're trying to go to optics to have speed, you don't want to introduce a lot of loss as you do that. So MEMS is the right answer.

Got it. And I think this probably benefits from some of the same tailwinds as the interconnect lasers, et cetera, too, right? Because as the rack sizes go up from 72 GPUs to 576 GPUs to, I don't know, 1,128 or something, you have Jensen talk about, the number of connections in the spine goes up as well. And that's similar for TPUs as well where TPUs are growing from 64 to, I think, the V8 that they showed had some 1,190 TPUs in inference.

So I think maybe you can talk to what is happening. I think today, the optical compute switch that you supply has 64 Radix or 64 interconnections and you're going to R300, I believe, the 300 matrix connectivity. And I'm sure there's more down the road in R512 or something, but maybe how that is picking up and that, obviously, drives a massive jump in your dollar count and your ASPs there. And so all of that is feeding into the number of TPU ramps, too, I guess.

Look, I think outside all the first part of our conversation on optical scale-up and optical scale-out, the OCS, we think, is a singular opportunity for the company. We've diverted a ton of resources to work on this. And the roadmap is vast and varied. I mean, it's exactly what you're pointing to. So our standard product today is 300x300, not a smaller Radix. There's 300 ports on it and you're able to switch light to any of those 300 ports. That's our primary offering. And what we see are opportunities to run the ports up, which is going to make it very, very difficult for a competing technology to come in. MEMS almost has to be used.

The higher the port count, the more this loss principle that we just discussed works in our favor. And we see port counts going up in our road map. And then we actually see ports going down. So there, it's going to be a little more competitive, and we're going to have to think about cost, we're going to have to think how we rearchitect the solution, still taking advantage of MEMS, but perhaps reimagining it so we can get the cost down to really get these numbers up, drop the ASP a bit and compete in these very, very high-volume emerging applications that we're seeing.

Got it. I want to go back to the road maps, like you've been there probably the best part of Lumentum's journey, I guess, in the last 18 months. But as you look out, look forward, the road maps on the laser side, on CPO, on OCS, what's your vision? What gets you excited? What are you seeing as you look out? Because the space keeps accelerating. Every month, it's a whole new landscape in terms of what people are looking at in terms of data center investments coming in, new clouds, new engagements from private equity. But maybe you can talk to how as you sit back and look at, not the last 18 months, which has been phenomenal, you've grown 10x. How do you see the next 18 months? How do you see the next 24 months?

Look, I think that there's been a market strategic shift in the company, and that strategic shift has been toward our components. So I think the previous administration and frankly, optics in general, sort of value systems. And if you look at some of our competitors, they're systems first, right? They're really going after high dollar content and generating boxes, they're generating platforms. And we were very much in that space. We weren't particularly good at making systems, but we were very much competing in the systems arena.

What we've done over the last year is pivoted the company a lot more to components. So I'm much more content, feeding into these system suppliers and being a strategic partner for them rather than us in some instances competing. But we just don't see ourselves as being a differentiated systems guy. We'd much rather be in components. And so I think if you fast forward for 5 years, we want to add more components to our portfolio.

We think we can compete in more than just lasers. We think there's a lot of things that go around the laser that are interesting, photonics ICs, photodiodes, maybe laser drivers, maybe even getting in more to the semiconductor world with TIAs, there's a lot of things that we think we can do. And so we're now looking aggressively as to how we can increase our shore line on the components end of the business.

Got it. I mean you mentioned briefly the administration might be -- I think they have been very pro trying to get the AI space to ramp up, get that growth going. Are you seeing more interest from not just administration but also key customer CSPs to onshore some of that supply chain, to derisk some of that supply chain, I guess.

It's been a conversation. I mean it's interesting for us, if we look at the sum total, I mean it's not just us, but you can check with Jim Anderson at Coherent. I think the sum total of products that we ship to hyperscalers is zero, to Chinese hyperscalers, right? So we've been very specifically blocked out of the Chinese hyperscaler market. Meanwhile, there's a lot of sourcing of Chinese components that are going into U.S. hyperscalers. Part of the problem is between the U.S. supply chain, we couldn't supply at all.

So even if you said tomorrow, look, let's wave a wand and kick the Chinese out of the U.S. supply chain, it would actually bring the U.S. hyperscalers to their knees because they are sourcing a ton of components. And in their defense, it's not like I can run out and fill that void immediately. It has to be a concerted effort. And I think the Chinese have made a concerted effort to keep us out, and that's very disappointing. But I understand their strategy. The U.S. government and our side of the industry would have to work together in a much more concerted fashion, I think, to make that a reality and reverse and keep the Chinese out of the U.S. hyperscalers.

We've got 5 minutes left before I go for any questions. One last one. I think we talked about everything within the data set, on the racks, how on the spine you're adding the lasers and optical compute switch, I guess. How about the DCI, the data center interconnect? You have the issue where you don't have all the power in one place. So you had to set up all these data centers in geographically dispersed locations and then you need to connect them optically on massive lasers interconnects between data centers. What's the opportunity there? Either it's, I don't know, you call it data center interconnect or multirail or maybe you can spend 2 minutes on that and then we'll open up for some questions.

No. Look, if you look at all of these opportunities we've been talking about, $10 billion OCS opportunity, $15 billion, which is probably undercalled, on CPO. NPO, we haven't sized, but again, another number. This is a smaller TAM, right, but a very interesting one because we have very, very high market share. So I think Kathy and I were doing a calculation in preparation for our chat. I think the current component piece of the DCI market or scale across is about $1.5 billion. And we see that growing to about $4 billion by 2029.

So there's good growth in that market, driven by two things. One is, frankly, the politics of data centers, right, where people are not looking to have these massive data centers in their backyard. And then the second is the power, right? If you make a more modular data center, you don't have the power draw at least localized on that particular grid. The sum total of course, is going to be the same, but it's much more distributed across the entire electrical network.

And so we see a lot more of these smaller data centers getting built out. And you have the emergence of inferencing, this agentic AI is creating a lot of need for compute and that compute really can't be contained to one specific area. You're going to have a lot more of these data centers working together. That is creating the scale across opportunity. We're trying to connect data centers at full bandwidth. DCI was always connecting data centers but not necessarily at full bandwidth.

Now with the inferencing, you got to connect at full bandwidth full rate and that's playing really nicely to the component sets that we provide. Our pump lasers, right, really important in multi-rail, our narrow-linewidth lasers really important in the DCO, the modules. And then the WSS, which are going into line subsystem. So there's a lot of components that we bring to our systems providers that enable this multi scale across opportunity.

Got it. So basically connecting all the data centers, so they look like one big monolithic GPU.

Correct, right, which, again, super important for inferencing, and it creates a little bit of a more friendlier political environment, if you will.

Fantastic. Maybe we can take some questions from the audience. Go ahead, Jordan.

Thank you, Michael, for speaking today. I had a question on high gross margins. You've done a fantastic job since you've been at Lumentum expanding, increasing the gross margins and the investors certainly are happy to see the trajectory and then you've outlined them getting much higher over time.

One question I get from investors is the ability to sustain that, how much of that is coming from the mix of these new products, which I think you kind of hinted to, these are generally accretive to the margins, but also one pushback or concern as well, the laser suppliers for indium phosphide are just raising prices and that's because there's just massive amounts of demand that exceeds supply.

But when the supply catches up as you guys are all adding, obviously, capacity, that real benefit comes down because you guys can't sustain that. Can you address like how you see the pricing playing out and then also the mix.

Thanks, Jordan. Good questions. It's not that we haven't heard that one before, but I appreciate you being the straight man. Look, I come from the semiconductor business, as many of you know, and we had one of the best gross margin stories of my previous company, I think in history. We went from mid-30s to over 60% gross margin. It was one of the biggest gross ever. We're on that trajectory now with Lumentum. So we see -- we've grown gross margins by about 14%, from about 33% now to 47% 48%, depending on whose numbers you believe in a little over a year. That's definitely been driven by price. It's been driven by mix. It's been driven only a very small amount by cost. We haven't taken a lot of cost out of the -- variable cost out of the product.

But going back to the Synaptics story, there was a massive run up on price during COVID, right, if you remember, in the semiconductor business, that never reset. That never reset, right? So once the demand fell off and we saw it fall off very significantly, pricing didn't go down, right? And so we would say the same thing here. I'm not worried about a pricing reset because I think it's a lot more durable than is given credit for, for. And I think the evidence point is what we saw in semis during the COVID crisis, the massive run-up from TSMC that then people passed on, and that proved to be sustainable.

Yes, great. I think that brings us to the top of the hour. Michael, what a phenomenal run it has been.

I just want my picture out there on Times Square. That's pretty good man. I was pretty good. I need to get my picture out there. That's amazing.

But I mean I can't say this enough. I think you guys have executed phenomenally. I think as you look out, your fiscal '28 number at $8 billion, but everything that you say from $10 million on the OCS and the whole NPO, CPO coming together and you have the whole laser side picking up. I think the opportunity is just phenomenal.

My job is to keep you happy, okay. That's it. That's it.

To another 10x in the next 18 months, I guess.

Thanks, Vijay. I appreciate it.

Thanks everybody for joining us. Thank you, Michael.

Thank you.

Welcome back to this afternoon session at the BofA Global Tech Conference. I'm Vivek Arya from BofA's semiconductor semi-cap equipment research team. Really delighted and honored to have Wupen Yuen, the Head of Business Unit at Lumentum, join us this afternoon. I'll go through my questions, but please feel free to raise your hand if you would like to bring something up during the discussion. With that, very warm welcome.

Thank you.

Really appreciate you being here with us.

So maybe let's start at the high level, if it's okay. I see Lumentum kind of involved in so many interesting high-growth areas, right, whether it is lasers, right, whether it is optical circuit switches or transceivers, right, just silicon photonics, right, multiple different areas. What are the key kind of operational and technical areas that you are spending your time on to make sure -- because there's no lack of demand, there's no lack of growth, but how are you kind of optimizing your -- what are the top 2 or 3 operational things that you are keeping your eye on?

Right. So first of all, is the fab, right? I think the fab is the most critical part of it. Our value is in the fab primarily. So we're really making sure that we have the right teams, right? One of the things that we are doing today with Lumentum, I'm seeing Chuck here, right? These fabs are actually like a temple. There's a lot of very experienced people running the temple. So we actually have -- make sure that our fab people are fully supported, right, with the right tools, right automation to ensure they can actually maximize their efficiency. So number one is the fab. We spend a lot of effort on the fab.

Second thing really is thinking about ramping all these kind of assembly and test operations is not easy, right? OCS is a complex product and the modules is rapid cycle products. These ramping are challenging, right? So what we do here really is, say, let's put our best resources, best engineering talent on ramping these complicated products. And frankly, we're actually moving our legacy products out of our own factories, moving to the CMs for the CMs to help us manage those kind of products, right?

So -- and then the third piece really is supply chain, right? As now AI demand going through the roof, everything from PCB to garnet to lasers and PDs and DSPs, everything kind of short. So we're also spending a lot of time managing the supply chain piece, make sure that this do not become the bottleneck. So really the fab, the test and assembly piece and also the supply chain piece.

All right. Makes sense. You have described almost kind of a 30% imbalance, right, between supply and demand on your EML lasers. When do you think that will close? Like what needs to happen? Is there a certain time frame at which you see that closing? And as you look outside, Wupen, do you see competition catching up and filling right, some of that gap?

Yes. We're seeing now -- so let's think about the -- where we are in the AI space, right? Today, all of our so-called supply-demand imbalance is really still in the scale-out phase, right? And the scale-out is already taking all of us -- all of our wherewithal and we're still short, right? And what we're seeing also is that the optical scale-up is happening in 2028. When optical scale-up happens, the optical intensity increased by at least 3x, if not more, right? And frankly speaking, if you look at -- we're struggling as an industry to even deal with the scale-out demand for the next couple of years. And then before you can really fully get your head above the water, the scale-up demand actually happens, right?

So frankly, we're not too concerned about there's more capacity, more competitors joining the game. We're actually focused a lot more on ramping our own capacity, right? Because what we see is that the CPO demand is as strong and on time or even stronger as before. We see the scale-out EML demand stronger or equal or stronger than before. There's more demand for CW lasers. And then we're seeing the tsunami of scale-up happening in a couple of years, right? So we're not overly concerned, frankly, by competition, but we're actually much more focused on ramping our own capacity and driving the -- as much efficiency as we can.

Got it. You made an interesting point that the specifications of these lasers, right? I mean, it's a similar laser, but -- or same technology, right, for these EMLs can vary as you go from scale-out to scale-up. Could you expand on that? Like what has to change?

Yes. So I think the -- there's also a very important point on the competition. I want to emphasize a little bit, right? Not every laser is built the same. Not every one is the same, right? For example, right, let's take the UHP laser or CPO laser, for example, right? You have to go through a very special modulator, silicon photonics in order to get the density of the CPO that customer is looking for. And that requires narrow bandwidth of the laser, very low noise. That's hard to make, right? And then that actually itself is a very high bar to overcome.

And then for the CW laser, for example, right, when you go to a high-efficiency CW laser, you actually are sacrificing certain features of the laser from a design point of view, that makes yielding the laser a lot harder, right? And therefore, we are a user of different CW lasers, too. We see a drastic difference between brand A to brand B to our own, right, that the design of the laser, ability of the laser to yield in manufacturing at the module level is a really big deal that people do not talk about, right?

So that's also really important. There's a major differentiation there. And this is frankly where Lumentum's pricing power actually exists because our customers are telling us when they use our lasers, they actually get a higher module yield. Now at the module level of a few hundred dollars per module, a couple of percentage difference in yield is a lot of money, right? So that's also really important, right?

Third, at the EML situation, right? When you go to 100G, 200G EML, it becomes harder to make. And then you also have to go to the structures that will reduce the interference between different channels, that requires a different feature on the EML, right? That also make it harder to make, right? So as we progress towards scale-out and then scale-up, the challenges because of higher density of packaging and higher density of bandwidth makes the design features that much more important and then the yield consideration much more important. And so therefore, not all lasers are created equal at the final solution level.

Got it. That's a good point. Does that show up in pricing because people have always thought of the optics industry as kind of even more deflationary than the broader semiconductor industry. Do you think it is helping from a pricing perspective also?

Yes, we hate to say this, right? But in the...

You mean, you like to say this?

We like to say that we're over that phase, right? Previously, I've been in the industry for 30 years, and Chuck has been there for 30 years, too. I mean, that was a kind of zero-sum game market, right? Today, the market demand is growing so fast, right? If you have a good quality, you can supply, the pricing power does exist, right? So we are seeing -- certainly, there's a structural level pricing. We're also seeing opportunities for arbitraging when there's a last-minute hot demand that when competitors fail to deliver, and we see opportunity there for us to also arbitrage based on the local supply and demand mismatch as well.

Got it. I wanted to get your perspective, Wupen, on the rollout of CPO. Right, so maybe first start with what is kind of the most important milestones that you're looking at? How will it evolve? And then the question that I had, right, following that would be from the suppliers, not yet from hyperscalers quite yet. But maybe first start with how do you see the time line of CPO deployment across your customers?

Okay. So first of all, on the CPO side, right, we're seeing our ramp of CPO lasers to be on schedule. And then the pressure from the customers are the same or increasing, right? That means that they are all in on the CPOs. In fact, we heard some of the -- their direct customers, the [ new ] clouds are saying that definitely, right, CPO is on schedule. But I want to kind of bring the stage out a little bit. What is driving CPO? Why is it very important, right? The CPO is never a scale-out story, right? The CPO really is a scale-up story, right? If you look at the AI hardware racks, right, the scale-up capacity or bandwidth is 10x that of optical scale-out. When you go to 10x the bandwidth, it's hard to say I'm going to use pluggable modules, right? The power consumption, the cost, the size is just crazy, right? So -- and so that's one thing, right?

And because of the inference, the AI inference traffic now growing so fast, I just made a statement that we're seeing now the inference induced optical scale-up ramping happening kind of '28, right? So to meet that time line, that's what's fundamentally driving the CPO because you need the density of CPO, the power consumption of the CPO to really enable, right, in the inference optical scale-up kind of time line, right? So that really fundamentally is driving it.

Therefore, we're seeing more urgency in the CPO adoption, we're seeing more urgency on the high-density optical interconnect adoption for that particular reason, right? And therefore, again, from a laser supplier perspective, we see that trend continues, right? So for the next couple of years, we still is mostly in the scale-out domain. But in '28 and beyond, once the scale-up happens, there's an inflection of the optical intensity, right, in the AI racks. And that was -- that's going to be another huge opportunity that we've been talking about, right, since the OFC time.

Got it. Do you think -- does that transition leave a hole that -- because CPO is implemented in scale-out first that -- but that's a very temporary part. Does that then leave a hole that scale-up then has to fill? Or do you think -- as you described, scale-up is such a massively larger opportunity that it shouldn't be a problem?

Yes. I think the eventual state will be the following, right? The scale-up is a very proprietary setup, right? Hyperscaler A to B to C or GPU A to B to C, they have a different kind of design for the rack level, right? And therefore, scale-up CPO is very straightforward. It's my own design, I own the racks, I do CPO, right? But the scale-out is different. Scale-out, you're connecting different racks together. That's where you may not have to use CPO. You could use DR optics, FR optics, LR optics, right? That's where you can actually use pluggable. It's okay, right?

So again, I would just say that the scale-out CPO is the first step, is to really trailblaze and mature the ecosystem, right? But that's not the final destination. The real reason for scale-up for CPO is in the scale-up. And you will see, I think, a mixture of optics used for scale-out, including CPO, but you're going to see a lot of CPOs in the scale-up applications because they self-contained. That's how we're seeing the world developing.

Got it. Where does NPO fit in this? Is that a temporary solution? Does it have legs? What do you think about it?

Yes, NPO is a great question, right? So here's our view, right? Still coming back to the scale-up story, right? When people realize that scale-up has to happen because of the inference impact, right, people figured out that our view is that they're not ready for CPO yet. But you cannot use pluggable, front panel pluggable, what do you do, right? Okay. Well, let's use an NPO, which is a socket-based, which is more like linear optics close enough, not quite as good as the CPO power consumption, but it's much better than front panel pluggable, right?

So it is really an intermediate first step to really for time-to-market reasons, right? But what we're seeing as a general conclusion is that the next generation after the NPO will be CPO. Everybody is focusing on CPO.

It's just a temporary...

Temporary thing. So we really think, okay, there's going to be 2 group people in the first generation of the scale-up implementation. It will be CPO plus NPO. But in the next phase, right, the generation 2, everybody will be focused on CPO. So this is really, in our opinion, NPO is intermediate step.

Got it. Now on the CPO, the question I really wanted to ask was, so I think it's clear, NVIDIA has described the road map, right? They have kind of a very clear time line of when they want to get to CPO. But if you're not deploying the NVIDIA solution, right, then are you still seeing enough of a pull to -- so yes, I think there is a Marvell, Celestial, right, solution with Amazon as an example. But are those really kind of the 2 alternatives? Or do you see a more diverse set of customers? Because we don't hear yet from the hyperscalers because this is a brand-new technology, right? They are already putting in so much complexity. So what do you think -- what do you hear from the end customers about the pace of adoption? What are their practical challenges that need to be addressed before CPO becomes a bigger deal for them?

That's a very complicated question. Every hyperscaler is very different, right? One hyperscaler is very much because the unique architecture, right, is very much a pluggable play, right? It is OCS, pluggable. That's one group, right? That customer, they're probably not so hot on CPO, right? But then there's definitely NVIDIA enables every single hyperscaler to use CPO. So that's one thing.

And then we also see another hyperscaler that's all in on NPO, right? That's, again, because optical scaled-up, right? And we see a couple more customers who are more looking at, okay, I want to go to CPO, but I'm going to use a merchant solution first, right? So their solution -- merchant solution on CPO, right, to -- including the switch, right, including -- that's also where you're going to go with, right? So I would say that for next 2 years, 2 to 3 years, you're going to see the pluggable customer with their own architecture. You're going to see the NVIDIA with the CPO architecture, and you're going to see some other hyperscalers, right, say, hey, you have own -- whether it's a high-density XPOs or whatever or solutions, it's going to be a mixed bag, right?

But -- that will change. Again, after 2028, it will change, right, to be more on -- you see the -- sorry, I'm a little bit over -- look at this OCI MSA, who's on the OCI MSA? Everything has to sit on OCI MSA, right? The OCI MSA has to be done by silicon photonics, by ring modulators, by slow-and-wide optics, DWDM, right? That is the ultimate solution, right? So that's where everything is going to converge. It's just -- everybody has a different starting point. We're going to actually gradually converge onto CPO from kind of different angles. But the final solution is pretty clear.

Does it make your job of forecasting tougher? Or you think that -- yes, these -- all these things sound very fragmented, but you have very good line of sight, good visibility, right, for each of these implementations that you can roll up, right, for your factory forecast?

Yes. I think we have a good visibility, right? We have a good view on which hyperscalers is doing what, right? And we're engaged in -- from the laser piece, we're actually engaged very well, right, in all the different opportunities. We're also engaged on the module side, right, in some of the major application of modules, right? So I feel we have a really good understanding. And also, there's like multiple LTAs, right, where we have with the customers that also give us the visibility of the product types, product mix, right, and the volume, right? So I think we're pretty well positioned. That's why we're pretty aggressive in ramping our capacity, right, because we have these kind of visibilities and in most cases, the commercial assurances as well.

Got it. Makes sense. Next thing on optical circuit switch. Again, from the outside, it seems like there is one big hyperscaler who has adopted it, but Lumentum has described engagement with several hyperscalers. So first, the use case, is this still kind of limited more to high-density kind of training clusters? Or do you see the role of OCS expanding in inference? Also, how is it doing that? And then are you seeing engagements with multiple customers? Or is it still kind of dominated by one?

That's a really good question, right? So today, we have been engaged with 2 kind of opportunities. One is more of a spine-level replacement, whether it's really data center spine or campus level spine or scale-across spine, right? So really that spine level replacement. That's a smaller opportunity, right? But the primary opportunity here really is the optical scale-up, right, in the particular Taurus kind of implementation, right? That's the majority of the volume, right?

Then what we see actually going forward is that when the CPO or optical scale-up happens, then there is an interesting phenomenon we're thinking really is that, that's the time when you are scaling the inference clusters from 1 to 8 or 10 or whatever, go to 1,000 XPU clusters. That's where OCS becomes a really interesting opportunity because then you can have different instances, you can have different models. You can actually serve, you can connect and then actually leverage the whole clusters and not wasting any resources, right? That's when we see that the OCS growth will become a really good complementary technologies to go with optical scale-up, right?

So we think there is an interesting potential convergence of optical scale-up and OCS, right. Not right away, right? The world takes time to really learn how to operate in that domain. But I think there's a multiyear trend that this could become another major growth opportunity for OCS on top of the current application and on top of the kind of scale across and scale-out applications of OCS.

Got it. So I know with CPO, right, you have a major system developer, right, really kind of promoting it. Do you see some kind of similar trend? So yes, OCS has been deployed by one hyperscaler, but for it to be widely deployed, do you think some system vendor has to really start pushing it? Or do you see the organic pull from end customers to deploy it also?

That's a good question. I think the -- I would say that now I think it's pretty clear that the inference requires clusters. Racks, right, racks and clusters. And we see hyperscalers thinking about how they can build their own clusters, right, really for high-efficiency inferencing. I think the XPU guys, they're all thinking about it. Now to learn how to use it will take time. Google spent many years perfecting the use of OCS, right? The software piece is pretty complicated, right? Therefore, I think that whoever wants to use OCS going forward needs to go through that learning cycle. I don't think it's going to be overnight kind of thing. But again, once the signal goes to optical in the scale-up domain, it makes sense to process in the scale-up domain.

That's right. Right, I think the OEM...

Why go back, right? Then -- I think that's a natural kind of migration for the world to go in that direction.

Got it. That's a very good point. Last question on OCS. Do you think there is still industry debate on the specific technology, right, MEMS versus liquid crystal? I imagine you have your own perspective. But do you think that debate has been sorted out, both technologies work well? Or you think MEMS has a better shot at being more successful?

No, I'm highly biased, right? To say that, right? I'm highly biased. But if I look at just kind of the pool outside looking at technology, right, the way I look at it is that the MEMS is an engine you build in parallel. You build at a wafer level. You build an engine and you put optics around it, you put a fiber alignment to it and you're done, right? The liquid crystal is more of a serial approach. You have 2 layers and layers and layers of liquid crystal, right? So it becomes more a serialized manufacturing process. And thereby, you're introducing a little more insertion loss and so on and so forth, right?

So it's -- I think manufacturing process itself is different and resulting in potentially different performance optically or potentially different manufacturability, right? But we don't have liquid crystals, so we don't really know. And the third piece is really that people some people are using this piezoelectric, right? That's probably even more serialized, right? And therefore, our view is that we know MEMS the best. We know it meets all the specification. We know we can manufacture it, right? We know we're ramping it. So I think jury is out, right? I think the -- if the market is big enough, it needs more than one supplier that can do this, right? Again, if the whole market goes to the inference-based optical scaled-up domain, big enough, the market will need multiple technologies to support it, right? But I think we know our technology is pretty well suited for the application, and we can actually scale it.

Got it. Next topic, Wupen, I would like to move to is optical transceivers, right, pluggables. Lumentum, I find has been a little reluctant initially to invest too much, right, into the business, then you got Cloud Light and then you got an important customer. So how strategic of a market is optical transceivers for Lumentum? Is it a lot more strategic? Or is it still more tactical that you have 1 or 2 customers, you will do what they need, but you don't want to make this a big business?

Yes. I think optical transceiver is an interesting piece, right? I think the -- so first of all, a lot of questions in the conference saying, hey, when CPO happens, what's going to happen to your module business? And luckily, I would say that our primary concentration of the module business was with customers who don't like to use CPO, right? So there's no cannibalization, right? We're kind of enjoying the benefit of module ramping along with OCS ramping along with the CPO ramping. So we're kind of lucky in that sense.

But the module piece is pretty important to us because through modules, we actually get to see a lot of the road map piece from our customers, right, whether it's high density like XPO or next-generation architectures where things are moving, right? And then there's a lot of evolution happening in our technology space around the modules. So I would say that's strategic in that way.

But we do admit, right, the margin is definitely below our corporate gross margin, right? So our goal is say, let's serve our current customer well, right? Let's not go crazy to expand our customer base, but just focus on serving our couple of hyperscaler customers really well and then ride along with their road map, enabling them and then -- and continue to develop the technology, right? So I would say it's strategic, but it is kind of a confined strategic product line for us.

Got it. Is there a scenario where -- because of various geopolitical reasons, U.S. hyperscalers decide to buy more designed in the U.S. I mean, everyone is kind of making it in Asia. So I don't know whether that makes a difference or at least packaging it there. But do you think there's a scenario where you get some advantage and that might make transceiver a bigger business?

That's a really good question. I think that there is a general concern and hesitation on the hyperscalers of the dependence on the China-based module vendors, even though they're all moving the production outside, right? Now different hyperscalers have a different level of concerns, some are very concerned, some are less concerned, right? Very hard to say what they're going to do, right? Because, frankly speaking, the China-based vendors are doing a really good job, right, serving the needs of the hyperscalers. Without them, probably our AI will be -- it's not going to deploy that well either, right? So I think it's a complicated question, but we do see concerns. And we do see concern about the IPs, manufacturing location and where things coming from and so on and so forth. So I cannot predict the future, but I think the concerns do exist. Yes. But again, the AI...

Have customers spoken to you about -- like let's say, if they wanted to, for whatever reason, do you think you have the desire, the capability, the capacity to actually become a bigger transceiver vendor?

Well, we don't have the capacity for sure. Given time, anything happened, right? Given 2 years, can you build capacity? Yes, you can build in 2 years, right? And it depends on what is the commercial condition, right? Would that be worth our capital allocation to make that a much, much bigger business? Technology, we have it. We have some of the key components. But whether we do that or not, depending on the commercial conditions, I think, at that time.

Makes sense. And then finally, on long-term agreements. It seems like this year, everything is in short supply, right? So customers, I imagine, are willing to kind of sign up for whatever, right? But how durable, how enforceable, right? How are these -- obviously, not proprietary agreements, but how in general are you structuring them? Are you holding customers to a certain unit commitment? Are you holding them to a certain pricing commitment, right, percentage of volume commitment? What is the general nature of these LTAs?

Yes, general nature of that is basically a take-or-pay kind of thing, right? So take-or-pay, there's a very strong commitment from the customer side. And in certain cases, there's a prepay element as well, right? So it's very much structured like that, right? Again, the duration it depends, typically 2, 3 years or something actually longer, right? So -- and it definitely is also -- we're also thinking strategically. We don't want to max our capacity with LTAs because we still do believe that the AI optics usage will continue to rise. Therefore, we don't want to just lock up all capacity we have. We want to preserve some capacity for engaging more customers or opportunistically spot price of the market and so on and so forth, right? So that's kind of our overall strategy. But by and large, it's a take-or-pay kind of architecture of kind of the framework of the LTAs.

Got it. And how long do these run until some of these LTAs...

No, it's like 3 years to 5 years. 2 to 3 or even 5 years in some cases.

Got it. So if, let's say, theoretically, cloud CapEx slowed for whatever reason in the next 2 years, you feel that these are enforceable?

We feel it's enforceable, but are we going to hyperscaler, who knows, right? But I think that the -- these are important relationships because I don't believe AI is going to crash, right? It may slow down, but you're going to grow again, right? And the reason we're building with hyperscalers are truly strategic. And therefore, I hope that they view it that way, too. We don't see that being a transactional relationship.

Got it. Okay. Last question, NVIDIA made an investment in Lumentum. So from what has been kind of said publicly, what is the nature of that relationship? What kind of assurances, what kind of engagements do you have because of that relationship? What does Lumentum need to do, right? What is your part of the relationship?

Yes, that's a great question, right? So basically, there are 2 pieces, right? The piece number 1 is the purchase agreement contract, right? That's a multiyear LTA for the ultra-high power laser, right? That is actually separate from the investment piece, right? Investment is completely independent from the purchase agreement, right? So investment really is like signifies the strategic relationship between the 2 companies, right? And then that's an important thing because then both bandwidth will say, okay, we are strategic partners. But there's no string attached to what we can use that funding for, right? They just become a shareholder of Lumentum, right? And then that -- the ultra-high power laser for CPO, right? That's something we're ramping, too. There's a commitment on both sides, right? There's a volume, there's pricing, there's take-or-pay.

Could you be exclusive, you think, in that opportunity?

No, I don't think that's an exclusive relationship, right? I think also because we don't want to be exclusive. They don't want to be exclusive, right? So there's going to be at least 2 companies sharing that share which is I think is good for both companies.

Yes. Makes sense. With that, Wupen, thank you so much. Really appreciate the time. Thank you very much.

Thank you.

Good morning, everyone. Welcome to one of the first fireside chats for our annual tech conference. It's quite appropriate that from a hardware and networking coverage standpoint that we do the first fireside chat with the company we spend the most time talking with investors about over 2025, 2026. So Michael, thanks for being here. As an introduction, Michael Hurlston, President and CEO of Lumentum. Thank you. Kathy, thank you for the time at the conference as well.

I'll start off with a few questions, maybe more broader and looking at the industry a bit more broadly. Historically, and I go back to the time I started covering the sector, investors consider optical companies to be cyclical. What has changed in the industry to change that outlook? What's driving your confidence that it is not the same as the previous cycles?

Yes, Samik, first of all, thanks for having us. And you and I are spending a lot of time together. Rumors are going to start. You've got to be careful, okay? Look, I think everybody loves the phrase this time is different, but it does feel like this time is different. Our customers historically in optical have been the telecom customers, AT&T, Deutsche Telekom, Verizon. And the fiber build-outs were indeed very cyclical. There was a boom and bust period. We had a huge run-up in the 2000 periods. We had another good run in 2014, 2015, but it was really driven by the telcos. And this time, it's driven by hyperscalers.

There was an e-mail that one of our guys sent last night that the hyperscalers themselves have $2 trillion of backlog at the moment. And the spending that they're driving, obviously, the capital expenditures that are well documented, the speaker before from JPMorgan was talking about that. I think that, that is a sustainable cycle. It won't go on forever. I think you and I know that. We've been around long enough to realize that, but this feels like it's a multi-multiyear run and one that is very different in character from previous optical cycles.

One of the things you've done after you started is to improve the margins. How are you positioning the company to improve long-term margins related to the historical margins the company has delivered? What's your North Star in terms of where you want to get to on the margin front?

Yes. I think people that have followed me know that margin is probably my most important metric. So at my previous company, Synaptics, we ran margins from 39% to well over 60% in the span of 18 months. So we're not doing that here. It's a little harder work to get the margins up. But we feel like as an industry, optics didn't get properly valued for what we can deliver. The value we're bringing to our customers, the components, the subsystems are truly what makes these networks run. And I don't think that we necessarily got paid.

So we've worked the portfolio, as you know, you've been very close to the company. We've worked mix. We've dropped some lower-margin product lines out. We've focused a lot more on higher-margin lines. We've worked cost, although I'd like to work cost more, I think there's an opportunity on both yield and our manufacturing cost to get quite a bit more on the margin line. And then the last thing is price, right? We've gone out and we've repriced the backlog, as you know, and that's helped us move the margins from sort of low 30s to now close to 50%.

Okay. Great. So not to put a negative narrative around it, but the upside to your earnings over the last 18 months has been great, great share price reaction reflecting that. But we often get the question from particularly investors who haven't looked at optical in a while is, I want to take a 3-year view, 5-year view, tell me the risk associated with how things have been going. Things just look like they're going to the right in everything that you touch. It's almost like everything you touch turns to gold dust, right? Like what's the risk here? Just help us think about what are you paying the most attention to when you think about what your internal plan is for the next 3 years, where do you see the most risk?

I mean the demand is clearly there. So if we look at the signals that we're seeing from our customers and our customers' customers, in some cases, there is no demand problem, which is an enviable situation to be in. Our issue is execution, right? It's building out the right capacity, finding the right balance to keep undersupplying to a certain extent the market, but growing our supply line to a point where we can keep capturing a lot of that demand, executing in that envelope, delivering products on time. And that's again historically been a problem for the company because the company is dealing at scales of thousands when we're talking about the telecom customers, and now we're looking at scales of tens, in some cases, hundreds of millions.

So we've got a lot of work to do to get our business in tow to hit that demand line. So execution is our primary issue. Obviously, over a 5-year horizon, Samik, we're worried about technology inflection points. You have speed changes. We're going from 800 gig to 1.6T. We'll go to 3.2T. We're looking at different technologies around our OCS franchise. I mean I think that's a very, very strong part of our business. We're looking around corners to make sure that we've got technology protection there. On co-packaged optics, again, we're in an enviable position on CPO, and we think that's going to be a long, long-term driver for the business. But we're always watching where is it from a technology inflection standpoint, we can either introduce products to capture more of the margin on more of the opportunity or we have to do something defensive to protect the franchise.

So maybe I'll follow up on that and then phrase the question the same way I get it from investors is they say Lumentum is leading in every technology that they have right now. Talk to me about the risk that there are a lot of these optical companies in China that start to get into the same markets Lumentum is in and the market looks a lot more competitive, a lot more commoditized, a lot more price competitive in 2 to 3 years. How do you think about those risks?

I mean I think what people don't realize is that these products that we're doing right now are not new. They didn't come in overnight. So if you look at our OCS, and Kathy speaks of this extremely well. It's been a 10- or 15-year development cycle, right? It's the WSS and the field-proven MEMS product that has made that a raging success. The concern always with OCS has been reliability, and we've solved for that, but it hasn't been an overnight solve. It's been a 10- to 15-year solve.

Our laser business, you look at the CPO, these high-powered lasers, again, didn't come out of thin air. It's been a long, long development cycle to get there. These are products that go in undersea amplifiers, right? So the same products that are dropped into the Mariana Trench are what's being used in some of these co-packaged optics opportunities. So I think the simple answer is there's been a long, long development cycle. I think if people started today, it would take multiple years for them to catch up on our core technologies, and we feel pretty good about our position.

Going back to OFC this year in March, you laid out a $2 billion quarterly revenue target with 40% operating margins in 18 to 24 months. The June quarter guidance, you're implying you're almost 50% of the way there already. Can you walk us through the key sequencing of growth drivers, the margin inflections that investors should expect from here on?

Yes. Look, I mean, we've talked about this. We have very little contribution as yet in our numbers on any of the big growth drivers. You've covered the story for a long time and know it as well as anybody. But we have 4 big growth drivers that start to layer in, in the third quarter of the calendar year and a little bit more in the fourth quarter of the calendar year. Those are OCS, right? We've got small contributions now from OCS. We've started shipping. We have small contributions for optical scale out, and we would expect to see much more significant contributions starting in the fourth quarter.

And then optical scale-up clearly isn't happening yet, but we'd expect big inflection points in 2027. So those 3 are not really kicking in. And I think the underappreciated part of the portfolio is our transceiver business. Our transceiver business is there. We're shipping transceivers to a good degree. But we think we have an opportunity to double that revenue line over the next 4 or 5 quarters. By virtue of the fact, as we were talking about last night over dinner, we've kind of got to the front of the line now, right? We were really trailing from an engineering perspective. And suddenly, we've figured out the engineering part of the paradigm, and we've got to the front of the line. So we'd expect significant growth from our transceiver business again over the next 4 to 5 quarters. So a lot of good things, I think, are in the company's windshield.

Okay. Going back to the question that you got yesterday as well, and I'm expecting you'll get the same question multiple times today. What's changed since OFC? Where have you seen the biggest inflections in customer engagement and broadening out of the demand drivers since OFC in March?

Yes. I'd say a couple of things, and we had a good discussion over -- on dinner. First is scale across, right? And we tried to highlight this in the call. Kathy did some work last night because we got a question from the team over dinner. There's a number of build-outs right now that are new. You've got Ciena talking about 5 customers. You've got Cisco talking about 3 customers. You've got Nokia talking about a significant presence now in the scale across opportunities. And that was something we obviously had a sense for. I mean, you sort of -- you probed on that last night over dinner, but we didn't know how big it was going to be.

And I think in the 2 months since OFC, the pump laser business, narrow linewidth laser business, WSS, these multi-rail opportunities have really, really been a surprise. And so I think we have a bit more upside since OFC than we talked about. I think the second thing that's been a surprise is our transceiver business, right? We really have been surprised because, again, for the first time, we're seeing what it means to be first to market on 1.6T, and that's put a lot of pressure on our factories to produce the transceivers, but we see a lot more upside by virtue of our position now.

And then the third thing is just the demand from our large customer on co-packaged optics. We talked about it in Los Angeles at OFC and said, look, it seems to be getting better, but I think there's been a step up, both a step-up on scale out but perhaps more importantly, on scale up, the inter-rack connectivity and the cross-cluster connectivity that I think really will drive our numbers in '27, '28 and '29.

Okay. Got it. So maybe let's dive into scale up a bit. You've talked about the scale-up opportunity that it's doing better even relative to where you left things off at OFC. What as an industry do you need to do in relation to manufacturing or even sort of the scaling up of the supply chain to address that demand? And how much is sort of the broadening out of the customer base contingent on being able to supply the adequate volume that the industry needs?

Yes. I think this is the question that we certainly got with the coincident investments with us and Coherent. We can't supply enough. I mean we are not going to be able to meet the demand of NVIDIA alone, right, let alone the other set of customers that seem to be going this direction. You've got Amazon clearly talking about NPO, CPO. You've got Meta talking about it. You've got other chipset guys talking about it to a huge degree. It really is an inevitable phenomenon, right? And it's a matter of when, not if.

And all these guys seem to be tipping in the '27, early '28 time line toward at least some part of their portfolio being optical connectivity. So we are not going to be able to scale to meet that. I mean we are trying everything we can in the fabs we have. We obviously bought another indium phosphide fab, our fifth indium phosphide fab to try to meet that demand. But even with that fifth fab coming online, we are not going to be able to meet demand. So Coherent is obviously going to have to play a role. And I think we're going to need others probably ending up to come into this market. The challenge is, back to your first question, it just takes a long time to qualify these high-powered lasers. So I think the market is going to be ours for quite some period of time, and that's going to put a lot of pressure on us from a manufacturing standpoint.

Okay. Moving to -- on the laser capacity or EMLs in particular, I think you've noted that the supply-demand imbalance has grown to greater than 30% or maybe even higher. I mean this is in the context of your output going 8x since fiscal '23. You're also targeting another 50% unit increase over the next few months here. At what point does this imbalance self-correct to some extent? What could be the drivers that this imbalance self-corrects? Or do you expect this imbalance to grow, widen even further? And maybe I'll have a follow-up, but maybe let's start with that.

Yes. I think at some point, it's got to correct. But I think that we're going to have -- it's interesting, and you and I have talked about this at 800 gig, the sort of the current predominant node for optics, EML is the dominant technology. At 1.6T, we do think that silicon photonics is going to come in, in a more meaningful way. It hasn't as yet. Most of the transceivers that we see are still EML based, but we would expect that silicon photonics is going to come in, in a meaningful way. That doesn't mean that our EML numbers are going to go down. It means still we would expect in the face of that, that the EML numbers go up.

And then the interesting problem is that at 3.2T, our smart people would say that silicon photonics no longer works, just the noise properties of silicon photonics are such that they can't carry a 3.2T signal. So with that node, we have a reversal back toward the EML-based transceivers, which is going to again put pressure on us because at each node, the numbers seem to go up pretty considerably. So I don't know. I mean it seems, Samik, that there's sort of no end in sight to the supply-demand imbalance. Nothing ever persists forever. I mean there's going to be some creative solution that I think comes up that ends up solving for the indium phosphide shortage, but we don't see it as yet.

Okay. On that front, just help us think about what are the things you're deliberating internally when you invest in capacity, particularly relative to indium phosphide when you have these alternate technologies relative to EMLs like silicon photonics or VCSELs that can emerge and that do impact eventually demand for EMLs. But as you said, like EMLs probably in the foreseeable future, keep growing, but you're taking decisions for capacity that are much more longer term. How are you taking those? What factors are you deliberating upon?

Yes. I mean, again, you know this well. But to give you a perspective, with our latest fab, we bought that early this year. We don't expect to see production out of it for 2 years. So it's a long cycle to put in this capacity. We have pretty complicated models that predict our output capacity, look at what we think competition is going to do relative to capacity, and we look at all the press clippings that you do relative to Coherent, Chinese, anybody else that might be putting in capacity. And we look at demand, right, the demand signal. We -- if we factor all of that in when we make these capacity decisions, we've been asked, and I think you asked it over at OFC, hey, when is the next fab, right?

And I think we're really at a point where we need to start considering that, right, because the demand signal is so very high. I think what's underappreciated with the investor base is just how much of a shift it represents to go from copper to optics inside the rack, right? The pressure that, that's going to put on the indium phosphide supply chain is immense, right? We're talking about, again, for optical scale-out, we've said, okay, let's consider X, which is already big. We would really be chasing our tail relative to just the scale-out opportunity. If you then factor in scale up, it's somewhere north of 10x more that we're going to need. And again, we simply can't produce all that output.

Yes. On that front, you recently outlined that you do want to transition some of the capacity to 6-inch, which for us was a bit of a shift from your position probably 6 months ago. What drove that change? How should we think about the time line regarding the transition to 6-inch?

Yes. I mean, look, we still think 6-inch is a risky proposition. We've been running 6-inch wafers, as you know, in our fab to look for avenues to get more capacity. We're doing everything we can to work yield, work cost. 6-inch definitely has benefit, right? It's Pi r squared relative to the amount of units that you get out of it. But it's not as easy as, let's say, a CMOS wafer. The edge effects that you get at 6-inch are pronounced. And that's why we've seen other people struggle so mightily to bring up 6-inch capacity. It's simply not that easy.

What is happening for us is in Greensboro, the new fab in North Carolina, that fab is already a 6-inch fab. So our intention is to keep it on 6-inch to certainly try, right, to not have the disruptions that we would have in our fabs in Japan around transitioning from 4 to 6 and having unpredictable output and things of that nature, keep that running on 4 and then transition Greensboro to 6-inch started as 6-inch right out of the chute. And we think we can get it right. But if we don't, we always have a retreat path. All of our 6-inch tools are 4-inch compatible. So we can go backward if need be. We're going to give it a shot and let's see, right? We think we have an idea, but I have to admit it's proving to be a lot more challenging than we might have expected.

Okay. Indium phosphide capacity, staying on that, can you give us a sense of how much effectively is committed to NVIDIA and what flexibility you retain to serve other customers in relation to your indium phosphide capacity?

I mean, look, they're smart, right? They moved quickly. They saw this trend, I think, before anybody else did. They came in and they locked up a considerable amount of our supply. They locked up a considerable amount of Coherent supply. Though they're not -- they moved very, very aggressively. I mean we're trying everything we can to create some room for additional customers. The good thing for us is that it's created a little bit of a gold rush to get what's remaining of our capacity. But a very, very significant chunk of it is now spoken for in this long-term agreement and NVIDIA has the option to take more should they so desire. So our job right now is to lock up additional customers as quickly as we can. We're working on that. We would like diversity in the fabs, but you could see a world where NVIDIA ends up with all of it if they push hard.

Okay. Although on that topic of other customers also being interested, are you seeing opportunities for signing deals that were similar to what you signed with NVIDIA in terms of involving investment, prepayments and some kind of take-or-pay structure as well? Do you see conversation with the other customers framing out to be on a similar structure?

Yes, very much so. I mean I think do we want more investment? Probably not. We're okay. I think the balance sheet is in decent shape. So I don't need to take on another $2 billion from anyone else. But prepay is very much part of the discussion. Some sort of pricing arrangement to give us some upfront advantage is very much part of the discussion. And those are super active. I mean we are really pushing hard to get those types of deals locked up before NVIDIA invokes options to take more of that capacity. So our job is to get deals locked up as quickly as we possibly can and to try to do so probably before next quarter.

Okay. Let's maybe take it a bit higher level about indium phosphide and not to stay on the substrate here, but ELS, you've talked about the opportunity with the ELS package. Where do you stand today in terms of engagement with customers? And when -- how should we think about again about timing relative to when you see some orders on that front?

Yes. Look, we feel very confident we're going to be able to take a portion of our lead customers volume on ELS. So there -- we're shipping our high-powered lasers to other ODMs at the moment, right? And that has some margin stacking principles and things like that. So if we are able to deliver an ELS ourselves, obviously, there's some cost benefit to NVIDIA. And we feel like that's a good opportunity for us. But we have not as yet closed that business. Again, I think it's a matter of when, not if. I think we'll get a good portion of that business because they want to have somebody who's totally vertically integrated for cost reasons, for time-to-market reasons, and it's just a matter of sort of working out the economics.

Got it. Okay. Let me ask you one more, but just a heads up to the audience. If you have a question, please raise your hand, and we'll get a mic over to you as well. While we wait for that, cloud transceivers, you mentioned the strong demand signals. How should investors think about the structural margin ceiling for this business long term? What scale and vertical integration will be required to achieve those margins?

Yes. Look, I think the cloud transceivers, there's -- we've spent a lot of time, you and I have spent a lot of time talking about it. It is a gross margin headwind, right? There's no question about it. We are struggling with our margins as well as we've done on the engineering side. We haven't done that well on the manufacturing and margin side. And so where we're left with is a business that's well below industry standards. Our guess, it's hard to tease it apart, but we would guess Coherent is in the mid-30s on their margin. They do a pretty good job with the Chinese Eopto and InnoLight are probably in the mid-40s, most of their business is in those segments, and you can see they're reporting.

There's some funny business in China relative to depreciation. The depreciation rules are a little bit different than the U.S. rules. So maybe it's low 40s in the end if you apply like-for-like. Our business isn't close to that, right? So we have work to do on the margin line with the transceivers. What our job is to do is to keep margins moving up in the face of a transceiver business that is growing pretty appreciably. And we, as I said, expect it to double over the next 4 to 5 quarters. So we've got our work to do. We've taken the first step, as you and I discussed, which is now we're integrating our own lasers. A piece of our own laser output is now going into our transceivers. Some of photonics ICs, our PICs are going into our transceivers, which is helping the margin line. But we would hope to be close to Coherent in the end, right, but we're trailing them quite significantly. So definitely, there's margin headroom in that business.

Any questions?

Are the hyperscalers trying to develop internal optical capabilities to any extent? And if so, how are you thinking about that from a risk perspective?

We -- obviously, the hyperscalers have different degrees of engineering capability around optoelectronics. NVIDIA is probably the best. They can take a bag of parts from us and from others, put it together, do a blueprint, for example, for an optical transceiver and hand that to a Fabrinet or somebody else to go and build out. Google has great engineers on optical.

But I don't see anybody, for example, getting into lasers. I don't see anybody, for example, getting into laser drivers, TIAs, anything like that. They can certainly understand the ecosystem. They can certainly put together components and make an end solution. That's predominantly why we want to stay on the component side of things. I think if we start moving up into systems perhaps outside of OCS, I think that's where the hyperscalers are going to run into us. But as long as we stay on the component side of the business, I think we're in pretty good shape. Good question.

Okay. So maybe I'll move on. And if you have any questions, please feel free to raise your hand in the meantime. OCS, the -- you've noted multiple new OCS applications that are emerging that include new port counts, new configurations that customers now want. Maybe address kind of what you're seeing in terms of the broader applications that customers want service, but also what does it mean for your R&D expense to support those new applications or use cases?

Yes. I mean this has been really incredible for us, right? We've seen just in -- maybe since OFC, the number of opportunities for our OCS product go up significantly. It doesn't mean we have design wins. It doesn't mean there's any new revenue to talk about, but just the number of customer engagements around OCS has gone way up. As you correctly point out, that's higher port counts than 300.

That's lower port counts. There's a bunch of new use cases. I think you and I have talked about it. The most interesting one of those is sort of going in rack and being able to steer traffic around the GPU that might be failing. We are very, very excited about that. And obviously, we're now tooling our engineering to meet that demand. And I would say from our perspective right now, that's a significant challenge just trying to come up with the right SKU set now to address that.

In general, and this has been a philosophy of mine for a long time, we want to use our engineers on high-value opportunities. And what we've done, I think, very creatively is we've shifted away from investments like industrial lasers, right? We've had an industrial laser business for quite some time and moved a lot of the engineers toward opportunities that make more sense. So you and I talked about our scale across. Scale across and trying to service that opportunity is largely being done by folks that were formally working on industrial lasers.

OCS has been a different part of the portfolio where we've taken some of the investments down and moved engineers over to service OCS. So if you look at our OpEx, we've actually kept that in pretty good control over the last year in the face of all this growth. We talked about it over dinner. The one place I think we are probably going to grow that won't show up in OpEx, it will show up as gross margin pressure is putting some more people into the fabs, right? Just to service all of this demand, you've got to have more workers in the fab, which is a gross margin headwind. But we think, again, we can work through that with price and mix and the other things that we can offset that pretty well.

Emanuel Zareh from 1789 Capital. A quick question. How do you view embedded optical approaches versus your transceiver architect? Are you seeing hyperscalers scope both of them? Or is one winning?

Yes. I mean by embedded optical, I think you mean NPO or CPO. That's kind of how I'm going to take the question. And NPO and CPO first will put pressure on the transceivers, right, to this extent that optical scale-out happens, you're going -- that is a cannibalization of transceivers at the end of the day. Obviously, it's a huge megatrend for us and very beneficial because our transceiver market share is relatively modest. And our transceiver business is heavily weighted toward the one customer that's shown no interest in going with NPO or CPO because they use an OCS, right? So that sort of dulls the need for NPO and CPO.

Optical scale up, which is by far the bigger optical megatrend, that's now putting pressure on copper because instead of replacing transceivers, you're now replacing either retime copper or general copper links. So that's just all upside for the optical industry. For us, we talked about it over dinner last night. We would see -- even in the face of that pressure, we would see the number of optical transceivers still going up, maybe not as fast, but going up through 2030. But certainly, the competition on scale-out, the scale-out opportunity is definitely supplanting transceivers.

Let's take one last question.

Two parts. One would be, how much do you think supply is going to increase in the industry in the next 3 years? And where is the limiting factor in your end? Are you finding there's going to be any supply constraints in terms of manufacturing? Is that even on the horizon? Or are you fine on your side, it's just production?

I didn't -- I apologize, the acoustics are not great. So I didn't -- I'm going to guess it, did you?

I didn't get the first question as well.

I think I got the first question. The first part was how much do we think capacity is going to increase.

And are you facing any inventory issues on your side? Are there any inventory problems in terms of someone supplying you that you need product that you can't get?

Yes. I mean our models show world capacity of indium phosphide going up somewhere between 2 and 4x. I mean it depends on where it is that you're talking about. So there will be a significant increase from where we are. And obviously, that doesn't scare us at all. We think that that's going to be necessary, and there's still going to be a supply-demand imbalance as you start adding all of this capacity.

That -- our challenge right now is interesting. One, it's been talked about a lot of substrates, right? We think we have that mostly under control, but any indium phosphide wafer starts with a substrate, and there is definitely a well-documented substrate shortage. We think we've solved for that by virtue of locking up a long-term agreement. But every day, the numbers go up, it certainly puts more pressure on us to find alternate sources for substrates.

The other one that's interesting is equipment. I mean the equipment is affecting us not only on the wafer side, but it's also affecting us in our factories. We have a significant demand now on things like reactors in the fab, on etch in the fab and then in the factories, I mean it's surprising that, that's ultimately been an inhibitor. It's just our ability to get equipment in there. So if -- I was to point to 2 things, it would be that. It would be substrates, which, again, I think we have under control, but it's certainly tighter than I'd like to see and then equipment.

Great. We'll wrap it up there. Thank you to the audience. And Michael, thank you for coming to the conference. Have a good conference.

Thank you. Appreciate it.

Good day, everyone, and welcome to the Lumentum Holdings Third Quarter 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, Melissa, and welcome to Lumentum's Third Quarter Fiscal Year 2026 Earnings Call. This is Kathy Ta, Lumentum's Vice President of Investor Relations. Joining me today are Michael Hurlston, President and Chief Executive Officer; Wajid Ali, Executive Vice President and Chief Financial Officer; and 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, particularly is set forth in our SEC filings under List Factors and elsewhere. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-Q for the fiscal quarter ended December 27, 2025, and in our most recent 10-Q for the fiscal quarter ended March 28, 2026, to be filed by Lumentum with the SEC.

The forward-looking statements provided during this call are based on Lumentum's reasonable beliefs and expectations as of today. Lumentum undertakes no obligation to update or revise these statements, except as required by applicable law. Please also note that unless otherwise stated, all financial results and projections discussed in this call are non-GAAP. Non-GAAP financials have inherent limitations that are not to be considered in isolation from, or as a substitute for or superior to financials prepared in accordance with GAAP. You can find a reconciliation between non-GAAP and GAAP measures and information about our use of non-GAAP measures and factors that could impact our financial results in our press release and our filings with the SEC. Lumentum's press release with the fiscal third quarter results and the company's supplemental slides are available on our website at www.lumentum.com under the Investors section. We encourage you to review these materials carefully.

With that, I'll turn the call over to Michael.

Thank you, Kathy, and good afternoon, everyone. Lumentum delivered an exceptional third quarter with revenue growing 90% year-over-year to a record [ $880 million ]. Top line growth was primarily driven by our transceiver business and laser chefs. Our revenue growth was impressive. Our non-GAAP operating margin was more so, expanding by over 2,100 basis points year-over-year, fueled by a rich product mix and strong operating leverage. The margin expansion was primarily driven by our industry-leading scale out portfolio. But another part of our story was our broad array of scale across products. As hyperscalers exhaust the power and space limits of individual data center buildings they are shifting to distributed architectures that link commute domains across disparate geographies. These scale across networks require high bandwidth synchronization across multiple data centers. To enable this we provide critical hardware components that provide high-density optical interconnects, while meeting aggressive power and performance targets.

Our pump lasers allow scale across architectures to amplify the light signal over 4, 8 or 16 fiber pairs simultaneously. Complementing this, our narrow line with lasers assemblies provide the precision required for 1.6T speeds and a higher order modulation, all within highly compact, pluggable form factors. To manage all of this traffic, our wavelength selectable switches or WSS function as the optical traffic cops. WSS keeps traffic in the optical domain bypassing the latency of electrical buffers while enabling the high port count essential for massive fiber routing between data center buildings.

Looking forward, our emerging multi-rail technology will be vital for the increased parallel required by the massive fiber counts and scale across networks. While we have spent the last few calls, detailing our revenue growth drivers, it is important to outline the considerable role to scale across portfolio will play in our ability to expand gross and operating margins. As we look forward, we expect this part of our business to grow appreciably and with the supply/demand imbalance likely improve profitability at the same time.

Now let's look closer at the metrics to define our third quarter starting with the components product category. Components revenue for the quarter was $533 million, reflecting a 20% sequential increase and 77% year-over-year growth. Shipments of our narrow line with the laser assemblies grew for the ninth consecutive quarter, rising over 120% year-over-year, while pump laser shipments grew 80% year-over-year. These components remain effectively sold out for the foreseeable future and we are actively working to secure long-term agreements that will help offset anticipated capital expenditures.

Turning to laser chips. We achieved another quarterly company record in EML shipments led by 100 gig [ lane ] speeds. 200-gig EML revenue more than doubled sequentially. We continue to ship CW laser to 800-gig transceiver manufacturers and starting in fiscal Q3, we began supplying CW lasers for internal use in our cloud transceiver business. Our wafer capacity wafer fab capacity in Japan remains at a premium and is fully allocated to meet surgeon customer demand. We shipped twice the number of late ships as we did in the same quarter last year and we are on track to achieve more than 50% growth in EML units by the December quarter of 2026 as compared to the December quarter of 2025. Our ultra high-power laser chip manufacturing ramp for CPO applications is also proceeding according to plan. We achieved sequential growth this quarter and are on schedule to both deliver meaningful revenue in our December quarter and fulfill the multi-hundred million dollar purchase order slated for the first half of calendar year 2027.

In addition, our development work continues with multiple CPO customers through collaborations that leverage our laser chip technologies within a pluggable turnkey ELS module solution. In mid-March, we announced our acquisition of a fifth Indium phosphide fab in Greensboro, North Carolina, which provides the capacity needed for years of future growth. At our grand opening ceremony held just days ago, we highlighted our commitment to U.S. manufacturing and the significant job creation we expect to generate in the state. We onboarded the plan's team and plans to convert the facility from gallium arsenide to indium phosphide are well underway. Another positive note is that we expect to take advantage of a significant number of the tools that already exist in our Greensboro site.

Now I'll move to our systems product category. Systems revenue reached $275 million, representing a 24% sequential and 121% year-over-year increase. Cloud transceivers accounted for the lion's share of this growth, increasing over 40% sequentially as we successfully leveraged our expanded manufacturing footprint in Thailand. In addition, we are poised to ramp 1.6T speed transceiver shipments in fiscal Q4 with a portion of this volume leveraging our own CW lasers. We are improving transceiver profitability through better yields and lower scrap rates. Despite these gains, supply constraints on critical components keep our shipments well below customer demand.

In OCS, the multiyear, multibillion-dollar purchase agreement we recently announced ensures sustained long-term growth. Our OCS ramp is largely on track, although our pace and slope are gained by the supply chain. We are experiencing considerable tightness in this product area due largely to the significant step-up in requested output. On the other hand, the number of new opportunities we are seeing for optical switches is putting tension on our road map, and we're having to make choices across the company in order to service them. Rounding out our systems business, performance industrial lasers and cable access remains unit. Industrial lasers were approximately flat sequentially, and while cable access shipments declined on quarter due to customer and timing factors.

Looking ahead to Q4, we expect to set another quarterly revenue record. We anticipate that over half of the sequential growth will stem for our components business. The remainder will be driven by the continued ramp of our systems portfolio, primarily through high-speed transceivers and additional contributions from OCS. Our current numbers and guidance reflect continued success in EMEA lasers and our scale across components. We are seeing improved performance in our cloud modules business, which has grown significantly across the last few quarters. In addition, while we are seeing initial contributions from both scale-out CPO and OCS, they are still relatively modest. Furthermore, our largest single growth driver, scale-up CPO is still very much in its infancy. Taken together, this gives us confidence that we are very much on track to reach our $2 billion quarterly revenue goal as we articulated at our OFC events.

Now I'll hand the call over to Wajid.

Thank you, Michael. Third quarter revenue of $808.4 million was above the midpoint of our guidance range and non-GAAP EPS of $2.37 was above our prior expectation range, demonstrating the leverage of our business model. GAAP gross margin for the third quarter was 44.2%. GAAP operating margin was 21.6%, GAAP net income was $144.2 million, and GAAP net income per share was $1.50.

Turning to our non-GAAP results. Third quarter gross margin was 47.9%, which was up 540 basis points sequentially and up 1,270 basis points year-on-year due to better manufacturing utilization across the majority of our product lines, increased pricing on select products and favorable product mix. The improvement in product mix was primarily driven by growth in data center laser chips. Third quarter non-GAAP operating margin was 32.2%, which was up 700 basis points sequentially and up 2,140 basis points year-on-year, primarily driven by revenue growth in components products. while continuing to invest in critical R&D programs serving cloud and AI customers, we have maintained the rigorous cost controls necessary to optimize our business model.

Third quarter non-GAAP operating profit was $260.7 million, and adjusted EBITDA was $293.5 million. Third quarter non-GAAP operating expenses totaled $126.2 million or 15.6% of revenue, an increase of $11.3 million from the second quarter and an increase of $22.8 million from the same quarter last year in support of expanding cloud opportunities. Q3 non-GAAP SG&A expense was $47.8 million. Non-GAAP R&D expense was $78.4 million. Interest and other income was $9.6 million on a non-GAAP basis. Third quarter non-GAAP net income was $225.7 million and non-GAAP net income per share was $2.37. Our diluted weighted shares for the third quarter was $95.2 million on a non-GAAP basis.

Turning to the balance sheet. During the third quarter, our cash and short-term investments increased by $2.02 billion to $3.17 billion, with the increase primarily driven by NVIDIA's direct investment in Lumentum momentum. Our inventory levels increased by $62 million sequentially to support the expected growth in our cloud and AI related revenue. In Q3, we spent $125 million in CapEx primarily focused on manufacturing capacity to support cloud and AI customers.

Turning to revenue details. Components revenue of $533.3 million increased 20% sequentially in Q3 and 77% year-on-year. Systems revenue of $275.1 million increased 24% sequentially in Q3 and 121% year-on-year.

Now let me move to our guidance for the fourth quarter of fiscal '26, which is on a non-GAAP basis and is based on our assumptions as of today. We anticipate net revenue for the fourth quarter of fiscal year '26 to be in the range of $960 million to $1.01 billion. The $985 million midpoint would represent another new all-time quarterly revenue record for Lumentum. We project fourth quarter non-GAAP operating margin to be in the range of 35% to 36% and diluted net income per share to be in the range of $2.85 to $3.05. Our non-GAAP EPS guidance is based on a non-GAAP annual effective tax rate of 16.5%. These projections also assume shares used for non-GAAP diluted earnings of approximately 102 million shares.

With that, I'll turn the call back to Kathy to start the Q&A session. Kathy?

Thank you, Wajid. [Operator Instructions] Now let's begin the Q&A.

[Operator Instructions] Your first question comes from the line of Samik Chatterjee with JPMorgan. Our next question comes from the line of Ryan Koontz with Needham & Co.

Can you hear me?

Yes, we can.

Yes.

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

Ryan, thanks for the question. Look, I think we're still chasing behind relative to demand. We are steadily increasing supply. I think we just gave the benchmark that we'd expect our supply line to increase 50% on year, meaning as measured from the December quarter to December quarter. So we're actually stepping up our supply in a pretty significant way.

That being said, as we said, kind of over and over again, we continue to lag demand. The supply-demand imbalance is probably even higher than we reported in our last call, somewhere greater than 30%. I think last time we gave a metric of 25 to 30. We still seem to be behind significantly. We had conversations today with customers, significant customers looking to really up their demand and get output from us, and we simply can't service that. So we are stepping up and doing everything we can to step that up. I think you know that story pretty well but we continue to lag demand.

And is that largely in your own control? Sorry, Michael, largely in your own control in terms of executing against that and getting the equipment you need? Or do you have input that is a big challenge?

Yes. Right now, it's largely within our own control. So some of these, for example, substrate shortages that's been reported out I think you know our story better than most, and that is that we've executed to long-term agreements that we feel leave us in pretty good shape on substrates. That being said, I mean, the number of lasers that we're going to have to output, for example, at 2027 is really a massive step up just given the scale out and scale up demands that we're seeing in that time frame.

So it's -- certainly, near term, it's mostly on us. I think as we head into 2027, we're going to continue to have to work the substrates. I think we have that mostly under control. But we've got a lot of work to do to sort of catch up to demand at this point.

That's great. And maybe on the scale of cross part, you really highlighted that as I think something that's -- the market opportunity is probably less appreciated with Lumentum. Obviously, you've got the kind of the components there among lasers, and you talked about the multi-rail opportunity. Can we expand on that in terms of where you fit in that supply chain in that value chain? And then how big you size that opportunity as it moves to multi-rail application densification?

Yes. Look, it's a significant opportunity. I think we chose this call to talk about it because I think it's a significant contributor to our margin enhancement. So we focused very much on sort of the 4 main growth drivers. I think you know those well. The transceiver business, OCS, optical scale-out and optical scale-up. We spend less time, I think, on our scale gross components, and they are actually big, big contributors to the gross margin line. As we look out right now, we are probably more constrained in this area than even EMLs, particularly on things like pump lasers, narrow line with lasers for sure. And both of those are going into the coherent subassemblies that drive a lot of the scale across activity, the synchronization and high bandwidth that we mentioned in the prepared remarks.

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

Yes. So a couple of things, right? So first of all, the pump lasers actually goes into the optical amplifiers, right, at the -- we call it in client amplifiers at the sites. And that's where a lot of the traffic and then the density has to really increase, right, to get the traffic through. So that's one big areas of growth. And frankly, the multi-rail opportunities are huge. And then with all the session plants that Michael talked about just now, the -- our view actually is that the material could be even bigger in that. So we don't yet have a full quantification. We'll share that when we are more ready. But we believe there's a huge opportunity for Lumentum to grow our business and gross margins.

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

Can you hear me now?

We can hear you now.

Samik you figure it out. You figured out the new button. Good, good. We know you're a smart guy.

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

Yes. I mean I think, look, we continue to work with the 3 customers that we've been talking to. 2 of those 3 are making up the majority of the volume, as we've been saying. I think that we are really making progress now on sort of additional wins. I think it's too early to call when we would be able to talk to those. But I would say that they're quite sizable. We really are, as I said in the remarks, working the road map to add differentiation different port counts, different configurations to service these multiple opportunities, and these multiple opportunities are substantial. They're on the order of what we've talked to relative to this backlog that we're seeing for 2027. So it is our biggest area, Wupen and the engineering teams are working aggressively to drive those new designs.

Got it. Got it. Okay. Great. And for my follow-up, maybe I can ask you on the revenue guide a bit. You did deliver when I look quarter-to-quarter, like a [ $140 million ] increase and you're expecting that to accelerate as you get into the June quarter, which is in the backdrop of sort of the supply constraints that you're also dealing with. So maybe if you can just sort of highlight which of the areas you see accelerating compared to the March quarter itself as you go into June? And where are the supply constraints may be impacting you more than others if you can sort of highlight that?

Yes. I think in the guide is contemplated, obviously sort of the basic business, meaning EMLs, we'd expect to go up we'd expect to scale across components to go up. We continue to increment OCS, so that will go up. But really, the big story is transceivers, right? That is going to be quite strong. And I think it's impressive to note that as you and I have talked about, our margins there are relatively challenged, but we expect to see margin improvement in the face of a growing transceiver business. So I think that's important to highlight.

As we go into the back half of the year, that's one you're going to start seeing a much bigger contributions from OCS. In the fourth calendar quarter, you're going to see more contributions from the scale-out CPO. So there's a lot of things that begin to layer in. But specific to your question on the guide, I think the big headline is going to be transfers. We appear to be ahead on 1.6T. We see we executing relatively well. I think Wupen and the team have done a really, really good job turning around our designs. Our constraint is going to be on transceivers. So we are we could ship quite a bit more in the guide, actually quite a bit more this quarter in the quarter we just completed. Certainly, quite a bit more in the guide have we not the supply constraints that we see. And as we detailed, there's electrical components are driving that, laser diodes are in that mix, right, which is necessitating the switch to our internal laser diodes. So there's quite a few things that are contributing there. But the main headline is we're under-shipping demand there quite significantly.

The next question comes from the line of Vijay Rakesh with Mizuho.

Just a question on -- question back to the pump laser side on a scale across. Just wondering, given that demand pickup, obviously, it looks like those will be pretty hyper lasers as well. Just wondering, what is the mix of demand you're seeing going to scale across? And does that imply, given the significant pickup in demand with that and 1.6T is that you continue to see this supply-demand imbalance of 30% as you go through into next year as well? And I have a follow-up.

Yes, Vijay, I mean, a couple of things I'd say. One, the constraints on lasers pumps are probably the biggest that we are it's somewhat unanticipated. I mean we haven't talked to you about this in the last couple of quarters, but it's somewhat unanticipated. It's hit us relatively suddenly and I don't even -- I don't think we've given a number of the supply demand imbalance, but it's certainly greater than that 30% number. We are significantly under shipping demand. And we're having to make choices as to who we support. We're trying to be as fair and reasonable as possible, but we are having any choices as to how we allocate our pump demand.

That being said, I think we're trying to ramp capacity here quickly. We have a plan to ramp capacity over the next 4 quarters that's coming out of our local facility here in the United States, our Rose Orchard facility. And we think we have room there to build some significant capacity. And we're obviously spending a lot of money on CapEx to try to enable that, as Wajid highlighted. So hopefully, that caught the gist of your question, Vijay.

Yes, sure. Just a quick follow-up, too. Back on the OCS side, and obviously, it looks like Google is now talking the [ V8 ] inference back with [ 152 TPUs ] and the trading back with 130,000 TPUs. Does that drive your OCS should drive a pretty nice uptick back to like the [ 300 Radic ], [ the 500 Radic ] OCS racks into next year, right? And it looks like you were an anthropic announcing a massive potentially not anthropic, but it looks like there's some information noting Anthropic could do $200 billion with Google positive for you guys. But just wondering how you're looking at OCS into '27. '28.

Yes. Look, I mean, we're not sort of commenting on specific customers and specific customer architectures. Based on what we know, I would say that Google is obviously doing very, very well in the market. I would say that Google is driving a lot of demand on our business, right? They're they are certainly one of our largest customers, and we benefited greatly from that relationship. As we know it, as we understand it, the sort of the difference in V7 and V8 in terms of OCS goal is a little bit. It's incremental. It's not that big, but we would expect, as you are correctly saying, that they are doing -- look, hopefully, we can get engaged. I think it would drive significant upside for us just given the expansion of our business as they look at V8.

The next question comes from the line of Meta Marshall with Morgan Stanley.

Great. Maybe a couple of questions. Just you're expecting to supply some of the CW lasers into the transceivers, into the quarter. Just any kind of further commentary there on just the path and progression the in-sourcing of your own lasers into that piece of the transceiver portfolio? And then maybe just as a follow-up, just any kind of disclosure we could have in terms of obviously a great step-up in the gross margins, just on kind of like rough mix of pricing yield mix and kind of the contributions there.

Yes. I mean I would say, Meta, maybe to the second question, on mix, it's sort of all of the above. I think the headline has been better factory absorption. I mean that helps I think our mix, and we made some big decisions here throughout the last year to drop certain product lines that are not margin beneficial. So we really worked on the portfolio to a great degree. And I think that helps considerably. And then, of course, there is price increases, obviously, pricing with this kind of supply-demand imbalance is something that we consider, is something that where we see biggest areas of constraints, we have applied and we continue to think about applying.

We think there's continued room, right? Gross margin is something that, as a management team, we have focused on tremendously. And look, I think people have followed my history know that gross margin is super, super important. And although we're trailing what we've done in our previous instantiations. I do think there's a lot of room for improvement on the gross margin line. Relative to the in-sourcing of the lasers, that's something that's driven by a margin, right? But we are forced to do that probably faster than -- and that forecast oscillated, as you know, I mean you follow our story extremely closely. We had initially forecasted some timing calendar Q2, we'd be introducing the lasers, then we backed off, you're seeing so much tension on the EML line but now we've seen a little bit of tension in our own supply line externally to get lasers from the external market, CW lasers.

And as such, now we've allocated more of our fab capacity to CW lasers. I think in our mix, roughly as we think about it in this -- in the guide, it would be about 20% of our modules would have our own CW lasers. It still minority, but we'd expect to step that up through time and see some of the associated margin benefit as a result.

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

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

Papa, I don't know -- hopefully, it's not us, but at least your line seems to be cutting out a bit. I didn't catch the last part of your question. Sorry for that.

Is it better now?

It's better now. We can hear you.

Yes. Sorry about that. Yes, I was just asking on just the opportunity around the kind of CPO kind of market. Most of it, it seems like you're mostly around the ultra-high-power lasers looking into maybe the second half of the year in 2027? I'm just curious on the opportunity around kind of being more vertically integrated as well kind of providing more ELS type of product. I'm curious if you are also getting engagement from the same customers you are providing ultrahigh power lasers opportunities?

Yes. Great question, Papa. And of course, I continue to thank you for following the company. Look, I think that on ELS we definitely have a very significant opportunity. And we have not -- we've only talked about opportunity there. I think we're getting ever closer to being able to convert and start thinking about that as part of our numbers. As we've outlined on previous calls, what I would say with ELS in particular, is the nonprimary customer engagements are largely driven by ELS. Simply, the engineering teams there are less flier with optics, although frankly, everybody is becoming a lot more conversed on optics. But our currency to engage those customers, at least initially, will be the ELS.

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

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

I mean I feel it's low. We are engaging all sorts of transceiver customers right now. Wupen teams out doing that actually, as we speak, I just got a report in this morning from our sales leader and the discussion is merits around extending the long-term agreements that we already have. So if there was an expectation from our customers that they see a an oversupply of any kind of laser where the EML or CW laser, I just think there'll be a lot more reticence to engage in the kind of conversations we're having.

So yes, we're hearing the same things. I mean, we know that all -- everybody is trying to add supply, but the reality on the ground now seems to be quite a bit different. We definitely have some pricing flexibility, which would indicate that, that supply-demand imbalance isn't going to solve for a while. And we certainly are engaging and extending some of these long-term agreements that we currently have.

The next question comes from the line of Ruben Roy with Stifel.

This is [ Fahed Singh ] on for Ruben Roy. Maybe just, Michael, tagging on to the LTAs that you're mentioning there. Even on the scale across portfolio, you sort of outlined that pump lasers, narrow line with lasers, WSS. These are not only supply constrained, but real margin levers for you guys distinct from the 4 growth levers and 9 consecutive quarter of narrow line width , I think you said 120% year-on-year and pump lasers at 80%. That's impressive, and you're still describing this as sort of an unanticipated bump up. And so you're talking about these LTAs. Maybe we can dive a little deeper there.

You mentioned that the long-term agreements being negotiated are helping in some sense to offset CapEx. And I think that was what scale cross, but it sounds like more broadly. So could you maybe give us a sense of the structure? Are these prepayment sales in events maybe similar in maybe spirit, I would say, to the NVIDIA agreement? Or are they take-or-pay capacity reservations? Or are they volume commitments tied to ASP floors? How should we be thinking about the CapEx for the build by offshore? These agreements are effectively underwriting. I'll stop there, and I have one other.

Yes, look, I mean it's all of the above. We're in active discussions right now on our pump lasers. And again, we have sort of a finite amount of capacity and we're being asked to put on considerably more. And so we are talking to the major customers around trying to help, right, and put some skin in the game around the CapEx that we're going to try to lay out one. That can entail prepayment, that can entail take-or-pay, that entail price increases. And Wupen's team is an active negotiation with all of the scale across suppliers on how that looks. And again, as I say, we're -- we have some really big customers and important historical customers of ours involved in that, and we want to treat them obviously as fairly as we can but it's really coming down to how these discussions play out as to how I think Wupen and his team think about the allocation.

Understood. And for the second, as I read through the brand, the beat was really a margin to beat and system sales, as you mentioned, was a driver and then seems to be so. And this is happening all while sort of the capacity story is happening and new programs are ramping. And then as we look to the next quarter, I think the margin story kind of gets a little washed out with the diluted shares jumping up. So maybe could you help frame the waterfall dynamics on margins right now? I mean you set out the targets that you did during OFC and I think this sort of ties into, I believe, Meta asked a question around this as well.

But the waterfall dynamics may be more across a matrix of product mix and the program ramps within those segments. How CapEx is dragging on that again on the build buy offshore sort of dynamic? And then maybe also on the volume versus ASP conversation that is becoming more and more prevalent on the supply constraint?

Yes. Look, I mean, as we said, there are many, many contributing factors to our margin improvement. I think we've had a big step up. It's an area of focus for us. I think we're going to continue to work the margin line. It comes from -- it obviously comes from mix, and we keep making mixed decisions every single day, allocating for the most margin-rich parts of the portfolio. It comes from factory utilization, right? We've historically been underutilized. We're just now getting our utilization up to where it needs to be.

As we've outlined, we have some of our fabs that are still underutilized. Some of the -- for example, our fab in the United Kingdom that now Wupen has put products in that we expect to see margin contributing output from them and fixing some of the underutilization. And then as we said, there are some price dynamics that are working in our favor. So we think there's a lot of room on the margin line. We gave a long-term target. We feel very comfortable with that. I think there is room from here to continue to really step up margin. We've been surprised to a certain extent, by how quickly we've been able to move up that margin line. And again, people who know my history know that we had 30% type moves in my last company. So it's not a total surprise that you'd be seeing this kind of step up on our margin line.

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

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

Yes, Chris. I appreciate that. Look, one, my colleague to the right, Wajid Ali is personally responsible for getting the supply chain right on OCS. We've assigned that to one of the most important people in the company. It's a challenge. Look, I mean, it's a big step up, right? We've gone in many instances, really from 0 to a significant number very, very quickly. We think we have things under control. We've outlined this sort of $400 million that we could ship in the back half of the year. We think we have that under control. As we look into 2027 that number continues to step up. We think we have that under control, but we are definitely on a tight rope on this product line, right? It's probably our biggest ramp now, honestly, pump lasers, CPO, all of these things are keeping us away.

The big 3 ramps are these pumps, right, OCS and the high-powered lasers. So we've got a lot of work on our hands and the biggest single tight rope that we're walking probably is OCS. I think relative to competition, we feel pretty good about our position. We really do. I think we feel like we're in a very, very strong position. That's not going to last forever, right? We know that. But I think certainly, in the next year, it's hard for me to imagine anybody is going to be able to ship one of these very innovative solutions. We are also not standing still. We are working on cost reducing. We are working on some innovative solutions in our OCS, which increases the complexity of the decisions that I was outlining relative to what Wupen is facing, right? Because we've got a lot of new customer demands coming on.

And meanwhile, we are trying to focus on new architectures that would keep us in a leading position with [ MAX ], right? We do believe that, that's the right technology for us long term, but we do believe that there's cost we can take out some litigations we make to continue to compete with these very innovative solutions.

Excellent. And I do know you have your hands full with those 3 very large opportunities. But are there some more adjacencies for you guys to pursue? I think it OCS, you talked about maybe full module design and assembly. I don't know if this would involve silicon photonics, chips, PICs, EIC, et cetera. Are there any other adjacencies or components that you may be able to absorb or organically create that you can bring into the organization as you look forward?

Look, there's a ton of stuff that goes into these transceivers or into a CPO-based solution that say hey, we don't ship, right? PICs, photo diodes, right, laser drivers, there's a ton of stuff to your point. And we're looking at all of these areas. I mean I think we have road maps that contemplate all sorts of different things around our strength in lasers. And I think there is quite a bit more that we can do around that. A previous question asked. And I'd say, again, ELS which is a vertically integrated module that your question sort of led to, we believe that there is significant opportunity there, right? We think that we can integrate up and take more of the dollars by generating a vertically integrated ELS. And I think as we engage on CPO, we're finding that to be a more convincing and shorter path to market than is just supplying lasers.

The next question comes from the line of Vivek Arya with Bank of America Securities.

This is [ Michael Mani ] on for Vivek Arya. My first question is on the transceiver business. Number one, how large would it have been if you had been able to address all the demand that you saw in the quarter? Or if you could peg that number relative to the 30% overall imbalance for the entire company, and then on 1.6T specifically, you talked about how the margin structure is a bit challenged and it's a work in progress. But as we move into 1.6T, what we're hearing from many of the suppliers in the ecosystem, is that the margins are just significantly better maybe led by pricing. So to what extent does that transition that's happening in the next quarter or to help your margin structure for transceivers?

Yes. I mean, on the first one, I don't think that we've given a figure of merit around our own transceiver imbalance it was significant. I mean we had a lot of demand that was placed on us, and we simply weren't able to ship due to largely due to supply constraints. The 30% number that I gave is on our EMLs, right? So it's a supply and imbalance not relative to our whole business, it's on that particular line of business. I would say here, the supply-demand imbalance on our own transceivers were somewhere in that ZIP code, but it was definitely appreciable though I don't know that we've calculated that.

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

So my follow-up on OCS specifically. You said you're still constrain maybe that's more due to your current output right now relative demand. How do you think about engaging with more contract manufacturers? I know you mentioned that on the OFC, but where are you in that process? Maybe not just for OCS before other product areas as well? And then within OCF specifically, how do you think getting the demand you're seeing for multiple customers, maybe multiple different applications and multiple types of products between medium radix, high radix products. How do you think about prioritizing all those different sources of demand, right, or applications based on your own competitiveness or share?

Yes. Look, I'm going to answer the first part of it, right, just in the interest of time and to get some more questions. I think one of the levers we do have is contract manufacturing. We have historically in-sourced everything. And we found that working with good contract manufacturers of which there are several we can actually improve our margins. So as we have started to shift and we're early in those innings, back to a contract manufacturing base we would actually expect to see improvement in our margins. The margins that we pay to those contract manufacturers are more than offset by the efficiency and cost benefit that they can drive on common components. So that ends up being a lever for us.

So Melissa, I think we have time for one more question.

Our last question comes from the line of Ananda Baruah with Loop Capital.

Really appreciate it. I guess I have to say apologies if this part have been asked. Hopefully, it hasn't been. But Michael, you announced -- I think it was last week, the opening of the Greensboro, new Greensborough facility that you recently purchased. I think it was also in the press release that, that capacity was new. And I think it is a clarification. Is it also incremental to the revenue projections that you gave at OFC. So could you clarify that? And then also, what's a good way to think about the capacity potential coming out of Greensboro. Appreciate that.

Yes. I mean, look, that is not in our numbers, right? It is very, very significant. I think what we've said is that we -- we will have a massive supply-demand imbalance on CPO. It's going to be very, very significant. We've seen multibillion-dollar orders that we've characterized on previous calls, come in mostly on scale-out. We expect to scale up to be significantly more than that in terms of revenue opportunity. I think it's going to be somewhere greater than $5 billion of incremental revenue that we can add if we execute properly.

Now what I would say is the Greensboro fab is not going to come online until 2028. So we've sort of set expectations that sort of in the early 2028 line. We start to be adding that incremental revenue. So we're still 6 or so quarters away from seeing significant contribution from Greensboro.

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

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

This concludes today's call. Thank you for attending.

We're going to get started in about 2 minutes. Just a brief advertisement. If you want to have WiFi, we didn't pay for extra WiFi here. So you can use the OFC one and the password is on the back of your badge for OFC. So we're being economical here at Lumentum as always. Everyone quieted down really quickly there. So I guess we can go ahead and get started.

So my name is Kathy Ta. I'm the Vice President of Investor Relations here at Lumentum. Really, really glad to see you all here, see a lot of familiar and friendly faces. And as expected, a packed room with everyone sitting around the periphery. I don't see anyone standing just yet, but I think that will happen as people leave some of the other events. So today, we're going to be talking with you about illuminating the networks of tomorrow. I'm super excited to be doing this event right after yesterday's event at NVIDIA. I'm sure you all have questions about what you heard at the GTC keynote. I think we'll be able to clarify a lot of those questions in today's presentation, especially in Wupen's presentation.

So a few brief remarks. I won't read this whole thing, but I need to read part of it. Today's presentation will include forward-looking statements 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 are set forth in our filings with the SEC and are based on our reasonable beliefs and expectations as of today, and we undertake no obligation to update or revise these statements.

So as I mentioned, we will have Wupen Yuen as one of our speakers. But first, we will have Michael Hurlston take the stage and introduce our topics for today and give us a state of the union on the industry. Then we'll have Wupen talk about all things CTO and OCS. Then we'll have Wajid at the end, so make sure to stay until the very end, the last slide should be exciting as well.

And then after our prepared presentation, we will have a Q&A session. At that time, it will be about an hour from now. I'll invite people to line up behind this center microphone here and then you can state your name and your firm and ask your question. So we'll all in all, take about 1.5 hours of your time. And with that, I would like to invite Michael to the stage.

Thank you very much. How is everybody doing? Everybody is good. Everyone is going to have to sit through Wupen and I to get to the last slide. That's what Kathy basically said. We're filler. Wupen, did you know that? We're filler. We're just waiting for Wajid. Is that true? Okay. Well, Wajid, it's all up to you, buddy. The model, that's anybody ever cares about.

All right. Look, we want to just give you some sense of where we are as a company. I think that there are sort of 4 building blocks that often don't get recognized. Of course, we have a deep networking knowledge. What we have done with our products, if you think about it, is we've evolved. We've taken technology that started in telecom from our telecom heritage, and we've now evolved those into data center and hyperscaler applications.

So we've really upped the ante and taken existing technology and evolved it. And that's why I think we have a really big lead because we've spent years and years perfecting these technologies. And now here we are in a position to ship them to hyperscalers in different ways, shapes and forms. And that's given us, I think, a pretty big defensible moat.

Of course, lasers, right, we're going to spend a lot of time and Wupen is going to talk a lot about our laser technology. This is something very fundamental to us. Most of our business is component-driven, semiconductor-driven. And as such, we expect to continue to evolve our margins towards semiconductor-like margins. One area that's a big example of this evolution of our technology is the optical circuit switch. And Wupen is going to describe this in detail in his remarks.

But if you think about the OCS, it's really based fundamentally on a WSS block that we've perfected for years in our telecom applications, right? That is something very, very much that we've done, and we've taken that and reapplied that to the OCS. And then finally, we've got indium phosphide capacity. We probably have more capacity than any company on the planet.

So as we think about these various ramps that we're going to talk about, EMLs, CW lasers, ultra-high-powered lasers for scale up and scale out, it's coming on the backs of a capacity that we've built and we've continued to build upon during the 10 and 15 years that Lumentum has been in existence, okay? So that's kind of our -- the basis of our company.

Speaking of the indium phosphide capacity, Kathy went back and looked at this for us. And the first data point that she gave was sometime in 2023, where we were still a little bit in the doldrums of this telecom crisis. We were sort of bottoming out, probably coming down in terms of revenue as a company. And we gave our first data point on EML capacity, okay?

Since that time, since FY '23, we've increased our EML output by 8x. We've been very, very successful and continue to be successful in terms of ramping our indium phosphide capability. If you look at this metric, right, which is a new data point, we are saying that we are going to increase -- further increase our indium phosphide output by 50% as measured from the last quarter of the calendar '25 until the last quarter of calendar '26, we will be up by another 50%, which is a remarkable achievement.

We've talked about 40% over the last 3 quarters. We're now upping the ante to say we are going to increase this indium phosphide capacity by an additional 50% on top of what's already the industry's largest base, okay? Despite that and despite our ability to continue to evolve our indium phosphide capacity, we are still undershipping the market. And frankly, that gap is growing as this chart shows

So we see the lanes increasing by an 85% on a compounded basis. Our output is increasing something less than that. So even as we talk about additional adds to our indium phosphide capacity, we are falling further behind. The demand is significantly outstripping our ability to supply. We've given the figure of merit that we are undershipping the market today by about 25% to 30% and as I said, we see that gap growing considerably over the next couple of years, primarily driven by the demand on our ultra-high-powered lasers for optical scale-out and optical scale up, as we'll talk about here in a minute.

So we are increasing our capacity. We're doing everything we can from a leadership position, the leader in indium phosphide capacity, but we are still undershipping the market significantly.

Okay. So we've talked about this repeatedly. Wajid, Wupen and I have been on the road with Kathy, and we've talked about four growth drivers that exist in Lumentum that are sort of separate from what's happening in the hyperscaler market in general. These 4 drivers are cloud transceivers, our optical circuit switch, our scale-out CPO for scale-out and CPO for scale-up. These are the 4 major drivers.

And I'm going to try to update all 4. So on our cloud transceiver business, we do feel like we've turned the corner. If you look out on the floor, we are one of the very few companies that's showing a 400 gig per lane demo, an optical transceiver that is capable of doing 3.20, 8x 400. We are in the lead pack now of transceiver companies delivering 1.6T. So we feel like we're ahead, and we're now executing very well from an engineering standpoint.

Our profit margin is improving. This has been a real struggle for us. We've actually not done a great job with this business as I've told you many times, but we're now starting to really see cash flow coming out of the business. Our 1.6T shipments start this summer. So we'll start seeing our first 1.6T shipments, which we expect to see improved gross margin on and then our vertical integration, bringing our own lasers to help with the margin will start happening in the summertime.

So we're starting to see a lot of good signs. From an engineering perspective, we're executing a lot better than we have. And from a manufacturing side, we're starting to turn the corner. We're really starting to execute and see better margins, better deliveries and improve revenue generally coming from our cloud transceiver business.

The second growth driver, and this is an important update. We've talked to you guys about $400 million of revenue shipping in the back half of the calendar year. We just closed yesterday a new multiyear, multibillion dollar agreement with a large OCS consumer. We are really excited about this. We believe that this will lead to multiple years of revenue growth and revenue enhancement on our OCS line. Our OCS line has been something that we think is performing remarkably well. We're well ahead of competition, as we've said, particularly on the 300 by 300, the high rating switch.

This is another proof point that we lead here. Our revenues are coming up, and we're seeing now engagements in LTAs that will be able to fashion by virtue of the position that we have in our OCS market. We are very much on track to be shipping this $400 million of backlog in the second half of this calendar year. We like where we are from a reliability standpoint, our MEMS-based solution that Wupen will go into some detail, we think is field hardened and has given us a competitive advantage of moat that is going to be very difficult for competition to overcome.

We think our design, right, if you open our box as opposed to other boxes that might be shipping, we feel that we have, by far, the most elegant manufacturable design that leads to better margins that ultimately will lead to better throughput on the manufacturing line. And then one thing that Kathy put down is it's important to recognize our solution is future-proof because we can ship -- we're agnostic to any wavelength, it simply mirrors. All we're doing is reflecting light. So any wavelength that comes in can go right back out. And that is important as people think about different bands that they may want to use the OCS product in.

Okay. Our capacity, right? We're going to talk a little bit more about this, particularly on [ UHP]. So there's been tons of discussion. There was a discussion yesterday from NVIDIA around optical scale up. We'll go into that in some detail. I guess [ Alexis ] was talking a little bit about it today. [ Rafiq ] was just showing me a slide. It does seem like there's a lot of conversation now on scale up. But in order to meet that opportunity, we really have to build capacity. And what you're going to see from us in the next couple of slides is what's the plan? How are we going to actually get there?

The first thing that we're doing is we're ramping our [ UHP ] lasers in our San Jose fab and that actually is going well. We're already shipping, as I reported many times, we're actually shipping our UHP lasers for optical scale-out applications. Then in 2027, we expect another step-up in capacity for our UHP lasers. It was we start shipping out of our United Kingdom fab in Caswell. And we will continue to build that as it says, and I'll describe that in the next slide.

And right now, one of the things we're doing, we obviously have this engagement with NVIDIA. You saw the output of working to presell this capacity. We had a $2 billion investment from NVIDIA. We are going out, Wupen, Wajid, I don't know if [ John Bagatellus ] is here, our sales guy, [indiscernible], who runs his business are now working with other customers to sign up long-term agreements and capacity arrangements whereby we would sell the rest of our capacity. I mean we are already close to sold out on all of our -- in spite of the fact NVIDIA basically took almost everything that we can make, we still have a little bit of room, and we're trying to figure out how to go and sell that.

To help the project we're announcing today, we finally closed our fifth indium phosphide fab. This indium phosphide fab is in Greensboro, North Carolina. It's an old [ Qorvo ] fab that we just closed literally this morning. The agreement was closed this morning. That will up our capacity very, very significantly and allow us, we think, to be able to meet the demand that we see from NVIDIA and from our other customers on optical scale up and optical scale out.

So we expect to be shipping out of this [ Greensboro ] fab by 2028, right? That's how long it's going to take. It's a nice fab in the fact that it's a brownfield. It's already staffed. It's already operational. In fact, the trick we're going to have is move out some of the [ Qorvo ] products that they're shipping out of that fab and bring in our own reactors, our own epi reactors and bring it online for what we need for indium phosphide. But the great news is there's already a clean room there, already fully staffed, already full or operational, which gives us a running start into being able to produce in 2028. So this is a really big step for us. a commitment that we're going to continue to invest in our indium phosphide capacity.

Okay. Optical scale out, right? As I say, we are already shipping optical scale-out product. Jensen talked a lot about it yesterday at GTC. We're doing extremely well. We're sole sourced at the moment. We expect competition to come in, but the reality is this market is huge. This market is very, very significant. We have set expectation that we'll have our first $100 million revenue quarter in the end of 2026, calendar 2026 and then deliver on this multi-hundred million dollar commitment that we talked about in our last earnings call in early 2027.

So we really see some good things. It's been a surprise to us how well the optical scale-out product from NVIDIA has done and how well customers are receiving it. It's been a pleasant surprise. Surprise enough to us that we got additional backlog, and we believe that we'll be able to execute to that and deliver incremental revenue in the first half of '27.

Similar to what you'll see here or a minute on optical scale up, One of the important vehicles we have is this external light source, being able to pull together a turnkey package to enable customers beyond our lead customer. That's a critical tool because there's just not the optical engineering that you see anywhere else. NVIDIA, Google, these 2 companies have incredible optical engineering departments, the rest of the market, not so much.

So in order to engage them, we need something a little more turnkey. And this is what this [ ELS ] does, right? And that will give us about 2x the top line that we see today. For every ELS that we ship, it's about 2x the revenue. margins come down a bit. but it's still very, very profitable above our gross margin -- above with the gross margin target that Wajid is going to share with you in a minute. And we really like it because strategically, it's an enabler. It really enables us to engage the rest of the customer base.

Okay. Optical scale up, right? This is the big story, I think, and there's a lot of debate around optical scale up. It's definitely happening. Does it mean that copper goes away? No, of course, not. It doesn't mean that. And I think [ Jensen ] said that yesterday, you're going to see a hybrid environment starting the second half of '27, we will be shipping our optical scale-up solution and it won't be entirely at the expense of copper or retime copper. You're still going to have hybrid environments. It's across the longer runs, as I think Kathy and I have described to you, 3-meter cables and up we'll use optics inside a cluster. And then for shorter runs, you're still going to use copper.

So it's not a winner take all. I think Matt Murphy was talking about that yesterday. You're going to have a blended environment. But what it represents for us in the optics industry is pure incremental upside. We have never been in this position before. We have never shipped optics inside a cluster. We believe that as you go on this copper wall, which Wupen is going to describe in a minute in his slides, as you start moving down the copper wall, there's going to be increasing opportunity to ship optics.

We will have optics inside the rack as well as across racks inside a cluster. This is going to be nothing but upside for the optics industry and we can see every customer, not just NVIDIA, every customer moving along this vector with the possible exception of Google who has their own architecture by virtue of the OCS, which does almost the same thing. It enables optical scale up.

Every other customer is interested in some way, shape or form in what's happening with our co-packaged optics solution and our ultra high-powered lasers. Again, similar to what we talked about, we will enable this ELS, this turnkey module, such that we can engage customers that don't have the optical engineering expertise that our primary customers do and this is a real vehicle for us to engage the broader market. Okay. So just to kind of finish up and then turn it over to Wupen, we're still just the warm-up act. You realize that. We're just a warm-up act.

Okay. Okay. All right. We're just a warm-up act. Cloud transceivers, we talked about the sort of $1 billion cap that we were going to have. Obviously, we're blowing through that -- our business is improving dramatically, still a gross margin headwind. We have work to do to improve the margins in this business but we are improving it from an engineering execution standpoint, getting into the lead pack, which is really good. OCS right?

We have this new multiple multibillion dollar order or commitment that we received. This is super good. We expect it to be ramping beyond $1 billion in calendar '27. So building on the $400 million that we've described in the back half of '26 and accelerating. Some people have asked us, is that just a bubble as sort of an order seed? The answer is no. We would expect to see significantly more business across calendar '27 on the OCS, on optical scale out right?

Our first instantiation that was talked about last year at GTC. We've -- we're shipping. We're already in business on that one. We've got this multi-hundred million dollar order that we need to fulfill in the first half of 2027. So things are going extremely well. And then the big opportunity clearly is scale up.

The first instantiation of scale up, which is, again, sort of moving across links inside Iraq, we estimate to be 3 to 4x larger than the initial scale out. So big, big bump. And then as we get inside the rack, which inevitably will happen, it's a 10x larger in terms of the number of lanes that we see. We are now unlocking a new indium phosphide fab to meet all this capacity.

And still, as I said many times, we're undershipping this market. We're still vastly undershipping where we think we can be given the demand we see, forget about the rest of the industry, the demand we see is so very, very high. We cannot build these things fast enough. We're sold out, as I said many times, through calendar 2027 even as we bring on all this additional capacity. Okay, Dr. [ Y], you're going to give -- you're going to wow the audience with a technical aspect. Is that true?

Ramp it up.

Ramp it up. Okay. This is perfect. That's okay. All right. Thank you, guys.

So good morning. Go here. That's a picture before the AI tornado. I think my hair is getting square and less. So let me start with the GTC yesterday. I don't know how many people went to GTC. But the GTC, there's one very, very clear message is that the agentic AI is going to change the world. And the amount of token generated is going to skyrocket, right? And we see that. We actually feel it all these numbers that Michael just talked about, the laser numbers, I mean, just to give you one example, some customers are asking for 1 billion lasers a year. Starting with a B. It used to be in the millions, not in the billions, right?

So the [ monoscale ] is just unimaginable. But you think about this -- what's driving all this really is the genetic AI. When you are still creating the intelligence, we were serving intelligence at scale, and we're actually allowing the agents to do a lot of work for you automatically. It's a big deal, right? Just last week, we had a dinner with a hyperscalers. They're telling us and say, "Hey, we're hiring new people now. Their job is to work with 5 or 6 of agents every day. The job is composed of working with agents."

All these agents are AI agents, right? Just imagine when consumers and moreover enterprises, how to take on this kind of approach to work, I [indiscernible] a little bit now, it's crazy, right? So actually, this time, it is very different. It used to be the case where in telecom so-called bubble fundamentally, it was for communications. [indiscernible] how many people you have in the world and how much time you can spend on YouTube. That's fundamental, right?

But this time, we are actually creating intelligence and service intelligence at scale. I don't think anybody can say we can go back to pre-AI anymore. I think that era is over, right? So going forward, and this has a lot of implications on optical networking, right? Because it used to be optics is a way for communicating. Now optics poor compute. The AI does not scale the period full spot without optics, right?

So there's a few very important things. First of all, now all the traffic generated in data centers by machines, not by humans and actually drives a lot of so-called east-west traffic in a very, very big way. And the features are, number one, you need to have all these networking elements become nonblocking meaning you don't want your AI to be stuck, right, at a node, either switch or something like that. Therefore, low latency, nonblocking is a key feature.

Why is that important? Because it used to be the cloud networking, there's a [indiscernible] called aggregation, right? The more aggregation you do, the less bandwidth there is. But in the AI networking, there is no aggregation per se. You have to be making non-blocking to reduce time, right? So that's a very, very big change from what it has to be. And then also to achieve that, then you need to have the highest bandwidth connectivity possible. Both we call the scale out, which is connecting the GPU or TPU clusters and also scale up, which is connecting all the XPUs at its full line rate, right? You just have to optimize and maximize the bandwidth as much as possible, which is a really big change.

Finally, it's also one thing that matters as well is that -- now the traffic flow is not really in terms of small package or so-called mice flows, it's called element flows. The flows are actually huge, right? What does that mean actually that now opens the door for a circuit switching rather than a packet switch. And this is where optical circa switching, the OCS comes into play, right?

So these features of how the traffic pattern is changing, how the traffic amount is different from the past, is actually creating this new opportunity for optics fundamentally and I have to tell you, famous last words, this time is different. Okay. And for that reason, you see this huge ramp, right, of the CapEx. Frankly, this number when it showed up, right, a couple of months ago, it wasn't really a big surprise.

You hear in the news that Anthropic, OpenAI, all these guys saying, "Hey, if I had more compute, I would have more revenue." Period. right? And you see all the agentic work, you see all the cloud code, now what's called [ open claw ] yesterday, talked a lot about now it has become a thing, a phenomenon now in -- at least in Asia. People talk about feeding my [ lobster ] right? That's a term now in Asia, right?

All these things is driving. And therefore, this huge ramp of the CapEx from the top 4 hyperscalers really is not a surprise. And then if you look at all these hyperscalers, they're investing in securing capacity, most famously on HBM, committing all the way through 2028, you see it in the news everywhere, and you look at the TSMC talked earlier this year in their earnings call had said, "Hey, we are seeing our AI contracted growth rate CAGR to go from mid-40s to mid- to high 50s over the next 5 years."

I'm frankly not surprised at all, right? Because again, these -- the paradigm shift that using the cache, the partnership of serving -- generating and serving the intelligence and increasing the scale is driving all this. So a lot of confidence in terms of not just '26, '27 and '28 and beyond. And this is why Michael talked about, we're investing so much into the fab capacity and still not nearly enough to serve all demand that we're seeing.

Okay. This is complicated slide. So let me slow down a little bit. There's been a lot of discussion on up to scale up, scale out. What does that all mean? Let me start with something very fundamental, right? The lowest line there is most fundamental, really is what's driving this, right? So fundamentally, right, to scale AI, to scale the compute, you are now -- you want to package more and more of compute and memory together, right?

That's the first unit you talk about, right? And then therefore, you see more of the cohorts from 1 single [ die ] reticle to 2 reticles to go to 4 radicals to panel scale. People are talking about how can I pack more compute and more memory on a single so-called chip. That's not a chip anymore, a single package, right? And second thing you want to do, you want to actually form a large so-called coherent domain of these XPUs and then connect them at a full native rate, whether it's [indiscernible] 5, 6, 7, 8 or whatever, things like that.

And that number is going up too because the compute is increasing and the bandwidth needed to bring out the data is also increasing at the same time, right? And therefore, there is a very, very strong need to go to say, okay, can I increase my bandwidth per lane, okay? So today, we're at 200G per lane. At 200, you can still do inside the rack, inside the rack with copper, right? So sensing showed this huge cartridge of cables, that's our component. To plan, copper works going to the middle plane, right? It probably doesn't go the full 2 meters, but going from the servers on the top to the middle of the rack, it still works, right?

And that's what we call the first phase. So today, the Phase 0 is that we keep all that copper, right, but the scale out portion scale out portion of network, we start to use CPO. We call a CPO Phase 0, okay? And in this network, we also use OCS. The OCS is used at a higher aggregation level, whether it's we called spine or super spine and this is part of our business today we're shipping to.

Actually, another part of the business we're shipping to, which is a big one is optical scaled up. That's for a very specific customer. So that's actually today that bring us from today 2026 into 2027. Okay? Now the next phase. Now the next phase, you stay at 200 per lane of copper, but now you want to, again, keep in mind, largest coherent domain possible. So now you want to scale your XPUs across multiple racks. How do you do that? Copper doesn't go that far anymore, right?

So then you want to use optics in between these racks, carry the full traffic of the entire -- the XPU traffic. That's when we see a major bump up of the optical demand. We estimate about 3 to 4x depending on how much traffic is diverted right, over optical. We also see that opportunity for OCS, we call low dimension roughly 60, 70, 80 -- 60 to 80 by 60 to 80, that size of OCS, that will be a good complement into this called a Phase I scale-up world. okay?

Finally, it's Phase 2. Phase 2 is when the copper even inside the rock become very challenged. Either is very expensive or is very power hungry, or it doesn't go very far or all of the above. And that's when [indiscernible] will go all in and to replace more and more of the copper and then fiber runs all over, not just across the rack, but now inside the rod and across the data center, right?

At that point, then you need to use -- again, use large ratings of OCS to switch and to route the traffic, right? So like Michael said, which is really, really important. Today, Optics has 0 share, 0 share in scale up. any uptick, any share increase of optics in that huge volume space is a huge deal for optics, right? And therefore, we look at it as a total -- is incremental gain for us and for our peers rather than a loss of any sort, right? And this is how we're looking at this, Phase I, today, through 2027, probably the next phase, '28, '29, '30-ish, maybe late '29 to '30, go to the next phase.

For the next 5 years, you're going to see a continued increase of optical content in scale up paired with increasing use of optical switch to connect all these fibers and route traffic. So if you then pull out a little bit, right? Now we'll look at the whole evolution of optics. We identified 4 key elements that will -- that's not ruminant specific, but Lumentum happens to be well positioned in all 4 of them, right?

First one is CPO. CPO is the ultimate interconnect. Nothing beats CPO, right? As delay goes high, you just have to use CPO to get you scalable, low-cost, low-power consumption connectivity. Second thing is optical transceivers, right? Transceiver is going to be complementary to CPO. CPO is not a completely overnight replace transceivers. There's no way. Nothing changed that fast, right? And the transceivers has an advantage of being able to provide a more granular units of bandwidth.

You can [ plug ] on the servers, we can [ block ] on some on other different places, give you an instantaneous actually upgrade of speed because it is actually easier or less challenging to implement the latest optal technology into a transceiver as one unit, right? Then you can use that to scale the network much faster. Sometimes, you also want to maximize the bandwidth per fiber. The transceiver also give you the opportunity there by providing you design flexibility right? So transceiver will be there for many years to come.

Third piece which we didn't talk about yet so far is high-speed lasers. Today, Lumentum is the largest EM laser supplier in the world. working about 200G right now. In this OFC, we're going to demo as Michael talked about a 400G differential EML, right? Again, the high-speed lasers is, again, instantaneous the fastest path to increase the bandwidth per connectivity unit, right? So we're going to demonstrate this module for the first time using a differential EML. And we believe that the high-speed lasers will continue to be really, really important as a co evolution of the CPO technologies.

Finally, it's OCS. We believe that OCS is fundamental to the evolution of AI networking. It will be there. It will be there to route traffic to be able to provide the connectivities at a very high scale from scale up to scale out to spine super spine to protection. And all these applications will find OCS being a very useful tool for implementation.

So this is a chart that this has been a debate, right? I want to say here really is that there is roughly a physical line between the optics and the copper. And that line depends on whether you use so-called direct attached copper, pure copper cable with nothing on it, which is the lowest cost, lowest power.

Unfortunately, it doesn't go very far anymore, right? It runs to a limit about 1 meter or so at per lane and a 4-plan probably doesn't go very far, right? And then -- but then you have to go the ACC, which has a retimer insight, you have a AEC, which has a DSP insight. The more compensation and capability after the link, the more power it consumes, the more latency it generates and also the more power and cost will go up as well, right?

So there's a blurry line over there, but we believe that a formula Copper will run into a big deal, big challenge. Despite the best technologies, TSMC and analog world can produce, it's going to be very challenging to really have a highly reliable copper. People are definitely trying, right? Last week, [ Brohan ] talked about they were trying to make this a [ PAM4,M6], I think we recognize that. But still, to broadly apply the copper at 400 per [indiscernible] is going to be challenging.

Therefore, we see in that world, there will be a mix of the copper and optics inside the rack, depending on the quality level required. And also, frankly, depending on how much volume the CPU world can actually supply, right? But overall, what we see this is that at 160 is [indiscernible], interact optical at 3.20 or 400 per lane, you're going to see [ intra-rect ] copper probably mixed with optics and certainly in between the racks, you'll be optics. Again, it's all net up for optical components.

And let me spend a few words a little bit here on the high-speed lasers. We talk about it a little bit, right? Why is EML laser as investors know, so attractive? Because the laser includes a light source and a modulator. So when we take it, fully yielded, that laser, you know it works. That's super attractive and compare that with [indiscernible] today.

So that today, you have to get a so-called CW laser and launch into an array of sitting photonics chip. And the trick is that -- you want to make sure all the lanes yield at the same time. Whereas EMLs, you put one at a time, every single one works, right? So that's why people always use EML when they go to the new speed node because they know that thing works. That thing doesn't require to yield the whole solution at the same time, right?

Another thing also does really, really well is unless you want to have many bandwidths and many wavelengths to put a lot of balances into single fiber. Within [indiscernible], it will be challenging. You now have to put all these lasers, all different color of lasers, align them together. Hopefully, they all work together, whereas you use EMLs, you can have all the wavelength putting into the module and you know it's going to work, right?

So these are the reasons why the EMLs are attractive and always be the first to market, first to volume for a new speed note. And frankly, we don't see that changing. Now 4G per [ land ] can be even more interesting, right? Again, we're going to demonstrate a 4x400G module with differential EML. This is going to be a bit more interesting because [indiscernible] has a challenge at 4G plan, right? The physical property of silicon doesn't easily lend itself a very high speed. And therefore, a lot to try to work on different tricks, different solutions to address the silicon photonics.

So far, we've not seen a very compelling manufacturable solutions. And therefore, people are talking about different materials, [indiscernible] or silent, right? But these things do not have a proven supply chain, do not have a proven deployment, reliable track record, right? It will take time. for them to develop into a solution that people can really come down, right? And therefore, we believe that the EML remains to be a very attractive solution at 40G propylene.

And again, I'm going to do a little bit of advertisement here, please come into our biobooth and see it. This is the world's first 400G EML demonstration in a pluggable module. And then Lumentum's category in this regard has been lasting in the last 20, 25 years. Again, you don't achieve these milestones such a feet overnight, right? The design and the process manufacturability, all tied together is what enables us to be -- not only will you design something, but also be able to instantaneously ramp the product right? And we're confident that we'll be ready within [ 2G ] era is arriving a partners. We'll be able to scale our 400G EML to the skill that's needed to support our customers.

And for that reason, we continue to see the penetration of indium phosphide into the data centers, increasing is market share, right? And it's now very, very clear. I think last time when we met here at OFC, we still a lot of that going to, "Oh, it's [ Martin ] going to survive, it's going to last for a long time." Now we see here is that our customers and customers' customers have put a raised decision that they will holistically use [indiscernible] fiber because [indiscernible] much more scalable in terms of how much bandwidth we can put into single more fiber, and they want to have an infrastructure that is scalable, sustainable going forward, right?

And for that reason, we see indium phosphide market share continue to increase in those high-speed areas and also in the CR laser areas or UHP for CPO, applications like that, that indium phosphide will be the force to better. And again, that's why Lumentum is investing so much into the indium phosphide world.

So on the cloud transceivers, I want to just add some color to what Michael just talked about, right? Some of the customers are really, really driving to increase the bandwidth per fiber, right? We see people talk about a lot of the high retics connectivities, but some customers are trying to drive up the bandwidth per fiber to scale their AI clusters.

And our modules are in designed very well to fit the application and there's definitely 1.6 with [ Tomahawk V ] switched now coming into the market, and we're now shifting our production over to 1.6, which is challenging to do, which we're actually now early to market, and we are going to ramp our production up and that will carry a higher gross margin and better economics for us.

And finally, we want to talk about really is that the -- not only are we going to integrate our lasers into our 16 modules, but also silicon photonics, that use in some of those modules are also for internal. And this is the reason why we understand the trade-off between silicon photonics and indium phosphide EML lasers. We want to [ detrade ] off very, very well. But we're integrating our componentry also into our modules for 2 reasons.

One is, of course, it gives us a better gross margin, but also secondary really important is secures our supply. Today, people are coming -- marking on the world try to buy modules also because we own lasers, and that makes a difference to them. OCS. This is super exciting. The Lumentum history of OCS starts year 2000. Our first generation of so-called [indiscernible] used the MEMS technology that's fundamental to our OCS today.

Through all these years, there have been a lot of products deployed in the field, woman has always been a leader in WSS on Q today. And there are lots and lots of these MEMS devices deployed in the field. Every single problem that anybody have ever seen on MEMS devices, we've seen it. We've solved it. We've overcome them, right? And then about 20 years -- of 25 years of experience, know-how, the processes control, manufacturability. And equally important is that our WSS scale has already exceeded the OCS scale our customers want us to run to.

What does that mean? That means we know what it looks like. This is a very, very important thing. Because before you know what it looks like, you don't know what to expect, what do anticipate, where the traps can be, where the shortfall can be, where the process problems can be we have seen all that stuff already, right? So now for us is really, okay, let's go to the supply chain, let's go scale the machines, those go kill the training. But for us, we know what it looks like to scale the OCS and we have feel there to prove how variable the MEMS mirrors are in the field. So there's a lot of very attractive features of OCS.

To summarize, I would say the MEMS space OCS is as transparent as you can get from an optical bus point of view, right? What do you want out of the optical switch really you want to switch the traffic without paying any bit of optical penalty. That's what you want, right? I think MEMS mirror comes closest to that. exiting mass is very, very low.

For a large 300 by 300 OCS is less than 1.5 bp. Our return loss with life doesn't come back. It goes on [indiscernible] doesn't come back, very important for certain applications. It's extremely low. It's scalable, right? It's transparent to wavelengths, data rate, nothing bothers it. It's the same switch. And then another thing on latency, unlike a packet switch, which depending on the route it takes, congestion or not, this switch has a fixed and low latency, right. In the case of nonsensical how much time the light takes to travel between those 2 mirrors and in and out.

And then power consumption. This is as kind of passive. There is no transceivers on a switch, like it goes in, got switch, like comes out, right? So power consumption of the switch. Number 1 is fixed, doesn't scale with data rate. And number two, is less than 1/10 of that of packet switch. As package rate goes higher and higher speed, that difference is going to become bigger and bigger. It's prudent viability. We know how to make it. And first of all, and furthermore, you can address wide range of [indiscernible] from very small to very large, right? The MEMS design and optic design is all together, right?

So again, we see a lot of opportunities for OCS and we believe that our technology strength build on 20 years of evolution experiences and manufacturing scale will enable us to be able to capture this market, pretty uniquely in this market space. And then we think that in a few very important applications, right? So today, we all know one of the biggest application is particular approach to optical scale up, right? In that case, what we do see is a 1.5:1 of attach rate, right?

So meaning one of this XPU will require 1.5x of the optical port for that application, right? That is really to enable certain topology, certain connectivity to scale the AI. And second thing here, we call the optical scale up. Now this depends a lot on how the cluster is designed how much traffic is coming out of this. This is a wide range. Our estimation is that the port to XPU attach rate is roughly 2:1 to 10:1. Actually some [indiscernible], I'll go even higher.

If you go with a pure DR optics, this is going to be 2:1, right? It depends on how much bank was put per fiber, and that will change this, the OCS demand drastically, right? So again, as we see more optical scale up, we're going to get a better visibility and better certainty on this coach number, while it's high. It's a lot higher than today. Finally, as a spine super spine scale of cross level is roughly between 0.21 and 1:1. That we see today, right, in other applications.

So overall, again, we see a wide range of OCS use scenarios use cases, and we see a wide range of the attach rate. And overall a together, again, it goes from a very small base or a 0 external market base to something very meaningful. It's all upside for aluminum. And for that reason, we talked about OCS ramp. We just talk about this multibillion dollar deal that we just made with the customer. And we now have visibilities into -- for the next couple of years, and this is all premised word XPU scale up.

And then when we add all this together, I think this line has a multiyear runway. Again, we think this will complement the packet switches and is uniquely suitable for AI clusters and AI networking. And with all these story out together. So we're really bullish on the market, right? So this year, roughly, we have an $18 billion TAM across all the products that we can cover. In 5 years, we think we're going to go to $90 billion plus.

You're going to see a very large growth of scale across huge growth scale out from 0 to nothing in scale up and huge ramp on OCS, right? If you heard our story about everything is from 0 to something, right? The OCS is almost from 0 to something, scale up from 0 to something, scale out already today. But with computes getting like this, you need a huge amount of scale out still, right?

And don't forget, the blue bar there, which is scale across, there's one important rule to keep in mind, hire much compute including data center, you need that much of -- you need to have a proportional amount of networking to connect data centers. So while data center is growing like crazy, the networking is also going to go like crazy, right? [indiscernible] has a bunch of products as well suited in that market.

So I would say if you look at the whole pie chart, a whole bar chart, Lumentum is really, really well positioned in all these different areas, scale across scale, our scale up and also in OCS. And we do see that increasingly in 5 years, we're going to see about more than -- about half of the traffic will start to go into the scale up domain that optics can cover.

So a little bit advertisement, these things actually matter. I want to spend some time on the demonstration we're going to do at the booth. So please swing by to take a look. First of all, there are 2 demos that we're working with NVIDIA on. One is to use our UHP laser for so-called CPO by using optical module, okay? Each such laser cares for 200G lanes. So each 1.6 module will take 2 UHP lasers, okay? There's a module from NVIDIA in our boots using our laser inside. There's one demo.

Second demo also for NVIDIA is for 200G EML, put it inside 8 of them or 160 modules, right? These are 2 demos that we'll work with NVIDIA. The next one is what we just talked about is a 400-problem the world's first 400 plan differential EML module, right? This is going to be the next standard, we believe, for the 3.20 model generation. And the next 2 things are full scale up. There is [ VCSEL], potentially [ VCSEL-based ] scale-up applications for certain more of a inter-chip connectivity kind of application that we're demoing and also, we're looking at a higher power of the lasers that can actually cover even more optical lanes or a WDM based laser that can now enable the next generation of optical scale up technologies up to 800G, 1.60 per fiber or more.

And finally, on the last column, we also have 2 scale across material scale across demonstrations. One is a coherent optical [indiscernible] monitoring. Now we want to monitor all the rails at the same time, Second thing is called the digital game equalizer, again, multi-rail ready, right? So again, we're going to show you technologies covers out scale up and scale across. These are new technologies that we will continue to drive our revenue going forward and then enable us to capture increasing amount of TAM, the big bar that we just showed you on the previous slide. Thank you very much. Hopefully, I've built up enough for you to take over.

My gosh, the pressure [indiscernible]. Okay. Good morning, everyone. Thanks again for joining today. It's great to see all of you. Many familiar faces from the Analyst Days that we've had over the last couple of years. And there's been a common theme among the Analyst Days. And that is, that it's the company's view that there is a shortage of indium phosphide capacity. And it was even before all of these orders that Michael and Wupen spoke about that we had a thesis around how we should be investing our capital in spite of the fact that we were actually hovering at around $300 million, $350 million a quarter of revenue and barely generating any type of operating profit.

But we were going through that transformation, and we had a lot of conviction. Certainly, Wupen convinced us a lot around what the CapEx needs for the company would be. And last year, when we got up, we talked about $500 million a quarter and then eventually a $750 million quarter One of the reasons we've been able to beat those numbers is because we really leaned in on a lot of the CapEx decisions back in fiscal '23 and fiscal '24 and in fiscal '25. And so -- and that was without a lot of the orders that we have right now.

You'll see in a slide or 2, our backlog is quite robust. I think that would probably be the measured way to talk about it. And again, what you're seeing from us is we're thinking out to '28, '29 and '30. And so the announcement that Michael made about the new facility in [ Greensboro ] and the investments that we're going to make in that in order to enable another $5 billion of annual revenue, and those are chip margins. I think all of you are familiar with how chip margins look, that will really, again, provide another pivot for us, another leverage for us to improve the business model of the company.

And so we're not going to get off that track. We're going to continue to invest on our front-end capacity to expand our indium phosphide capacity, both at our [ Rose Orchard ] fab, which is our San Jose fab, at our fab in Caswell, we're going to be expanding to put in more clean room space and then at our new Greensboro fab as well as well as in [ Saga Mahara ] as we move around the mix of our lasers especially with 200G and like Wupen spoke about 400G really ramping up, we're going to have to make investments there as well.

So we're going to stick with that strategy. That strategy has been working for us, and we've been able to execute on the financial numbers that we spoke about last year with -- and being able to beat expectations. I think the other thing that's worked very well for us is very early on when Michael joined, he said, "Hey, guys, you're not going to be able to hit these numbers unless we start investing in our CM partners." And so what you'll see is that we are investing across our CM partners really to provide us with scale.

And we had an internal management debate, "Hey, do we give up a little bit of margin?" And the decision was made that no, we're going to get more operational efficiency if we have a number of CM partners. We'll be able to scale with market demand. We have a number of people rolling in the boat with us. And so you'll see we've made that decision, and that's worked very, very well for us and especially with the multibillion-dollar deal that both Wupen and Michael spoke about, that's going to help us a lot. That skilled strategy on [ Sam ] is going to help us a lot as we look to execute to significantly bigger numbers.

On our operating margins. So does anybody remember what we showed last year in terms of our operating margins anybody? Okay. So we had talked about eventually getting to 20% operating margins. And for fiscal Q3, that will end in March. We've guided to north of 30% operating margins. A lot of that has happened because we were able to execute on DCI demand and EML demand and with the product mix really working in our favor on both of those product segments, we've been able to improve the gross margins of the company and I think many of you are now modeling us into the low to mid-40s for gross margins, and we'll give you guys an update on that as well.

Capital structure. So up until a couple of weeks ago, our net debt was quite high. And thanks very much to the generosity of NVIDIA and their management team, we've had an investment of $2 billion. I remember when that wire transfer came through. It was a really interesting moment to see the -- I got an e-mail from our Chief Accounting Officer, and it had a picture, and I was like, wow, that's great. So that was fantastic. Now we've given up a little bit of dilution. So we have 2.9 million more shares out there. So as you're updating your models, you should certainly account for that.

But that really gives us the ability, and we could have done it on our own. We had taken a look at this internally. Should we do it on our own or should we invest with someone? And obviously, with the commercial agreement that we have with NVIDIA that really kind of kneeled over to the decision that, hey, let's invest alongside with a leading AI infrastructure partner and really strengthen our balance sheet at the same time. And probably about half of the $2 billion will be investing in strategic CapEx.

So even though we've got a great CM strategy for back end in the front end, we will probably be offering our CapEx investments over the next couple of years. So probably about half of that will go into strategic CapEx investments, but then the rest will really allow us to have firepower as we think about how we should vertically integrate from an M&A standpoint. And also, obviously, we're going to need some more working capital to achieve the numbers that I'm going to show you in a couple of slides, okay?

So the difference between last year and this year, this slide says it all. Last year -- by the way, this is all going to be on our website. So unless you're taking pictures of me, you should -- and I don't think you are. I don't think you are. This will all be on the website, but you're welcome to take pictures. So the difference between last year and this year is last year, we had a forecast. We had Wupen coming into my office and Michael's office saying, "Hey, this is what customer X told me, this is what customer I told me."

And now, now it's real backlog. It's real long-term orders. And that really gives us the visibility and the confidence to make the CapEx decisions that we're making, right? And so generally, we like to have our CapEx payback within a year of it being operational. And being able to have this type of backlog from our customers certainly gives us a lot of visibility, allows us to communicate better with our supply chain, and I'll talk about our supply chain in a minute and really invest what we need to from a business standpoint to make sure that we don't miss any opportunities because I think outside of the financials, Michael has allowed me to sit in on more customer meetings than in the past, our customers are really counting on us.

And I've seen that firsthand, and so we really can't disappoint them because there are even bigger customers that are counting on them that then count on us. And so this type of visibility really helps and it allows us to make the right type of decisions from an inventory standpoint, from a head count standpoint and all of those other things that come along with making decisions under certainty rather than making decisions under uncertainty.

So I talked about the CM manufacturers. Actually, Michael and I had dinner with one of our leading CM manufacturers last night, we were talking about how we could continue to expand our business with them. And -- but at the pace that we're growing, we need to have multiple sources of supply from a CM standpoint and really be able to take those steps within the manufacturing process that don't have sensitive IP, right?

The parts of the manufacturing process that have sensitive IP, our new leader in Thailand, KW has got a great pedigree from [ Jabil ] and he's able to really work with the CM manufacturers and say, okay, well, this part of the production process, I'll take and then this part of the production process you should take. And that has really helped us from a scale standpoint in order to be able to virtually manage the type of output that we need to because last year, at this time, we were delivering $400 million of revenue. We've been able to double in a 12-month period.

This is one of the big reasons we've been able to do that. And we expect to continue to grow sequentially as the year passes on during calendar '26 ending calendar '27. And this will be a critical enabler for us in order for us to achieve our customers' expectations that they're setting on us.

So probably no surprises here, right? Our current quarter, we've set at a midpoint of $805 million and future quarter, we think that we can grow to $2 billion. And this $2 billion quarter is without the Greensboro fab that Michael spoke about earlier. This is the EML capacity that's increasing year-over-year by over 50%, and that's unit capacity. That's not revenue capacity, right? The mix is going to shift more to 200G as the quarters pass on.

So that certainly provides us with a nice tailwind. This includes the OCS win that we just got the multibillion dollar agreement with a large hyperscaler customer. This includes CPO as well and what we're going to be shipping throughout calendar '27 based on the commitments that we have from our customers as well as an uptick in 1.6 transceiver demand. And the 1.6 transceiver demand, like Michael spoke about earlier, the profitability of that business and that product line has improved quite a bit.

And so as that business is growing, where -- earlier, our position was, okay, we want to limit the growth, and we've softened a little bit. And we're still being selective, and we are only taking on business that hit certain thresholds from a margin standpoint because we'd like to manage the overall business model, but that will certainly be a contributor of growth.

So the current quarter, those 3 areas, OCS, CPO and transceivers, that's about 25% of our company revenue. Fast forward a number of quarters from now, and we'll talk about the timing in a minute, we expect that those 3 products will drive 60% of the $2 billion number that we have. So you're probably all wondering where EML is. Well, EML is in the balance, right? And so there's a little bit of natural hedge in the model when you take a look at where we are now and where we move to at the $2 billion quarter. So hopefully, no surprises here.

All right. So then you take a look at, okay, how much is each one of the growth drivers contributing. You can see it's pretty balanced, right? I mean there's a little bit more OCS than others. But on balance, it's fairly even from a growth standpoint. Now the timing will be a little bit different because you'll see that our gross margins over the next number of quarters will up and go up and down.

You were like, "Hey, well, you just hit the top end of your model this quarter, why are you going down a little bit next quarter?" And then why are you overachieving a lot of it will depend on product mix, right? And so the first thing that will come out is 1.6 transceivers. We'll start shipping those in the June quarter. That will start ramping up then Michael talked about, OCS, well then that will layer in next, right? And that has a different margin profile than our cloud transceivers business. So that will give us a little bit of a tailwind.

And then when we really ramp in the December quarter and then in the March quarter next year with CPO, that will provide another tailwind again, right? And so it'll be a little bit lumpy but that's really how we're thinking about it, and that's how we'd like all of you to think about it. So then there's the bar to the right, so the $2 billion, right? And so -- and I think this is really important for all of us to understand because we are thinking about the company to the right of the $2 billion, right?

How do we go and achieve those opportunities? And so many of the capital deployment decisions we're making now, like the one we announced this morning, on the Greensboro fab are around the box to the right of the $2 billion. And so many of the R&D decisions that we're going to make are going to be focused in on that. And you can see that there is a wide variety of opportunity for us to continue to grow and to really match the market data that Wupen showed in his slides, right?

And he showed I can't even remember what the number was, but a significant uptick in market growth. Well, how do we go ahead and capture that market growth? Well, it will be with the product -- the diversified product lines that we have that are on the box to the right, and we'll be happy to answer more questions about that in the Q&A. But hopefully, those -- none of those are any surprises.

Okay. Okay. So the model -- so we wanted to make sure, just like last year, we had talked about a $500 million quarter and then we had talked about a $600 million quarter, and we talked about a $750 million quarter and we have put some time lines around that. And so we wanted to make sure that all of you had some perspective around what our very short-term targets are, which is the middle column, and then what our midterm targets are.

And so in the very short term, we expect that we'll be able to hit $1.25 billion a quarter with operating margins that hover around 35% and so we just guided to just above 30% for this March quarter. So I'm sure everybody can kind of draw a straight line and figure out how this could also happen. And then when we move to our $2 billion quarter with all of the capacity ramps that we've got going on, we think that we can actually run the company at a 40% non-GAAP operating margin.

This is not EBITDA, this is operating margin. And so now, obviously, our share count will be a little bit higher, like I spoke about earlier. But from an operating standpoint, outside of capital structure, this is where we think the operating margins can be. Now from a time line standpoint, and we talked a lot about this internally. So if you take a look at what we internally believe and what our customers are asking for and what we're ramping up our own internal capacity for, and you were to say, okay, how long would it take for us to achieve each one of these targets from a run rate standpoint, we would say 9 months and 9 months. So 9 months from now, we think we can exit at $1.25 billion. And then 9 months after that, we think we can exit at $2 billion.

However, I'm sure that everybody's heard about all the supply chain tightness that we've got going on in the market right now. And so we think it is prudent and measured to add 3 months in the range to each 1 of those targets. So the first target -- it will be 9 to 12 months for the $1.25 billion. And then the second target, after we achieve the $1.25 billion, another 9 to 12 months, really with the delta being any type of supply chain surprises or supply chain tightness that we see across all of our product lines.

Now obviously, the internal team is doing everything possible to make sure that we be even the low end of those targets. But since we're communicating out something that is 18 to 24 months from now, we felt that it was prudent to have a bit of a range on that. And again, the capacity for Greensboro is not included in any of these numbers that we're talking about here. And yet the multibillion dollar agreement that we have with NVIDIA requires that Greensboro fab.

So none of that potential revenue and capacity is in any of these numbers. And the reason for that is because we're not talking about calendar '28 yet, okay? I think I'm running out of time. All right.

So I think I've talked about this before. We're going to keep to the same strategy. We're going to continue to invest in the right R&D programs with the right customers and the right CapEx. We've got a great balance sheet now to help enable and really lean in on some of those decisions. We think that we can drive the company to another 1,000 basis points operating margin improvement from the 30% that we just guided for the March quarter. And we think that we can exit at $2 billion operating margins anywhere from 18 to 24 months from now. Okay. All right.

Okay. Kathy, you're the MC. You don't need that, no more clicker.

Yes, I'd just like to announce that we have now published the slides on our website. Many of you have asked me for the slides. So they're on our website as of right now. So if you have a question, I would encourage you to step up to the microphone. There's one microphone in the aisle here. And then please state your name and your firm, and we'll just take your questions.

Right. Thanks, Samik.

Thank you. So maybe Wajid and Wupen for you. The first one is you're highlighting sort of the range on the years that your targets are based on the supply chain constraints. But the new growth opportunities that you're also highlighting seem to be a bit more under your control going forward. So I'm just wondering, when we think about the growth drivers, how much really seems to be supply chain constrained given most seem to be a bit pointer control. And secondly, for open, more specifically, you mentioned silicon photonics doesn't scale to the 400-gig lane. So are you doing something internally on [ lithium niobate ] already?

So like I said, Samik, our -- what we have visibility to, and both from a capacity standpoint and from a supply chain standpoint, enable us to say, okay, look, we think that the targets are 9 months from now, 9 months and 9 months. But we do see surprises in the market, right? And we'll see a certain supplier come short.

And the problem is if even one screw is missing, you can't ship the final product. And so because we are setting numbers that are for, call it, the end of this calendar year and effectively the end of next calendar year, we're putting in that 3 months because there is just a lot of volatility in the market. And there are things that come up on a weekly basis that we are able to work through generally, but we want to be measured in terms of the type of range we give on our targets.

I would say a couple of things, right? One, OCS definitely is a significant driver over that 9-month period. That does rely on supply chain. So cloud transceivers are going to be in there, where that's actually growing really fast for us, that relies some on supply chain. So 2 of the elements do I think, on scale up and scale out less so, right? We've got a lot of that under our control. And obviously, as we think about the margins and the mix, those 2 elements are super, super important. But 2 of the 4 are definitely areas where we see supply chain pressure.

Yes. On the indium phosphide or the silicon photonics question, we did also, like everybody else, we're looking at different kind of mature combination. But we definitely think that indium phosphide, especially with all the investment that industry is going in has a very strong potential to be the so called material of choice [indiscernible]. We think that actually complements today's silicon photonics really, really well. That's all.

Thanks. Karl?

Karl Ackerman from BNP Paribas. Wupen, you showed how VCSEL could be used for scale-up CPO. Yet VCSEL, I think, would be just 9% of laser demand despite how you showed later, that scale-up would represent maybe 1/3 of that $90 billion TAM. I guess why wouldn't VCSEL address a larger part of scale up versus other technologies, such as EML? And could you discuss your investment priorities to address VCSEL if it does become a larger TAM opportunity?

That's a great question. I think at this point right now, our view is that the customers want to use single mode fiber to scale for scale, right? And -- but there is a small group of customers say, "Hey, I want to still leave the options open, right?" What is the scale-up -- scaling of scale up is more challenging than what we thought it would be. So that really is kind of the leaving that as an option, right?

Second thing is actually, if you're looking about the VCSEL ecosystem, it's well established, right? And therefore, scaling of that laser and chips is not too much of an issue, right? That's why people still say, "Hey, let me just keep that as an alternative solution let's see how it goes, right?" And that's what we're still investing in. We want to make sure, frankly, we get all the scale up bases covered.

Karl, I'd say it's a timing issue, too. I think certainly for probably the next 3 to 4 years, it's all going to be indium phosphide. I think what's being discussed is beyond that for very short ranges, and that's where VCSELs work, right? At the very, very short ranges. If you believe in this thesis that we're putting out there that there's going to be a tremendous amount of optical scale up, you are going to get into a world where you're going to have short runs -- and in those short runs, VCSELs make some sense. So I think that's where we see applicability. It's certainly not in the next 4 years. It's a 2030 and beyond type of thing, where you really start to see this high penetration of in-rack scale up.

Simon Leopold, Raymond James. So you gave us a lot of information today, but the one thing I didn't hear much about was really wide area network. So I'm just wondering if you could frame your thoughts of your opportunities for DCI, particularly scale across a number of the OEMs that have talked today have talked about amplifiers being particularly tight, we know you do 980 pumps. But when I look at the chart you put up, DCI looked kind of small relative to everything else. Could you maybe elaborate on this opportunity set for you?

Yes. Look, I mean, we've -- the 3 of us sat in a meeting this morning that was exactly to the content you described. We have a big, big share in pub lasers, as you know, and we intend to build on that. So we're actually investing a lot in pump lasers. It's just on a relative basis, it's smaller. I mean at the end of the day, the numbers that we're looking at for these other opportunities are huge. Doesn't mean we're not investing there. It's an important part of the portfolio. We've talked about ITLAs. We've talked about pump lasers. We've talked about WSS. All 3, I think, Wupen and the team are investing in again, just in a relative order of magnitude perspective it's smaller.

It looks on the chart like it stays small, but it roughly doubles.

Triples. Yes, I think it's we're actually upping our output in some of these areas, 5x. So our output on pumps are super important to us and we're actually upping the output 5x. So we're spending a ton in the capacity there. Again, just a relative order of magnitude, Simon, right? It's just smaller. No less important.

Thanks for hosting the day and congrats on that long-term model. And congrats on the Greensboro purchase as well. So that will probably be my questions. Any other details on the economics there would be great. But I guess, maybe more importantly, is this going to be for 3-inch, 4-inch or 6-inch and then you suggested ultra-high power for ELS modules, but this will, I assume, do all of the EML additional capacity you need as well there.

Yes. Chris, super quick first, I want to thank you for rescuing this morning, right? I would have been toast without Chris. I was in the wrong hotel apparently. I was in a wrong hotel, going up and down the elevator, then Chris save me. Thank you, Chris.

Look, I mean, I think that as we think about Greensboro, it's going to be very much focused on UHP. Consistent with what we've said, it's a 4-inch, 6-inch compatible line, right? So we are thinking about starting on that particular line on 6-inch but that's a TBD decision. We have the ability to flex both ways. And as we start continuing our experimentation on 6-inch in Caswell and in San Jose, we will look to make a decision on that, but we will have the capability to swing both ways.

What we've said and very consistent is San Jose, UHP Japan is going to be EML. And then as we communicated, I think to you last time, we're thinking about now Caswell because the UHP numbers are so very big, shifting that, which was originally intended for and now thinking more about it for the UHP. So we're going to have 3 blocks now of UHP. San Jose Phase 1, Caswell Phase 2, Greensboro Phase III. That's kind of how we're thinking about it.

Excellent. And online in '28?

What's that?

The Greensboro?

2028. So online '28, we should be shipping in 2028. We'll be qualifying next year, right? Again, we have a nice fast run. It's already fully staffed, which is great. And it's a fully operating fab. So it's just a matter of switching out the Qorvo stuff and putting in ours. But that first phase will take a year just to get to the samples and then probably another year for qualification and production.

This is Papa Sylla from Citi. So Wupen, I think you had a very kind of helpful slide around kind of putting everything together in terms of TAM. I was wondering, I guess, for your largest I guess, CPO customer or in general, if you can kind of talk to the content per GPU, I guess, let's say, if you take that customer, how should we think about it for [ Bladel ] and we move to [ Ruben, Ruben Ultra and Fima], just kind of any color on dollar content.

Yes, that's a complete question. So let me think this way. So if we were to implement right today, let's say, in the black well generation, you have -- today is all scale up, right? So assume that you go all CPO all scaled out, right? And then you go from black well over to the [ Ruben ] generation, there is an increment. I think the scale out net is becoming bigger, right? So that's probably a, call it a 2x increase, right, of just scale out based on CPO, right, per GPU, right?

Now we go from that to an inter-rate scale-out has probably it's got up. That's going to be another probably 2 to 3x. That's why it put us 3 to 4x, right? So that's -- think about black well to [ Ruben], roughly 2x to be [ ultra ] or something like that, the scale up happens, that be another 2 to 3x. So that's kind of how you think about from a UHP content point of view.

I don't know, Papa, that we've actually characterized how much -- we get asked that all the time, right? You and others have said, "Hey, how do we measure it per GPU." It's tough for us to measure that, right? what we're looking at is what's the demand on us, what's the backlog that's been placed on us and then trying to give scales relative to what we see for scale-out, initial phase of scale up and then the second phase of scale up.

Okay. That makes sense. If I have a quick follow-up on that TAM graph, you had kind of scale up scale up optics TAM and then you had the scale-out. I assume a lot of that scale-out you have the transceivers in there. But I'm curious if you can, let's say, if you remove out the transceiver and we look at kind of optics from just kind of is scale up by 2030 bigger than scale-out? Or what point should we expect scale up to --

I don't have that number.

You're right. When I saw that graph, I thought the same thing you did. I think that the reality is scale up is much higher time frame. I think Kathy put 2030 on the chart. In that time frame, if you just look at UHP, UHP should be significantly higher for scale up and scale out what you see in the mix is transceivers, right? That's what sort of shifting the number a bit.

George Notter, Wolfe Research. I guess my question is just qualitatively, what's embedded here on the $2 billion number in terms of the trade-off between copper and optical in the scale up domain, right? So there's a copper distance radius associated with racks. And I guess I'm just curious how you kind of put your numbers with that copper radius and what's embedded in how you think about your TAM and your sizing?

Yes. I mean, George, I think what we're saying is sort of in the second half of 2027, right, we'll start shipping scale up and the scale up is going to be coming sort of switch to switch. You're going to see not in the back plane itself. It's going to be a lot of connections inside the cluster, right? And so the Papa's question, we are sizing that from a magnitude standpoint at 3 to 4x what we're seeing in scale out, but it's not going inside the back plan. What we said is at the end of '28, we're going to start to see connections inside the backplane. So that's where you start to see it really a significant leg up on CPO. It's not to say that first leg is small. It's pretty significant, and we're going to have to ramp significantly to get there. But to be clear, it's more of a cross-cluster type of connection.

And then the other one I had was just on the NVIDIA relationship. Obviously, they're going to become a very large customer, I think, for you guys as I kind of play this forward. Like how do you walk the balance between NVIDIA soaking up your indium phosphide capacity and other customers that also want that capacity? I expect you're going to say this is not an exclusive arrangement, but again, it probably creates a lot of paranoia, I think, among the other customers. So what's the view?

Yes. I mean to a certain extent, it's been a good paranoia, right? Because I think people can sort of size it and say, wow, that's a big chunk of the capacity. So what's -- it's enabled Wajid and Wupen to go out and do is negotiate with the rest of the guys on very favorable terms, I'd say. So yes, it has created a little bit of a feeding frenzy. Yes, I think that's actually going to end up being a positive for us. But it is nonexclusive, and we intend to ramp this capacity pretty significantly to serve -- I forget, I think it was Wupen that talked about this discussion with a customer looking for 1 billion, literally 1 billion CW lasers that's outside our current ecosystem that's coming in saying, we need as much of this capacity as we can get. So it is great to be in the driver seat. I mean, there's no question about it. We really are trying our hands on the wheel and these 2 guys are out negotiating with our -- there's our sales leader in the back, John these different capacity arrangements, and we expect to be able to talk to those over the next couple of quarters.

This is Vijay from Mizuho. I want to go back to Wupen. Obviously, a very interesting $90 billion chart, I guess, getting a lot of questions on that. When you look at the scale-up and scale-out that you showed, how much of that is the transfer versus [indiscernible] that? You mentioned, as you go to CP you have some challenges might be slower, might be there's more trend. So what is the mix within scale-up and scale-out, out? And then on OCS also, when you look at the OCS slide that you showed, is that just one customer? Is that multiple customers -- do you see that in scale up, scale out, if you can kind of give us a little bit of [indiscernible].

Yes. Let me answer the OCS question first. That's an easier one. So the OCS really is multiple customers, multiple applications. right? The bar is big enough to be higher than anything that we know today, right? So we definitely is multiple scenarios multiple customers. That's for sure, right? On the skill --

I mean, let me just add to that, right? So I think, Vijay, look, we're shipping to 3 guys today. We've been clear on that. This new incremental order is 1 of those 3, right? So to be clear, we expect to add customers. I mean, the use case is that Wupen talked about are varied. We talked about the spine switch, we talked about sort of a scale-up type of approach. And then we talked about sort of a super scale up going inside the rack and getting to that high ratio of attach. So the OCS opportunity for us is, we think, is the most exciting sort of medium term, right?

And then as you go out, it's certainly to scale up. So it's 3 customers we're shipping to. We expect to add more one of those 3 definitely leaned in with this multibillion dollar incremental order.

Yes, your first question right, I think in that scale arout like [indiscernible] right, there's not much transceiver in the both EML-based transceivers and cycle-based transfer, right? And then certainly [ $400 ] per land will be in the near to and in the scale up bar primarily is more of the USPs and EOS, right? So certainly, the content here, the volume here is probably more similar right, than the time side because of the -- how much content -- module content is in there in the scale out area.

Okay. And one is just a quick question for you on the convert side. You have some converts out there, I guess, '28, '29. Any plans on that?

Did the bank send you? So I mean, like I said earlier, we're very comfortable with our capital structure now, not only because of the NVIDIA investment, but the operating profits that we're generating now is really giving us a lot of flexibility. It doesn't mean that we won't go and take a look at the maturity and what makes sense. And we'll take a look at the pricing versus fair value and all that type of stuff. But there's no pressure. I guess that's the way I would position it. There's no pressure.

Meta Marshall from Morgan Stanley. I guess just 2 questions. Any details that you can give around the new OCS order? Just is it scale up? Is it spine? Is it 300 -- 300, just any details there? And then just a second question. You guys have been using [ Caswell ] as you spoke to kind of aid with EML capacity. Just what is that transition time line to kind of move that over to UHP and just or -- and then just how does that impact kind of the excess capacity you've kind of been able to deliver on the EML side?

Yes. Thanks, Meta. On OCS, we haven't said who the new customer is. It's definitely one of the 3 that we're currently shipping to and they are -- have seen our product and really believe in it to the extent that they're willing to commit quite a bit more backlog than they had previously. It is a 300 by 300.

So it's the high rate where we think we have quite a bit of differentiation. And we expect to build on that. I mean I think right now, if you look at our opportunities, again, sort of intermediate term, this is one that we're super excited about. We're growing our customer base. We're really leaning into that opportunity. And we feel like it's something where we can really add to the revenue profile in late '26 and '27.

With respect to Caswell, right, you're 'right. I think that we initially had targeted as well as EML overflow. And we are looking at it now saying, look, this UHP opportunity is so significant. We've got to bring extra capacity online for scale out initially and then scale up as a second phase. And we think that can kind of carry us through to when Greensboro comes online. What does it mean? It means that we're actually going to rely more on [ Taca], the second Japanese fab, which is still very underutilized to bring up additional EML capacity. So the basic strategy is now concentrate EMLs in Japan, right? So it takes away a little bit of the diversity that we wanted to have initially, but it helps us get [ to cal ] up and running and then concentrate first San Jose, then Caswell, then Greensboro on UHP.

Ryan Koontz with Needham. Thanks for hosting today.

Save the best for last, Ryan. Is that true?

[indiscernible] were reflecting on your experience with the 800G transceivers and some of the delays you saw, what gives you the confidence in 1.6T. Where are you in qualifications? Maybe any color you can share with us gives you confidence in that quick ramp. It seems like a fast emerging market.

Yes. Look, I mean, 800 gig, we acquired Cloud Light sort of in the middle of 800 gig. Cloud Light was never sort of first to market. They were always a captive Google house, right? We -- that's always to be very clear. And we were always sort of later. It was a silicon photonics. If you look at the -- what Wupen described quite well. Most of the first designs are going to be EML. They're easier. They're more -- they're performance driven, and we have been pigeonholed as silicon photonics providers.

So that means we're typically later in the curve. Then when we took over Cloud Light, we actually didn't do particularly well. We got later and later in the design cycle. Our designs were well off the mark relative to timing with Google and other customers. And so we started falling behind.

Now we've reconstituted that whole Cloud Light business. We rolled it up under Wupen. He's spending a tremendous amount of time on it. And the last couple of 800 gig opportunities, we were first. We were actually at the head of the curve. Even with silicon photonics, we were able to out-execute the EML guys. And based on what we know on 1.6T, again, we're first to deliver samples. Now that's only half the battle, right? We have to get our production working as well.

So you have to go from samples, which we've definitely created a tremendous amount of excitement in terms of our ability to execute on the samples. We have to then roll that into production which is still choppy. I mean, if I'm being honest, we're not perfect in our production, and we've got to get better in terms of getting the margins up and getting our production right. But it definitely looks like we're catching the early part of the curve, which is super important from a margin and revenue standpoint and then provided we can execute on the back end, we should be in pretty good shape.

Great. Maybe a quick follow-up if I could on indium phosphide expansion? I know there's long lead times for those reactors. You guys feel comfortable with the supply there.

Yes. I think we're in pretty good shape with the reactors, it is. You're 100% right. It's a long lead time item. It's probably not the thing that worries me in Greensboro or as we ramp up in San Jose, right? It's really around substrate supply. I mean, there is still tightness. I think we've got that result. We talked to you -- Kathy and I had talked to you about the 7-year agreement that we've been able to work out. We feel pretty good about where we're sitting there but that's probably the thing that keeps me up at night most is substrates, less so sort of reactors and getting the right tools into the fab, although it's not a 0 challenge.

Thanks so much, Ryan. So with that, that's a wrap. I look forward to seeing all of you at our booth, which is [ #1439]. It's smack dab in the middle, biggest booth on the show floor and not that we're competitive at all. But yes, so I look forward to seeing you there.

I have predetermined like office hours with our CTO, [ Matt Susa], at the booth. So you know if you have an appointment with us. If not, feel free to stop by the booth, especially today, I think, is the least crazy day. So I appreciate all of you attending and thanks so much.

Thank you.

Thank you.

All right. Welcome, everybody. We'll get started 30 seconds early because I feel like there's a lot to talk about. I'm Meta Marshall. For those who don't know me, I cover networking and cybersecurity here at Morgan Stanley.

We're delighted to have Lumentum, real star of the show today, Michael Hurlston, CEO. Maybe before we start with kind of all my prepared list of questions, you might have had an announcement this morning. And so clearly, kind of a $2 billion investment from NVIDIA. Just any kind of details you're giving around that would be helpful.

Yes. Look, I mean, first, we're super excited about the partnership. It's been many years in development. We've been working together with NVIDIA for a long time on our laser road map. And that's really what's -- the culmination of that resulted in their investment in us and perhaps more importantly, a multibillion-dollar purchase commitment that we're super, super excited about.

We've been working on these lasers for a long period of time, and we think we have tremendous differentiation as it comes to high-powered lasers that would be used for optical scale out and ultimately, for optical scale up, right, whenever that particular opportunity hits and different people have different forecasts on that.

But we think we've got advantages relative to the 400-millowatt high-powered laser that we've talked to you and others about. We think we have advantages relative to the reliability of that product. And one of the knocks on co-packaged optics as a technology has been the reliability of the laser.

And we think we've solved that by virtue of reapplying a laser that we used for undersea pumps and undersea pumps are not something that you can lift out of the ocean every week when there's a problem. They have to be very, very reliable. And that reliability is, I think, something that NVIDIA and other customers as they start considering the transition from copper to optics, think about. And then the third piece is our capacity, right? So we have the most capacity in the world relative to indium phosphide today.

As part of the investment from NVIDIA, we're going to go out and get another fab. We've actually identified and have that under negotiation at this point in time, but we haven't identified and where that is. But part of the commitment from NVIDIA will certainly go toward that Fab Meta, and it will enable us to step our capacity up yet another notch.

And so obviously, this is, I think, the first agreement that NVIDIA has done with a supplier. They've done a number of different agreements with ecosystem, and we're honored and very, very thankful, frankly, that they saw the virtue and the scarcity of the indium phosphide supply that they felt it necessary to go out and do an agreement with us.

Obviously, they did a similar agreement with Coherent. And I think it speaks volumes to that transition that we all see coming relative to copper moving toward optical interconnect and they've locked up jointly now between the 2 major suppliers, a significant amount of the world's capacity of indium phosphide.

And we ultimately see this thing as a good thing, right? And the fact that we're working together with Coherent on this, hopefully, between the 2 of us, we can supply enough content that ultimately catalyzes the entire industry.

All right. Perfect. So it's been a little over a year since you came in as CEO. Over that time, revenue has almost doubled, earnings have gone up by 4x, and there's expectations of much more. Maybe to start with, what did you think you were stepping into this job a year ago? And just what has kind of surprised you about the last year?

Yes. I mean I'm just over a year anniversary you said. Now it's my second foray into optics. You and I spoke when I was with Finisar and Finisar, of course, now is Coherent and really the life of what Coherent is doing is my old group at Finisar. A lot's changed in the industry.

I think we've gone from a telecom-driven industry and time scales are very consistent with telecom applications, meaning measured in years to a hyperscaler-driven industry and time scales that are measured in months and volumes that are measured in millions.

So it's a much different situation than my last work as CEO in the optics industry. I think what's surprised me is obviously the rate of change, right? And it's only changing in one direction, which means up -- and also what surprised me is the company's receptivity to change.

We've had to retool everything inside the company to meet a challenge that is far different than a telecom challenge, right, really retool the whole company to get it thinking on hyperscaler time scales, hyperscaler volumes. And the company has actually received that really well.

I think we've been able to move the company forward in leaps and bounds while -- and really retool the culture to meet the challenge that we see in front of us.

Got it. We're kind of talking about this AI cycle has continued to ratchet up and the demands on the optics vendors increase almost exponentially. Just how are you continuing to judge what is the right amount of capacity expansions to bring on? How are you determining how much you want under long-term commitment? Just like where are you finding that sweet spot of your phone, which must be ringing off the hook and what's the right amount to bring on board?

Yes. I mean we're obviously -- we're trying to be measured. I think what we see right now is we have 4 indium phosphide fabs. We intend to bring on a fifth. And in those 4 indium phosphide fabs, we've given figures of merit to you that said we've probably quadrupled supply in the last year or 18 months.

So we really put on a tremendous amount of additional supply in the existing properties that we have. We forecast in the existing properties that we have that we're going to be able to increase capacity another 20% over the next 2 quarters, which on balance means 10% increments over the next couple of quarters. And even in the face of all of that increase, we've fallen further behind in the supply-demand imbalance.

And sort of tying back to the first remark, right, what I think what NVIDIA sees is a massive scarcity in indium phosphide, and they've been very strategic in making this first bet on the supply chain on something that is ultimately very, very scarce. So as much as we're adding capacity, we know our competitors are adding capacity.

Our forecast certainly through 2027 and now probably into 2028, seeing the demands that are being placed upon us, we are sold out, right? We cannot make enough of these lasers. And even though we'd expect our competitors to continue to add, we're falling further behind in the supply-demand imbalance equation.

Okay. I've asked you this a couple of times over the last year. But with $1 of CapEx or $1 of R&D, just what are you deciding some near-term wins in terms of kind of building out additional indium phosphide capacity with just longer-term bets like OCS or CPO or maybe those aren't long-term bets anymore, they're medium-term bets. But just where are you judging where to spend that incremental dollar?

Yes. I mean we're excited about a couple of things, and we're trying to invest our capacity along these lines. I mean, first, and you hit on it, is CPO. We view our fab assets as incredibly strategic. As I said, we have 4. We're intending to bring on a fifth. We really feel like that's important for us to own. It's a differentiator for us. It's a competitive moat. OCS, right? As the world swings more toward optics inside the data center, OCS occupies an increasingly important play. And one customer uses it today, it's actually for optical scale-up.

We see other customers looking to that for things like spine switch replacements. So OCS is something we're investing in heavily and really trying to shore up our road map because the demands on OCS are increasing. We see a world where the OCS can actually go in rack as opposed to being a rather big box that sits in a rack form factor, but sort of adjacent to the main rack.

And then our other area of investment that you've talked about for a long time and has been really interesting for us is optical scale across. We've taken our telecom assets and we've repurposed those telecom assets to hyperscaler type of applications, things like our pump lasers, our WSSs, our wavelength selectable switches, our narrow linewidth lasers. We've reapplied all of that now toward the hyperscaler market, and we're seeing a lot of virtue there.

So we're investing in all of these things and trying to defocus on things like industrial lasers. Industrial lasers is a nice business for us historically. We've taken a lot of the bets off the table there.

We've tried to be very purposeful in these road maps in our laser road map, OCS road map, scale across road map to narrow down the amount of R&D we're doing and really focus on what we think are the winning opportunities.

Okay. So we've done a lot of alphabet soup so far. But maybe we could just take a step back and explain how Lumentum got to a place where -- how -- you talked about having the 4 fabs and that creating a competitive moat.

But just where did you get to this spot where you could be kind of the leader at the high-end laser and just being able to keep that positioning for almost 30 years now.

Yes. I mean it's like anything in technology, and I see a lot of the Morgan Stanley people who have helped us so much through the years. Anything in technology is, I think, evolutionary, not revolutionary. You do have these successful companies that will come out of nowhere with truly revolutionary technology.

But I think the big tech companies that do well are more revolutionary than anything else. And we've been able to really build upon a long heritage that was there way before me, right? The previous CEO, I think, did a terrific job in terms of building up a war chest of assets and a war chest of technology that we could evolve into what you see today.

OCS is an evolution of WSS. Our lasers are an evolution of things that have happened really to drive long-scale metro transceivers, right, that we've now reapplied. We talked about our co-packaged optics being an evolution of our pump laser technology that we have now reapplied to a new application.

So this is something I learned. I've worked for, as you know, many years at Broadcom. And I think what they did particularly well is focus on the core markets, evolve the technology and stay ahead.

And I think if you look at the landscape that we're facing, there's so much differentiation now that's happening in optics, if we just stick to our lane, we have so much upside and so many derivatives that we can use on our core technology to expand our customer base and expand our footprint.

We've talked a lot about in terms of kind of demand on the EML front. Just how are you kind of balancing production needs of how much -- how quickly the industry is going to move towards 200 gig versus 100 gig? Even within these kind of 4 fabs, you have a lot of decisions that you're making.

Yes. And the way we think about that, Meta, is actually to sort of now allocate by fab the technology that we use. You and I discussed, I think, 6 or 7 months ago, this idea of sort of virtualizing the fabs to a certain extent. We are not doing that anymore.

We're sort of purposely applying our fabs to different technologies. Our Japan fabs, and there are 2 in Japan, those will be used for EMLs, CW lasers that are more transceiver and scale-out focused. And -- our -- obviously, our opportunity here is to increase our output, but then to increase the mix of 200-gig EMLs.

To the extent we can, we want to prioritize that better ASPs, better margins on the 200 gig. And so one of the things that people are forecasting is we switch from 100 to 200. We want to lead that, and that helps us on both margin and revenue.

We have a fab in the United Kingdom, which is a little bit of a flex fab. We originally thought that we would use that for EMLs. CW lasers and actually PD open up a new front for us on the photodiodes and have some received technology that is an incremental opportunity for us. We're now going to reapply that fab in the United Kingdom to CPO.

So the CPO ramp that we're facing is so very high and so considerable that we've decided now to shift that fab to CPO. We'll still try a little bit of PD because we think that's a good incremental opportunity for us. It's not getting a lot of attention.

And then our last fab actually is in San Jose in the U.S. just down the street from us, and that fab is entirely dedicated now to CPO. So we've cleaned everything out of that fab to get ready. And we've already started production, as you know, and are shipping our high-powered lasers for the CPO application, but we would expect really to use all of that fab.

And it's actually, at this point, it's relatively underutilized. We'd expect all of that now to be consumed very quickly within the next couple of quarters on CPO.

Okay. Got it. That's helpful. Early 1.6T demand weighing heavily towards EML-based transceivers, we expect to kind of move more towards CW lasers later on kind of in the 1.6T cycle. You recently kind of are testing some of your CW lasers externally kind of for this datacom purpose. Just how do you see kind of being able to time that switch?

Yes. I think right now, we don't think we're going to need to switch. In the face of sort of 2 things. One is to the extent that we believe CPO is going to take off, right? That CPO does replace transceivers, at least in scale out. The discussion around scale-up is something totally different where you're actually replacing copper.

But the scale, scale out, you're -- we're cannibalizing ourselves as an industry. But in the face of a certain amount of scale out and in the face of exactly as you characterized, we think more CW lasers and silicon photonics transceivers will ship at 1.6T than will EML-based transceivers.

In the face of all of that, our forecast is that our EML capacity is totally sold out and the number of EMLs across 100 and 200 gig will be completely consumed. So we don't think here that we would need to shift any of our capacity to CW lasers other than for our own internal consumption for our transceivers.

Our transceivers are all CW-based, silicon photonics-based. So there's some dynamic that plays there. But we would expect to be almost entirely consumed on EMLs.

Okay. We've talked a lot about EML, CW lasers. You've been talking more about kind of the ultra-high power lasers more. Just where do you see kind of this biggest -- or the biggest opportunity here developing?

CPO is clearly the highest volume. I think as we start, we're seeing big impact for us on scale out. But again, that's a cannibalization, right? I think the interesting thing -- and again, depending on how it hits and how it feathers in, scale up is huge, right?

This is all of the backplane of a rack that eventually, right, through time. It's not an instant thing. It's not a tomorrow thing, but you're going to see more and more optics creep into that rack, and that is a massive incremental opportunity for the entire industry.

And I think this is why, again, some of the things that NVIDIA sees as they start thinking about getting their supply chain secured on co-packaged optics and on indium phosphide.

Okay. We've talked a little bit about the transceiver business. Cloud Light gave you access to kind of a very large hyperscaler customer. You've mentioned in the past kind of wanting to cap this business at $1 billion annual scale.

You've said that, that clearly is not going to be the case anymore. Just how are you thinking about kind of growing the Cloud Light portion of the business?

Yes. I think -- so you got it right. I think what shifted for us in terms of the thinking is $1 billion cap turns out it's not possible, right? Even with my charm and silver tongue, I cannot convince the customers to not give us business.

So it looks like it's an all or nothing, meaning if we say to a customer, look, we don't want your business, then they'll find somebody else. I mean the transceiver market is commoditized. You've talked about it for a long time. There are 7 people lined up to take our place if we were to back away.

What we found is, look, we're actually pretty good at the silicon photonics designs. We have, I think, a leading engineering team. And what we have to bring along is our manufacturing. We've struggled -- first, we struggled a lot with our design. We were really not doing a good job on the design.

We seem to have addressed that. And now it's about our manufacturing, scaling our manufacturing. We recently brought in a new manufacturing lead from a contract manufacturer who understands volume at scale. And I think that's helped. So we're optimistic we can get this turned around. But the way we're approaching it now is, look, we have 3 customers, 2 of which drive most of our volume. And the previous administration, I think, talked a lot about let's get customers 6, 7, 8, right, bring a lot more customer diversity on board.

The way I'm thinking about it is, hey, we're good with these 3. They're driving plenty of volume for us. The transceiver business, even if I can get it to operate better, and I have to say that it's not operating well for us at the moment, even though the design side is going better, it's still going to be a drag on margin, right?

I think you look at our competitors, they're 40% margins. I would hope to push this company considerably above that. And I think we can do that as long as we keep executing on lasers, on OCS and things like that.

So we try to balance a bit of what we see from revenue growth on the transceiver line against the margin, right, and the margin headwind that it will invariably present.

So we're trying to do that by let's focus on a couple of customers. We have 2 great customers. We have a third one that is a good customer, smaller customer. But if we can focus on those, I think we'll be just fine, and that will kind of give us that balance on the margin and revenue lines.

Got it. You've alluded to the scale across and kind of DCI opportunity. Can you just say just how you see kind of ability to participate today? Are there other ways in which you can kind of increase your content within those opportunities?

Yes. This is a way I'd say that we're probably pulling back from an integration standpoint, right? So we're focused on the components end of this.

We -- when you started getting involved with the company, there was a big move to participate like in ZR modules, right, and do the DSP, for example, in the ZR module.

We're proven unsuccessful in being able to do that DSP. And as such, competing against good companies like Ciena, Cisco, Marvell to a certain extent, we're never going to be able to catch them on a fully integrated ZR module. So we said, look, we'll kind of finish out our string there and focus our resources on the component side of it, meaning the narrow line with lasers that all of these guys are buying from us at good margin.

We would want to see our pump lasers continue to do well and scale across WSS. I mean it's become a smaller part of our business because of success elsewhere, but it's a high-margin, high-value piece of the business that we continue to focus on. And we can think we can continue to differentiate here in the face of some of these guys bringing in vertical capacity on, for example, narrow linewidth lasers.

So we feel pretty good about our ability to compete here long term, continue to drive really good gross margins, drive a lot of growth. It's the business has grown for us quite a lot. And we know that some of our customers are working on vertical integration and that's fine. There's still plenty of room for us to play.

Yes. Got it. Moving on to the optical circuit switch opportunity. Just what are you seeing in terms of -- I think you obviously talked about kind of one customer who's already deployed this for years, a lot of customers kind of trialing it.

Just where are you kind of judging where people might be kind of doing lab trials, need some time versus like who's ready to go and you can prioritize them in your scaling operations?

I mean, look, the OCS has been a big surprise. I mean, we've had a series of surprises, right? Today is one in a long series of surprises. But OCS has been a huge surprise for us, right? We talked to you not 3 months ago about aspirationally getting to $100 million of revenue -- incremental revenue on the OCS line in the fourth quarter of the calendar year.

And then on our last earnings call, I think we surprised a lot of people said, "Oh, no, that's going to actually be something more like $400 million across the last 2 quarters of the calendar year." So effectively sort of tripling the volume and revenue that we saw coming on the OCS. That's actually coming from 3 customers, 2 of which are driving the majority. And one of them is really interesting in that it's a spine switch replacement.

So we see -- if you subscribe to this thesis, which obviously we believe strongly in that more of the world is going to go in an optical direction, more of the data center is going to go in optical direction. Why switch between electrical switches and optical domain? Why switch between the electrical and optical domain?

Why not leave everything as optics? And so in the spine switch, spine switches are lower -- a longer latency, so you don't need that fast switch time. They are typically traffic-based rather than packet-based. And so you can actually replace that entire layer if you're intelligent in it and offset some of the power budget that is going to come as people start thinking about optical scale up, that is a power hit, as you know, right? That's a power and a cost hit.

You can offset a good amount of that by deploying OCS at the spine. It's a power savings. It's a cost savings in terms of the total cost of ownership. So we really like what's happening on OCS. There's one customer that obviously is deploying it today a great effect. in their data centers using it to scale up. And look, we think we can compete there, right? But that's a TBD. I think where we're most excited is on this optical -- the spine switch replacement application. We see a lot of other use cases now starting to occur, right? You're seeing it potentially deployed in rack at really high volume as sort of a fail-over mechanism. You're seeing it on a DCI application. So as we've been able to prove the maturity, the reliability, the scalability of our manufacturing, we're seeing a lot more use cases for OCS.

Got it. We have all been talking about CPO for many years and probably the biggest hurdle has just been that kind of supply chain ecosystem to kind of turn out what is as reliable as kind of the transceiver ecosystem today.

So just where are you starting to see kind of the steps be taken not only by you guys, but there's kind of a whole ecosystem that needs to come together to kind of make CPO more realistic I guess?

Yes. I mean I think the knock on CPO for a long time, and you've been around this business for a while and understand it to a level of detail that probably even I don't, you really have a good handle on this thing. The knock has been reliability of the laser, right? There's been this concern that the laser will fail.

And if you put the laser down next to a switch chip or next to a compute, it's going to cause a yield problem for the entire box, right? Nobody wants that. And so the way at least these first instantiations are solving it is, one, to use a very, very reliable laser, right? As I said a minute ago, we're reapplying pump lasers that are used for undersea pumps in this technology. And nobody wants to pull an undersea pump out of the Pacific Ocean, right? You better not do that because that costs millions of dollars.

So those lasers are already robust and built not to fail. Two is the amount of testing that we have to do on our CPO solution, right? We're burning in each -- lasers have an infant mortality problem. They typically will fail early in the cycle. We're burning these things in for 24 hours, each laser. And so that goes to an additional bulletizing or ruggedizing of the solution. And then the third thing, frankly, is the initial approaches are in these pluggables, right? So you're not putting the laser right down next to the switch chip or the compute. It's going in a pluggable that can ostensibly be removed if you so desire.

That ELS represents another area in which we think we can compete. Today, if you look at our business, it's all these numbers that anybody is talking about, just the laser content. But we think we can start competing in this ELS. And that becomes important to us as the number of customers on scale up right? The conversations are broad-based. I mean we just have a whole host of customers now that realize that the laws of physics are beginning to run out for copper, and you're going to have to have optics in a fairly prevalent way, and that is working very much to our advantage, but most customers are not optics experts.

And so they need a more turnkey solution to apply this, right? You have a certain class of customers that are used to dealing with lasers on a stand-alone basis, NVIDIA being one. They have a great engineering team. But most of the other customers that we talk to, hyperscalers, other chipset guys do not have that capability, and therefore, you need an ELS for us to really engage.

So something that's -- there's a lot of things, I think, that are beginning to be understood about the opportunity for us, but the optics industry at large. One thing that's really not appreciated in our numbers is the opportunity for us to compete in a broad way on that ELS, right? That's a really incremental revenue opportunity that we have that we think can be a differentiator for us over the very near term.

So you noted on the last call, production capacity would potentially be through M&A. You kind of alluded to that earlier. Just how are you thinking on capitalizing on the position with M&A? You were very successful with Oclaro, NeoPhotonics, Cloud Light. Just how are you thinking about kind of other -- is it largely going to be kind of these additional fabs or any other areas we should expect on the M&A front?

Look, I mean, I'm fundamentally a deal guy. [ Wally ] knows that very well. I like deals, right, a lot. And we built my previous company largely through M&A. The beauty here is we don't need M&A, right? I mean we actually don't need it because there are so many growth drivers right now. Our most important area of focus is on our own execution, right?

We have to be able to deliver and meet a series of huge ramps, precipitous ramps that the company is facing. But that being said, right, I think there's an opportunity for us to continue to consolidate the industry. I like components. I think components are very strategic for us.

OCS aside. OCS is obviously a system, and we've done phenomenally well with that system because it's differentiated and high margin. But if we could bring in more components, we'd like to do that. We have a relatively strong currency at the moment, so we'd like to use that to our advantage.

And we're going to do some things, I think, to clean up the balance sheet here, some of this injection of capital that we've seen from NVIDIA will help us in that context, obviously help us as we try to scale out the fab. But hopefully, we'll be in a better position to really get our M&A engine firing.

Got it. We have a couple of minutes left. So any questions from the audience? Tom, I can repeat it.

Might be [indiscernible] they work in the space.

That guy uses our products. Yes. I saw the speaker as I was coming in and they use our products. I mean it's much smaller volume, right, because the application is still very nascent, but you need a sort of a similar thing, high-powered lasers that are going to go over a long distance, and they're a big customer of ours.

We see that as an opening front, but nowhere near the volumes that we're talking about and Meta is referring to with respect to scale out, scale up and these kinds of things.

How are you dealing with geopolitics, particularly around China's export restrictions to Japan?

Good question, right? So as I mentioned a minute ago, we have 2 fabs in Japan. What we've been able to do sort of skate around that is form a long-term agreement. One of the concerns in the company a couple of weeks ago was around substrates. So we buy indium phosphide substrates from a third party.

Fortunately, for us, that third party is not in China. And we've done a very strategic deal with that particular supplier, a 7-year deal, right, that we think covers us out through mid-2030s that assures us of supply. Again, in the face of all these extreme forecasts and all these numbers going up, we think we're really well positioned.

So we sort of work with them to kind of corner the supply of their indium phosphide substrates, which certainly mitigates, I think, a lot of the concerns that existed previously around China and the Chinese substrates coming into a Japanese fab. Good question.

Got it. All right. With that, a very exciting day for you guys, and I'm glad we were able to have you here. So Michael, thanks so much.

Thank you, Meta. Thank you. Yes.

Good day, everyone, and welcome to the Lumentum Holdings Second Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] Please also note, this 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, Kevin, and welcome to Lumentum's Second Quarter of Fiscal Year 2026 Earnings Call. This is Kathy Ta, Lumentum's Vice President of Investor Relations. Joining me today are Michael Hurlston, President and Chief Executive Officer; Wajid Ali, Executive Vice President and Chief Financial Officer; and 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, particularly the risks set forth in our SEC filings under Risk Factors and elsewhere. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-Q for the fiscal quarter ended September 27, 2025 and in our most recent 10-Q for the fiscal quarter ended December 27, 2025, 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 that 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 second quarter results and accompanying supplemental slides are available on our website at www.lumentum.com under the Investors section. We encourage you to review these materials carefully.

With that, I'll turn the call over to Michael.

Thank you, Kathy, and good afternoon, everyone. Lumentum delivered a standout second quarter with over 65% year-over-year revenue growth and non-GAAP operating margin increasing by greater than 1,700 basis points. At $665.5 million, we set a company record for quarterly revenue for the second reporting period in a row.

We are now recognized as a foundational engine of the AI revolution. Virtually every AI network is powered by Lumentum technology either through our direct hyperscaler partnerships or is a critical component supplier that enables our network equipment manufacturer customers.

Our momentum is accelerating. While we previously projected crossing $750 million in quarterly revenue by mid-2026, we now expect to comfortably surpass that milestone next quarter. Our March revenue guidance with an $805 million midpoint represents an impressive 85-plus percent year-over-year increase.

We previously identified three primary catalysts for Lumentum's future growth: cloud transceivers, optical circuit switches or OCS and co-packaged optics or CPO. The headline for this quarter is that the vast majority of this growth is still ahead of us, and we have increased confidence as to the timing and magnitude of the ramps. While our Q2 results and Q3 guidance reflect meaningful contributions from cloud transceivers, we are only just beginning to unlock the massive potential of OCS and CPO.

Beyond these high-growth drivers, our Q2 performance was anchored by sustained execution on our foundational components business, specifically in laser chips for cloud applications and in specialized components for DCI. I will now break down our Q2 performance, starting with execution in our primary growth drivers.

Our OCS business is exceeding internal expectations. While we originally targeted our first $10 million quarter for fiscal Q3, we cleared that bar 3 months ahead of schedule. This outperformance is a direct result of the seamless collaboration between our engineering and operations teams, proving our ability to scale complex technology at pace.

Customer demand for OCS is intensifying. Our order backlog now has surged well past $400 million, the majority of which is slated for shipment in the second half of this calendar year. Barring any unforeseen manufacturing or supply chain disruptions, we are well positioned to deliver on this substantial pipeline.

Our execution in cloud transceivers has reached a definitive turning point. In Q2, transceiver revenue grew significantly and outperformed the legacy cloud-like run rate, and we expect continued growth in Q3. We have focused on time to market in the business and have greatly improved our execution through the design cycle. As a result, we are now in the lead pack of transceiver suppliers as customers transition their networks to 1.6T speeds. Beyond design execution, we are also improving the profitability of our transceiver business with better yields and lower scrap rates.

Turning to CPO. We have secured an additional multi-hundred million dollar purchase order for our ultra-high power lasers that support optical scale-out applications. We expect shipments for this incremental order in the first half of calendar 2027. Meanwhile, we continue to execute on the initial orders we have discussed previously and remain firmly on track for material shipment inflection of UHP chips in the second half of this calendar year. Furthermore, we have established a clear line of sight into the broader external light source for ELS market, which would enable us to participate more holistically than as a stand-alone laser chip supplier. By expanding into pluggable external length source modules, we would dramatically increase our serviceable market.

In addition, the ELS allows us to diversify our customer base has several new partners adopting next-generation scale-out architectures are looking for more turnkey solutions. We have built significant momentum through our leadership in crowd transceiver, OCS and scale-out CPO.

Now a fourth growth driver is taking shape, one poised to be a generational game changer for the industry: optical scale-out. Today, data center architectures have a clear divide. Optical links handle scale-out networking, connecting relatively longer links within the data center. Conversely, copper links dominates scale-out connectivity, referring to the ultra short-reach high-speed pass within a single rack or a cluster. While copper has long been the gold standard for scale-out for simplicity and cost, it is hitting a physical wall. An industry pivot is underway to bypass the scaling limits of copper. By late calendar 2027, we would expect our first scale-out CPO shipments, replacing longer copper connections. We are already deeply embedded in design-in cycles for this, leveraging our ultra-high power lasers and external light source modules. As we look into the not-so-distant future, it is only right to assume that optics begins to capture more and more of the connectivity, eventually subsuming copper.

In response to these demand projections, we've initiated proactive capacity planning. Given the sheer magnitude of the scale-up optics market, we are carefully assessing our projected wafer output plans. We are in active negotiations with leading customers to offset our capital requirements in exchange for long-term supply assurances. These discussions underscore the critical nature of our technology and their road maps.

Now let's look closer at the key performance metrics to define in our second quarter. In our last earnings call, we introduced two primary product categories: components, the foundational building block for larger solutions; and systems, which are stand-alone products, providing full functionality such as optical transceivers, optical circuit switches and industrial lasers. Components revenue for the quarter reached $444 million, representing a 17% sequential increase and 68% year-over-year growth. This performance was fueled by broad-based demand across laser chips, laser assemblies and in-line subsystems going primarily into inter data center, DCI and long-haul applications.

Our laser chip business, serving cloud transceiver customers drove outsized sequential growth this quarter. We achieved another quarterly company record in EML laser shipments led by 100 gig line speeds and bolstered by a ramp in 200 gig devices. Simultaneously, we expanded our footprint in next-generation architectures shipping CW lasers for 800 gig manufacturers and increased volumes of ultra-high-power laser shipments for CPO applications.

Our indium phosphide wafer fab capacity remains at a premium, fully allocated to meet surging customer demand. We have front-loaded our 40% expansion target delivering on over half of that this past quarter. We are scaling rapidly through precision tool optimization and yield gains. This execution will help to ensure that additional capacity comes online as planned over the next two quarters and beyond. While not able to size it, we now have line of sight to a significant block of additional capacity starting in the second half of 2026 both recurrent activities in Sagamihara and better utilization of our Caswell, United Kingdom and Takao, Japan fabs.

Beyond share volume, our Q2 revenue was propelled by a favorable mix shift toward 200 gig line speeds, which provide a meaningful ASP uplift. While these high-speed devices represented approximately 5% of unit volume, they contributed roughly 10% of data center laser chip revenue.

Moving to our scale across business. We continue to see sustained momentum in components supporting optical links ranging from intercampus to longer-reach topologies. Shipments of our narrow line with laser assemblies grew for the eighth consecutive quarter, a clear proof point of robust market demand and our successful manufacturing expansion. Our long-haul portfolio also saw gains with both coherent components and aligning subsystem products growing sequentially and year-over-year. In addition, we achieved another record quarter for our pump lasers, supporting not only long-haul terrestrial and subsea networks but also new scale across architectures with revenue in this product line surging over 90% compared to the prior year. Finally, 3D sensing grew modestly, following a new smartphone launch and some incremental share gains.

In Systems, revenue reached $222 million, representing a significant 43% sequential and 60% year-over-year increase. Cloud transceivers accounted for the lion's share of this growth, increasing by approximately $50 million on quarter as we successfully leveraged our expanded manufacturing capacity in Thailand. As noted last quarter, we have moved past the production volatility seen in earlier calendar 2025 and are now on a sustainable growth trajectory. Our Q3 guidance reflects this momentum as we begin to see the revenue layering benefits typically enjoyed by larger transceiver makers.

As noted earlier, optical circuit switches continue to grow and were the good news story of the last quarter. On the other hand, as our cloud-related business continues to accelerate, we see a different dynamic in the industrial end market. Here, shipments remain roughly flat sequentially in Q2. This performance reflects the persistent cyclical softness we continue to see in the broader industrial market. With that said, we have an increasing design win funnel for our newly introduced PicoBlade Compact line of products.

Looking ahead to Q3, we expect to achieve a new quarterly revenue record with our guidance midpoint exceeding historical revenue levels by a substantial margin. Within this outlook, we anticipate that approximately 2/3 of the sequential increase in revenue will be driven by our components portfolio, reflecting broad-based strength across cloud applications. The remaining 1/3 will stem from systems, fueled by the continued ramp of high-speed transceivers and additional contributions from OCS.

In summary, Lumentum has established itself as a market leader in transformative optical technologies. Our position across OCS, optical scale-out and optical scale-up is the envy of the industry. Furthermore, we are now meaningfully participating in the well-documented growth in the optical transceiver market. With all that said, we continue to believe that our current performance is only a precursor of things to come.

Now I'll hand the call over to Wajid.

Thank you, Michael. Second quarter revenue of $665.5 million was at the high end of our guidance, and non-GAAP EPS of $1.67 was well above our prior expectations, demonstrating the leverage of our business model. GAAP gross margin for the second quarter was 36.1%, GAAP operating margin was 9.7%, GAAP net income was $78.2 million, and GAAP net income per share was $0.89.

Turning to our non-GAAP results. Second quarter gross margin was 42.5%, which was up 310 basis points sequentially and up 1,020 basis points year-on-year due to better manufacturing utilization across the majority of our product lines, increased pricing on select products and favorable product mix. Mix improvement was primarily driven by our ramp in data center laser chips. Second quarter non-GAAP operating margin was 25.2%, which was up 650 basis points sequentially and up 1,730 basis points year-on-year, primarily driven by revenue growth and components products.

While continuing to invest in critical R&D programs serving cloud and AI customers, we have maintained the rigorous cost controls necessary to optimize our business model. Second quarter non-GAAP operating profit was $167.7 million, and adjusted EBITDA was $198.3 million. Second quarter non-GAAP operating expenses totaled $114.9 million or 17.3% of revenue, an increase of $4.4 million from the first quarter and an increase of $16.6 million from the same quarter last year in order to support our expanding cloud opportunities. Q2 non-GAAP SG&A expense was $45 million. Non-GAAP R&D expense was $69.9 million. Interest and other income was $4.6 million on a non-GAAP basis. Second quarter non-GAAP net income was $143.9 million, and non-GAAP net income per share was $1.67. Our diluted weighted shares for the second quarter was $86.1 million on a non-GAAP basis.

Turning to the balance sheet. During the second quarter, our cash and short-term investments increased by $33 million to $1.16 billion. Our inventory levels increased by $39 million sequentially to support the expected growth in our cloud and AI revenue. In Q2, we spent $84 million in CapEx primarily focused on manufacturing capacity to support cloud and AI customers.

Turning to revenue details. Components revenue was $443.7 million, which increased 17% sequentially in Q2 and 68% year-on-year. Systems revenue of $221.8 million increased 43% sequentially in Q2 and 60% year-on-year.

Now let me move to our guidance for the third quarter of fiscal year '26, which is on a non-GAAP basis and is based on our assumptions as of today. We anticipate net revenue for the third quarter of fiscal year '26 to be in the range of $780 million to $830 million. The $805 million midpoint would represent another new all-time quarterly revenue record for Lumentum. We project third quarter non-GAAP operating margin to be in the range of 30% to 31% and diluted net income per share to be in the range of $2.15 to $2.35. Our non-GAAP EPS guidance is based on a non-GAAP annual effective tax rate of 16.5%. These projections also assume shares used for non-GAAP diluted earnings of approximately 92 million shares.

With that, I'll turn the call back to Kathy to start the Q&A session. Kathy?

Thank you, Wajid. [Operator Instructions] Kevin, let's now begin the Q&A session.

[Operator Instructions] And your first question comes from the line of Simon Leopold with Raymond James.

So I just wanted to see if you could maybe double-click on the OCS market, which sounds quite a bit better than what you discussed last quarter. So maybe if we could hear a little bit more color in terms of how you're seeing the market, the exit rate and the customer diversification. And I'll give you my follow-up because it's relatively quick in that you've raised prices, is there any way you can help us quantify what impact your price increases have had on the growth?

Yes, the OCS market is definitely developing a lot better than we believed. It's accelerating certainly from a time standpoint. So the data point we gave today is that our backlog has increased to well in excess of $400 million, most of which is going to be shipped in the first two quarters of fiscal 2027. So we're really going to exit the calendar year on quite an increased philosophy.

If you remember, you and I discussed last time, we believed our calendar Q4 would be around $100 million. It looks like it will be quite a bit higher than that, although we're not breaking up that $400 million between the two quarters. So we -- it's a broad-based -- there's multiple customers making up that backlog. We've talked about shipping to three customers, and that continues -- but those customers are increasing their demands rather significantly. And thus, the demand on us has gone up quite appreciably. So we feel pretty good about that. I think as we enter calendar year 2027, it should go up from there in terms of what we see in our backlog and in terms of our revenue.

On the second question, obviously, price increases are definitely having an impact both on top line and gross margin. They are starting to flow through in the Q1 or the March guide, right, where we're seeing a lot more of that, as we said last quarter to you and to others, we'd expect a little bit of an impact in the December quarter, and we've had a little bit, but not a lot. We see a little bit more in March. I don't know if we've quantified how much of it is. I think it's relatively modest in terms of the overall revenue impact margin, certainly a little bit more, but we're doing a lot of things to benefit margin, including cost down, a lot of work on manufacturing scrap and yield. There's just been a lot of intense focus from myself, Wupen, Wajid on the gross margin line. So a lot of things are contributing to that. And for the first time, we're moving up into the 40s.

And your next question comes from the line of Samik Chatterjee with JPMorgan.

Maybe I'll start off on the indium phosphide capacity ramp. And just to clarify what you said in your prepared remarks, you pulled forward or front-end loaded some of that capacity increase that you've planned and we're going to see the effect of that in the March quarter guide, just to confirm that? And then what does it mean for the end state in terms of the sort of 40%, 50% capacity increase that you have planned? Does that change the end stat in terms of how much capacity you can add those existing fabs? And as you're talking about alternatives with your customers, does it really sort of focus on the existing fab or are you assessing sort of new fabs? And then I have a quick follow-up.

Yes, Samik. Look, we're definitely doing better than expected. I think that we characterized in the last call that we see a 40% impact from our September quarter over the next three. So December, March and June. What we're saying here is that we probably got somewhere a little bit north of 20% in the December quarter alone. So in the results in the December quarter, and the guide, we're not necessarily saying how much of the increase is there. There's obviously more.

I would expect at this point that given that we see kind of half of the impact in the first of the three periods that we had outlined that we were going to do a little bit better than 40%, but we haven't quantified that. What we are saying is now we have line of sight to more capacity increases grew the next four quarters, meaning probably the second half of 2026, calendar 2026 into early 2027, by virtue of the improvements that we continue to see in Sagamihara. So the 40% is all Sagamihara, but we would now start to see some impact from our Caswell facility in the United Kingdom and also contributions from our second fab in Japan, Takao. So all of these things together say that we have line of sight to do a little bit better than we outlined on the last call and certainly extend the ramp more appreciably than perhaps we said on the last call.

Got it. And Michael, I mean, just following up on that, any new fabs being considered when you're sort of talking to your customers? And then for my second question on transceivers, I mean, you took a sizable step up here in the December quarter. I think you're taking another bit of a step-up into March. You had previously indicated you sort of want to maybe manage that business to $250 million a quarter run rate. I mean is that still sort of how you're thinking about it? Or because most of the demand is from our customer, you sort of can't scale further than that. Any updated thoughts on that?

Yes. I mean, on the transceiver question, I do think that it's going to be more difficult than we outlined in the last call to sort of cap that to $1 billion. We're definitely seeing a lot of demand for our transceiver products, not only from the primary customer, but from other customers as well. So suddenly, as I said, we've turned a bit of a corner. Wupen is here, and I think he's done a super job with the transceiver business, improving margins, improving execution, primarily improving our design time, our time to sample. And as I said, we've actually got into the front of the pack as a result of that. So I feel a lot better about the transceiver business.

That being said, still a margin headwind, right? So no change from where we are before. A little bit less of a margin headwind because we made these improvements, but still a margin headwind. I think, however, it will be a challenge. We are seeing appreciable growth in the demand of our transceiver products. Wajid is here. I think we can manage the portfolio to increasing gross margins and increasing operating margins in the face of a business that might be greater than $1 billion. Am I wrong?

Yes. No, that's fair. I mean, I think -- when we made the comments about $250 million a quarter or $1 billion that Michael alluded to, our thinking on the rest of the business probably wasn't as large as how we're thinking about it today. Certainly, OCS, CPO, the multi-hundred million dollar order that Michael talked about in his prepared remarks, all of those things are contributing to a larger pie for Lumentum. And so as part of our operating margin profile is revenues growth. So the fact that the rest of the business is growing faster than we expected allows us to grow the transceiver business. And then because 1.60 margins are significantly better than 800g, that's also helping us say yes to more orders that are coming in. And Michael's right, they're coming in substantially higher than we had expected.

Cathy, what was Samik's first part of the question?

News fabs.

New fabs. Okay. Yes, Samik, I mean, to that question, yes, that is an active investigation. We're certainly looking at how we can bring on more capacity, whether it be creatively in the current fabs that we have or bringing on new fab capacity by acquisition or something of that nature. So it's an active discussion in the company. Nothing to talk about at this particular point, but it is certainly something that's top of mind for us.

And your next question comes from Ryan Koontz of Needham & Co.

Great. I want to double-click on the transceiver market, if we could and the transition to 1.6T. Obviously, some great progress at 800 here. Is that primarily being driven by emails today? How do you see the readiness of SiPho at 1.6T being prepared? And then what are your kind of derivative laser supplier opportunities? How are they stacking up overall for the 1.6T transition?

Yes, right. I mean, let me talk a little bit to the laser part of the market and then maybe throw the ball to [indiscernible] because two separate things. And certainly for our business, the transceivers as we've characterized a couple of times, our transceivers are mostly silicon photonics. But what we're seeing right now from our customers is a strong EML demand. Most of the initial transceivers that are going to 1.6T are based on EMLs and that's good. Our 200-gig line speed, as we said, is actually doing a little bit better than we expected. I think on the last call, we had said that the 5% revenue of -- 5% of mix would be this quarter. It was a quarter earlier than we had expected, and that's primarily because 1.6T is coming on, I think, faster than we initially anticipated, and that is heavily being driven by 200-gig EMLs.

That being said, I still think, consistent with what we've said over the past, we would expect silicon photonics to be the majority of the transceiver shipments in -- at the 1.6T node. We think the numbers are so large based on what we're seeing in terms of the demand from our customers, that our EML shipments even in the face of a mix shift toward silicon photonics. The absolute number of EMLs will go up for us and rather appreciably. So we feel really, really good about the way the market is shaping up our lead on EMLs is second to none, we're introducing 200-gig differential EMLs now to give us another leg up in that market. So we feel pretty good about the way that's setting up.

Wupen, on the transceiver side. You want to talk about our transceivers and how we're thinking about 1.6T?

Yes. Thanks, Michael. So on the [ 1.6T ] product, there's still really, by and large, two groups of applications. One group requires WDM-based solutions, one requires basically a parallel fiber-based solutions. And therefore, you will see that EML is pretty dominant in the WDM-based architectures. And then the Silicon Photonics are starting to take more share on the kind of parallel fiber applications. We see these kind of hand-in-hand grow at a similar pace. And that's why Michael was talking about EML continue to grow despite the fact Silicon Photonics will take more share in 1.6T generation. But overall, as Wajid talked about, we see 1.6T generation of products having a higher gross margin at a margin level. And then of course, we'll benefit continuously on the laser front, in generation as well.

Right. Any update on your plans on vertically integrated -- your own CW lasers at 1.6T. Is that still the plan?

It's still the plan. Yes. We shipped CW lasers to the external market for the first time, Ryan. Last quarter. Those shipments continue to sort of help us develop and improve our CW laser technology. I would say our time line is pushed out a bit. In terms of that introduction, we were talking about introducing that our own CW lasers and our own transceivers kind of [indiscernible], and I think it's probably pushed out to late Q2, early Q3. It's probably been a 2- to 3-month push out relative to that introduction, but still very much part of the plan to continue to increase the gross margin in our transceiver business.

Great. And maybe just a quick follow-up on the laser opportunity in CPO, do you view that competitive landscape any different than you view the transceiver laser market? Are there nuances there that investors should be aware of relative to bigger barriers to entry or your capabilities relative to the overall market for CPO?

I mean, look, I think on CPO, we feel really good about our position. I mean certainly, for EMLs. We also feel very good about our position, but I think we feel even better about our position on high-powered lasers going into CPO. Remember, a couple of things, right? One, the power level that needs to be delivered here 400 milliwatts is not something that many people could do. But perhaps more importantly, remember you and I have talked about this, and the technology has been proven out in our subsea applications. One of the big issues with CPO has always been reliability and I think now we've regained real customer confidence. I mean it is much more broad-based. I think that people think in terms of customer engagement now on and that is primarily driven by the reliability that we're able to prove out.

Your next question comes from Vijay Rakesh of Bank of America.

Congrats on a great set -- a fantastic set of numbers here. Just a quick question. I know you on CPO, you mentioned another multi-hundred million dollar [ order ] there and also your own CPO ramping well. Can you size what the CPO quarterly run rate would be with the new multimillion or multi-hundred million order? And also, I believe CPO for scale up, as you mentioned.

Yes. I mean what we're talking about now is mostly scale out, right? So what we've said in the past is that we would expect somewhere around $50 million in the fourth calendar quarter perhaps more, but we're kind of pegging it there. And then this multi-hundred million dollar order, while we're not prepared to give the size really is clicking in, in the first half of 2027. So it kind of gives you a rough feel. This is definitely ramping. It's ramping across not just one customer, multiple customers. The strain on our fab is high, right? We're very much sold out in our high-powered laser fab. And this is one of actually Wupen's primary task is to figure out how we can bring more capacity online much more quickly. I mean, this ramp is hitting us probably faster than we forecast even last quarter. So we have a lot of confidence in the ramp, we have a lot of confidence in the demand and backlog that we see. Now it's going to be really a matter of servicing now.

Got it. And then on the indium phosphide side, I know you said a lot of the capacity is sold out. You're adding some 40% capacity more front-end loaded. But as you look through into '26, '27 given this very strong ramp on EML, [indiscernible] and also what you're seeing on the transceiver side. Would you expect pricing to be a tailwind for most of this year and into next year too?

Yes. I mean look, we really are sold out. I mean I think that we've talked about sort of trailing demand, even as we add capacity, it seems that the demand-supply imbalance increases. We talked about that last quarter. And I'd say again, even as we've added this 20% additional capacity, the demand, supply imbalance has increased. And [indiscernible] Wupen comment, I think his team is spending a tremendous amount of time trying to squeeze product into our allocation bucket. It's really like a jigsaw puzzle for these guys to figure it out.

The good news for us is that we'd expect now to increase supply throughout the calendar year. We've obviously sort of indicated that we have another 20% to go over the next couple of quarters. That probably is going to come up a bit just given our current trajectory. And now what we're saying is we have line of sight for additional capacity in the last two quarters of the calendar year. In that, we obviously have this mix issue where our 200 gig lasers are a big portion of the mix, today, small, 5%. We've said that by the end of the calendar year, we'd expect to be 25% of our mix to be 200 gig. And you can see in the prepared remarks, roughly on the pricing. So our ASP will increase, margins will increase in that balance as we get more and more 200 gig. The really good news story for us, I think, is the differential 200 gig, which offers significant price power reductions for customers, that isn't yet another tailwind on ASP that we'd expect to see and another big, big enhancer on gross margin.

Wupen, how are you thinking about it?

Yes, that's Michael. So yes, this is what I could describe, right, in terms of capacity increase. And I think our team continues to really drive the yield out and reduce the die size of the chips, for example. Definitely, we're trying to squeeze every bit of the capacity output that we can get of our current fabs. As Michael already pointed out, the demand supply in [ balance ] continue to increase. And therefore, we're doing everything we can, trying to grow that supply base and then continue to drive the yield up. So all very good, but very challenging. We look forward to serving the market with better [ relatives and watches ].

Your next question comes from Papa Sylla of Citi.

Congrats on the impressive results. So Michael, I guess for my first question, it is on visibility. I'm curious if you continue to see further visibility from your key AI customers on the EML front? I think previously, you quantified for us that the supply-demand gap has moved from 20% to 25% to 30%. Has that gap extended? And tied to that, it will be helpful to understand how has your longer-term contract or commitment with customers change now versus one to two years ago? [indiscernible], for instance, kind of longer in duration? Are we able to add more pricing versus before? Just any color.

Yes, Papa. Look, first, I want to thank you for some of the insightful notes you've written over the last couple of weeks. We certainly appreciate the diligence you're doing on the business.

Number one, Obviously, the supply Imbalance -- supply-demand imbalance is still very much there. I would say that it's about the same this quarter as last quarter, even in the face of adding the 20% and what we anticipate in the March guide. If anything, it's incrementally up, but I'd still say it's roughly 25% to 30% off, we're undershipping our customers' demand by somewhere around 30%. So it's a relatively big gap. And again, tremendous pressure on Wupen's team.

With respect to the long-term agreements, I mean, frankly, and I'll have Wajid comment, the company never had these long-term agreements. I mean it was a very tactical business until Wajid and I got involved in the business and started seeing that there was a lot of opportunity to institute these long-term agreements. We -- all of our capacity, just to be very clear, on EML is spoken for. In these LTAs, we have very tight LTAs that run through the balance of calendar 2027. And even as we increase the capacity that -- everything is spoken for. So we projected out what we can do. Look, if we do better in capacity, we might have a little more to sell, but that is really spoken for. We're really proud of the LTAs that we were able to get it in place and look, our customers are very happy. We do have pricing leeway in there. I mean, I think as conditions change, Wajid, Wupen and I will continue to look at the pricing. As you know, we've done a couple of step-ups and our products are just in high demand, right, across the board. So I think it gives us some pricing latitude, and we'll certainly look at that

I mean Wajid, any comments from you on this?

No. I mean I think you've captured it. Actually, the whole LTA process has actually helped us from a pricing standpoint overall because then there aren't those same type of quarterly negotiations for price downs, if anything, prices are holding or they're increasing for what customers want. And what we're actually seeing is that customers are coming back and asking for even more capacity and more products than we had agreed to in the LTA. And that's actually allowing us to have incremental pricing discussions around those incremental units that they're asking for. So the LTAs are serving as a nice baseline and if customers want more than that, then it allows for a discussion with Wupen's team and our sales team to ask for incremental pricing optimization. So it's worked out very well for us from a process standpoint. And for those customers that are not willing to sign an LTA are having concerns about their continuity of supply because we are allocating to those partners that are committing to us first and then whatever is left over, then we can talk to those that are not.

Got it. That's very helpful. And Michael, for the feedback. Just quickly on the follow-up, and apologies if it's a little bit of a long-winded type of question. But I just wanted to double down on the CPO opportunity, particularly if we contrast it with the opportunity you have on the EML/transceiver front? I think previously you discussed in terms of content per accelerator or content per AI server, the two opportunities are mostly on par and you really benefit from having a higher market share on the CPO side versus the transceiver front. Now that I guess you have more cells you have more visibility, any change on how you are thinking about content for CPO versus the transceiver business?

Yes. I mean it's exactly as you said. I mean, obviously, the dollars are lower for our lasers than they all would be if we were able to sell a transceiver. But given the strength of our product in the laser product, we have quite high market share. So in general, and Kathy's run the numbers for us a number of times, the math works out very favorably for us as CPO comes online.

What I'll say, and I want to highlight again what we said in our prepared remarks, which is new. There is an opportunity for us to participate now in something that looks like a module. This ELS, external like source and that is obviously a much higher ASP. Wupen and team are looking at that now. It looks like we can preserve very decent margins and attack that market at another step-up in terms of ASP. It's somewhere around 2, 2.5x content gain from a revenue standpoint as compared to just our lasers.

Do you want to give two seconds of color?

Yes. Certainly, thanks, Michael. Not only the pluggable [ USP ] opportunity. But as we talked about earlier, actually the scale-up opportunity there I think that's brand new, right? When we compare before the margin opportunity is [ double ] module opportunity versus CPO opportunity, it was a wash just from a scale out kind of a comparison. But now in a scale up opportunity here is a brand-new market that didn't exist before. So therefore, I would say that our overall market share on the scale out market, we'll be improving because our position in the laser front, and then by extension, the pluggable light source market. And then on top of that, when the scale up actually happens, then that's another big chunk of TAM that didn't exist before. And therefore, overall, I think this scale out and scale up with CPO will benefit us meaningfully going forward.

And your next question comes from Ruben Roy of Stifel.

Michael, apologies if you answered this already, but I just wanted to go back to the OCS momentum. And just thinking through the order backlog improving, is that still sort of relegated to a single customer and just sort of momentum at that customer? Are you seeing a broadening of orders from multiple customers?

And I guess a follow-up for Wupen on that topic is just in terms of applications, what are some of the new applications for OCS that are coming up? And have you seen actual orders for things outside of maybe spine switch replacement and some of the other applications that you've already been delivering to?

Yes. Ruben, and thanks again for your support over the quarter. Appreciate some of the things you've helped us with. Number one, the strength in the backlog, and we did answer this previously, it is coming from multiple customers, not just one. We feel very good about our volumes in the business. This $400 million that we're talking about primarily deliverable in the back half of the year sets us up well above what we previously outlined, which was sort of $100 million exiting calendar Q4. So our run rate going into 2027 is quite a bit higher, and we would expect, obviously, in 2027 to do better again. So it is setting up for us [ nicely ], it's broad-based, right? It's three customers are making up that backlog. And we are -- definitely have stepped on the accelerator relative to deliveries even this quarter to all three of those customers.

Wupen on the applications, right? Again, fairly broad-based, but why don't you give some color to Ruben?

Yes. I would say no changes to the applications. As you recall, I think we talked about before, they were primarily four different applications, right? One is the [ spine ] replacement, as you mentioned. One is the scale across applications we also talk about and two more are really the optical scale-up application and the full protection or redundancy in the network. Actually, we see these applications in all the customers to different degrees. And therefore, I would say that these multiple customers are covering these four different use cases in the applications. I think there may be some other potential scenarios showing up. I would have been watching very, very closely. But these four to us today, they're the dominant application scenarios.

Great. Just a very quick follow-up. Has anything changed with the way you guys are thinking about 800 gig versus [ 1.6T ] module mix this year one way or the other? Is it accelerated towards 1.60T for any reason in terms of volumes from a single customer or multiple customers? Or is it relatively unchanged from how you're thinking about it 90 days go?

Yes. 1.6T is definitely stronger than we felt than we felt 90 days ago. So 1.6T is definitely accelerating. Our 800-gig volume actually is doing better than we would have expected. So an 800-gig that what you're seeing right now from us is an acceleration in revenue on our 800-gig shipments. But in the market, to your question, Ruben, 1.6T is definitely going better. We have exposure to a couple of customers, a couple of large customers on 1.6T, and we've been surprised by how quickly they're trying to push us to deliver and their forecast to us relative to the different SKUs that we're being asked to deploy.

I mean any different thoughts, Wupen?

Yes. Definitely, I think there are two factors there, right? So one is the -- [indiscernible] still a very large market today. However, our market share of 1.6T, as Michael talked about earlier, is actually higher as we kind of get our act together on the development side. So we definitely are seeing for our business, 1.6T trend -- growth trend is a lot stronger than 800G, even though the 100G continue to be going forward, but the surge 1.6T business is coming our way for this calendar year.

Kevin, I think we have time for just one more question.

Your next question comes from George Notter of Wolfe Research.

I just wanted to kind of get in here and ask some questions about supply. It just seems like -- obviously, there's a tremendous amount of demand here. I know you guys have been trying to consolidate more and more of your manufacturing into the Nava facility down in Thailand. And I'm just curious about what that looks like right now in terms of capacity, available capacity in Nava. Is it possible that you guys would look to outsource more given the demand you're seeing? Just walk us through kind of how you plan to ship all this product?

Yes, George, that is the right question. I mean we have pivoted from a manufacturing strategy to really look at more contract manufacturing. We have stepped on the gas at Nava. We're doing everything we can to clear out some of our factory footprint actually in China to help us with some of the most important SKUs that we're going to be able to deliver to. So we've really tried to work to optimize our floor space that we have for the high-value products that we think we need to deliver.

That being said, we simply don't have enough. I mean, right now, one of the significant challenges we're facing is in addition to fab capacity, which is well documented, there's our factory capacity and there, we're starting to look a lot more to contract manufacturers than we have in the past. We did hire a new leader for our back-end operations that came from [ Jabil ]. He is very familiar with the contract manufacturing community. He and Wupen were actually meeting last week in Thailand, outlining a strategy by which we can move a lot more of our products to CM just to help us accelerate these various ramps. We're facing so many challenges right now from a ramp perspective that to not rely on partnerships would be stupid.

Got it. And then just one quick follow-up. You mentioned the LTAs, I think more in the context of the EML supply that you have. But if I look at the telecom business, I look at transceivers, other components in the business that are really sort of asymmetric in terms of supply demand. Are you also putting LTAs into those product lines as well? I'm just curious like how much of the business is now covered with LTAs?

Yes, we are. I mean that has definitely been a pain point because I think that there's been a lack of recognition from the historical telecom customers as to right now, it's a seller's market. And so a couple of our key customers have been problematic around the LTAs, and Wupen and I have been able to sort of get to a reasonable compromise with those customers. But honestly, we'd like to do more there. I think there's more opportunity for us to increase price on the telecom customers than we have in the past, and we're going to look at that and pick some partners that really are working with us, quite frankly, better and those customers, I think, we're going to treat favorably, and we'll figure out how to service the rest with the volume that's left over.

Thank you, George.

And that is all the time we have for questions. I will now turn the call back to Ms. Kathy Ta for closing remarks.

Thank you, Kevin. We look forward to connecting with you at upcoming investor conferences and meetings this quarter. I would also like to invite all of you to please take a moment to register for our upcoming investor briefing at OFC, which is taking place in Los Angeles on March 17. Whether you can join us in person or via our live virtual webcast, we look forward to seeing you there. And with that, I'd like to thank you for joining us today.

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

All right, everyone. Welcome back to the Barclays Global Tech Conference. I'm Tom O'Malley, semi and semi-cap analyst here. I'm very happy to have Wupen Yuen with Lumentum. Thank you for being here.

Thank you.

So it's been some crazy times of late. You've seen an unprecedented demand in AI kind of come into the market. You guys have talked about certain areas in your portfolio in which things have gotten tight. So maybe start with like a mark-to-market. Where are you seeing tightness? Is this across the portfolio? And then maybe how long do you think that dynamic lasts?

Yes. Actually, to be honest, I think the short summary is that we're seeing tightness across the board. Every single product line we have today is -- we are basically capacity constrained. Demand is exceeding supply. And of course, certain different areas have different levels of tightness, indium phosphide, lasers is really, really tight. And then -- but even the scale across optics, also very tight. So overall, we are seeing the demand to be -- especially on the backlog and commitment customer making is really through 2027. So that's what we're seeing, right?

For example, our EML lasers is basically sold out to 2026 and largely booked through 2027, right? So whether capacity will increasing continuously, it's actually spoken for fairly quickly, right? So we see that trend lasting for the next 2 years.

And in this type of dynamic, how do conversations change with your customers? Because to get that much assurity on supply, obviously, there's an economic ask that you'll have for them as well. So how is this impacting pricing broadly? And then maybe talk about the time line, LTAs, contractual agreements. Are you seeing those that exist for 6 months, 1 year, 1.5 years? How are you seeing those?

Yes. I think the -- let's take laser, for example, right, that we are -- for the largest customers, it's typically a 2-year commitment. So we definitely -- the price is not going to be the same as before, right? So because what we're seeing here really is that the longer it is, you're not supposed to get a discount, given this kind of a sellers market. So we actually then raised the price, of course, relatively flat price over those 2 years, but definitely at an elevated level compared with before, right? But the larger customers typically are the ones that are willing to give the longest contract because they also see the demand, right, for the next 2 years.

So how does that work with the ability to only supply some customers? Is it the guys that are willing to sign up for a longer period of time, they get supply first? Is it the guys that are more strategic? Because when we were on the road a couple of months ago, you guys talked about like you guys are the ones that are going to allow larger customers to be able to have product or not, right? So how do you go about choosing who's getting supply?

Yes. I think one big thing here, we want to make sure that, one, we're not a king maker around our end customers, right? So we're trying to make sure that, hey, are we -- do we have a good visibility about who's selling to who, right, the end customers. So we want to make sure that we don't favor Amazon over Google, for example. We want to make sure that we can supply them well across the board, right? So that's one very important element. Of course, pricing matters. Of course, geopolitics matters, all this playing a role. But end of the day, we want to make sure that every single cloud customers are -- we actually support them visibly, right, that they can see that we're supporting them.

So why don't we go into some of the product verticals. So on EMLs, in particular, you've talked about a 40% capacity increase over the next couple of quarters. How is that progressing? You have a facility in Thailand. How is that coming along? Should we expect that to be pulled forward given how quickly the market is kind of growing?

Yes, I think on the laser front, right, so definitely, the 40%, we're actually well on track of that. And then it's not like one step jump, right? It's a quarter-by-quarter, we're increasing. And the reason for that is actually, we don't have like one piece of equipment, oh, this is a bottleneck. You move it, it's going to jump up. No. We have like incremental additions over time. So we're doing well in the ramp.

Yield is holding up pretty well, which is anything from 3 to 4-inch, right? In the beginning, it was a little bit rocky, but now we have gone through it. So yield is holding up well. So overall, I think we're actually on track on the chip side, right?

On the assembly side, we're definitely pulling in, right? The demand on the OCS, for example, the demand on the module, for example, all these are kind of accelerating. So we're definitely pulling in the capacity there, too, right, kind of accelerating beyond what we were thinking about before.

So it sounds like it's not a particular tool that's got you short. It's just -- it's multiple tools.

Multiple tools at different capacity level, right? Imagine you have like 20 steps, 20 machines and everyone has a different capacity level. As capacity requirement goes up, okay, then some is going to fall short, right? It's not like one over here and one over here is really short, it's actually really across the board, right? So kind of incrementally, you're tracking all the equipment and to ensure that we get the capacity we need.

Okay. In the same vein, you've kind of talked about allocating for either EML or SiPho modules. I think that, that's been an important kind of distinction as well. Maybe talk about why you would choose to put capacity towards one versus the other. And then what's your current view on your directing of capacity?

Right. So definitely one most important factor there is really kind of gross margin per wafer, right? So if you look at that, the EML is better than CW laser for silicon photonics. And then 200G EML is better than 100G EML, right? So that kind of in large is our kind of our -- how we're thinking about allocating the capacity. However, right, even though we are sold out for EMLs, we still want to make sure that we are seeding the CW laser opportunities. Because silicon photonics is important. It is going to take more share on the longer term. And we have a really, really good CW laser, right? So I want to make sure that we are in the game as well.

So we basically say, hey, majority of the capacity is out there for EMLs. And then -- but we're also still providing some capacity to CW lasers to the customers so we're in. And also, we're providing some to ourselves for our own modules starting from middle of next year, right, to ensure that we can bridge the gap of our own laser supply to for our own modules.

How fungible is that capacity? Let's just say customer demand profile changes or you internally decide that you want to split that dynamic a little bit differently. If you wanted to take capacity going towards EML and move that to SiPho, what's the time frame that you could get that done in?

It's actually just the lead time, right? Today, both the CW laser and EML lasers are made in our Japan fab, right? So really, it's just the lead time of changing the wafer start. 200G, 100G stable lasers is actually fungible capacity in our Japan fab.

So let's just say, if we move towards 1.6T, I'd love to hear your opinion on. Do you think that the world moves more towards silicon photonics versus EML at 1.6T? And do you feel like because your existing footprint is so fungible, like you could move your capacity very quickly to address that? So yes, just general thoughts on technology for 1.6T and...

That's a good question, right? I certainly, number one, the fungibility is there, right? That's why we want to make sure we're designing to every customers, right, with silicon photonics laser too. So if their demand changes, we can always change, right? That's number one. Number two is actually then we do see photonics actually -- they are kind of got designed into the transceivers slightly later than EMLs, but not by too much, right? So we definitely see SiPho will take -- the market share increase will be faster than the 100G generation, right?

But on the other hand today, though, given the supply constraint situation, it's not about technology choice anymore. It's about which one you can get lasers for, right? Can you get EMLs or can you get CW lasers? So our largest customers all have 2 solutions. And depending on the laser availability, they will go with that solution, right? And keep in mind today, the silicon photonics supply chain is also constrained, right? So now you have constrained silicon photonics, you have constrained on lasers, constrained on EMLs. So every single customer of ours, you're trying to figure out is how can I supply to the demand based on the constrained supply chain that I have.

In prior generations, you've also seen VCSELs take share as time has gone along, generally lower cost option. Is that a reality at 800G? Is the performance good enough to get there? Do you think people move in that direction? And then same question for 1.6T. You kind of talked about SiPho in that way, right, where it takes share over time. Is that the same way you think that VCSELs will be at 800G?

Yes, 800G definitely -- VCSEL has always been there, right? When the hopper was ramping in the first -- in the beginning, it was a lot of VCSEL-based modules, right? And then it got shifted over to silicon photonics and to EMLs because they didn't have the capacity. Now capacity is back. So we see 800G kind of coming back, the multimode kind of coming back a little bit, not to the previous level, right?

Now for 1.6T, despite some of the vendors pushing for 200G VCSELs, we're not seeing it being adopted broadly, right? People have already made the mind up and say we're going to shift over to single-mode based architectures, actually infrastructures. And then we have not seen the effect of coming back. So we're seeing the constraint of the lasers and silicon photonics and things like that. But we're not seeing people say, hey, we're going to use 200G VCSELs as a replacement. We're not seeing that.

Got it. less of a factor.

Less of a factor. Because it's very limited, right? When we do like 30 meters, it's just too limited, right, for the -- especially nowadays, all the racks, right, are really high power. And then the rack spacing becomes wider and wider, you really need about a couple of hundred meters to cover all the scale of networking. So 30 meters is too short to cover the use cases.

Got it. Maybe switching gears to another vertical, and I do want to come back to kind of RO scale architecture and solutions to that. But why don't we start with just OCS. So I think on the last earnings call, you guys talked about OCS going from kind of single-digit millions to something around $100 million per quarter by December of '26.

If you listen throughout the quarter, you guys have kind of been incrementally more positive there. Could you talk to why you're more positive? Are you seeing more customer engagement? Is it a broadening of customers or kind of a deepening of your existing customers? And maybe just from a technical perspective, I get a question a lot of times, like is this replacing packet switching? Is this existing alongside packet switching? Maybe spend a little time explaining where this fits in.

Yes. I think, first of all, I would say that we're getting deeper with the customers. And then today is a primary use case, there are actually 2 primary use cases. One is the scale up, right? It's a scale-up architecture that really drives the volume, right? The second one really is, I would call it, a multi building campus scale across, right? So you have like, say, 3 or 4 different campus buildings, big data centers, 100,000 GPUs each. You want to connect them at the campus level. These are 2 major applications, right?

We also see the scale up, which might be a replacement of the spine switch, right? We also opportunity for scale up. That will also be a replacement for the kind of call the NVLink switches, but those are kind of further out, right? So today, the dominant one really is a kind of scale across level application and then the scale-up portion, right? So these are the big ones. And we see this scale-up portion is actually strengthening. Our position is strengthening, the demand is strengthening. And this customer also starts to sell their solutions outside, right? That's also an upside.

So all these add together, we're seeing -- that's what give us increasingly more confidence, right? It's because we're seeing our progress. We're seeing backlog visibility, and we're seeing our customers' demand because of their own success, right? That's all factored together and we say, this is looking better and better.

Outside of the customer who kind of evangelize this technology, is there a lot of greenfield expansion where you're seeing new data centers get deployed and customers are saying, I'm going to deploy optical switching along with packet switching in tandem. Are you seeing OCS kind of eradicate some spend that you would need on traditional packet switching? I guess that's the question that people ask a lot times, like should I be worried about players in the traditional packet switching environment because OCS is coming on? Like how would you...

How do I think about it? I think right now, I would say the following, right? So right now, it is really an architectural decision. Okay. I'll answer the first one first. We definitely are seeing much more interest in OCS. People, especially from the AI model companies, they definitely are interested in exploring and even in some cases demanding the use of optical switches, okay?

But it's actually right now, I see it's building on top of the packet switches. They're using it because architecturally, it is a better choice, right? There's all the benefit about cost and then power consumption, all that stuff like that. That will play out over time. In the near term, I don't see it kind of cannibalizing the packet switches. It's going to be supplementing the packet switches.

Over time, when it goes to more into the spine or even into scale-up architectures, I think it will kind of eat into the share of the packet switches, right? But the market is going to grow really, really fast. So you're going to see packet switches still grow, but then an increasing amount of the share is going to be allocated over to OCS. That's how I see it.

And so will that business as well, OCS be limited by supply like your other business? You kind of started saying, we see constraints across our entire portfolio. Like you are starting from a very low number, getting to a moderately sized number there. That is in that same camp, right, where you are limited by constraints?

Yes. Right now, because the OCS supply chain is still pretty new, right? So the whole needs to be primed to support the volume, right? So right now, it's not so much of a constraint because of the capacity -- fundamental capacity per se, is just it's new, right? So it takes time for the supplier to adjust to it, right?

We're not seeing like supply constraint fundamentally like we see on the laser side for the next couple of years, but depending on how fast the OCS will grow. And we already started to think about how we're going to plan for that to enable the further ramp up of OCS.

Got it. Switching gears to CPO. It sounds like late '26 is kind of the time frame where you'll see scale out technology at first, which is revenue towards you guys there. When you look at like volume of switches that are moving to CPO, do you expect a significant volume transition in late '26, early '27? Or is that something closer towards the end of the decade?

That's a fantastic question. I think our customers don't know, right? So they're asking us really to say, hey, do you have fungibility between the CPO laser and the regular lasers, right? The answer is yes, with some fungibility. But we do see that I think -- let me just give you some rough ideas. I think by '27, by '28-ish, we should see, let's say, 40%, 50% of the switches of the first user of this CPO to be a CPO based, right?

They have the incentive to really drive the adoption of CPO, right, and then selling the whole solution. We'll see at that vendor in 2028 time frame, [indiscernible], you will be like 50-50 between a pluggable based versus a kind of CPO based. That's our best view, right? And then themselves actually have a large uncertainty. They are trying to gauge from their customers, too, right?

But meanwhile, I think it's fair to say we see the CPO activities picking up at every single hyperscalers, every single one of them. And not just for scale out, but also for scale up, right? So we definitely think that 2026 ramp is happening and '27 will continue to ramp. And we're going to see the share of CPO increasing from '27 onwards to '28, probably reaching 40%, 50% in '28. And then around that time frame, probably scale up will start to show up as well. right? That's how we're picturing the CPO demand.

Yes, 40% to 50% is a pretty large number going into that '28 time frame. I guess if you're already at that adoption rate with that large first customer, what is the barrier to moving to scale-up architectures? Because I think the idea that we've heard as an industry is scale-up is where most of the benefit comes. It's just it will take a little bit longer. What's gating you from getting into scale-up architectures and systems?

That's a fantastic question. I think from a system point of view, there's still a power consumption, cost considerations from the application perspective, right? But also from -- if you look at it from our biased angle, capacity, right? Because, again, the scale up is going to be several x of the demand, right? So we're going to scale -- we're already ramping very aggressively. Now we're going to actually tilt that slope by another several x, right?

So we're already planning for that and thinking about it, how we're going to actually address -- actually enable, right, what to enable the scale-up opportunities, right? Again, there's multiple conversations, not just one customer, right? So how we're going to do that as an industry. So that's what we're actually already starting to work on.

Got you. All right. Broadly into 2026, you're getting, I would say, more substantial 1.6T volumes. 800G, I think you said before, is still supposed to be the largest node in the market for next year. Could you give us some view on what you think total port count looks like next year or just optical ports in general for 2026?

Yes. I think optical ports, our estimation is probably about 60 million ports, 60 million, 70 million ports in that range. Actually, the number kind of doubling, almost nearly doubling year-over-year, right? This year, probably 40 million, 50 million, next year, not doubling, maybe 50% increase. Next year, probably 70 million, 75 million ports. And we're getting -- if you look at it from the GPU count, you can do some attach rate calculation and you can look at the TPU multiplier, right? And then what we'll hear from the hyperscaler directly is probably around 75 million ports, around which I would say probably 55-ish or 60-ish is like 100G -- or 800G and 15 to 20 is 1.6T.

So that's largely the hyperscalers.

Hyperscalers including whether it's NVDL, whoever it doesn't matter overall the market, right? That's what we're looking at.

Got it. And then your customer exposure within that vertical, like Cloud Light was well understood to be kind of a Google provider very early on. In terms of like the diversification and your scale, like do you still feel like you have a very good position at that customer versus where you were...

Yes, we are. So I think we originally -- our strategy a year ago was, let's go proliferate and win more share. We're like, well, actually, we don't need to do that. Because every single customer is so demanding, lead customer is particularly demanding. So we want to make sure that we focus on serving them well. And then just -- we have 3 customers. just the 3 customers can keep us really busy, right? So we want to make sure we're serving them really well. And then, yes, while position is still very strong, right, in those lead customers. And we have road map visibilities multiyear into the future, and that's what we're focused on.

When you look at those 3 big customers, longer term, looking to get to kind of $1 billion business or so, what are the biggest challenges in getting from where you are today? Is it manufacturing? Is it yields? Like where is the hang up? Because I would assume that today, if those customers could get more modules from you, they would happily do so. Where is the hang up?

It's really just capacity. It's really just capacity. I think every single customer, frankly, today, if I were to win more customers, I just go over capacity. You'll get it, you win it, right? Especially if they -- here you have your own laser supplies, "Oh my God, please come in," right? So that's the dynamics, right? So really for us, it's like, okay, let's be careful with this, right? Let's make sure we can produce and deliver the capacity, right? That's really the only gating item.

Because historically, I remember at the 400G transition and then early 800G a hyperscaler would qualify 2, 3, 4 modules, and then there would really be very little requalification process, right? What was set, was set from that point forward, you got [indiscernible]. Now if you have supply and you go rebid that project, are they like welcome in? Has that dynamic changed?

Yes. I think a little bit, right? So basically, now the customers are still favoring the existing supply chain because they have a lot of trust. They know these guys can ramp, these guys have good reliability, quality, all that trust takes time. Especially now opportunity cost now for them becomes really high, right? Everything has to ramp instantaneously. They have no time to qualify new vendors. However, we have been getting a lot of invitations. They say, "Hey, are you interested in bidding for this opportunity?" We're like, why? Because we're short. We heard you have your lasers. right?

So that's become a common theme, right? But we're like, okay, let's be careful, right? Let's make sure we hold on to our current customers really well because the capacity is short in the industry, right? Even the DSPs could be short because TSMC is moving capacity from 5 nanometers to 3 nanometers, and they're struggling to supply the world's GPU, TPU, XPU demand, right? So everything is going to be short. And therefore, even if you want to invest in the capacity, you may not be able to get the parts, even semiconductors, right? So that's the challenge I think industry is facing. So -- but opportunity is there. If we want to grab it, it's there.

Helpful. So in the last quarter, you look at all your large new opportunities in the data center, you have switching, you've got your module business, you've got your laser business. It was surprising where you saw a lot of your upside was actually in the telco business, where you saw like more broad telco strength. Could you maybe point out where you're seeing that strength? Is this just the ZR, ZR+ market actually starting to come to fruition? Or is it a certain subsector of component that's going in there?

It's actually broad-based, right? So the term scale across was invented, right? That really was the case, right? So you look at our portfolio, all of our other products, whether it's wafers management or WSS or pump lasers or tunable lasers or modulating products across the board, every single product line is increasing, right? So basically, what we're seeing here really is that you have a supercharged growth of data center optics, and we're talking about already here.

And then all that -- some portion of that is leaking out means we're leaking out to the wider area networks, right? So really across the board, everything is actually growing, right? So if you look at our kind of the forward-looking view, there's kind of this baseline not at 2x, 3x per year growth, but at 50% year-over-year growth, that kind of thing. And then on top of that, then you have this supercharged data center growth, right? That's how we're looking at it. So still, we're seeing that trend continuing.

Well, things sound fantastic across the board. Thank you very much for joining me.

Well, thank you. Thank you for the opportunity. That's great. Thank you so much.

Thank you.

Simon Leopold, Raymond James, semiconductor and data infrastructure analyst. So I'm delighted we've got our conference here in New York, fireside chat with Lumentum and Michael Hurlston, company's CEO. So some Q&A, we'll keep an eye out if folks in the audience have some questions.

But maybe just to kick it off, if there's possibly anybody who's not familiar with Lumentum, how do you like to introduce the company to a new investor?

Yes. Look, first of all, thanks for having us. I mean I can't thank you enough. I think when we first met -- again, as I came back into the optics world, it was in the OFC conference, and you were very generous because I didn't know a thing. So you steered all the questions away from me. Now you're going to -- you're going to hit me with everything.

Oh, yes. Honeymoon's over.

The honeymoon is over. That's it. That's it. Honeymoon is over. Okay. I think fundamentally, we are an infrastructure provider to the data center. We've now got most of our business focused on data center. And within that, we sort of think about 2 pieces. On one side is semiconductors, where we're providing compound semiconductors and components to the hyperscalers and to the data center opportunity. And then on the other side, as you know well, we've started talking about systems, and we're pulling together whole systems, whether that's an optical circuit switch or a transceiver that we sell into the hyperscalers. But fundamentally, we are kind of the optical backbone that goes into the data center, and that's created a whole universe of new opportunity for us.

So I'd like to try to structure these conversations with a little for people who are new and something for the folks in the weeds. Why don't we sort of start out at a little bit of a higher level because the term laser covers a lot of stuff. So maybe double-click and give people a little bit of education as to what are the lasers you're making, what don't you make, what's important in terms of lasers. So sort of double-click as to, yes, where does it matter for Lumentum?

Yes. You're right. Lasers mean a lot of things to a lot of people. And we'll keep aside industrial lasers and medical lasers and military lasers, all of which exist at different power levels. Inside the data center, fundamentally, you have 2 types that go into these transceivers. And then a third type that's emerging that's serving what we call the scale-up or scale-out opportunity. So the primary vehicle today for lasers is incorporated in these transceivers. And for those of you who don't know transceivers, it looks like a little USB drive that plugs into the back of a server or switch and converts electrical signaling to light. And the thing that's actually doing the transmission of light is a laser.

And you have 2 dominant types today. One is a CW laser, continuous wave. And that is primarily we call silicon photonics. You're using a shutter or an external modulator to send light along a fiber. And then there's another type that we call an EML, an externally modulated laser means the laser itself is actually modulated, right? So there is an advantage to EMLs. There's an advantage in certain cases to CW lasers. We predominantly make EMLs. They're the more difficult type of laser to manufacture. There's more masking steps in an EML, over 2x more masking steps than there is in a CW laser. They are typically harder to get to yield. They're harder to center in the process. And by all accounts, we have somewhere between 50% and 60% of the world's EML volume. So that's where we play. We do make CW lasers.

And then the third kind of emerging type that I referred to inside the data center is an ultra-high power laser, which we see being applied both to scale up optics and scale out. First, it will be scale out, which means now connecting from a rack to a switch bank. And then scale up is an interesting opportunity where you can actually use it inside the rack itself in various degrees. So we like where we're positioned on lasers. We think it's really our dominant currency. We think of ourselves back to your first question, perhaps as a laser supplier first and then a transceiver supplier a distant second, where the other of our competitors would say that they're a transceiver supplier first, and they do much better in that market than perhaps we do.

Now I think there's another way to sort of further subdivide in that when people talk about the EMLs use for data centers, they sometimes attach it a speed, 100-gig EML, a 200 gig EML. So what's the point there? .

Yes. So again, the super question, Simon. You understand this business better than I do. 100 gig, primarily, you have 8 of these lasers per transceiver. So when we say 100 gig per lane, it's 8 times 100 and you get an 800-gig transceiver. So today, the state of the art in these pluggable optics, which are taking those electrical signals and converting to light, the transceivers are 800 gig. The industry is moving to 1.6T, 1.6 terabit per second. And that shift is occurring now. And primarily there, you'd start shipping 200-gig EMLs per lane, 200 times 8, 1.6T. There are instances we see where you get 4 by 200 to make an 800 gig transceiver as you know, several customers are taking 200 gig per lane and 800 gig. But the primary form factor for me, EMLs is 8 of them per transceiver and you multiply 8 by the speed and that gets the speed of the transceiver itself.

So your answers have been very focused on inside the data center. Now a number of years ago, Lumentum acquired a company called NeoPhotonics, which gave you some narrow line width lasers, how does that sort of fit into the narrative? What's different about that market?

Yes. I mean this is now scale across. So what's happening -- we talked about -- and you and I probably for the last 3 or 4 months have talked about data center interconnect. Where you're really trying to link together numerous data centers to create sort of a larger instance. But sale across, as my partner in crime, Kathy would say is sort of a smaller circle in the Venn diagram. And here, you're actually running an inference model, the data center itself, one single data center can't contain that inferencing model. And as such, now I need multiple properties to run the inferencing model. And scale across now has become much more of a thing. You've written about it, several other of your colleagues have written about it and it's a big opportunity.

It feeds into the ZR and ZR+ modules, which are coherent light, as you know. And one of the key components in coherent light is a narrow line width lasers sits at the front of that module. But then they also involve pump, pump lasers like amplification for traveling, getting signals to travel over larger distances, coherent components themselves, all of which we make. And I think caught both of us by surprise, quite frankly, into our Q2 guide, our December guide was buoyed very significantly by the scale across opportunity. Our customers here are primarily the Cienas, the Ciscos, the Nokias and they're doing phenomenally well, right? You cover Ciena and they're kicking butt on the scale across opportunity and they're dragging us along primarily with these narrow line width lasers.

So it leads nicely to sort of the next question. We often hear from the OEMs like the Cienas of the world, as well as other prospective partners like an NVIDIA as an example, about these customers thinking about doing more vertical integration. So their messaging is often we're going to get more vertical integration. How should we think about the risk to Lumentum that a laser becomes something they vertically integrate?

Yes. I think all of these guys are purportedly working on that. And meanwhile, we've actually made a decision to step back a little bit from the entire integrated module. So we compete with Acacia, Cisco, we compete with Ciena. We compete with Marvell on Z -- ZR+ modules and they have the DSP that sits on the back end. And we've made a decision as a result of that to sort of back away from that market. That's tough for us to compete on because that DSP is such a key piece of the bill of materials. So we've said, look, this is probably not something that we want to compete in long term.

Where we do want to compete is on the components. And those narrow line width lasers are something that we sell to everybody. Reportedly, all the guys are working on their own internal solution. We don't think that anybody is particularly close. And even if they were, there's so much demand out there, Simon, we can't fulfill it all. I mean one of the biggest things that we're getting into right now with the customers is we simply can't fill all the demand. So it wouldn't surprise me in the asymptote, let's say, sometime in '27, '28, I don't know whenever these guys can get the narrow line width lasers to work, that we're splitting the business in some way. And it doesn't worry me all that much because the demand signal is so very high.

Now that's sort of one of the other things that I wanted to kind of delve into a little bit because it's not just the customers, but we hear from coherent ramping production, Broadcom ramping production, the Japanese players like Sumitomo. So we're frequently asked, when does the market come in balance. So everybody has the same messaging, right? Demand exceeds supply. When do you think the market gets into better balance?

Yes. It's a hard one for me to answer because as we've ramped, and you're right, I think the other folks are ramping as well. The Sumitomos, the Broadcoms, all of these guys have talked about ramping supply. I still think we're getting further behind. So what we've said to you and to others is as you entered sort of the end of our fiscal year, we were roughly 20% behind demand. If we look at the forecast we're seeing for the middle of the year and the end of 2026, we expect to fall further behind. Worth saying we probably think we're 30% behind. And that in our own book, we're adding 40% additional capacity on a big number, right, because we're the -- by far the largest supplier of EMLs today.

So when we say we're adding 40%, it's probably bigger than a Broadcom or Sumitomo can do when they're saying double and triple and all these other numbers. I mean we are the king of this market and we're falling further behind. When do we hit supply? I just can't tell you. I mean it's a great question. Based on the LTAs that we have based on the requests that we have, we don't think that we hit equilibrium in 2027 at least. And then beyond that, I simply don't have great visibility.

And you -- I think you've talked about adding 40% by June of this year. That's relative to what date. What's the...

Yes. So it's -- as compared to our September quarter close, so into our guide is factored a piece of that in the December guide. And then the next 2 subsequent quarters, we'd expect to add pieces of additional capacity to get us to a total of 40. We've been asked today by several analysts how we're doing. We're tracking to that. I feel very comfortable we'll be able to hit that commitment.

And beyond that, what we've said to you is we're going to adopt this really interesting strategy where we virtualize 3 of our indium phosphide fabs. We're going to take Three different properties we have, 2 of which are rather underutilized today. Surprisingly enough, with all these constraints, we have 2 properties that are relatively underutilized, and we'll try to run different steps of the process in each of those 3 properties, right? We're doing it today. We're running our epi process in our United Kingdom fab and then shipping that to Japan for finishing for all e-beam and lithography and things like that. And then we'll adopt that more globally across our second Japanese fab or U.K. fab and the Sagamihara Japan fab, which is the one that's so very constrained at the moment.

And then I wanted to talk a little bit about this 200 gig cycle in that I think you've given us a metric you expect it to be 10% in the March quarter. I say 10% of revenue or volumes? How should we think about that value?

Volumes.

Volumes. And so I've assumed the ASPs, it cost more than 100-gig per lane?

Yes, it's 100 to 200, you might be the same rough ratio.

So how should we think about the trajectory of that mix and how that affects the business? And what I'm really getting at is, so you're an analyst, you're trying to build a financial model. And I've now got another variable. It's not just capacity increase, but ASP increase. How should we think about that math.

No, no. I mean that's a super question. What we've said from a trajectory standpoint is we would expect that the 200 gig per lane lasers, as you said, 10% in Q1, calendar Q1, going to 25% in calendar Q4. So it will be an increasing part of our overall mix as our mix is going up as the number of units go up through that time period, which, as you correctly call out, leads to more revenue. It's an ASP bump of roughly 2x and then a margin bump, right, because the gross margin on the 200 gig per lane is definitely better than the 100 gig.

So you've got a number of different tailwinds in our EML business, again, capacity going up, mix shifting from 100 to 200, all of which are super good for us.

And there's been this, I think, long-running debate about which laser wins. EML versus VCSELs versus CW. And I feel like one of the messages that came out of the ECOC show back in September was that CW and silicon photonics was taking over the market. Now my theory is, you say that if you can't buy EMLs. So I'm leading the witness of course, and I'm sure you're a little biased, but how do you think about the competitive forces among different architectures and what's sort of the right answer for the industry?

Yes. Look, we've been honest. I mean I think that there's no doubt that you'll see a mix shift toward CW lasers at the 1.6T node. There will be more as a percentage, there will be more silicon photo photonics-based transceivers at 1.6, then they were at 800. That doesn't mean that the number of EMLs go down. We'd expect that the number of EMLs go up because the number of transceivers is going way up. Even in the face, and we haven't touched this yet on co-packaged optics. Co-packaged optics certainly eats into transceivers a bit, but the market is growing so very significantly that we would expect -- in the face of some share loss that we would still expect the EMLs to go up rather in a rather pronounced fashion.

That changes again. I mean you understand it as well as I do at 3.20T, the next node, our folks think, hey, silicon photonics doesn't work. It runs out of juice, particularly at a reasonable throws, reasonable distances. And as such, the market will add back to EMLs. What I'll also tell you, and this is very true, all the initial 1.6T designs are EML-based right? There's very few, if any, silicon photonics-based designs that are coming. They're easier to make EML you have 1 throat to choke, right, because we're doing the modulator and the laser but they're just generally more robust design. So people are going to lead with those. And then the CW lasers, the silicon photonics space will come in on the back end.

So I want to pivot topics to the optical circuit switches or OCS. So interestingly, I don't know if you caught this the market researchers at Signal AI, they increased their forecast.

Oh, they did.

No surprise.

So what's the new number?

$2.5 billion by 2029, which maybe proves a little bit conservative, I think, but we'll see. Maybe, first of all, help people understand what this market is, what you do here and how you're seeing that market developing.

Yes. No. I think that number is very conservative. I'm sure you have a model in your mind, Simon. It seems wildly conservative in terms of the TAM. You have 3 different dominant use cases for OCS. You have a spine switch replacement. And what we're seeing is a lot of greenfield deployments that are coming out, new data centers are adopting the optical circuit switch in the spine layer. And that is probably the first volume that certainly we're seeing with a slower ramp, right? And then there's a use case where you have TPU interconnect, and this is really a scale up. I mean, for all spreads respects and purposes, you're using OCS inside a rack to connect multiple TPUs together. That is a use case today that exists, right? There's one hyperscaler that uses that model.

And from our perspective, obviously, a big opportunity. We don't know yet that, that particular customer will be looking for other alternative suppliers. The good news for us is they use a MEMS-based solution today, we would expect that, that familiarity would give us an inside track because obviously, we're a MEMS based, as you know. As we look at that one as an opportunity.

And the third one is kind of an interesting opportunity where you're now to have GPUs inside a cluster. And as bad or wrap as optics gets, and you've been around the industry for a long time, it turns out that GPUs actually fail more often than optics. And when you have a model, an inferencing model that's costing you 10s and 50s of millions of dollars to run, you cannot have a GPU that fails. And so there's a big use case out there where you're actually steering traffic away from utilized, but actually more importantly, failing GPUs.

And so these 3 use cases actually makes up the revenue target that you and I have discussed sort of $10 million of our -- $10 million of OCS in Q1, going to $100 million of incremental dollars for us in Q4. All 3 of those use cases make up pieces of what we'd expect to see. And we're super excited. I think the $2.5 billion in 2029 is very, very conservative based on what we see in front of us.

And for you, what are any milestones or limitations, capacity to get from $10 million a quarter to $100 million by just to clarify, December of '26 calendar quarter. What needs to happen? Do you have the manufacturing set? What are your hurdles?

Yes. Our biggest limiter is ourselves. I mean the demand signal we're getting from customers is far in excess of what we can build. We've got to build the manufacturing capability. We have to build out the supply chain because this is one where we're depending on key strategic suppliers, both for the analog voltages that drive our MEMS for the MEMS themselves. If we can get the supply chain to work and we can get the -- our manufacturing work, I think we can beat the numbers that we've put in front of everybody's targets.

But that's still a big what if. I mean this is a tough ramp. We're running -- we're going from a standing start. We're manufacturing all of this in our factory in Thailand, which is already very constrained with the transceiver activity. some of the optical scale out. I mean there's a ton of stuff that's going on in that Thailand factory, and we're trying to rejigger resources every single day.

Now do you do the MEMS yourself? Or is there an outside contractor that does that fabrication?

Yes, it's outside. So we've contracted that out. We haven't said who it is, but it's a very, very key and important supplier for us that we spend a ton of time with. They've been working with us since the days of WSS, which you covered for years. It's the same fundamental technology that goes in our wavelength selectable switch that we apply to telecom that we're now reapplying for this OCS opportunity.

And there are a number of different architectures or designs. Do you feel like MEMS has a particular advantage over, say, LCDs or piezoelectric or it's a black box, it doesn't matter what's inside?

No, I think it does matter. I mean the biggest thing that this is -- remember, this is not a packet-based switch. It's a traffic switch. And so when you're switching traffic, you want to have perfect transparency between one port or in another, meaning no loss. And so MEMS has an advantage that it to mirror. And then also, and we know our competitors do this, they have -- we're talking about different SKUs for different wavelengths. We're also wavelength agnostic. So you can apply one SKU to C-band, O-Band, L-band, whatever frequency you're trying to switch, you can deploy one of our OCSs whereas competitors who use different technologies have to be in a certain frequency band.

The knock, right, is the reliability. You definitely have pieces that are moving. You're trying to move these mirrors to direct the light from one port to another, that we believe we've solved and we have proof points everywhere with this WSS solution. We've been deploying this for years and years. Telcos are digging earth up to deploy these WSSs, the last thing they want to do is pull them out. So we really feel very confident we've overcome the knock, and there's a knock out there on the reliability of these things. We think we've overcome that. And then the technical advantages that we have are serious. So we do think that as people deploy this, that technical advantage that gives us a big running start.

So I want to go to co-packaged optics. So I think it's interesting to tell folks to sort of a little bit of the back story in that. I think if you look at Lumentum stock chart from sort of December of '24 till March of '25. It just was down, down, down because co-packaged optics were the end of Lumentum. And then Jensen gets up on stage and shows his slide to announce co-packaged optics, lo and behold, Lumentum as a partner. So I think from that day on, the stock is just pretty much gone up. So market perceives co-packaged optics is now a good thing, not a bad thing, maybe unpack this a bit. I assume you think it's a good thing, too.

We definitely think it's a good thing. Look, there's been a knock on co-packaged optics again for a long time because of the reliability of the optical solution and the fact that, okay, now I have a big switch box or a server box and I have these optical engines next to it, and my whole yield is now going to be impacted by lasers. I do think that the approach that NVIDIA has taken is very smart, and that is that they have an external light source. As you well know, that looks like a pluggable. So it's basically the same as a transceiver without the DSP and the associated electronics in there. So it's a very simple solution, very elegant.

We believe that there's no reliability problem similar to what we were just talking about, but to satisfy their customers, they've come up with this form factor. We believe it's doing very well. We're already in -- on the InfiniBand switch we're shipping in limited productions. We would expect to see this take off on ethernet, on the ethernet form factor. And Look, it's -- if you look at Lumentum, the growth drivers on OCS on this optical scale out and then we haven't talked about optical scale up, these are huge growth drivers that I think are underappreciated.

But generally, look, this is a good thing for us. We tip our business away from the transceivers right? To the extent that we have transceiver share, we don't. We're not a big transceiver player and more toward components, which are higher margin. And for us, when we compare them to the lasers going into transceivers higher dollar content.

And how do you think about sizing the co-packaged optics opportunity? I know we've got sizing for OCS, we have sizing for transceivers. This is a trickier one I feel.

Yes. I think we feel like it's going to be, for us, the sort of the data points that Kathy and I have given is we feel like it's going to be material revenue for us in the back half of calendar 2026. And we believe, at least at the outset, we'll be the only supplier, at least on the -- with the opportunity you just mentioned. We believe that several customers are looking at this, both for switches and for processors and for servers, where we can expand the customer footprint. We just had an announcement from my buddy Matt Murphy, now buying the Celestial AI. To us, that's a nice proof point that co-packaged optics is indeed a thing, right? You're not going to pay $5.5 billion for something if you don't...

Now, are you in that project? Or is that something where they're vertically integrating?

No. I mean, we could, right? So the substrate and all the PIC and all the electronics, that's all coming from Celestial, but a light source, they need somewhere.

They do.

And we have not said one way or the other where we're engaged there, but we're a likely candidate to play. But anywhere there's going to be co-packaged optics we feel that our light sources, it just creates more opportunity for us on the light source vector.

So some of the work we've done is looking at how the sort of architectures evolve. So it seems as if when you talk about co-packaged optics, these are for scale-out rack to rack. So when we get to a point where optics are necessary for scale up, my guess, 2029?

Yes. Look, it could be sooner. I mean we're getting indications now that copper is running out of juice in certain applications. So you're right. If you think about the racks themselves, there's servers and switches inside those racks, and then there's a rack of higher-end switches that exist in the topology. That is where scale-out is going. We're taking it from a rack and going to the switch rack, the main switch rack inside a cluster. I think what's being discussed for scale-up is something where you're going to connect in various ways and shapes and forms GPUs because you've got to maintain the bandwidth, right?

Remember, when you're going to scale out you're cutting the bandwidth. The bandwidth is no longer perfectly. It's usually a ratio of 8:1. In scale up, you're going to have to preserve the bandwidth. And with these higher speeds, you have to think about electric cable, copper cables running out of the juice to do that. Maybe at first, it's longer throws. There's throws inside the rack where you're connecting one GPU to another, not just along the backplane. But ultimately, I think this thing is going to go everywhere.

I mean you're going to have a high degree of optics even in the backplane. And this opportunity for this industry is scales of hundreds of millions, where we've been an industry scaled on thousands, that scale has changed to hundreds of thousands. Now as we think about co-packaged optics, the scales of millions. If you think about scale up, it's tens or hundreds of millions of units. I mean it's a huge opportunity. But to start, back to your time line, we can see a world where this happens late '27, earlier '28. There are use cases we see already where copper is running out of juice.

So believe it or not, we've run out of time. I think I've got another hour worth of question. So I appreciate it. We'll take it up again, maybe at OFC.

I always love chatting with you, Simon. Like I said, I really appreciate it last time. You took it easy on me. You were a gentleman.

No, let me just ask you to sort of close with what do you think is the least appreciated or most misunderstood aspect of the Lumentum story?

Yes. I mean I think that everything you see now, and you're right, we've had a nice appreciation in the stock since OFC. Everything that you see is really based on the core business, meaning the EMLs, the scale across, the core sort of connectivity that we've had, transceivers contributing a little bit to that, right? But none of our numbers are the 3 big things that you touched on. OCS, not in the number. Scale up, not in the number. Scale out, not in the number.

So if you look at how we are thinking about the business, 2026 will be a very good year for the company because we will start to see contributions from OCS. We will start to see contributions from scale-out optics and we think that we'll start to see scale up, at least we'll formulate where that strategy comes from. So I think our best days are ahead of us.

I'll paraphrase Gary Smith's comment which is optics are cool again.

They are cooling again. Gary had it absolutely right. I texted him after our last earnings and said just that. Great. Great guy.

Thank you very much, Mike. Thanks everybody.

Thanks Simon.

All right. Great. Good afternoon, everyone. Thanks for spending time here at UBS' Tech Conference. I am David Vogt, the hardware and networking analyst, and we're excited to have with us Michael Hurlston from Lumentum, President and Chief Executive Officer. We're going to dig into the business.

But I thought maybe since you've been in the seat for 18 months, is that about right, 15 months?

Less than a year, David. Less than a year. Yes, less than a year. Yes.

But maybe just -- okay, so we'll go into each of the segments that I think investors are focused on in a second. But from your seat, from an outsider coming in, clearly less than a year. Maybe just level set kind of how you're thinking about the business when you joined to where we are today? I think a lot has happened in this less than a year period, and we'll dig into each of those products and categories separately.

Yes. Look, it was -- CEOs very rarely change jobs. You either get fired or you retire, right? And I've now been CEO of three public companies, one of which I was retired from, but then I made a switch. And I remember the Board of Directors sort of presenting to me their view of the forecast as they were trying to recruit me to come into the company. And I'm like, this is crazy. I mean, there's no way the forecast can look like this. Why would you possibly be wanting to make a CEO switch in the face of this forecast.

And the reality has ended up much different. The forecast that they gave was understated probably by a factor of 2, which was already incredible to begin with. And it's been an incredible journey. I mean 10 months, I think the day I joined, the stock was like $70. And obviously, we've seen quite a bit of appreciation in the share price over that period of time.

But we've had to do a lot of work on the company. I mean, I think the previous CEO did a great job, obviously, setting up the road map, but the Board wanted to see the ability to scale because the telecom industry, which is really where optics has been, was built on scales of thousands, right? And they could see that it was going to be semiconductor-like scales that were coming, and they wanted to get somebody who had seen a semiconductor cycle before and could scale thousands into millions and tens of millions and maybe even hundreds of millions, right?

So this optics industry has never seen anything like this. And I hit it at exactly the right time. I watched my good friend, Jim Anderson, who is also a semiconductor guy, make the jump to Coherent, and he's done, obviously, a hell of a job over there, too. So you've got two semiconductor guys now in optical companies.

Great. Great time to be alive.

Yes, not too bad.

So when we think about the forecast that you talked about being really bullish and now obviously, magnitudes stronger. Let's talk about underpinnings of that. Let's start with sort of, I think -- not to deemphasize this business, but let's talk about the transceiver business first.

So obviously, that business has seen tremendous growth, the market has grown leaps and bounds better than I think anyone had expected. Back in -- you're in this business because of an acquisition made back in 2023. So can we talk about kind of how you're thinking about that business long term? I know you've been pretty vocal about how you see that from a customer perspective, a volume perspective, an IP perspective. So as we sit here today, given just the demand trends that you're seeing, like maybe just refresh us on like how do you think that plays out? I mean is there really a cap on that business in terms of how you're thinking about the revenue opportunity? Self-imposed cap, I should say, not a demand cap.

Yes, David. Look, I mean we -- of all the businesses that we have in the portfolio, this has been the most challenging for us. We haven't executed, I would say, particularly well in the transceiver business. We are a minority player. We are behind several of the big Chinese names in terms of being able to supply transceivers and certainly behind Coherent.

So we're trailing the play. And what we've said is given the margin profile of that business, which even in the best case, I think, is sort of a mid-30s, maybe high-30s type business, we want to get our overall corporate margins. We've given a long-term target of 42%. We think we have, obviously, room to expand above that. But that transceiver business will always be a bit of a headwind.

And so we've communicated that today, that business is running about $500 million annually. We said, look, we have aspirations to get it to $1 billion annually, to add another $500 million of incremental revenue. But we don't want it to run much higher than that, just given the margin headwinds we see. We think we can manage our business up from a margin perspective if we keep the business to about $1 billion top line. If it gets beyond that, it will be more challenging.

Now that being said, and you sort of alluded to it in the question, we've certainly seen pressure from our largest customer and other customers to ship more, right? Because the demand right now is very, very high. And so our challenge is going to be how to improve the margin of the business. We really need to do that and then how to kind of manage it probably in the face of a little bit higher than $1 billion of top line revenue over the capture period.

And that, I think you said publicly that's really targeted with three large existing customers that you've had a long-standing relationship with since you've gotten back into this business. And to get to that margin target, I know it's probably below that 35% today, what needs to happen? Is it vertical integration? Is it outsourcing? Like how are you thinking about driving that margin? I know it's the least exciting piece of your business today in your view, but just -- maybe let's get this one out of the way first.

Yes. No, no, I appreciate it. Look, it's a good business for us. I mean I don't want to minimize it. I just think that other parts of our business have incredible growth opportunities with better overall margin profiles. Look, you guessed it right. I mean we're operating meaningfully below the mid-30s in terms of margin. We have a couple of levers. First, we are not manufacturing at any kind of scale. Getting the business to $1 billion allows us to amortize units over our manufacturing footprint, that helps the cost.

We have to improve our manufacturing. Our manufacturing is substandard right now. We brought in a new person that comes from Jabil to run our factories, and he really knows what good looks like, and I think he can improve our automation levels, he can improve our throughput levels, he can improve our scrap and yield, all of which are contributing mightily to our problems. So I like how he's thinking about that business.

And then you and I have talked about it, we also don't in-source. So none of our transceivers use our own components. That can be a margin benefit by taking our lasers in particular and bringing them into our transceivers. And so we intend to do that as well, all of which, I think, moves us much closer to a sort of a mid-30s margin profile over the next handful of quarters. It's still going to be below sort of corporate margin targets. And we have other levers, of course, across the portfolio that I think help us on the margin line.

Okay. Got it. So as an extension of transceivers, maybe let's touch on EMLs, right? So EMLs have been an incredibly strong business for you, supply is incredibly tight. Indium phosphide is an incredibly short supply. I think you've added 40% capacity year-over-year this year. So how are we thinking about -- how are you thinking about as we go into '26? I'm pretty sure I know the answer to this, but it kind of feels like you're sold out for '26 on EMLs, if I'm not mistaken, and you have long-term agreements with customers. Is that how investors should think about the EML business in '26? Or is there room for incremental sort of capacity additions from your existing footprint at this point?

Yes. Let me talk a little bit about the capacity. You've got that a little bit wrong. We have Kathy Ta, who's here with me today, our Vice President of Investor Relations, talked about before I joined doubling our EML capacity in a 12-month period and a backward look, that happened, right? We actually out-executed that road map. And then I think she and I thought we were sort of going to see very asymptotic improvements in our overall capacity. We brought in, again, sort of a new person to look at our fab strategy and that person has figured out ways to squeeze our existing footprint fairly considerably.

And so we gave in the last earnings call a new benchmark saying, over the next 3 quarters, meaning our December, March and June quarters, we expected to add that 40%. So that's a forward-looking statement where we'd expect an increase in capacity of 40% on what already is a doubled number. So we're outputting a ton, and then we expect to increase that by another 40%.

Then on top of that, as we look at the next 6 quarters, we've also talked about a strategy that's a very unique strategy that this person, our new leader for our fabs has come up with, and that is to virtualize. We have four indium phosphide fabs, which gives us a very unique purview on the industry. One of them is largely dedicated to co-packaged optics, which I'm sure we're going to get to in a minute. But the other three, one is really stretched to a maximum capacity. That's where our EMLs come from. Two are relatively underutilized.

And this guy has come up with a really a strategy to use all three as sort of a virtual single instance of a fab. And in so doing, we would expect to get another step-up in capacity over the ensuing 6 quarters. It's such a unique strategy in this virtualization. We don't know what it ultimately leads to, how big that number is. So we -- Kathy and I haven't characterized that as yet. But you can imagine now if we can really take advantage of three factories as opposed to one, we should get a pretty nice step-up in our output. We just haven't quantified that.

So along those lines over the next 6 quarters, it sounds like there's obviously additional capacity. One of your relative competitors, partners in the industry is adding 6-inch capacity in indium phosphide. So how do you think about -- on a couple of lines, how do you think about the industry supply-demand balance longer term? I mean is this a let's get through '26 into '27 and then we'll kind of revisit? Or is the demand existentially strong for multiple years where you still have to consistently look at ways to drive more capacity to meet the underlying demand that we're seeing, which seems to be unwavering.

Yes. Look, I mean, again, a really good question, David. I think we're seeing Broadcom has indium phosphide capacity they're adding. You're referring to Coherent. They're doing a really good job adding capacity. Our Japanese competitors are adding capacity. We're adding this 40% we've stated over the next 3 quarters.

In the face of all that, we've also said we see the supply and demand imbalance increasing we're falling further behind. And that accounts for all this other capacity that's being built out here or there and everywhere by our competition. So at least through 2027, we don't believe we catch up. We think we're still behind on supply given the demand levels we're seeing. We are facing a decision now, certainly in the next quarter to maybe invest in a much larger footprint and that's one that we're weighing. And we're just trying to really gauge where our customers and our demand profile is before we really go and invest in breaking new ground or investing in new clean room space that would really inflect our capacity another level.

Well, you mentioned earlier, given your background from a semiconductor perspective and Jim's background and you used the word cycle, doesn't feel much like a cycle right now, right? It feels like an elongated demand backdrop. I mean how would you characterize where we are in this particular part of said cycle versus like your historical perspective? I mean I don't think there's an analog that I've seen in 20, 25 years. Just kind of love to get your perspective because we get questions from investors all the time, do you have visibility into '27, visibility into '28? Jim made reference to '28 orders -- or not orders, basically comments and potential commitments from customers into '28, so how are you thinking about that maybe at a higher level?

Yes. I mean we're -- we have commitments certainly through 2027 in our business. I'm sure it's not dissimilar to how Jim is seeing it. I lived through probably the biggest wave of demand in semiconductors, which was WiFi, right? WiFi was in nothing and grew to a massive technology wave. And that was very, very sustainable, obviously, right? It's a technology that continues to live on.

But this dwarfs even the WiFi cycle. I mean just crazy in terms of the amount of demand that we see, the changes in the demand signal, and by the way, those changes are only in one direction, right? So it feels very sustainable. We see no slowing down we're asked the same question you are, right, on a daily basis. Well, what if, what if, what if. And at least right now, the what-if is, can you please manufacture more.

Got it. All right. So let's just move to CPO since you mentioned CPO. Obviously, that's, I think, a unique -- you have a unique position in CPO from a laser perspective. The market, I think, is still kind of debating in terms of scale and scope of how big CPO from an industry perspective can be as we move through '26, more realistically '27 in terms of more volume. I think you said you expect your CPO-related business to start ramping in late calendar '26 or the second half of '26. Maybe kind of give us a sense for how you see that sort of demand curve playing out or that cadence playing out as we move through '26 into '27 where volume should ramp more materially?

Yes. Look, we're shipping today. I mean the good news, there's -- as you're correctly saying, I think there's been a lot of debate on CPO. We see that debate waning simply because there's enough proof points out there that it is, in fact, happening. And of course, we're participating in a very material way. So we're shipping today. I think we've been surprised at the robustness and the performance of the solution that we're out there with, obviously, our leading partner, they've done very well with it. But we expect an inflection point on Ethernet-based switches. That's where we see the real step-up where our revenue would become more material. Today, you can't really see it because it's relatively small, shipping on one switch platform.

What we've said in the second half of 2026 is we'd expect a pretty big step-up in the revenue, and it would become something much more material. And I think since the last time we talked, we have a lot better confidence in that timing. That timing seems to be holding very consistently and more confidence in the vector, the magnitude vector of that -- the revenue. We expect that to continue through 2027.

And then we're actually engaged with multiple customers. So it's not just the one leading customer that has made a lot of noise about co-packaged optics. We see engagements now from other switch companies, from other people that are deploying switch silicon themselves, from other GPU and CPU vendors. So it's a little more broad-based than the one customer. And obviously, that's given us pretty good confidence.

And what -- and just maybe [indiscernible] straight on this, what you're seeing, this is an opportunity largely in scale-up, right, near term. So does the Ethernet consortium or ESUN, is that a longer-term opportunity by the time they set standards, by the time protocols are determined. Like how do you think about that as an opportunity outside of that large very vocal customer that you're working with today, particularly on Ethernet switching?

Yes. Look, it's scale out. So the opportunity that we're addressing today is a connection to the top of rack switch. So that, of course, is scale out. We do see opportunity. ESUN is really a scale-up type of technology, and we see opportunities for the first time in a much more appreciable way on optical scale up. I think the conversations today have really been about optical scale up. I mean, people are starting to see signs of that.

Still too early, right, to really call how optical scale-up feathers in but it certainly seems that the laws of physics are playing now much more in our favor where CPO had been talked about for years and years, it's happening. It seems like in a similar vein, now optical scale up is being talked about, but there's enough trials, enough activity around it that it looks like it will happen, whether that's in '27 or '28 remains to be seen, but we certainly are much more bullish on optical scale up than we have been in a while.

Maybe just touching on competition in CPO. You mentioned CBO has been talked about for a while. I think if we went back to like OFC in '22, '23, players like Marvell are making a big stink about it, Cisco is maybe a little bit less optimistic. They don't -- Cisco doesn't sound as optimistic on CPO being sort of a mainstream solution that they're going to participate in, how do you see the competitive landscape today and how that's evolving and the relationship between some of the other optics players in the space right now?

Look, I think it's sort of a matter of timing. I think these first high-volume shipments that we'll participate in with our customer, we think that, that helps them differentiate their solution against the Cisco, against the Broadcom. They're excited about the power savings that it brings. They are excited about the cost savings that it brings. And they've obviously done very well in their networking business, right, over the last couple of quarters. They've really been able to differentiate there.

So I think that depending on the success, and we're obviously super optimistic, I think they're very optimistic about the success, we would expect other people to fall in behind. I mean, Broadcom makes a lot of noise about it with their platform, and they have the ability to deliver a turnkey solution on CPO. We'll see how the landscape plays out.

Got it. So since you mentioned your large customers switch portfolio, maybe it makes sense to touch on OCS, right? Obviously, this is a new TAM for you, relatively new TAM for you, talked aggressively about it 6, 9 months ago. How do you think about your technological road map in OCS versus the incumbent road map? You have -- like Google has their own technology, you're MEMS-based, competitor's liquid crystal, maybe talk through like why you think MEMS -- your MEMS solution is technically the right solution, and as you, two, three customers that are ramping as we speak and will probably ramp aggressively as we move through '26?

Yes. Look, I mean, OCS is an incredibly exciting opportunity for us, right? I think we have not given TAM sizes. There's a third-party data point out there that says it's a $2 billion TAM in 2029. Based on what we see, we can say that, that is way off.

Probably too low.

Way too low. We deploy, as you correctly said, a MEMS-based solution. The one existing OCS that's out there that ships in very, very high volume is also MEMS-based. MEMS has the advantage of being effectively lossless, right? Because it's a mirror. You're basically shining light on a mirror and that mirror is redirecting traffic from one port to another. Remember, OCS is really a traffic management system. It's not a packet-based switch. It's a traffic-based solution. And having no loss is really a key technical advantage.

The opposing camp, there's solutions that are based on liquid crystals, as you correctly said, you're passing light through something, so there's inherently going to be loss. You also have a band dependency, when you're using a mirror, you could operate in any frequency band, any wavelength, you're just moving light around, whereas a liquid crystal is by its definition, going to have to have different SKUs to handle C-band, O-band, whatever it might be. And that again gives us a distinct technical advantage.

The knock on MEMS is the fact that there's moving parts, right, that there's a reliability concern. And the way we answer that is, look, we've shipped these things in telecom solutions for years. They've had to exist under the ground in fiber backhaul networks for 7, 8, 9, 10 years, and they haven't failed. So we think we've got that part of the solution [ linked ], the reliability piece.

Got it. And so when you -- I know you haven't given a TAM, but I think it's my understanding, and I think you might have said this publicly, your initial foray with three large customers sort of mimics or overlaps with your three transceiver customers. Is that fair?

We have not said that but...

Okay. So I'll throw that out. I'll state that with maybe different rank orders in terms of maybe the revenue opportunity within that portfolio versus transceivers.

How do you think about -- so I mean, is it -- is the volume ramp dependent upon the speed at which sort of AI data is driving training environments and then ultimately, inference environments, where bandwidth latency, to your point, is critical.

And so as we see more customers, these three customers that we think are your customers ramp 800G and then faster speeds, 1.6, that is sort of the tailwind to think about how quickly OCS gets deployed in those environments?

I think this is a great situation. I think the limiter on OCS is ourselves, right? The demand numbers that we're seeing from OCS are numbers that we simply can't meet. And so our challenge is building out our infrastructure, our manufacturing capability, the supply chain as quickly as we possibly can.

There are a number of different use cases, as you know. And each of our three customers deploy this differently. You have a TPU, that's really an optical scale up inside a cluster. You have an optical spine switch replacement use case. You have a GPU or XPU kind of protection mechanism, whereby you're trying to steer traffic away from a failing or overloaded GPU. We're shipping to all three of those use cases.

We've given a revenue road map, as you know, David, saying, $10 million, which will be our first real appreciable revenue from OCS, $10 million incrementally in Q1 of this year, ramping to $100 million in Q4 of this year. Our limiter, we could do quite a bit better than that if we could actually make the stuff, right? It's really a limiter again, on the supply chain and our manufacturing capacity.

So maybe I'm not as familiar with what the bottleneck is from the supply chain. Is it manufacturing capacity? Is it substrate? Like is there a golden screw, if you will? Like what is sort of the gating factor that's limiting how quickly you can produce, your partners can produce for you?

Yes. I mean I'd say the long pole is our manufacturing capability. So we're going from a standing start, right? We've never seen demand on our OCS. It's been something that we've sort of had as a science project on the back shelf. We're now making sort of limited production quantities. And to get to the levels that our customers want, we have to get to a whole different set of manufacturing capacity. So we're -- we've already spent the money on the CapEx, it's a matter of deploying it.

The next limiter, there are certain components in the system that are tough to get. The MEMS, back to your point, we are overdriving our MEMS supplier. They've, again, never seen volumes like this. They're not used to this kind of scale.

They're used to the telecom market.

They're used to the telecom market. There's power solutions. We have a very specialized DACs that go into the product to drive the MEMS. It's a voltage-driven MEMS solution. So there's several key components that we need to have come in place as well.

Final question on OCS. So obviously, it comes up in questions, and so I'll run this by you. When you think about MEMS versus liquid crystal, that voltage dynamic that you mentioned, obviously, since you're actually mechanically moving mirrors, how are your customers thinking about that sort of voltage dynamic difference between liquid crystal. I know it's lossless versus not -- with-loss issues, but how is that sort of reconciled by your customers? And how do you think about that dynamic?

Yes. Look, I mean, I think from a competitive standpoint, we've shown, first of all, that we have a pretty appreciable lead on a 300-radix switch. The majority of the deployments are on a high-radix switch. There are some that are 64 by 64, that I would see to our competition. I think they're doing a better job on the lower-radix switch.

The MEMS argument, as we discussed a second ago, is that, that is a concern that comes up over and over again, but we're able to show data that we've had these MEMS-based solutions deployed in the field for 5, 10, sometimes 15 years without any reliability problem. So we're able to overcome that objection pretty quickly with -- on the backs of good data.

Got it. All right. Just in the few minutes we have left, I'll talk about your telecom business, components, obviously, that's a bit different than sort of what it looked like 3, 4, 5 years ago. I think the outlook is considerably stronger. So when we look at the portfolio today, within your component business. What are you most excited about that is not only supportive to the gross margin targets that you're aiming for, but sort of growth rates, maybe not on par with what you're seeing in some of the other parts of the business, but really, where you're seeing sort of a step-up in demand from a component perspective in that vertical?

Yes. I mean it's -- we talked with you and with other people that are involved in the stock in the last earnings call, the other surprise -- we had two big surprises. One has been our ability to increment the EML demand. We talked about that.

The second is just the broad-based nature of the scale-across opportunity, and that's affecting all of those traditional telecom type components, our ROADMs, our pump lasers, our narrow-linewidth lasers, all of these things are seeing unprecedented levels of demand. And it's now -- our traditional telecom customers, Ciena, Cisco, Nokia, these are great customers of ours. They're now -- their customer now has gone from AT&T to Horizon, to Google, to Meta, to Amazon. And they've done a great job really capturing that scale-across opportunity, but we're selling components into that, and that really has been a catalyst for our...

And I know you're the component provider, so this isn't directly kind of in your purview, but like there's a subtle difference between scale across and traditional DCI, right? So in scale across, we're connecting -- effectively your products or -- your components are going into products to connect sort of dedicated links between AI clusters. Is that how you're seeing your -- I mean, you're [indiscernible] from it, I guess, one step.

Yes. But you're right. I mean I think that Kathy used the example of a Venn diagram earlier today. DCI is the large circle and scale across the smaller circle. Specific scale across is, I'm trying to run an inferencing model over multiple sites, right? So you're actually transferring data -- actively transferring data across multiple clusters within multiple sites. And that's the portion of the business that has done super, super well.

And as an outsider looking in, should we view the opportunity set driven largely by kind of the regional distribution of data centers because of power considerations and other sort of nimbyism? And so the more we have, more distributed data center infrastructure that's just a fairly meaningful tailwind for your component business, particularly in scale across?

Yes, 100%. I mean, I think it's driven predominantly by power. I've not heard the term nimbyism, but that is an issue, right, where you're just not going to get these massive data centers in somebody's backyard. And that's been a great tailwind for us. I don't think that, that's going to decrease anytime soon.

Great. So I think -- we're out of time.

Okay.

I want to thank you, Michael, for joining us. Thank you, everyone, for joining, and enjoy the rest of your stay. Thank you.

Appreciate it. Thank you very much.

Good day, everyone, and welcome to the Lumentum Holdings First Quarter 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, and welcome to Lumentum's First Quarter of Fiscal Year 2026 Earnings Call. This is Kathryn 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, particularly the risks set forth in our SEC filings under Risk Factors and elsewhere. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-K for the fiscal year ended June 28, 2025, and in our most recent 10-Q 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 first quarter results and accompanying supplemental slides are available on our website at www.lumentum.com under the Investors section. We encourage you to review these materials carefully. With that, I'll turn the call over to Michael.

Thank you, Kathy, and good afternoon, everyone. In Q1, revenue surged more than 58% year-over-year, while operating margins expanded by over 1,500 basis points. $533 million represents the highest revenue achieved in a single quarter in the company's 10-year history by significant margin. Our growth is powered by AI demand spanning our laser chips and optical transceivers inside data centers as well as the interconnect and long-haul networks that link them. In fact, we estimate that over 60% of our total company revenue now comes from cloud and AI infrastructure, driven both directly by hyperscale customers and indirectly through network equipment and optical transceiver manufacturers that embed Lumentum components in their solutions.

There is a growing convergence between telecom infrastructure and AI data center-driven networking as our customers align traditional network equipment with the needs of intensive inferencing workloads. Having built the company on telecommunication subsystems, Lumentum has evolved into a leading provider of optics for scaling AI compute. On our last earnings call, we projected crossing $600 million in quarterly revenue by the June 2026 quarter or earlier. Today, our Q2 outlook shows that we expect to surpass this milestone well ahead of schedule, with the guidance calling for a revenue midpoint of approximately $650 million, 2 quarters earlier than we previously targeted.

As a reminder, we have identified 3 major drivers of future growth: cloud transceivers, optical circuit switches and co-packaged optics. Of these, within our Q2 outlook, we are not yet expecting meaningful contributions from optical circuit switches and co-packaged optics. In cloud transceivers, we are set to resume sustained growth in fiscal Q2, and this upward trajectory should accelerate over the next 4 to 5 quarters. Before discussing our first quarter results in more detail, I want to address an important change in how we report our financial results. We will now discuss our financials as a single reportable segment, aligning with our current organizational structure.

After several months with the company, I decided to reorganize in order to react more quickly to market and technology changes and move resources to the highest value opportunities. In that context, Wupen Yuen, who many of you know, is now the Head of Global Business Units, owning all product road map decisions. While this shift simplifies our reporting framework, it also gives investors more insight into our numbers by breaking the cloud and networking business down a bit. In that vein, we will provide revenue breakouts in our quarterly reports and commentary for 2 product types, components and systems.

We define components as the individual building blocks that enable larger solutions such as laser chips, laser subassemblies, line subsystems and wavelength management subsystems. Systems in contrast are complete stand-alone products that deliver full functionality to the end customer, including optical transceivers, optical circuit switches and industrial lasers. We provide historical views of those 2 product types in our earnings deck that can be found on our Investor Relations website. Using this breakout, components revenue in the quarter was $379 million, which was up over 18% sequentially and up 64% from the same quarter last year.

Our components products delivered strong broad-based growth across our laser chip, laser assembly and line subsystem product lines, driven by robust demand inside the data center and from data center interconnects and long-haul applications. We achieved another record in EML laser shipments, driven primarily by 100-gig line speeds and supported by an increase in 200-gig shipments. We also initiated CW laser deliveries for 800-gig transceiver manufacturers, marking an important milestone in our product road map. As we've shared before, our indium phosphide-based wafer fab has been fully allocated due to robust customer demand. However, I'm pleased to report that we have made better-than-expected progress on yields and throughput and now see line of sight to add approximately 40% more unit capacity over the next few quarters, setting the stage for calendar 2026 to be another breakout year for laser chip shipments and solidifying our leadership in indium phosphide-based light sources for the data center.

Although still small in absolute terms, we saw sequential growth in our ultra-high power laser shipments as we continue the initial phase of our production ramp. we still expect a significant increase in shipment volumes in the second half of calendar 2026 as adoption continues to accelerate, and we are seeing opportunities to expand our customer base. We are seeing strong sustained momentum in our data center interconnect or DCI components, which support not only optical links within campuses, but also connections spanning up to 100 kilometers in scale across architectures. Shipments of our narrow line width laser assemblies for DCI transmission grew for the seventh consecutive quarter, rising over 70% year-over-year, demonstrating both robust market demand and our continued success in scaling manufacturing capacity.

Shipments of our line subsystems for data transport also delivered strong sequential and year-over-year growth, benefiting from the same macro trend. We also saw sequential and year-over-year growth in coherent components for long-haul data transmission and achieved a record quarter for pump lasers supporting subsea and terrestrial networks. Finally, we saw a sequential rise in 3D sensing products, consistent with the seasonality of a new smartphone launch. Even in our Q1 historically peak shipment quarter, these products contribute less than 5% of total company revenue, underscoring that the broad strength of our components portfolio is driven almost entirely by the accelerating global build-out of cloud infrastructure and highlighting Lumentum's essential role in powering that expansion.

In Systems, revenue was $155 million, down 4% sequentially, but up 47% year-over-year. Cloud transceiver revenue was roughly flat to the prior quarter as we used the quarter to increase manufacturing capability in Thailand to meet increasing customer demand. From this point forward, we expect to see the end of the fits and starts in production capability we have experienced in this product area, and we now forecast a period of sustained revenue growth.

Our guidance into Q2 provides our first proof point that as new 800 gig and 1.6T products ramp in future quarters, we expect to see the revenue layering benefits that our larger transceiver competitors have experienced. Our initial ramp of optical circuit switches from Thailand is progressing well, and we remain on track for a rapid acceleration in manufacturing expansion over the coming quarters. As expected, we saw a sequential decline in industrial laser shipments, reflecting the continued softness in the broader industrial market.

Looking ahead to the fiscal second quarter, we expect approximately half of our sequential revenue growth in absolute dollars to come from our components products, driven by broad-based strength across product lines serving cloud applications. The other half is expected from our systems products serving cloud customers, primarily reflecting the ramp of high-speed optical transceivers for data center applications and to a lesser extent, the early phase of our optical circuit switch ramp. As I highlighted at the start of my remarks, we are only at the beginning of our growth journey in cloud and AI infrastructure. Lumentum story has many chapters ahead, and we are entering a period of sustained expansion, fueled by the accelerating adoption of AI and the optical technologies that enable it.

Our components products will remain the cornerstone of both revenue growth and profitability, while our systems products are scaling rapidly with cloud transceivers, optical circuit switches and other high-performance solutions. With expanded manufacturing capacity and the ramp of new products, we are confident in our ability to drive continued top line growth, margin expansion and long-term shareholder value. Now I'll hand the call over to Wajid.

Thank you, Michael. First quarter revenue of $533.8 million and non-GAAP EPS of $1.10 were at the high end of our guidance ranges. GAAP gross margin for the first quarter was 34%, GAAP operating margin was 1.3%. GAAP net income was $4.2 million and GAAP net income per share was $0.05. Turning to our non-GAAP results. First quarter non-GAAP gross margin was 39.4%, which was up 160 basis points sequentially and up 660 basis points year-on-year due to better manufacturing utilization and favorable product mix as a result of increased data center laser chip shipments.

First quarter non-GAAP operating margin was 18.7%, which was up 370 basis points sequentially and up 1,570 basis points year-on-year, primarily driven by revenue growth in components products. First quarter non-GAAP operating profit was $99.8 million and adjusted EBITDA was $127.6 million. First quarter non-GAAP operating expenses totaled $110.5 million or 20.7% of revenue, an increase of $1.2 million from the fourth quarter and an increase of $10.1 million from the same quarter last year. This year-over-year growth reflects annual employee cash incentives tied to company performance, along with ongoing investments to scale our operations in support of expanding cloud opportunities.

Q1 non-GAAP SG&A expense was $41.5 million. Non-GAAP R&D expense was $69 million. Interest and other income was $3.7 million on a non-GAAP basis. First quarter non-GAAP net income was $86.4 million and non-GAAP net income per share was $1.10. Our fully diluted share count for the first quarter was 78.3 million shares on a non-GAAP basis. During the first quarter, our cash and short-term investments increased by $245 million to $1.12 billion. Our cash position benefited from a convertible notes transaction completed during the quarter, which contributed $306 million in net proceeds. Our inventory levels increased sequentially to support the expected growth in our cloud and AI revenue.

In Q1, we invested $76 million in CapEx, primarily focused on manufacturing capacity to support cloud and AI customers. Turning to revenue details. First quarter components revenue at $379.2 million increased 18% sequentially and 64% year-on-year. Our first quarter systems revenue at $154.6 million was down 4% sequentially and up 47% year-on-year. Now let me move to our guidance for the second quarter of fiscal year '26, which is on a non-GAAP basis and is based on our assumptions as of today. We anticipate net revenue for the second quarter of fiscal year '26 to be in the range of $630 million to $670 million. The midpoint of this range would represent a new all-time quarterly revenue record for Lumentum.

Our Q2 revenue forecast reflects the following expectations: Components expected to be up sequentially with strong growth across our portfolio of products addressing cloud and AI applications and systems to also be up sequentially with strong growth from cloud transceivers and progress in the early phases of our optical circuit switch ramp. We project second quarter non-GAAP operating margin to be in the range of 20% to 22% and diluted net income per share to be in the range of $1.30 to $1.50. Our non-GAAP EPS guidance is based on a non-GAAP annual effective tax rate of 16.5%. These projections also assume an approximate share count of 83.5 million shares. With that, I'll turn the call back to Kathy to start the Q&A session. Kathy?

Thank you, Wajid. [Operator Instructions] Now Kevin, let's begin the Q&A session.

[Operator Instructions] Your first question comes from the line of Samik Chatterjee with JPMorgan.

Just making sure. Can you hear me?

Yes, we can hear you.

Sorry, getting used to the new system. So thank you, strong results. Congrats on the outlook as well. Maybe on the transceiver side, high confidence in relation to sustaining that growth going forward, and you're calling for a pretty sizable growth into the next quarter as well. Maybe just talk a bit about what's driving that confidence, maybe more in addition to the capacity ramp that you talked about? Is there more diversification on the customer front as well. That's giving you visibility into that consistent growth? And what's in particular driving the strong increase of about $60 million or so, I think that's what you're guiding to for the quarter-over-quarter sort of into the next December quarter? And I have a follow-up.

Yes, this is Michael. I think we've highlighted this for the last couple of quarters. Our improvements in execution is beginning to bear fruit. If you remember, we said that we've been really missing the front part of customer ramps due to some execution challenges. And that seems to have corrected off where we now are participating in the very early part of customer ramps. We have expectation to be shipping 1.6T transceivers sometime middle-ish of next year. and those will be at the early part of the customer ramp as well. So for the first time, we're getting this layering effect where we're not seeing a dip in revenue as we sort of see one cycle ramp down and the next one ramp up. We're getting this layering effect that I talked to in the call. That's predominantly with our largest customer, but we are seeing revenue from the 2 customers that we've talked about previously as well. But pretty much the majority of all of this is coming from our largest customer.

Got it. Got it. And for my follow-up, Michael, you talked about the 40% increase in capacity for datacom chips. Wondering if you can just help me think through what that means on a revenue basis? I would assume the mix would tilt more towards 200-gig EMLs, but what is generally the plan in terms of usage of that capacity? And how should we translate that maybe into terms of what it means for revenue increases?

Yes. I think you have 2 effects, and those 2 effects will ultimately layer on top of each other. One is just the raw output, and we'd expect to see this 40% increase over the next couple of quarters. But then to your question, we also see a second effect, and that is that the 200 gig lasers will start to layer in. We talked about shipping 200 gig lasers in the last quarter. There's more in the guide. We'd expect to see about 10% of our mix in the early part of 2026, calendar 2026 be from 200 gig lasers. So you're going to get those 2 effects now sort of adding to one another, the fact that our capacity is increasing. And then the second issue is the fact that we would expect to see 200-gig lasers become a much more meaningful part of our mix in calendar 2026.

Kevin, I think we'll take our next question.

Your next question comes from the line of Ryan Koontz with Needham & Co.

I wanted to ask about the continuous laser output, how -- that's a new product for you, how you think about that market opportunity. Is that something you're targeting for your own optical transceivers and what sort of customers lined up for that?

Yes, Ryan. I mean, we've talked about the CW lasers for a bit here. We have a 70-millowatt CW laser that really started meaning shipping in this quarter will be a reasonable part of our mix next quarter. We've characterized that as sort of a pipe cleaner, shipping to other customers in an effort to eventually bring CW lasers into our own transceivers. So we have a 100-millowatt CW laser that we'd expect. We're actually sampling it this month. We'd expect to be in full production in the middle of the year of 2026. That 100-millowatt CW laser is what we're going to use really in our internal transceivers. So as we've stated in previous discussions, we'd expect to be manufacturing the CW laser specifically to use it in our own transceivers, and that should happen sometime second quarter-ish of calendar 2026.

That's great. Exactly what I was hoping to hear. So -- and then shifting gears maybe to narrow line width lasers for the DCI element. Is that a different set of competitors? Obviously, a different set of customers, but can you kind of educate us a little bit on the competitive environment for the narrow linewidth lasers for Coherent?

Yes. I'll maybe give some comments and then throw it to Wupen. We are -- we have very strong market share here, right? I think our competitive landscape is more limited perhaps in this area than many of those we participate in. To your point, Ryan, the customer base is different. These are more of the traditional telecom guys that now have shifted and pivoted their business toward the hyperscalers. And so we're providing solutions to all of those guys in our narrow linewidth offering. But we have, Wupen correct me if I'm wrong, very, very high market share there and a strong competitive position.

Yes. Thank you, Michael. I think that's definitely true. I think that's a business we've had for the last 10, 15 years as a company. And then the challenge that laser capacity is not easy. And we have actually mastered that over the last 10 years or so. And you can see our continued progress in our revenue quarter-over-quarter. We're strongly positioned there. We do see some competition there, but again, the technology is going to be difficult. So we expect we're going to continue the strong market share position going forward.

Your next question comes from the line of Mike Genovese with Rosenblatt Securities. Mike, your line is open. Please go ahead. You may have to unmute yourself.

So as you increase indium phosphide capacity, the output of that, how should we think about the split between that going into components or that going into systems? Like what's the framework there?

Yes. No, the vast majority of our output will be sold into the external market. We are shifting our mix toward 200-gig EMLs. Wupen has been in the middle of that. And as I said, about 10% of our mix in the first quarter of calendar 2026, the March quarter, we'd expect to see at 200 gig. We will continue to sell the majority of our capacity out to external customers. The small amount of capacity that we've allocated to CW lasers just to prove that we can do it and as I say, pipe clean a little bit, we will probably end up reallocating that to internal consumption. And that percentage, again, is relatively modest, right? We'll sell most of our capacity into the external market.

So I guess given that, and I realize this is a tough question to answer, but $1.40 outlook for EPS at the midpoint, it's a really impressive number. But it also -- could it even be higher I mean if we've got a really high-margin product leading to growth?

Yes. Look, I mean, we feel like we have a very dominant position here. I think in our last call, we talked about being sold out. That is absolutely the case. The demand far exceeds even as we continue to add laser capacity, demand is far outstripping our ability to supply. And so our challenge right now is making these allocation decisions. We're trying to allocate the capacity to the highest dollar value components we have and the highest margin components we have to your point, Mike. And that in order is 200-gig EMLs, 100-gig EMLs and then CW lasers for internal consumption. And we're going to mix as much as we can to 200 gig. The demand is certainly there. 100-gig EMLs. We're going to continue to allocate as much as we can to that. And then to the extent we can cleave a little bit off to improve our transceiver business, we'll do that as well.

And Mike, just -- it's Wajid here. Just to add a little bit to that. So that 40% increase in indium phosphide capacity is focused on laser chips, which has, as you know, higher gross margins than many more of our other product lines. So as that flows through in the coming quarters, that will have a positive effect on our earnings per share. What you're seeing this quarter is without that increased capacity and increase gross margin contribution from the indium phosphide capacity we talked about in our prepared remarks.

Your next question comes from Christopher Rolland with Susquehanna.

So congratulations, particularly on the guide, that was -- that's pretty incredible. And congratulations to Wupen couldn't have happened to a smarter guy. But in terms of the transceivers and that market, it's my understanding that 102 switches are not really ramping until next year. In fact, they won't have like qualified ASICs in a box until early next year. That's the precursor to qualifying 1.6T transceivers. So perhaps for Michael, as you see this playing out, I guess my first question is, are you going to strategically use your -- what seems like market-limited EML supply to drive new customers and new qualifications on the transceiver side. It sounds like maybe yes. And secondly, on the EML side, as in the first half of the year, would you expect customers to stockpile these ahead of these qualifications? Is this something that you see in the first half even before 1.6 starts ramping?

Yes, Chris, first, thanks for the kind words, and I fully agree. Wupen is the smartest guy in the industry. We're very lucky to have them. Look, a couple of remarks. Maybe first on the last piece of it, which is the stockpiling for right now, what we're seeing happen is demand, as we said on the last call, is far outstripping supply. Even as we add this extra capacity, we're in a situation where we are making allocation decisions almost on a daily basis. And it's really putting a lot of strain both on the business unit and on Wupen as we try to make those calls.

In that regard, honestly, Chris, we're actually probably shedding customers rather than adding. We're trying to make our bets on the folks that we think are going to be good partners. We've gone out and worked a series of long-term agreements and the folks that are willing to step up and help us, we really want to help them. And so what we've actually tried to do is maybe counter to your question a bit, and that's consolidate supply and consolidate our customer base around a couple of folks that we think are going to be long-term winners. Those customers in return have given us multiyear commitments that give us a lot of confidence that our business is going to be sustainable even as we continue to ramp capacity through the next probably 6 or 8 quarters. So that's kind of the dynamic. Do you want to speak a little bit about 200 gig and the dynamic there because not all of it is 1.6T.

Correct. Thank you, Michael. Again, thanks for the comments. I really appreciate your kind words as well. So on the 1.6T front, right, you're correct, 102.4 switch until really, I would say, late Q2 next year calendar. And today, applications are actually mostly to the customers or through the customers who do not rely on that switch to take place. And there are 2 customers today can use the 200-gig EMLs optics in their systems today. And certainly, I think you have a good point there that are we going to leverage our laser supply position to increase our 1.6 module opportunities. We will say that the customer already know that we have such a laser in our portfolio. And therefore, I believe that they will have thought about it when they engage us on the module side. But again, like Michael said earlier, we will allocate our laser capacity based on the profitability metric more than to try to broaden our transceiver opportunities in 1.6T using our laser.

Very helpful, Wupen. And back to you, Michael, at OFC, I remember you were somewhat reticent to put on more indium phosphide capacity. And so as I think about the industry more largely, ,competitors are ramping 6-inch indium phosphide kind of as we speak. And it does seem like the early market is going to be for EMLs here, which are a large die because you put the modulators on there. But as we move to CW, it's a smaller die. And I'm just wondering do you think we might end up in an overcapacity situation, particularly when we -- competitors ramp and eventually we move to SiPho and CW. And what do you think the timing might be around that? And just putting all of this together into your decision to put more capacity on, what made you change your mind?

Yes. I mean, look, I think there's a couple of things, Chris. One, we're actually been able to squeeze more out of the capacity we have and the remarks that we had in the prepared remarks, we talked a lot about improvements in throughput and improvements in yield. And that's really what's helped us. We are still transitioning between our 3-inch and 4-inch. We made a decision to really focus on 4-inch as a sweet spot here at least in the near term. And that's what's led to most of the improvements you can see here. So we've not put a lot of additional capital into our fabs to expand output, that's number one.

Number two, I think on the battle between CW and EML, it appears to us that CW is going to ramp with 1.6T but so will EML. And so the slope of the 2 ramps was hard for us to call but it looks like no matter how you slice it, the numbers will increase. So even if the mix shifts away from EML-based transceivers at 1.6T, the absolute numbers seem to be stratospherically high. And at least in the near term, we see no end in sight. We watch it every day, Chris, just like you're sort of cautioning but I think for the next 6 quarters, we're completely sold out, and we have long-term agreements, as I said, that we've worked out with our customers to ensure that they're going to take any capacity -- that the additional capacity we've got online. So we obviously think about it every single day, but I'd have to say, right now, our concern is not when will this roll over. It's how do we get and service the customer base that we have and the demand profile we're looking at.

And just one last comment in addition to what Michael said, right? The capacity we have in place are interchangeable between lasers and EMLs. No matter how the market share of these lasers change over time, we're able to serve the overall market. So that's also part of our investment decision in fab and kind of implementation decision along the way.

Yes. understood. Thank you guys, good strategy and congrats.

Thanks, Chris.

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

I wanted to first ask about the OCS opportunity. I know you said that it's currently a fairly small market. But coming out of the ECOC show, it certainly sounded like the industry as a community was more upbeat. And I've heard second or third hand that you've suggested that this could be $100 million by your December '26 quarter. Now I don't know that, that's true. So I wanted to hear directly from you how you see this market evolving? And then I've got a quick follow-up.

Yes, Simon. Look, I would say, if anything, our confidence has increased that we will ramp through the calendar year to that $100 million a quarter target in December of 2026. Our engagement level with customers on this product is super high. Wupen and I are spending probably more time in this product category than any other. The number of use cases we're seeing coming from customers and potential customers is growing. And the virtues that you and I have talked about on a number of different occasions are really playing forward. So we are -- make no mistake, we are more confident in this market than we were probably last quarter at this time, and that confidence is building every single day.

And then just as a follow-up, in the prepared remarks, you described the outlook for the December quarter as broad-based improvement. I would like to see if you could rank order, what does the biggest dollar increase come from sequentially in December versus September relative -- thinking about the datacom transceivers, the telecom devices, the datacom chipsets, where is the biggest dollar contribution coming from in your forecast?

Yes. Look, this is broad-based. I mean I think the thing that probably caught us flat-footed is the width of the customer demand. It's touching everything. We talked about pump lasers. We talked about narrow linewidth. We talked about the transceivers. We talked about even coherent components. So it is very, very broad-based. And every single one of our segments is up. Every single one of our segments is contributing to the growth that you see. If I was to specifically answer the question, Simon, I would say it is the transceivers. The transceivers are coming off the mat. We had, as we characterized, I think in the prepared remarks, fits and starts of the transceiver business. We finally see that turning a corner.

I think last reported quarter, we got back to the level that we had when we bought Cloud Light in the guide, that number is up significantly. But the thing that we expected people to ask is just given not only exceeding $600 million, but doing so by a pretty wide margin in the guide, we had expected more questions on, hey, what happened here? Why are you guys so surprised? And what really did happen was just the width of the demand that we saw -- and our ability to service it, quite frankly, our execution has improved. I think Wupen's team has done a really, really good job getting in there and figuring out how to deliver these products. As we think about the forward look, that's going to be a challenge. Supply chain will be a big challenge. But it is -- has been a surprisingly, surprisingly broad-based demand signal.

Next question comes from the line of Papa Sylla with Citi.

Congrats on the very strong results. I just wanted to kind of -- it was asked differently, but I just wanted to double check on the supply-demand imbalance for EML specifically. I think it's very clear kind of demand is running ahead of supply. But I guess, how would you characterize the supply-demand this quarter versus last quarter, for instance? I understand you kind of increased investment and yield improve. But on the other side as well, it seems like CapEx is going up across the board. Just if you could help us understand kind of how has that balance changed from last quarter to now?

Yes. I mean I'll have Wupen give some color, pop-up. But I would say the following. I mean, in our -- in the guide our supply is going up more than 10%. So we definitely have some pretty good additive supply even into the guide. What I'd say, though, is the demand signal has -- the demand supply imbalance has increased. Last quarter, I think we characterized it as roughly a 20% shortfall relative to total customer demand even with this add, even with the add in supply, I would say that number has increased to 25% to 30%. We are quite a bit short right now relative to the customer demand. And again, we'll kind of have you talk to it a bit, right? You're making bets on who you think is winning and trying to consolidate through LTAs and other vehicles who our customer base will be as we look out in the next 6, 7 quarters.