Lumentum Holdings, Inc. Aktie

Good morning, and welcome to Marvell's conference call to discuss the proposed acquisition of Lumentum. [Operator Instructions] Please note this event is being recorded. I will now turn the conference over to Mr. Ross Seymore, Senior Vice President of Investor Relations. You may begin.

Good morning, everyone, and thank you for joining us. Earlier today, we announced an agreement for Marvell to combine with Lumentum. To discuss this announcement, I'm joined on the call by Matt Murphy, Marvell's Chairman and CEO; Dan Durn, Marvell's Chief Financial Officer; and Michael Hurlston, Lumentum's CEO.

A press release and supplemental information, including an investor presentation about this transaction are available on the Investor Relations section of our website. Please note that we will be referring to certain pages in this presentation during our call today. This conference call is being webcast live, and a recording will be available via telephone playback and also archived on the Investor Relations section of our website.

As a reminder, today's call will include forward-looking statements, including statements about the expected benefits, timing and financial impact of the transaction, expected synergies, accretion, market opportunity, customer adoption and product development. These statements include risks and uncertainties that could cause our actual results to differ materially from the statements made on this call.

Please refer to today's press release and each company's most recent filings with the SEC, including Forms 10-K and 10-Q for information on specific risk factors. Unless otherwise noted, financial figures discussed today are non-GAAP. We ask that you focus your questions on the transaction in the Q&A section as we will not be addressing current business conditions or other topics. So with that, I'll turn the call over to Matt.

Thank you, Ross, and good morning, everyone. Today, we are pleased to announce that Marvell is combining with Lumentum, a leading provider of photonic technologies. We at Marvell have been on a decade-long journey to build a strong position in the core technologies powering the AI industry, creating tremendous value along the way. This transaction marks a defining next step in that journey.

We believe an opportunity like this comes along once in a generation. By combining the 2 companies, we expect to define and become a category leader for the next generation of AI connectivity. I could not be more excited about this opportunity. As you can see on Slide 6 and 7, Marvell and Lumentum are 2 of the fastest-growing scaled AI enablers in the industry. And together, we form a category leader in AI connectivity.

We believe our complementary technology portfolios, deep domain expertise and world-class engineering talent will accelerate innovation and drive meaningful long-term growth. Combined, we will be the pure-play leader in the optical connectivity industry, significantly greater in scale than the next largest competitor. Zooming out, we expect the combined company to become 1 of the top 5 largest AI infrastructure semiconductor companies.

The strategic alignment of our 2 companies is remarkable. The product portfolios are highly complementary, and we share a common foundation built on engineering excellence, innovation and an unwavering commitment to our customer success. We believe that after the transaction closes, the combined enterprise will be extremely well positioned to solve some of the most critical challenges in the AI data infrastructure industry, a market that we believe represents 1 of the most significant technology investment opportunities.

I'm also thrilled that upon close of this transaction, Michael and 2 other members of the Lumentum Board will join the Board of Directors. Michael has guided Lumentum through exceptional growth and transformation since he joined the company, and I have seen firsthand the quality of the organization and the depth of its engineering and business culture. That experience gives me strong conviction in this transaction and in the future success of the combined company.

Now let's move on to Slide 8. The AI infrastructure industry is at an inflection point. Over the past decade, Marvell has built, integrated and invested in the capabilities to be at the forefront of the electrical to optical transition. We had the foresight to see where the industry was heading and aggressively invested in positioning ourselves to capitalize on the growth opportunities ahead. This included building 1 of the industry's largest engineering teams for electrical and optical connectivity.

By combining with Lumentum, we will become 1 of the largest and most strategic optical and photonic engineering organizations in the world. The operating scale resulting from this combination will significantly increase our ability to innovate and invest in next-generation solutions for our customers. Over the next decade, as AI infrastructure scales at an unprecedented pace, we believe connectivity is becoming critical to solving the top 3 bottlenecks in AI data centers: performance, bandwidth and energy efficiency.

Rapidly growing bandwidth requirements and the physical limitations of copper-based connectivity are accelerating the transition towards optical technologies. We believe the next decade of networking will be defined by optics, just as electrical SerDes defined the previous era. As AI infrastructure scales to increasingly complex architectures, particularly scale-up and scale-in, we see the industry shifting from discrete modular components towards highly integrated optical solutions that require much closer co-design of electrical and optical technologies to deliver greater bandwidth, performance and energy efficiency.

In fact, what's really needed is an extreme co-design, which is why we believe that now is the ideal time to do this combination. This transition to next-generation architectures is still in its early stages, but it's clear this is truly a once-in-a-generation opportunity to define and lead the AI connectivity category. This is why we are acting now as scale-up begins to ramp next year. The optical content opportunity in next-generation architectures is expected to be significantly larger than scale-out.

Upon completion of the transaction, we estimate that our combined total addressable market will expand to $550 billion by 2030, and we believe the combined company will be well positioned to capture a greater share of that significantly larger opportunity. Slide 9 puts this combination in the context of Marvell's broader track record of creating value. For more than a decade, Marvell has systematically built its business through a combination of organic innovation and disciplined strategic acquisitions.

Our M&A efforts are anchored by 4 pillars: strategic foresight, world-class integration, being a destination for talent and robust value creation. We have successfully integrated a series of significant acquisitions, bringing together complementary technologies, products and teams to strengthen our competitive position each time. Now simply acquiring a company does not create value. It is our relentless focus on aligning to the right themes, integrating effectively and investing in the businesses we acquire that drives meaningful and lasting value creation.

We have established a proven track record of identifying major industry transitions, making decisive acquisitions and then investing to build much larger businesses. To illustrate that point, let me take you back to the acquisition of Inphi. We saw the transition from NRZ to DSP-based optical connectivity and scale-out networking, acquired Inphi at the right inflection point and invested with conviction to scale the business.

That business is on track to grow by over 10x from the time we announced the transaction to this year, and we expect significant growth continuing. Fast forward to today, we believe another architectural shift presented by scale-up and scale-in networking is creating an inflection of even greater magnitude and positions us to create enormous value for our stockholders.

Marvell has a strong track record of integrating leadership and engineering talent from acquired companies with executives from those organizations taking on significant roles in shaping and leading the business. Lumentum brings exceptional expertise in compound semiconductors, optical technologies and advanced manufacturing that we believe will further strengthen the combined organization. We look forward to welcoming the Lumentum team to Marvell after closing.

Our acquisition strategy has helped build a leading technology platform, expand our addressable market and create substantial shareholder value. You can see from the chart, our stock price has appreciated very significantly over the last decade, reflecting the compounding impact of our M&A and organic execution since I became CEO in 2016. Okay. Now let's turn to Slide 10.

This transaction is about bringing together Marvell's connectivity capabilities with Lumentum's photonics expertise to create a category leader in AI connectivity for the era of integrated optics. We believe this new era requires end-to-end extreme co-design between the XPU, switch and the entire electrical to optical signal chain. As we will discuss in subsequent slides, we believe the customer benefits of this move to integrated optics are fully optimized when all of these critical technologies reside under 1 roof.

Now turning to Slide 11. Both companies address large and compelling TAMs independently. But as the teams began to compare our opportunity sets, it became clear that the combination would result in an opportunity together that is far larger than the sum of its parts. As a result, we expect a combined TAM of $550 billion in 2030 with the majority of the incremental upside coming from NPO and CPO.

And importantly, we believe that we can capture a greater share of this opportunity. For all these reasons, it's clear to us that now is the time to join forces and take advantage of this generational opportunity. Now let me turn the call over to Michael to go deeper into this technological inflection point. With that, Michael, over to you.

Thank you, Matt, and good morning, everyone. Before I begin, I want to thank the Lumentum team whose extraordinary work made today possible. Before I dive into the slides, let me provide some high-level perspective for the Lumentum side. Lumentum has built its reputation on being equipped to solve the toughest optics challenges in support of our customers' most demanding requirements.

As the industry moves toward highly integrated optical solutions, we recognize that delivering increasing levels of technical difficulty requires unprecedented scale and capability. When we looked at Lumentum's path forward, we considered all the options available to us, including continuing to execute as a stand-alone company and potential acquisition targets of our own. What became clear through that process is that a combination with Marvell stands in a category of its own.

As Matt alluded to earlier, the market is sending us a strong signal that the next wave of explosive growth in AI connectivity cannot be satisfied solely by discrete point solutions. The copper wall is shifting. Optical interconnects are pushing closer to the compute, creating the greatest opportunity yet in scale-up and scale-in networking. Today, we at Lumentum are delivering clear proof of this market momentum.

We are announcing our second major NPO and CPO win, a massive milestone that we expect to generate over $5 billion in revenue. We believe that this win demonstrates exactly why this combination works. By bringing together Marvell's world-class semiconductor platform and digital design depth with Lumentum's industry-leading optical capabilities, we believe that we can deliver fully integrated solutions spanning the entire optical and electrical signal chain.

In addition, Lumentum's hyperscaler relationships are exceptionally strong. We are recognized across the industry as the premier indium phosphide laser and optical switching provider. Paired with Marvell's deep architectural intimacy and trusted top-to-bottom presence within these same accounts, this combination creates an unrivaled partner for our customers.

Marvell engages customers years ahead on architectural road maps. This gives Lumentum additional visibility, creating a time-to-market advantage, positioning us to win earlier, scale faster and solve the most challenging customer requirements first. Today, hyperscale customers stand on the cusp of adopting scale-up optics, an architectural leap where high-volume manufacturing paired with world-class device performance is paramount.

As optics and silicon rapidly converge, we see customers demand unified solutions from partners capable of executing at scale-across both R&D and manufacturing rather than navigating a fragmented supply chain. By combining, we expect Lumentum's optical capabilities together with Marvell's digital design depth to provide a more complete offering for next-generation challenges, supported by an expanded R&D engine and global manufacturing footprint.

Turning to Slide 12. Let me give more details on why this combination makes sense for Marvell and Lumentum from a technology perspective. I'll start with how the landscape in data center interconnectivity is changing. While optical links already connect data centers and AI racks, intra-rack, intra-tray and intra-package interconnects still depend on copper.

As next-generation XPUs power larger clusters and heavier inference workloads, copper reach degrades rapidly, creating a physical barrier known as the copper wall. Bypassing this barrier requires optical connectivity to move progressively closer to the compute engine, effectively shifting the copper wall to the right. With each shift, data bandwidth requirements increase by an order of magnitude.

Scale-out links already carry 10x more bandwidth than traditional scale-across data center links. Today, leading customers are on the verge of deploying scale-up optics which carry another 10x increase in bandwidth over scale-out. Furthermore, we are actively collaborating with customers on next-generation scale-in optical solutions that we expect will drive yet another 10x increase over scale-up distances.

While traditional pluggables excel and scale-across and scale-out networks, the exponential data bandwidth requirements of scale-up and scale-in require tightly integrated co-packaged optics to maximize performance and power efficiency. Following the closing, we expect the combined organization to bring expertise required across all 4 distance domains: scale-across, scale-out, scale-up and scale-in.

Turning to Slide 13. Scale-across and scale-out are the primary optical links deployed today, representing large established markets served largely through pluggable modules. In scale-across, the market is vertically integrated with Marvell as a key module supplier and Lumentum as a key supplier of pump lasers and narrow linewidth laser assemblies. Marvell also supplies coherent DSPs as a merchant supplier to competing module makers.

In scale-out, both companies supply key building blocks to the module ecosystem. Marvell provides DSPs, drivers and TIAs, while Lumentum supplies laser light sources, modulators and photodiodes. Additionally, Lumentum manufactures premier scale-out transceivers tailored for high-speed customer-specific applications. Because our solutions are highly complementary, as illustrated in the block diagrams, we plan to maintain our existing go-to-market model, offering best-in-class components and systems while supporting the entire ecosystem.

Uniting our companies enables us to jointly optimize every link in a signal chain, integrating lasers, photodetectors, DSPs, TIAs, drivers and silicon photonics to enhance performance across established applications. Our joint engineering will unlock lower power consumption, expanded link budgets and superior performance at every speed generation alongside meaningful COGS synergies across our operating model.

As we look further ahead to the scale-up market, while customers are evaluating CPO solutions for enabling the lowest power and latency per bit, they are in parallel adopting NPO solutions to accelerate the adoption of optics inside the rack. We believe the combined company will be well positioned to help drive the transition to scale-up NPO with a full suite of components, which can be further optimized collectively to work better to deliver a superior solution to our customers.

Turning to Slide 14. As I mentioned, scale-up and scale-in represent the next frontier, but the requirements here are significantly more demanding. Bandwidth density in these architectures is orders of magnitude higher than scale-out while simultaneously needing lower latency and lower power per bit while mitigating thermal constraints in the design. These requirements cannot be satisfied by traditional pluggable solutions.

Instead, optics needs to be integrated very close to the XPU and switch. This can ideally be achieved by careful co-design of electrical and optical technologies, including the light source itself. This is the extreme co-design that Matt was referring to earlier. Success in CPO for scale-up and scale-in requires simultaneous best-in-class performance across multiple domains, including high-speed SerDes, analog TIAs and drivers, silicon photonics and lasers.

While customers can try to source these independently from multiple suppliers, Lumentum and Marvell believe the performance of the solution will be dramatically better with a faster time to market if it's co-architected and delivered by a single supplier. This is why we believe now is the time for this combination. We believe the combined company's ability to offer fully co-designed pre-validated optical engines at scale is truly a significant competitive advantage.

Importantly, the content in these integrated systems featuring NPO and CPO is expected to be significantly higher than scale-across and scale-out today. This reinforces the once-in-a-generation opportunity that Matt was talking about earlier, and I fully believe that the combination of Lumentum and Marvell will define and lead this new era. With that, I'll turn it back to Matt.

Great. Thanks, Michael, for outlining those truly compelling opportunities. Now let's talk about switching on Slide 15. The combination also creates a comprehensive electrical and optical switch platform, and it makes us uniquely capable of addressing both network and optical switching architectures.

In the electrical domain, Marvell offers a complete portfolio of Ethernet switches for scale-out networking complemented by new products for emerging scale-up networking. Lumentum has become a key provider of MEMS-based optical circuit switches, also known as OCS, which are increasingly being adopted by customers to augment their network switching architectures for additional resiliency and reconfigurability.

The key takeaway is that in upcoming AI data centers, network and optical circuit switching are expected to coexist, provide complementary capabilities and each deliver strong growth. We expect this expanded technology portfolio to make the combined company switch topology agnostic with the breadth to address a wide range of customer architectures. As AI infrastructure continues to evolve, we believe that flexibility will become increasingly valuable to the customers we serve.

Next, let's move to Slide 16. At our Investor Day last month, we discussed how the industry is moving beyond silicon alone. The next generation of connectivity depends on heterogeneous integration, combining CMOS, silicon photonics, silicon germanium, indium phosphide and gallium arsenide in a single system or package.

Each material contributes something different to achieve performance that silicon alone cannot deliver. The result is a platform designed to be fully integrated, process-agnostic and future-proof. Upon closing with Lumentum's indium phosphide and gallium arsenide VCSEL capabilities, we expect our combined portfolio to span all these materials co-integrated in system and package to give us the ability to design and optimize every layer of the solution as customers' connectivity needs evolve with a fully heterogeneous integration capability that no single company has been able to offer before.

Now turning to Slide 17. We touched on this earlier, but this slide emphasizes that we expect the combined company to have the broadest and most comprehensive AI connectivity platforms in the world, enabling the ability to deliver end-to-end extreme co-designed, customer-optimized solutions across every distance and topology. More importantly, this combination will create the largest and most comprehensive engineering teams to define the AI connectivity solution of the future.

Okay. Let's turn to Slide 18. In order to leverage our combined and sizable connectivity portfolio following the closing, we will also need significant production scale. On the Marvell side, we have long-standing and highly complementary relationships across the semiconductor supply chain from substrate suppliers to leading-edge foundries, advanced packaging specialists and everything in between.

While we are technically fabless, we have been investing in CapEx into our supply chain to build production lines dedicated solely for our demand. To be a leader in this market, you have to invest and control your own destiny. These partnerships will not change with this combination, but we expect the combined company to have a larger presence to further strengthen its ability to meet the significant growth in demand for AI connectivity we expect over the next decade and beyond.

We intend to continue to work hand-in-hand with our supply chain partners, investing multiple billions of dollars to ensure we have continued access to the capacity necessary to deliver on the production commitments made to our customers. And Michael, can you please comment on the Lumentum side?

Thanks, Matt. Lumentum owns the world's largest indium phosphide manufacturing footprint. Indium phosphide is a compound semiconductor that can naturally emit and absorb light efficiently, which standard CMOS simply cannot do. Making high-performance lasers with field-proven reliability requires highly specialized fabs, proprietary fabrication techniques and deep packaging know-how that have been developed and refined over decades.

These lasers are key enablers of the shift to NPO and CPO. It is not practical to replicate this capability as a fabless company. It requires intimate integration of material science, fab processes and systems level engineering. Lumentum owns and operates a significant footprint of specialty indium phosphide fabs, giving us 1 of the scarcest and strategically valuable manufacturing capabilities in the entire semiconductor industry.

This is a crown jewel in our portfolio, and we are investing aggressively to expand our capacity to meet the tremendous demand for our laser products. We maintain full control over our front-end fabs alongside a flexible hybrid back-end assembly and test model, which combines internal capacity with that of contract manufacturer partners.

This operational model allows us to deliver an unmatched level of supply certainty to our customers. As the transition to scale-up and scale-in accelerates, we expect this production control and high-volume capacity to become even stronger competitive differentiators, enabling the combined company to deliver even greater value to our customers. Back to you, Matt.

Thanks, Michael. Slide 19 brings us back to what it means for our customers. AI infrastructure is rapidly increasing in complexity, and we expect this combination to deliver four direct and compelling benefits. First, an end-to-end signal chain. We expect Marvell and Lumentum to be a full-stack technology partner with expertise from photon generation to electronic processing.

We believe customers will no longer need to manage the critical interfaces between the separate suppliers across the signal chain, and they will benefit from more tightly integrated high-performance solutions. Second, leadership in every distance domain. We expect the combined company to be able to address customer complexity at every distance and topology from distributed data centers all the way inside the semiconductor package.

Third, fully optimized solutions. Higher levels of extreme co-design for the next generation of fully optimized customer-specific solutions means faster development cycles, greater innovation and lower program risk. We expect to be able to bring prevalidated optical engines to market in ways that a combination of separate suppliers simply cannot.

Fourth, we can deliver at massive scale. The combined company's greater R&D and manufacturing scale means we can invest more deeply in supply and production to meet the accelerating demand for AI optics. We believe Lumentum's company-owned indium phosphide fabs, combined with the breadth of Marvell's supply chain partnerships will provide a level of supply assurance that will be critically important as AI infrastructure investment continues to grow at a rapid pace. With that, I'll now turn it over to Dan to walk through the financial model.

Thanks, Matt, and good morning, everyone. Let me walk through the combined financial profile on Slide 20. You'll see we've outlined Marvell and Lumentum's annualized revenue, non-GAAP gross margin, non-GAAP operating margin side by side based on Marvell's current quarter guidance and the results Lumentum reported earlier today.

When you put the 2 companies together on a pro forma basis, we believe the long-term financial picture is even more powerful. We expect the transaction to accelerate revenue growth and be accretive to our non-GAAP gross and operating margins, inclusive of the $1 billion plus in run rate synergies we primarily see from COGS.

Overall, we expect the combination to be accretive to non-GAAP EPS starting in year 1 post close. Beyond the cost synergies, we also see significantly larger revenue opportunity from the combination. We believe our ability to offer fully integrated end-to-end and extreme co-design solutions across the optical and electrical domains creates the potential for truly architectural level partnerships with our customers.

We expect the depth of these relationships and our increased ability to deliver complete solutions will unlock a larger TAM and increase our penetration up. Taken together, we believe this transaction creates a compelling path to increase long-term shareholder value. With that, I'll turn it back to Matt.

Thanks, Dan, and let me leave everyone with a couple more thoughts. First, the pro forma figures shown on the slide highlighting $17.7 billion in annualized revenue and a non-GAAP operating margin of 39% going just 1 quarter further illustrates the momentum in both of our businesses.

Combining the guidance Lumentum provided for their next fiscal quarter with the current consensus for Marvell's next fiscal quarter implies pro forma annualized revenue of over $21 billion with a non-GAAP operating margin in the low 40% range, meaningfully higher in just 1 quarter.

Second, let me bring this to a higher level. While we've outlined over $1 billion in run rate cost synergies, I'm even more excited about the revenue synergy potential. As we've already highlighted, even in these early days, the joint teams have identified a significantly larger TAM opportunity. I would not be surprised if this TAM continues to upsize.

In addition, I fully expect we will collectively be able to capture a greater portion of this opportunity, just like we have seen in prior acquisitions. Optical networking for scale-up and scale-in applications is just starting. As a combined organization with the deepest and broadest set of capabilities for next-generation AI connectivity, I fully expect to be the category leader who defines and drives this transition, enabling us to deliver meaningful revenue synergies.

I want to thank the Marvell and Lumentum teams for the extraordinary work that has brought us to this milestone. We look forward to welcoming the Lumentum team to Marvell after the transaction closes, and we believe the combined company will be positioned for durable long-term growth and significant shareholder value creation. Operator, please open the line for questions.

[Operator Instructions]

And our first question will come from Blayne Curtis with Jefferies.

Congrats, Mike and Matt and the team. I just want to ask you on the revenue synergy part. Obviously, there's a long-term co-design potential. I'm kind of curious in the near term here, is there a PAM4 bundling opportunities? Is there anything in coherent? Like can you just talk about over the next 2, 3 years, is there any obvious revenue synergies that you see?

Yes. Blayne, thanks for the question. I think you're going to be able to see -- certainly, the long-term synergies are very meaningful. I mean, we're talking about a TAM increase for the combined company incremental of $60 billion. And this is right in our wheelhouse and our sweet spot in terms of where we can really attack the market. So I think where we're heading post close is very compelling, especially if you look out through the period.

That being said, we showed on some of the slides the various architectural block diagrams of how the Lumentum products and the Marvell products all come together. And I think as we execute the combination, certainly, there's opportunities there. And some of those are going to manifest itself in COGS synergies, right, our ability to pull more content that we didn't supply from each other together. But then I do see as well opportunity for revenue synergies.

And look, Blayne, I'll tell you, if I look back to the big acquisitions we've done, namely Cavium and Inphi, we saw very early on feedback from our customers about wanting to do more with us. Back in Inphi, if you remember, it was really an enterprise and in carrier and Inphi was in data center. And that pull-through we saw sometimes wasn't even on a product you would think was directly adjacent. I mean it was basically let's look at the whole Marvell portfolio combined with the acquired company 1 more time and how much we can do together.

And the final thing I would say is both Michael and I have received a lot of feedback already since the deal leak, but also over the weekend from our key customers. And across the board, there's just tremendous support for the combination and excitement about how we can do more together. So more to come on that, Blayne, but we're very excited about both the near-term and long-term revenue synergies we can drive from the combination.

Our next question comes from Harlan Sur with JPMorgan.

Congratulations on the announcement today. Marvell is a leader in digital signal processing DSPs, right? We estimate 70% plus market share. And obviously, you layer on top of that your best-in-class analog for TIA and drivers that target both scale-out and scale-across networking. Being in a leadership position, you supply to a majority, if not all, of the global optical module and transceiver suppliers in the world.

So by vertically integrating on the pluggable transceiver side, will you not be competing with existing module manufacturers who use your DSPs and TIAs and drivers today? Will this maybe open the door for other DSP suppliers to take share at your existing module customers?

Yes. Thanks, Harlan. I think I'll answer it in 2 ways. The first is that today, if you even look at the existing Marvell business, we operate in a flexible business model. We have module business today in DCI, where we have very strong market position. But that's complemented by a very robust merchant business as well, where we sell our coherent DSPs to other companies to manufacture modules to enable the whole ecosystem. So that model is in place.

The other thing I would say is that when you look at it, Lumentum is a key supplier today to those same customers that we supply DSPs to, even though at the surface level, it would look like there's competition. So in this ecosystem, especially given the customer driving demand, there's a very healthy balance between the suppliers and then the competitive ecosystem.

I would say, in our case, when we combine with Lumentum, now we have optical modules that will be for the inside data center applications. That business today inside Lumentum has been a very focused effort. And really their priority has been, and I'll let Mike comment in a minute on really being a #1 supplier of components, i.e., lasers into the ecosystem is the first priority, just like Marvell's first priority is leading in DSPs, EICs, TIAs, drivers, silicon photonics, et cetera. That strategy is not going to change.

I would then add to that finally, and I'll let Mike comment that at the end of the day, what really matters first is product leadership. So on the Lumentum side, absolute best-in-class performance on laser technology on the Marvell side, as you pointed out, on DSPs and broadband analog. And we're just stepping on the gas, both companies collectively on those 2 technologies, working directly with our end hyperscaler customers to go drive the road map and the module partners.

So I think that ecosystem is going to be very healthy. If you have the best products, you have the customer trust and you work out the right business arrangement, we can continue to grow our business. And I can tell you already, we've received feedback from some of our customers that you mentioned and what their message is right now is how can we do more business together. So I'm very confident in our ability to continue to grow our business as a component supplier, but also participate in a very thoughtful way in the module ecosystem. Michael, anything to add to that in terms of?

I think, Harlan, the key point that Matt just made is important for everybody to understand. And that is we supply our lasers to almost all of our competitors. It's an ecosystem built on a lot of co-opetition. So we supply our lasers. We actually buy from people that we ostensibly compete with, and it works very well. And I think we're going to double down in terms of supporting those customers.

I know Matt's had calls today with a number of the different module manufacturers and all of them, he's expressed support. We're going to continue to support them on the laser side. And I think Matt is going to continue to support them on the DSP side. So I don't think that this is going to be an issue for our customers and ostensibly our competitors.

Our next question will come from Tom O'Malley with Barclays.

Congrats both on the deal. So 1 technical 1 and then 1 longer-term technology 1 on the technical side. Well, most of the $1 billion you're saying is in cost. Could you just give us a percentage there? Is that 90%, 95%? And then maybe walk through some of the big chunks there to get those synergies?

And then on the longer term, kind of why now? So I understand both of you have deals with Google and NVIDIA. The co-design and the process of getting these things done years in advance, totally appreciate that. But part of the rev run rate in the near term is highly levered to some of the indium phosphide supply-demand dynamics. So Matt, maybe talk about how confident you are in that supply dynamic persisting for the next couple of years to kind of get to some of these revenue numbers as well.

Yes. So from a synergy standpoint, as you think about bringing the companies together, opportunities where we serve customers where the Lumentum components are not a part of that solution and vice versa, where Lumentum is serving customers and the Marvell technology is not a component part of that solution that they're selling. The opportunity to bring the companies together and unlock the combined full stack opportunity that the combined company has to drive those cost synergies is important.

As you think about the long-term revenue trajectory, you think about taking the combined company and in a very short period of time, taking it past $100 billion. You can see what the combined gross margin of the company is, and you can get a sense very quickly at that scale, what the aggregate opportunity for COGS is in that portfolio we expect the transaction to be accretive on a gross margin, operating margin and non-GAAP EPS perspective.

And as we grow the company, we think there's an opportunity to grow those synergies over time. And so we feel really good about the financial horsepower in addition to the technology leadership and the full stack solutions that we're going to be able to co-optimize and drive a larger TAM, but also a deeper penetration of that TAM.

Yes. Great. Thanks, Dan. And then Tom, on your second 1 on the why now and as it relates to some of the comments you made about supply-demand dynamics. So I want to make 1 thing clear that tight supply is not the reason we're wanting to enter this transaction now. I would think of that as a byproduct of our thesis that we're outlining, which is the demand is here. I mean this transition to scale-up is actually here. This isn't a, hey, at some point in the future, this thing may ramp or it may not. It's absolutely here.

And finally, I would say that there's pervasive supply constraints across the entire hyperscaler ecosystem. The memory supply constraints are well understood. You've seen this in advanced node. I mean, indium phosphide is in that category. But the why now really comes down to the fact that we are at the inception of the transition as the copper wall moves, as I showed, really from scale-out to the next wave, which is going to be scale-up and then scale-in beyond that.

And it's hard to see sometimes. I mean, if you look back at Inphi, the company when we acquired it, looked like we were paying a very high multiple for it. It was sort of not clear how big it could really be. But you could see the sort of when you capture a market inflection at the right time with the best asset and the best team and you execute well, you can really outperform.

And the interesting thing now, too, is that if you look at Lumentum vis-a-vis where Inphi was, let's say, 5 years ago, similar inflection coming, but the scale of Lumentum alone is about 10x the size that Inphi was back then on a market that's multiples, almost an order of magnitude of what we thought Inphi's market was 5 years ago. So that's what really gets me excited is you say why now, it's because it's happening now, and it's not even -- it's not -- the orders are in front of us.

So that's what I would say on the why now. It now is the time. And final comment, it's very rare to find 2 companies with such strong leadership positions in their respective areas that just have this moment in time where both companies and the leaders of both companies, me and Mike, saw a very similar vision of where the world was going. And the fact that we've had a relationship for a long time professionally and personally, Lumentum is a big customer of Marvell.

We had a lot of interaction with the team. It just came together, which is basically at the end, as we started looking through it, it was kind of obvious that this trend is happening and then why don't we go and look at how to put these companies together. And we're just super excited about where this is going to go, Tom. So it's definitely not because of short supply in the short term, and let's go deal with that.

Yes, Tom, just a quick 1 for me. Look, we posted some pretty impressive numbers this morning. And we see this trend line for our business continuing. It's -- we've got a very, very strong business, and we think that, that business is going to persist in the long term. What we think here is this is a multiplying effect. By combining with Marvell, our strong business times their strong business equals something that's much, much more impressive than the 2 parts.

So we really like this transaction. It's something that we think is going to give us the scale. We've signaled to the market before that we needed a semiconductor solution to really be successful. And I can't think of a better semiconductor solution than Marvell and what Matt and team are bringing to the table.

Our next question comes from Simon Leopold with Raymond James.

I wanted to see if we could reflect back on the Analyst Day that Marvell hosted at the beginning of the month. And it's not as if I haven't listened to the conference call you're hosting today. So I get the industrial logic that you're describing. But I'd like to see if you could reflect back on the Analyst Day and help us understand what's different from what you presented of a stand-alone Marvell.

Well, I think the thesis that we laid out at the Analyst Day is highly consistent with the industrial logic and the transaction today. All of those trends that we were talking about at the Analyst Day, and we had extensive presentations on that, Simon, as you remember, across the board in a very detailed way on all of the different connectivity growth drivers, and we went into detail on scale-up and scale-across and scale-out and scale-in.

And in every 1 of those -- if you go back and look in every 1 of those system block diagrams, we were showing where the Marvell content was, whether it's a DSP or a TIA or driver or a switch or an EIC or an XPU. And every 1 of those in terms of the transition to optical has a light source integrated or attached into that solution. And so the way to think about it is those are coexisting today, bringing them together, 1 of the key benefits that I want to stress here is you can go way faster.

I mean that's the real advantage here because you can always do things when you cobble together a solution. You can get a bag of parts, you get a bunch of suppliers together, you can have the customer referee. And then at some point, you bring it all together and you got your solution. I've seen this over and over in my 30-plus year career in the semiconductor industry. The companies that can pull together the solution and they can do it in a very time-to-market efficient manner are the ones that win.

And the tried and true rule, the 1 I'll leave you with is the faster you get the product out and the faster you are in time to market vis-a-vis your competition, the bigger the economic opportunity and the margin opportunity and the differentiation opportunity is. So a big part of this is layering on the Lumentum technology to the same framework we outlined at the Analyst Day and then just absolutely turbocharging the combined road map and pulling in all of the R&D programs we've got together and getting them done faster for our customers.

Yes. And just to build on what Matt is talking about from a financial perspective, everything we put forward at the Analyst Day from a stand-alone opportunity standpoint still holds. We're very focused on driving the stand-alone opportunity to that $80 billion of revenue in a very short period of time. Everything we're talking about here is incremental to that opportunity, and it's only going to increase the revenue opportunity as well as uplift from a gross margin, operating margin and non-GAAP EPS standpoint. So this opportunity we're talking about today is all incremental.

Our next question comes from Timothy Arcuri with UBS.

When we see deals like this, there's obviously motivations on both sides of the deal. So I guess, Matt, maybe the answer is really what you just said that you can just move faster as a combined company. But I guess when I see a company growing more than 100%, I guess my question is, what's the urgency to have sold now? Is there something in the market you're seeing that makes you worried? Or are there opportunities that you can pursue on a combined basis that you couldn't pursue on your own? Maybe the question is more for Mike.

Mike.

Yes, sure. Look, I think the answer is pretty simple. I mean our business is going gangbusters, as you correctly said, we're -- we doubled last year. Most people have us doubling again next year, and we don't see any change to that. What we see is the opportunity. The opportunity, I think, is significant. And by combining with Marvell, there's a lot more we can do on scale-up and scale-in and we don't think that we can be as successful pursuing those opportunities than under the Marvell umbrella.

So I completely understand the argument our business is ripping. It continues to rip. Hopefully, the numbers this morning give people confidence that we are really, really on a roll. That roll will continue, but I think it accelerates with the help of having a semiconductor solution that we can co-design with, co-market and take advantage of some of the relationships that Matt and team bring with the hyperscalers.

Yes. And then I fully agree, Mike. And just to add, Tim, I mean, there's a big advantage here in moving aggressively and being the first mover. This trend is happening. This intersection of electrical technologies and optical technologies fusing together under 1 roof this is happening. I mean I was talking to a customer this morning about this, believe it or not, people are up early. And I mean, it was almost like the customer was finishing my sentence in terms of starting to explain the rationale. It's like, well, it's obvious. Of course, these things are coming together.

And so you can either be the first mover, Tim, or you can sit on the sidelines and you can be comfortable with your own, Mike's got a great growth rate. I got a great growth rate, like why go do this. That's not in my DNA. That's for sure, and that's not in Mike's either. And this is strength into strength. That's the way you should look at this. And we're taking the #1 and the #1, and we're putting them together. And any other combination after that is not going to be as compelling as this 1.

So yes, we have a little bit of a history at Marvell for moving fast and moving quickly and decisively, and this is no different. But I couldn't be more fired up about what we can go achieve.

Our next question will come from Vivek Arya with Bank of America Securities.

Just a clarification. I was wondering if this has been a competitive process. Do you expect any other bidders to emerge? And then, Matt, the question for you is back on valuation. So based on the numbers this morning, you're paying Lumentum essentially 1x its 2030 TAM, right, as kind of the implied market cap, whereas Marvell is trading at less than 0.5x, right, your addressable market.

So as much as you see the benefits of the deal that you mentioned, the reason that Lumentum has partly traded at this valuation is because of shortages. So the natural question, right, which I think has been asked before also, but I would appreciate your views on this is that how are you so sure that you're not buying right a company at kind of the peak of its shortage environment that by the time you close the deal, what is really going to be the state of the optical and AI industry at that time, right, and sometimes in the first half of '28. So I would just appreciate your perspectives on those 2 issues.

Yes, sure. Sure, Vivek. Thanks for the question. And look, as I mentioned earlier to respond to 1 of the other comments, there are supply shortages today across the industry. Marvell's got supply shortages. I mean we're behind. We're trying to catch up. We got unprecedented customer demand. We're rising to the occasion. We don't see the situation at Lumentum as any different. And we had an opportunity, obviously, through the due diligence process and having the combined teams meet and share their views and share their road maps and share their opportunities. And I can tell you that their growth opportunity and their growth rate is very commensurate with Marvell's.

The other thing that gives us a lot of comfort is, as you know, Vivek, and it was outlined at our Analyst Day, we are tremendously deep and embedded at these and have a very trusted relationship with these large hyperscale customers across every hop in the network and have deep architectural insight into how these hyperscale systems are being configured and deployed. So we have a very good view of where Lumentum lays in to the designs that we're working on. And we have multiple checkpoints because we have XPUs, we have switches, we have DSPs.

And so as a component supplier, which is more pure play where Lumentum is, it's harder to get that visibility because if you're 1 level back in the stack. So what happened is as we looked at this together, 1, we both got even more convinced that this is going to last because the design wins are real. The application is real. The adoption of these new technologies is real. And it's not just a supply-demand situation. This is fundamentally a shift in the architecture inside the data center and every 1 of our -- and we know our volumes, we know our run rate. We know our growth rates, and we know that every 1 of those needs a light source. And the best light source company in the world, Lumentum.

And so yes, we're going to manage the supply-demand situation, but it's -- this is differentiated technology, Vivek, in product. And I think in the end, when we look through the period, to their 2030 and our 2030, we're able to line this up very well and have a huge degree of conviction, not only can they -- would they stand-alone probably they had a very similar trajectory to Marvell, but combined, we'll definitely grow faster together because of the revenue synergies I mentioned and the increased TAM.

Yes. Let me, Vivek, describe the process. I mean we certainly, as I said in the prepared remarks, looked at alternatives. And I think 1 of the most obvious alternatives for us would be to go out and build a semiconductor practice through acquisition of a couple of companies. And what we quickly concluded when Matt and I started chatting as he correctly said, look, we've known each other for a long time. Our companies work together. When this first idea came up is like why would we go out and buy a string of pearls that are #2s and #3s and #4s in a market rather than combining with the #1.

So I think it was pretty obvious to our Board and to our management team that this was a much better alternative, although obviously, we're ceding control, we really believe that Matt can take this forward. Dan, we think this management team is excellent. And I really, really do believe, as Matt said, this is a #1 and a #1 in our respective markets, very, very unique and singular opportunity.

And we'll take our last question from Tore Svanberg with Stifel.

Congratulations on the deal. So I had a question going back to the Analyst Day, Matt. So you talked about interconnect revenue growth of 60% to 70% between now and fiscal '31, targeting $37.5 billion number. I believe that's primarily scale-out and scale-across. So obviously, now with this combined entity, I'm just curious, how should we think about that, especially given the much bigger opportunity now in scale-up?

Well, our numbers, we haven't provided them. We put a lot of time and effort into our view. And those were validated actually, which was great and having -- talking to the Lumentum team and saying, what you guys see? And fundamentally, there might be some differences here and there with some of the customers, but fundamentally, see the same trajectory, see the same growth. And as I mentioned, actually see a bigger TAM, right, together.

So that growth rate, which I know took some people by surprise is, gosh, your biggest business is also your fastest-growing TAM, which is interconnect for Marvell, having third-party validation from a real player in this market like Lumentum gives us great comfort. And that's why in that process we went through, we actually both concluded we were -- some of it was we were just missing things. We didn't have all the market insight, but most of it was we just realized, as you put these together, that opportunity set we can address is much larger.

So I hope that answers your question. But yes, we're still on track with what we thought. And most of the TAM increase we're talking about, that $60 billion, to your point, is in interconnect, it's really in scale-up and then at the later part of the period in scale-in, which is this whole micro-emitter opportunity where their best-in-class micro-VCSEL technology with our best-in-class EICs and our ability to package all this together, connect directly into an XPU package, drive the total solution.

I mean these are all things that we had put some TAMs on, but nothing that meaningful. And I think those are going to get larger, especially as you get to the end of the period and beyond. So we got another leg or 2 of growth that we can already start envisioning beyond scale-up.

This now concludes our question-and-answer session and also today's conference call, which we'd like to thank you for your participation. This does conclude today's teleconference, and you may now disconnect your lines at this time, and have a wonderful day.

Thank you.

Thank you, everyone, for joining us today, and welcome again to day 2 of Citi Tech Conference. My name is Papa Sylla. I'm the U.S. optical networking analyst here at Citi. And I'm very pleased to welcome Wupen Yuen who is the President of Global Business Units and prior to that, President of Cloud and Networking. And of course, we have Kathy, who you know very well, the VP of IR of Lumentum as well. First of all, I'm very glad to still have you now. I wouldn't be surprised if, Wupen, you canceled last minute to secure more capacity at this point.

Well, this is important. This is very important.

But yes, thank you for joining us. And maybe to get started, and I will ask questions, and then we'll leave the last maybe 10 minutes for your questions as well, if you have any. To get started, Wupen and Kathy, I guess, given your role into AI, I'm curious to first have your take around but also optical and networking is playing a more and more important role into the AI infrastructure. So just if you can touch on that as well before we touch on the company in general.

Yes. Let me jump in here. I think the AI really is we're at the very beginning of AI, right? If you look at the whole industry here, yesterday, I was sawing this article talking about Anthropic in a year signed up $517 billion worth of compute, right? So today, the demand of AI way exceeds that of supply, and we're not seeing it changing. It's very different from the past cycles of optical, which is really for infrastructure, for communications. This is really for the intelligence, the generation and also serving the intelligence. So the demand is just absolutely crazy. And then we don't see that changing for the next at least couple of years, if not longer. And as a result, right, as AI making progress into faster throughput, bigger models, more sophistication, the agentic AI, the connectivity requirements is also increasing.

Every generation of GPUs or TPUs getting more and more bandwidth. And then with copper running into the limitations of physics, then more of the optical has to be used for interconnecting this XPU. And therefore, we're seeing the demand for optical connectivity is also increasing as generations goes on. Therefore, we feel both the demand side and also the technical requirement continue to escalate. And all this actually is good for the optical world that we're in today.

Papa, if I could just add on to that. Thank you again for hosting us at the conference. It's been just a fantastic conference for us. So we really appreciate that. I'll just add on to what Wupen just said. If we think of data center interconnect or the telecom market being sort of a 1x multiple, what we're seeing now for scale across is probably 10x of what we saw for DCI. What we're seeing now for scale out is probably 10x of what we're seeing for DCI. What we're seeing for scale up starting in the second half of '27 for the first instance of CPO going to scale up is probably 3 to 4x above the 10x that we're seeing for scale out. And then when all of scale-up goes optical, it's probably a full 10x above the 10x of scale-out.

So there's many multiples of optical bandwidth that we are needing to deploy in data centers, and we're not yet even talking about scale in. I think you may have a question for us later on scale in. There's another 10x multiple there. So it's mind-boggling in terms of what we're enabling in terms of enabling the compute.

Absolutely. It's been quite a fascinating journey. And I'm curious on -- I guess, it's been not too long since last earnings, but just curious on the state of supply-demand gap at this point. Where are we? Is it extending? Any general kind of update on that front?

Yes, I think it's still extending, right? So today, we're still short everywhere, right? The laser -- think laser, for example, we're short, EML is short, CPO laser is short. And then we don't see the shortage going away in '27, right? I think '27 is going to be another major year. People forecast just the scale-out module is going to be doubling the volume on '26 to '27. Laser supply is not really catching up to it, right? And in '28, the scale-up is going to happen are going to drive yet another 3 to 4x of increase of demand. So we really don't see the laser supply-demand gap actually close within the next couple of years. And then we're doing the very best we can.

To this day, we're still allocating capacities in some cases, like based on pricing, right, expedite fees and things like that in order to make sure that we serve to the most profitable opportunities. That's the case today. The pricing remains very healthy. All the deals we're making today are equal or higher pricing than the escalated pricing that we already had before. So overall, we've seen the pricing environment to be -- continue to be very favorable, and that is kind of a signal that the supply-demand gap still remains.

Maybe before diving deep into different kind of segments, Kathy, maybe one question for you. Recently, you updated your 2028 target to $40. I think it probably came earlier than most expected because you typically do that, I think, at OFC. Just curious on the timing and...

Yes, sure. Again, thanks for the setup there. So -- since our last earnings call, we learned that we have more opportunity in OCS than we previously had understood. That visibility in OCS enables us to be very confident about for the first time, I think, ever, putting out a fiscal year '28 guidance on EPS of $40. So the upside that we're seeing from OCS enables us to get there. And that OCS upside is coming from our largest customer, and it's a function of more units, more units that we need to ship to them, and it probably is in large part due to their success in the market and our success with them in enabling their success in the market as they begin to sell hardware.

I will probably circle back to OCS. But just a quick follow-up. I guess, is that more back loaded kind of more '27, '28? Or is that kind of every single quarter, you are seeing more demand for OCS?

I think it does layer in as we move through the fiscal quarters of '28. So this is $40 EPS in fiscal '28, and it kind of pertains to all of the quarters of fiscal '28. You should probably think of it as layering in linearly and increasing as we move through calendar -- fiscal '28.

Got it. Very helpful. But maybe perhaps I can start with the CPO, NPO part, and then we'll get back to OCS. I think during last earnings, the discussion was around CPO, particularly for your main customer demand is coming even faster and stronger than expected. I was willing you can -- I was hoping you can pull the curtain a little bit and discuss it more unit than expected? Is it kind of the wins are coming faster? Or is the customer pulling forward this timeline? Just any color on what's driving that sentiment.

Yes. I think from the -- that's a great question, right? There's a lot of noise about the CPO, NPO story. First of all, on the CPO piece, right, what we're seeing here is the schedule is the same. Schedule is not changing, but demand is higher. right? It appears that there is more demand for the CPO first is going to be in the switch, right, the scale-out switch. Later in the second half of '27, as we talk about, it will be for the optical scale-up, right? We're seeing both actually going up in volume. No change in timing, but intensity is actually increasing, which is a very good sign that CPO is doing well, right, getting traction in the market and technology is continuing to ramp well.

Got it. No, that's very helpful. And it seems like recently, NPO is even more popular than CPO, which is very hard to do, right? But I'm curious, I guess, if you take '27, '28, '29, is there a year in which you can see NPO potentially be bigger than CPO?

Okay. Let me take the minute to describe the story. So let me sit straight and describe this, right? So if you look at the -- first of all, why is NPO even there in the first place, right? At the OFC time, we talked about the CPO. We thought the CPO -- okay, was going to be a one customer only story, right? And that's going to be one customer scale-up story. Ever since then, what we found out here really is that the optical scale-up is now industry-wide story. And to support the level of volume and demand for the optical scale-up in the time frame in 2028, the industry is needing to use both CPO and NPO approaches to serve optical scale up, okay? So if you look at the overall market, we think it looks like the following. CPO will be half of the market. NPO is the other half of the market, right?

So I would say just from the volume point of view, it's kind of 50-50. Now look at what we serve. We serve in the external light source, high-power lasers, right? We see the CPO world being an exclusive external light source market. And then for the NPO market, half of that will also go with external light source, okay? And the remaining half, the customer discussing between ILS or integrated light source versus external light source, but there's more and more of movement toward external light source. The reason is very simple because we have such a high optical density with optical engine being placed so close to the heat source, which is the accelerators.

There's a great concern what happens to the laser when it's so close to the heat source, right? And therefore, to ensure reliability being strong, there's a strong desire to move the laser outside and so that you don't have to worry about the laser being a reliability limiting factor, right? So we're seeing that and we discussed also in the earnings call, this is really why we believe that the NPO is a net addition to our opportunity because when we're thinking about the CPO before, we didn't think about the NPO being a mechanism for the industry to jump on the bandwagon of optical scaleup. I hope that explains the situation.

No, that's very, very helpful color. And kind of just to double-click on NPO specifically, I think you discussed before, there are 2 versions, one in which the laser is inside, more of 100-milliwatt kind of laser is needed or so and then outside more of a 400. I'm curious kind of -- and you mentioned it seems like most will be outside, but is that like 75%? And the reason I'm asking is I think there's a lot of discussion around China competition and being able to do the 100 kind of version of it. Just curious if you can kind of paint.

That's a great question, right? So let's go to the 25% overall market of the ILS piece, right? Even for the ILS, you really don't want to use a low-power laser. Why? Because imagine, if you look at an NPO engine, is the size of like this big, 1 inch by 0.5 inch, right? It will pack 6.4T inside. Compared with a 1.6T module today, it's half of your iPhone size, right? So optical density is a lot higher inside this little package. And therefore, you really don't want to use too many lasers inside. We want to use as few lasers as possible, so it doesn't fail, right?

So therefore, there's a very strong push to also use high-power lasers. It's going to be 100-milliwatt laser. It's going to be 150-milliwatt lasers or 200-milliwatt lasers, right? And so therefore, I would categorically say that for the entire NPO, CPO applications, it's going to be 120, 150 milliwatt and above of high-power lasers, which is not the traditional 70-milliwatt laser, which is used in today's pluggable market. right? So a lot of the chatter about the CW laser supply, China, in particular, is really targeted today to serve the pluggable market, which we talked about earlier is short. But for the NPO, CPO, what we see really is a strong push towards less lasers, more power and then to feed both the EOS or ILS applications.

Got it. And even in the U.S., I assume particularly for the 400 ones, you don't see many competition at all.

Yes. We see one competitor, right, who is Coherent that NVIDIA also signed an LTA with, right? And we're really not seeing anybody else in the high-power laser area.

Got it. No, that's very helpful. Now that we -- I guess, for the CPO, NPO, you said a very clear picture on the demand front. I guess now the question is supply. And one important kind of aspect of that is the Greensboro, which is supposed to come in late 2028. I guess, any potential kind of drivers for that Greensboro fab to come in faster? Any color on the time line? What would pull it forward? What would...

That's a great question. I think it may give you a holistic picture on how fast -- how we're thinking about ramping our ultra-high power laser for CPO and NPO, right? So first of all, we are ramping today in our San Jose fab, right? We have a line of sight to ramp from today all the way through 2027. So that's the first ramp. Second ramp is we're ramping this high-power laser also in our U.K. fab. That will come in second quarter 2027, will continue to ramp through 2028. That's the second ramp. The third ramp is our Greensboro fab. We will start to ramp in second quarter 2028 or mid-'28, that's a third ramp, right? So in composite, you can imagine there is a 3 wave of ramp that continue to support the UHP laser for both the NPO and CPO application, right? What can change that?

Really, I think is -- so far, we're on schedule for all these different ramps. And what can really change the schedule is the qualification timing, right? We have to submit the PCN for customer to qualify the product. If we can actually accelerate that qualification of the product, we can actually put it in and vice versa. So that will be the biggest variable, but we're definitely working really hard to ensure we get all the quality, all the data ready so that the PCN approval can be a pretty straightforward process.

And I'm curious on particularly the fab that exists already. I'm sure you are using it to some capacity or for, let's say, telecom and so on. So I guess it must be a very tough decision because demand is strong everywhere. So I'm curious on how you think about allocation. Are you kind of giving priority where margin is strongest? Are you also looking into the future on, let's say, CPO or NPO could be a bigger TAM than the other one?

That's a great question. So we are -- in principle, we're adding capacity. We're not taking away, right? For example, when we're ramping our UHP laser in our fab, we're adding capacity. So we can actually keep our current product, which is also ramping. And also in the U.K., we're adding a clean room. we're putting the new equipment, the latest and greatest state-of-the-art equipment into that clean room and ramp the UHP laser that way. So we don't sacrifice our current products. So that's how we're thinking about it really is to ensure -- because all these products are ramping at the same time. The telecom scale across is also ramping as Kathy just talked about. And therefore, we don't want to sacrifice those, right? We're adding new capacity, 6-inch capable capacity to ensure we have the highest efficiency possible when we start to ramp these products, right? So by and large, we don't sacrifice, we add.

And then beyond laser as well, now you are also doing ELS or you plan to do more ELS as well. I guess, how large do you see that opportunity relative to the laser longer term? And any color on -- is it one customer mainly currently? Or is it pretty diversified?

You want to take that question?

I mean we announced our first ELS win on our last earnings call, and that was with our existing CPO customer. We know that, that's just a relatively small portion of their ELS total demand. We expect the timing of that -- those first ELS shipments to take place in the second half of calendar '27. And our estimate is maybe 15% to 20% of their fleet is about the right amount of their share that we think that we will win. Looking forward to the NPO opportunity, I think we can be even more excited about our ELS capacity to take share because it looks like as Wupen just described, the majority of the NPO opportunity seems to be on the ELS side of the equation rather than the ILS part of the equation.

And many of those ELS customers would also like us to be an ELS supplier, not just a laser chip supplier. So I think we have both of those product opportunities to look forward to. We haven't yet announced any NPO wins, but I think that we can expect to see something in the next handful of months, at least in terms of a first customer that we may be looking at.

Got it. That's very helpful. Maybe jumping to the transceivers kind of EML, CW part. Just curious there, it seems like there as well, demand is pretty strong. I guess, are you seeing it more for your 100 gig? Is it more 200-gig EML? Or is it kind of CW? Just any color on what you're seeing on that front?

On the EML side?

On the -- yes, I guess the lasers for the transceivers. Yes.

The laser for transceivers. Okay. Yes. I think today, definitely 100G EML remains to be the workhorse. The 1.6T or 200G per lane is ramping, right? So I think we talked about we exceed 25% of the mix, right? We think it will continue to go up. So that's going to be predominantly our output. We talked about before, we also are allocating strategically a portion of our capacity -- minority of our capacity for CW lasers, right, really for 3 purposes. One is that when our end customers are short and asking for some help on CPO lasers, we try to help them to ensure that they can kind of bridge over with the deployment. Two is that we want to make sure that we have CW lasers also seeded at every opportunity that we can to ensure that when we have more capacity in the future, we have a design win, design slot we can ramp to.

The third piece really is that we're also supporting the internal modules. because our modules are basically silicon photonics and the customers really need us to make sure we deliver our modules. We're also allocating a little bit of our lasers to our own module need, right? But overall, I would say, predominantly our allocation today is still EML. Workhorse is 100G, but increasing amount of 200G. And then our own several lasers used 3 different purposes and the minority allocation of share.

Got it. And then for both, I guess, 100 gig and 200 gig, similar question to earlier, the lasers on the CPO, NPO. What are you seeing in terms of competition, both U.S. and out of kind of China as well? Are you seeing much competition on 100 gig or because again, there as...

So frankly, we are not seeing merchant competition on EMLs other than who we already know, right? The Japanese and some U.S. company, but we're not seeing new entrants of EML coming from China. There is one vendor who's producing EML internally for their internal module use. But for -- actually there are noises we heard in terms of putting EML into the marketplace, but we're not really seeing it into -- in our radar -- on their radar screen in terms of being a competitor that we're fighting share with, right? To this day, our EML pricing remains very favorable. And if anything, we're really not seeing the competition.

Got it. That's very helpful. Maybe last question around the transceiver/kind of lasers going into the transceivers. It seems like for 1.6T, the idea is silicon photonics might be -- might have a bigger percentage of the mix. But I think there's a lot of debate on by the time we get to 3.2T will come back. Can you just discuss -- is that, I guess, your point of view? And two, can you kind of discuss why would that be?

Yes. We got the question a lot today on this 400G per lane kind of technology, right? So first of all, silicon photonics, while it's really good for integration, it has a material property limitation on the speed. So 400G is going to be really a stretch for silicon photonics. And can you do it? Yes, probably can, but you have to pay a lot of price on power and power consumption, power output and power consumption. So -- and indium phosphide for 400G is -- we have already demonstrated it. We know it's rampable. So it's a sure bet for 400G per lane. So the industry is still trying to figure out one technology people are thinking about really is not silicon, but thin-film lithium niobate, right?

But as a new technology, unclear whether the supply side will be able to be there when the volume goes to millions, tens of millions, right? I would say, if you look at today, for 3.2T, indium phosphide is a short bet. [indiscernible] will be probably pretty challenged. And thin-film or thin-film niobate is promising, but the supply is a little bit challenged or a little bit questionable at this time, right? So really depending on 3.2T timing, right? But we -- because of this, we think that indium phosphide has a good chance of regaining the share that you had at the 100G per lane generation.

Maybe switching to OCS, and we'll open it for questions, if any. And then Kathy, I know I bother you all the time on this question, but still very curious on any way, I think for the transceivers, most of investors and sell side are now able to do some type of bottoms-up and so on. But for OCS, I think everybody is still trying to get there. Any sense of, I guess, how should we think about kind of content per accelerator or kind of content per TPU? Just any color.

On a first order basis, I think you can still think of like a 1.5 to 1 XPU attach rate for the most part for the major applications that most people are thinking about. There are nuances to the attach rate as we think about the new topologies coming down the pipeline. There are some puts and takes. But in general, I would say, Wupen, that it still ends up roughly 1.5:1. But by the time you get through all of the puts and takes on back end of network, fewer hops in some parts of the network, it nets out to be about the same attach rate.

Got it. That's very helpful. Maybe I can pause here for now and open it up for questions. If you have a question, just raise your hand.

I get a better understand [indiscernible] like is the edge of your product at hop free window? Or is it peak power? And then is that kind of driving the better yield? So if you could just comment on that.

So good question. I think from a performance point of view, what -- okay, let's start with what customers care about. The customer cares about power, obviously, that's a big one, but they care about the noise as well, right? The noise of the laser, we call the RIN noise. That has to be really low, right? And the third piece is linewidth, right? Because the customer uses modulator, any kind of linewidth excursion will cause it to be translated into intensity noise, which is through the link, right? The fourth one is what we talk about here is mode hop, right? Because if you look at the -- today's silicon photonics, the biggest problem with silicon photonics is the laser with mode hop. The mode will jump. Once you jump, you have link failure, right?

So all these 4 things has to be achieved simultaneously in the laser at volume with good yield and it doesn't change as you go through the packaging processes. That's a pretty tall order. I think the jury is still out, right? We have already started ramping the lasers now. We're seeing real data. We're doing pretty well. But I think for anybody who's new to this market that has such a high power, such a different laser designs to meet all these criteria at the same time, it's not going to be easy, right? I think Coherent is also working really hard on this. I think they will overcome it at some point. But in terms of overall competition, it's not an easy laser to make.

In addition, it's pumping multiple lanes, right? So you don't have the laser fail at all in any way at all. So yes, so I think that's a differentiated product, very challenging to make.

What does that time line kind of look like for when they catch up? Because as you said, their laser isn't necessarily stable versus your set power. So is that like 12 months? Is it 18 months?

We frankly don't know, right? I think our -- from a demand point of view, holistically, I think the customer will need them to be ramping up sometime in 2027, right? We don't know if they're going to be there or not. I'm sure they're working hard on it. But I think to keep this market going, we need a second source, right, as an industry as -- from a customer point of view to have this capacity ready in 2027. Probably second half, I would guess, but that's -- I think that will be needed. The reason why I'm saying that because we need to support the scale up in 2028, right? And there's going to be a big need of lasers, right? So I think that's the time frame that if I was a customer, I will push Coherent to have the product ready for that ramp.

Yes, I'll just go from here. So I guess on the OCS, I think often you think about, I guess, the TAM, I think there was an $8 billion number. I guess, anyway, probably upsiding that number, but just curious on how should we think about the TAM? And what do you think Lumentum could potentially capture of that TAM?

Yes. I think there is -- I mean that $8 billion number isn't that old. It was something that we put on a slide just 6 months ago. But now I think we see upsides to that. Not only is our largest customer doing extremely well in the market, which is one source of upside, but there is also this sort of level in rack different way to think about OCS from a dynamic positioning perspective for an XPU player, they may want to not only have 576 XPUs in a cluster, they may want to have different numbers of XPUs in a cluster to dynamically position that, you could use OCS.

Could also use it as a resiliency network application where you route around underperforming accelerators. We now see those applications kind of coming into very serious R&D, and we are working with customers on that. And I think that gives us better visibility to at least by late '28, early '29 type time frame, we can see the advent of a lot more OCS that will be required for those types of applications. So that probably puts upside to that $8 billion number.

Got it. That's very helpful. And just on the $40 EPS for fiscal 2028, to my understanding, it was just the EPS number. Is there any way we can kind of reverse to get to the EPS? What's the implied margin? Or any color on how we should think about the other line?

Yes, I'm hesitating to say that because we did see the sell-side models out there, yours included, by the way, Papa, that had us a little bit lower on EPS for the fiscal '28 time frame and we felt like, okay, well, we have all the confidence that we'll be able to meet this $40 metric by that time frame based on the goodness of the additional orders and business that we're seeing in OCS.

Got it. Very helpful. Maybe going back to you, Wupen. On CW, kind of something that was really interesting that you mentioned -- I guess, you mentioned during the call was -- Michael, sorry, mentioned during the call was CW margins or kind of yields improving a lot. Just curious on, I guess, how far can we think of kind of it getting -- can it get to EML level or kind of just any color on how should we think about that aspect?

Yes. I think that's a good question. I think the -- our laser yield has climbed up to be higher than EMLs. And the pricing of our CW laser, believe it not, is similar to EMLs. And then -- so the -- it's a little bigger than the EMLs. But as we discussed in our earnings call, we have also shrunk the size of the laser to be a lot closer to that EMLs. So I would say the margin profile is not going to be as good as EMLs, but pretty close for lasers. And therefore, our past kind of hesitance in putting more CW lasers out there is really gradually diminishing given that the progress we made on the maturity of the CW laser technology from the yield and the die shrink perspective. So it's still not as good as EML, but it's coming close.

That's very helpful. And maybe to finish it off, last question for maybe both of you. Kind of obviously, Lumentum is a name a lot of investors look at. But I'm sure from your point of view, there are part of the story that you believe maybe might be underappreciated or misunderstood. So I want to give both of you the chance to maybe part of the technology or part of the story that you perhaps want to double-click on.

First thing that comes to my mind is scale across, and this is partly our fault. We don't give it enough airtime, but we also see scale across really inflecting our pump laser business. We talked about in this last earnings call and the call before that, that we see a 4x multiplier on our volume of pump lasers that we're expecting over the next 5 quarters or so. We have signed up all of the major network equipment manufacturers in long-term agreements with us over a multiyear period, and we engage them with higher prices for pump lasers to help us underwrite the CapEx that we need to spend to expand that capacity.

So we really see scale across in pump lasers as well as near linewidth lasers that is really -- has been a story of growth. I think this last quarter, we had the 10th consecutive quarter in a row of growth in that business. So it's really been a very strong foundational story for us.

Yes. For me, I would just try to maybe emphasize our position, right? Kathy talked about scale across is 1, scale out is 10 in bandwidth, scale up is 100, scale in is 1,000. Lumentum's position today is going all the way from scale across to scale out to scale up and later to scale in. The position -- the focus we're doing on whether it's the laser or pump lasers, laser, EML lasers, OCS, right? And then later on, the VCSEL stuff like that, we are positioning ourselves to be kind of the technology of choice in all the different areas, right? So as we ramp AI, as intensity of optical demand increasing, moving from scale from scale out to scale up to scale in and with the whole demand is going up because few numbers going up, I would say Lumentum's best days are yet to come because we see the positioning of our products and technologies. We see the road map of our customers and working hand-in-hand with them to facilitate the realization of these opportunities. So we feel confident that we'll be well positioned to capture the AI growth for the years to come.

Very exciting stuff. Thank you both for joining us, and thank you, everyone, for joining us.

Thank you.

Thanks, Papa.

All right. I think we're live. Welcome, everyone, back to DB's 20th Annual Tech Conference. My name is Gianmarco Conti. I'm heading the hardware equity research team here at DB. Today, we have the pleasure of hosting Michael Hurlston, CEO of Lumentum.

So Michael, I want you to open as wide as possible. For 50 years, the story of computing has been the chip and connecting the chip was an afterthought. Optics has forever been the technology of the future. 25 years later, we're in the largest infrastructure build-out in history and the bottleneck has shifted from the chip to the connectivity. So my question is straightforward. Let's just set the stage for everyone. What fundamentally changed? Why is light winning? And what makes this moment structurally different from the last time?

Yes. First, Gianni, thanks for having me. I mean, really a pleasure, not too bad a setting, I must say.

Yes. I know it's not too bad.

Too bad. Look, I mean, what's happening right now is the speed that's required in these compute racks has gone up to a degree that copper cannot carry it over x distance. So at 800 gig, so the connection rate of, let's say, 800 gig, copper can carry 800 gig reliably, maybe 10 meters, right? Now we're at 1.6T. Copper can carry that maybe reliably 2 to 3 meters, right? There's many, many links inside a rack or inside a cluster, inside a data center that are longer than 2 to 3 meters. And so as these speeds go up, you go from 800G to 1.6T, eventually, we're going to go to 3.2T, the presence of copper and the technical aspects of copper become more and more difficult to make work.

And so we've always been, as you know, for going -- a reasonable distance inside the data center has always been the purview of optics. But it's been relatively small numbers because the distance is long. You're going from a compute rack out to scale-out switches, and that's hundreds of meters, let's say. And so you've always had scale-out optics where there are these transceivers. Typically, it's been in optical transceivers have always been in there. But what the new change has been is now you're seeing optics go inside clusters and then more importantly, inside the rack itself. And that's really what's driving the number.

If you think about Lumentum, we've always been playing in scale across, right, connecting data centers to one another. That number has gone crazy because the number of data centers has gone up and the amount of connectivity you now need between data centers has gone up. But really, you're just beginning to see optics now come inside the rack and inside the cluster. And that's really what's driving our number and why many people have a pretty good growth rate ascribed to us.

That's a fair nice view of the industry. Okay. So maybe let's begin with OCS. I think it's quite the point of contention here. It's a great opportunity for Lumentum. I think it's fair to say that you're the only merchant supplier of OCS at scale. You're getting every call about it. Shipments have doubled sequentially and you expect to cross $100 million in OCS with revenue next quarter. So my question is, how should an investor translate what you've done for Google with potentially expanding that expertise to many more customers seeking to implement OCS in scale-up topology?

Yes. I mean the first thing I would say is the breadth of customer engagement is very high on OCS. We started with customers other than Google. People are ascribing us to be shipping to Google. Google deploys a great number of OCSs in their topology, but we actually have customers that were much more substantial than Google in our early rounds of shipments. The breadth of customer discussion is significant. And probably one of the more interesting use cases is deploying an OCS inside the rack itself, being able to use one per rack to route around GPUs or TPUs that may be overloaded.

You have a surprising amount of GPUs in a data center actually fail. And when these fail and the compute model is $20 million, $30 million, $40 million of compute time and you have something that gives out, that's a problem, right? So now there's a move to say, okay, how do we route around those GPUs? And how do we get to a point where a GPU might be overloaded and we can better route traffic? A great way to use an OCS is exactly in that application.

Now what I'd say, Gianni, has been very significant for us in that our largest customer has taken up their orders very significantly on us really since our last earnings call. We've seen a huge uptick in our order book and the order rate. And that actually gives us confidence to increase -- give a new guidance, right, a new guidance for the company. And that is that in 2028, we figured that we can now deliver $40 of earnings power, a very, very significant number and a take-up, I think, against all the sell-side analysts in terms of where we think our earnings power can be.

And that's now driven on -- significantly on the back of OCS. The OCS numbers have come up a lot since our last earnings call. And that really gives us a lot of confidence given the margin profile of that good to substantially take up where we think our earnings power will be in 2028 and our fiscal 2028.

That's very clear. So what do you think the shape of OCS will look like in 3 years' time from now from like an industry standpoint because, of course, you're sort of like leading the whole edge? And do you think it's see gaining faster pace than what the industry and actually sets at?

Yes, I think so. I mean, Kathy, who you work with rather closely, has given a TAM number, right? And that TAM is $8 billion. We think that -- and that we gave that at OFC last year. I think the TAM now looks like it's significantly undercalled. You have just such a rush toward finding ways to use OCS. OCS has significant power advantages relative to an electrical switch, significant loss advantages, right? The loss through the switch is far less than you'd see an electrical switch. And those together are stimulating a lot of discussions from the customer base around how to use it.

And I think as we look out in time, this, we think, will be one of the largest growth drivers in the company. Yes, we're predominantly today, I'd say, tied to one customer who's figured out a topology in which to use it and use it meaningfully. Their numbers are growing very significantly. They're doing well in the market. The number of OCSs per torus is going up. All of those things are obviously very good for us, which is lending us to give this new target for 2028. But beyond that, the customer base is increasingly widening. And we're very excited. I think in the next OFC in March of next year, I'm sure Kathy will put together a new set of numbers around that TAM, and I think they'll be significantly up from the $8 billion that we've given previously.

That's incredible. Yes. I think some investors think of it as like a binary solution when they look at CPO as well, and it really isn't that you can kind of also stack it on top. And so it just kind of like exacerbates further the whole push for implementing OCS.

Okay. Great. So look, as I mentioned, revenue doubled year-over-year. You guided another 25% sequential step and you hit your target operating model a quarter early. Where are we on this demand curve? Can you decompose it for us, scale out, scale across and now the first signs of in-rack, which of the 3 is the steepest from here and which is the least appreciated in your view? It's a very broad question, but...

It's a really good question, and I appreciate it. I think, first, what's the biggest? It's obviously CPO and NPO. And I'd lump those 2 together. CPO and NPO have been used as an either/or. It's -- in a topology, it might be an either/or, but it can even be an and. And I think we talked about this in our earnings call where we see customers deploying CPO and NPO, all of which is additive, right? So I think there's been this misnomer where CPO and NPO are somehow viewed as competitive, somehow viewed as taking away in some way to the optics industry. No, that's not true, right? We see these things as being completely additive to the numbers that we see today.

And remember, if you look at the scale out, right? And scale-out CPO is something that is fundamentally interesting for us because of the partnership with NVIDIA. That is optics supplanting optics. It's just transforming one form of optics to another form. Scale up is all additive for the optics industry. Forget about Lumentum. It's all additive for the optics industry. And so if you look at near term, that is the single biggest driver that we have. And we're just super excited because we're -- today, nothing is showing up in our number relative to either CPO or NPO.

What's the least appreciated? That's the scale across, right? Our scale across business is quite high margin. It's growing rapidly, but nobody talks about it. Everybody wants to know what's happening inside the data center. Outside the data center is equally interesting for us and is equally important. You have a couple of phenomenon, right? These training sequences, training models are so big, they can't be contained within the 4 walls of 1 data center. You have to have multiple data centers playing together to really run these compute models.

Number two, you have this now dynamic around the politics of data centers. Nobody wants these big gigawatt factories in their backyard. So the workaround has been, well, let's make smaller megawatt facilities and just have a lot of them scattered across a couple of kilometers in distance. That plays really well to our scale across business because you have to connect these data centers to one another using fiber. And that's where we -- our scale across business plays.

Yes. It's very interesting. I actually heard the argument a lot in sessions between the whole geopolitical angle like playing into the data center expansion.

Okay. So look, you've described Lumentum as sitting at the heart of a secular shift from electrical to optical connectivity. The physics does most of the argument, of course. Every doubling of lane rate roughly halves copper reach, and there is no visible electrical road map beyond 448 gig SerDes, at least. From where you sit with visibility into every architecture on the planet, is there any scenario left in which this transition stalls? What would it take?

I don't see a scenario in which this stalls out. Simply, as you said in the question, it's physics, right? It's the physics and Kathy Ta, who's here with me today, describes this copper wall. Eventually, the physics of copper, copper has resistant properties. It's got resistance to it. So it can only go over a certain distance. And as these speeds get ever higher, the distance over which an electrical signal can travel on copper gets smaller and smaller. And you know as well as anybody, the number of links inside these racks that are longer than a meter, longer than 2 meters is huge.

And so we're just going to see this shift. It's not going to happen overnight, right? You're not going to see copper go away tomorrow, but you're going to start seeing more and more optical links. And eventually, at some point, you're going to see the entire backplane of a server system be entirely optical. That's multiple years away. I think the interesting thing for the audience to understand is there's also now inside the trays themselves, you're getting the same phenomenon. These high-bandwidth connections between multiple GPUs in a tray or between the GPU and high-bandwidth memory are such that it's also necessitating at least the discussion of optical connectivity.

And so a new market that's emerging for us and it's opening up is now how do we get optics inside the tray itself and connect these very, very high bandwidth, but short reach that's always been the purview of electrical traces on a printed circuit board, how do we get that to move toward optical? And we are seeing that beginning to happen as well.

It feels like light is dominating pretty much everything at some point.

I wouldn't say dominating.

No, it might be a bit too -- stretch...

That might be a bit... That might be a stretch, but it's -- look...

Transition.

Transition. I think it's a transitioning statement. And I think your -- this is all new TAM. All of this is just incremental TAM, not just for us, but for the whole optical industry. We've always been a fairly small, sleepy cottage industry. And you started getting involved in covering it and suddenly, it looks pretty sexy.

It does. Let's double-click maybe into EML a little bit. The narrative treats EML as a component that simply sits inside the transceiver. But I think it's fair to argue that there are also yield components in the transceiver that ought to be considered that can improve with higher quality lasers. So perhaps walk us through the laser economics of the lane speed transition. 200 gig is now over 1/4 of your EML revenue. You previously flagged 300 gig per lane as the next milestone. You also flagged that 3.2T silicon photonics loses some of its advantages. And indeed, EML does come back in a meaningful way. So my question is, what does this arc do to ASP and mix?

Yes. I mean a lot to unpack in the question. It's a good question because, yes, there's a lot of range to it. So first, 100 gig to 200 gig EML, you're seeing about a 2x uplift in price. So as we go from 100 to 200, our ASPs are roughly doubling. And as you see the market shifting from 800 gig to 1.6T, that's where you've got 200 gig lasers are coming in. It's coming in at the 1.6T node. So very good for us overall.

At 200 gig, at the moment on 200-gig EMLs, very little competition. We don't see a lot of competitive threats on the horizon either. Broadcom is a supplier of 200-gig EMLs. We're the other large supplier of 200-gig EMLs. We don't see a lot of other folks entering that field anytime soon. I think the interesting thing is at 1.6T, today, most of the transceivers are EML-based, most of them. But we have said, and I believe this to be true, that over time, you'll see the majority of transceivers be silicon photonics based, which does not necessitate the use of an EML. Cycle over cycle, 800 gig to 1.6T, we would expect the number of EMLs to go up, but the share to come down somewhat considerably.

The share of EML-based transceivers at 800 gig is probably 70%, 80%. We would expect the share of transceivers to be 40% to 50% of the market at 1.6T. So raw numbers going up, share going down. At 3.2T, our best expert, our technical guys that make these transceivers say silicon photonics again runs out of steam. So you'd see a comeback of the EML in its share. And again, we -- it's too early to call the numbers. We'd expect the numbers to continue to increase. So we're going to have a double whammy as we go to 3.2T where both numbers and share end up going up. So it's an interesting cycle. There seems to be a temporal issue relative to simple silicon photonics at this node, but we'd expect to see it come back at 3.2T.

It is very interesting indeed. Maybe following on for this, and perhaps it's worth spending a few words on the Chinese CW laser entrants. Put simply, when and if supply normalizes, what keeps the premium? Is it narrow spec, high-power laser manufacturing, perhaps a process art that transfers slowly? Or does this commoditize from the low power end up?

Yes. I mean -- and I missed it in your last question, which again, was really well framed. One of the advantages that we have that I think is underappreciated is the yields that we're able to generate for our customers, right? So if you look at our EML on a price for price, we're certainly getting a higher price, but that more than makes up for itself in the high yields where the tolerance of the laser sets the yield of the transceiver more than anything else. Almost everything else behind it is electrical. So you're going to get a real consistency in the DSP and the TIAs and the drivers.

What sets the yield is the quality of the laser to a large degree. And we command a premium. Why? Because that premium is more than offset by the quality of our -- and the yield that our customers are able to get out of their transceivers. So to your question now, what we see in the market, at least right now, interestingly enough, we get this all over the place, which is, hey, these Chinese guys are coming in, they're adding a bunch of supply. What we said on our last earnings call was that we're actually going to increase the number of CW lasers because we see an opportunity. So at least at the moment, we see no impact from any Chinese laser supply.

In fact, we see a pretty big hole that we are being asked to fill. In the asymptote, I do believe they're going to figure this out, right? The degree of difficulty on a CW laser is high. It's not as high as EMLs. It's not as high as a high-powered laser that we ship into the CPO and NPO opportunities. I think it's going to take longer than people think. But eventually, I think you're going to see Chinese laser suppliers come on. I think it's largely relegated to 70 and 100-milliwatt CW suppliers, which is a high volume -- today, if you sort of understand what I said on SiPho, that's going to be a very interesting part of the market, but it's something that I think they can execute to Chinese suppliers can execute to. It's not such an interesting part of the market for us.

Yes, particularly because they do have all the raw material supplies as well to be able to grow all the actual lasers needed for it.

Okay. Great. So maybe I'd love to get your thoughts on NPO. As engagements in the last quarter actually surprised me. Your bare EML chips already shipped to every module maker, but your team described the new product form, the EML packaged as a module built so customers who do not want to handle the bare laser chip can still build NPO systems. My question is, will NPO be a bridge that pulls the in-rack opportunity forward as CPO matures? Or is it a lasting for the architecture? And how should we size it?

Yes. Okay. Let me describe it. And again, a super question because there's just a lot of range to it. So the large customer, NVIDIA, right, really is adopting CPO. What is CPO? CPO simply means that the optical engine is going on the same substrate as their main compute, whether that's a switch or whether that's their GPU, okay?

NPO, what does that mean? NPO means that the optical engine is off the substrate. It's somewhat decoupled from the main compute substrate, the main switch substrate, if that's where you're trying to put the optical engine. And that opportunity for us is we view as, again, very much additive, but actually larger than the CPO opportunity, at least in the near term. Why? Because what we see from customers is a higher adoption rate of optical lanes at least to start than we would see from NVIDIA, very high adoption of optical lanes. That's, again, great for us.

So NPO. NPO has a number of different forms. One form that you talked to is putting the laser in the same package as the PIC, as the laser driver, making it a complete optical engine in a single package. For us, again, we see ourselves as largely a component supplier. We want to supply components. We also see ourselves as a great packaging house. If you look at everything that we do, you have lasers that ultimately get into a package. And that packaging capability is an underappreciated part of Lumentum. We can apply that packaging capability to the whole optical engine, integrating the laser in with all of these other components to make a complete optical engine in the case that you have the laser inside that package. That's super interesting and very complex.

A number of the NPO and certainly the early CPO architectures are different. They pull the entire laser content outside that optical engine to a separate block. We call it an ELS, an external light source, and that actually moves off of this whole substrate issue and out onto the face plate of the tray. And in that configuration, again, we can compete effectively for the ELS. NVIDIA, look, they have the best optical engineers in the world, right? They can compete with us any day of the week. Still, they decided to adopt in their early architectures this ELS, and we think we can compete for that ELS. It's not so much a high degree of packaging capability there, right? It's more an issue of we control a lot of the bill of materials, and we think we can get a decent margin while competing for a bigger piece of the revenue pie.

For other customers, for NPO, they've actually, interestingly enough, adopted a very similar architecture where they've decided to pull the lasers out of that optical engine, creating again an ELS. And there, because the optical capability might be less than in NVIDIA, they're actually requiring us to ship the entire ELS to participate in their opportunity. So great revenue for us because we control these high-powered lasers, which are extremely difficult to make. We are able to participate at great margins and in a pretty meaningful way.

It sounds like you have a great opportunity with NVIDIA on ELS.

Yes, and other customers. I mean I think that as the NPO customers, Gianni, think about deploying, several of them are saying, look, we want to take this NPO architecture in the same direction that NVIDIA did and deploy this ELS.

Yes. So it helps with the transition, I guess, to CPO. Okay. Great. So perhaps we'll shift on the fab side of the business. Let's touch a little bit on to the supply chain. You previously mentioned Greensboro will see first revenue in 2028 and I believe full production in '29. This is a fab size for billions of annual revenue. You currently have multiple LTAs and capacity rights signed. So 2 things here really. Firstly, what did you see that gave you the conviction to commit first? And secondly, now that there are customers queuing up to underwrite the capacity, how do you decide how much of the future build stays on your risk versus theirs?

Yes. Look, this is a complicated problem, and you're not the first one to ask about it. And that is we have to bet so far ahead of when we would see orders. Our build cycle, we talked to the investors about acquiring that Greensboro fab in early calendar 2026, and it's not operational until early calendar 2028. So it's a 2-year cycle to get that darn thing into production. And that's pretty fast. I mean I'd say our team that is doing it is probably the best in the planet. The team that we inherited from Qorvo that drives that fab is a really good team. And so I think 2 years is a pretty aggressive cycle. So we had to invest in 2 years ahead.

Now we obviously had these discussions with NVIDIA that have emerged with, one, a very substantial long-term agreement that we've characterized as a multibillion-dollar deal. And then, of course, the investment where they helped us considerably buy that fab and equip it and outfit it. So it's been a great partnership with them. We are looking to get similar types of deals with NPO customers. The NPO customers, as I said, we see at least in the near term, a larger opportunity with the NPO customers than we do with the CPO customer. We believe the CPO customer, if we -- if they want it, they could take all of that capacity and then we'd be in the business of looking for additional capacity. At the moment, that hasn't happened more, I think, timing issues. I think they certainly could just given the demand signal we're seeing.

And so what we're trying to do is lock up additional business now with these NPO opportunities to fill that fab up and more, right? And it may end up being something where we have to go out and get additional capacity down the road. But as I say, this NPO opportunity has surprised us with both the timing and the magnitude vector. And in order for me to invest, I would definitely need to see a similar type of commitment as we ultimately got from NVIDIA. They've been a great partner. I think they're a great partner for the entire industry, but certainly for us, in terms of allaying some of my fears about spending all of this money and deploying it into a fab that has a multiyear cycle before you see it pay off.

If that additional capacity would indeed kind of it would be like 2028 story, right onwards? It will be -- because that's when you see inflection CPO, right?

Yes. I mean, look, what -- again, what surprised us with NPO is, again, timing and magnitude vector. I think prior to our last earnings call, we probably thought that it was going to be a late 2028 and early 2029 event. It seems like the market has sort of caught on to the same physics issues, I mean, no surprise. But in order to compete effectively with NVIDIA, they've said, look, we need to deploy a lot more optics in our racks, and we need to do so sooner.

So it seems like now it's a late 2027 into early 2028 event. And again, the magnitude is such that it's going to put a lot of pressure, a lot of pressure on that Greensboro fab. So we need to think now about our next leg of the stool, what can we do to add more capacity. We have a lot of differentiation, I think, in this high-powered laser. And as you and I have discussed, a lot of this is the fab. Your question talked about fab.

We're part TSMC, part semiconductor design house. It's really a marriage of the fabrication facility and our design capability that makes all this possible. It's not like NVIDIA, Broadcom, the great semiconductor houses where there's a strict delineation between them and TSMC. These are very much intermingled. Our process, our process control, our fabrication know-how is intermingled with the ability to design and make these lasers at reasonable yields and reasonable margins.

Maybe staying on this fab theme, you're expanding indium phosphide fabs in Japan, qualifying CW and EML on the newest tools simultaneously, holding to more than 50% EML unit growth by December quarter. You spent the last 3 months securing additional substrates because ultra-high power demand outran the supply. My question is, what is the binding constraints over the next 18 months, substrates, InP capacity, tool lead times or people?

More than anything else, it's time, right? I think in the fab business, there's long cycles. You have long cycles to deploy equipment into the fabs. You have long cycles to qualify products on your own tools in your own systems. And then you have long cycles to qualify these lasers at the customer. I mean one of the things that we've said, and it's good to remind people, it's a year -- it was a year cycle for us to get qualified at NVIDIA. They're very discriminating in terms of how they test and qualify lasers.

There's a lot of fear -- some of it founded, most of it unfounded, about the reliability of these lasers. And we've been able to produce really high-quality, highly reliable lasers, but there's a huge testing cycle that goes into these things. So that's the long pole in terms of deploying capacity. It's time. There are other issues. You touched on a lot of them, equipment, right? There's a lot of constraint now in terms of getting reactors, getting e-beam, litho tools into these fabs. There's constraint in terms of the substrates. The substrate problem has become very significant.

We said before you got involved in the company, we said, look, we feel pretty good. We did a massive deal with a Japanese supplier to secure a lot of substrates. Now given the demand signal we see, not enough, we went out and did another deal with AXTI. Still, that might not be enough. So we're always in search of substrate supply. But really, I would say that the headline is just time. I mean this is a long-cycle process, which makes it one that gives us a competitive moat, right? It's -- people don't want to get into this business for a reason.

That makes sense. Okay. So maybe let's shift towards the system business. Your system business grew 90% in FY '26 and your 1.6T modules just left the factory. It's great. With you crediting the signal integrity team because of the degree of difficulty plays to your strengths. I believe a few years ago, the market saw Lumentum as a components house with less of a module footprint. So what changed inside Cloud Light? And how far does the module ambition go before it collides with the module makers, but also in your customers?

Yes. Look, I mean, the history of Cloud Light is rather a difficult one. When we acquired Cloud Light, they were doing roughly $75 million a quarter. And there were a lot of quality problems coming out of Cloud Light. Our largest customer, Google, was complaining a lot about the quality coming out of the production line. And so we took a lot of steps back. We -- our revenue from Cloud Light dropped below $50 million, largely because a quarterly run rate of $40 million to $50 million, largely because of these quality problems. So we sort of went in, we retooled our engineering. We got back to sort of $100 million quarterly run rate by virtue of improving the quality, but we were still very late to market.

We were coming in behind large competitors like InnoLight, like Coherent, like Eoptolink. We simply couldn't figure out the time to market. At the 1.6T transition, suddenly, we started to get things right. We put an intense degree of focus on our engineering and our turn time, retooled the entire process, retooled the way we thought about engineering these modules. And as you said, at 1.6T, you're getting into a world where signal integrity for all the reasons we've been talking about with optics, it becomes really hard, right? And so our engineers have figured that out. We have a good signal integrity team.

And suddenly, we got to ahead of the curve at 1.6T. And we are now shipping ahead of great customers, great competitors like InnoLight and Coherent. We're first to market with a lot of our SKUs, and that's given us a great increase in our revenue. I mean we are now running well over $200 million a quarter in that business. It's doing fantastically well, and we expect it to grow considerably throughout 2027. Challenge for us, as you know, has always been the margin of that business as we've now fixed the engineering side of the equation. We've yet to fix the gross margin.

It's still a challenge for us. We don't perform as well as the top competitors. And we've got to structurally fix that. So we're able to fix the engineering problem. What we're looking at as we enter calendar '27 is how do we fix the manufacturing? How do we go best-in-class or not -- I don't think we're ever going to get as good as InnoLightd or Eopto, but I think we can get a lot better in terms of the margin.

There's always that debate about merchant versus module suppliers. The margins are slightly better always on the merchant side, if that makes sense.

And -- okay. Maybe I'd like to take a question on the long-term technology risk, and this might be an interesting one for you. The eventual threat to the discrete laser is heterogeneous integration, and it comes in 2 flavors. InP bonded on SiPho, which already exists commercially, and lasers grown directly on silicon, which does not. You'll likely have first dibs in seeing this given your position in the market. So where are each of them really? Give us your bird's eye view.

Yes. I'm glad this shows your technical acumen, and I'm glad Kathy prepared me for this question. Thank goodness for that because it is quite a deep one. Look, this is an opportunity for us, actually. I don't see it as a threat. We're already working with the best silicon manufacturers to embed indium phosphide in their processes. And if we think if we can do that and work with them, we just have a much greater adoption of indium phosphide. So we see an opportunity, again, with the best in the world silicon processing houses to embed indium phosphide as a critical layer in their process. We see an opportunity, as you said, to -- which has been done before to embed the laser right on a silicon photonics PIC.

We actually think that's an enabler because some of the -- as really a component supplier first and a module supplier second, we see that change as kind of enabling a component vector, making the modules a bit easier to make by putting the laser and solving some of the inherent alignment difficulties that you get right on top of the photonics IC. So as I say, if you're a module guy, it might be more challenging because it sort of takes -- moves towards more of a commoditization vector. But we see ourselves as components first. We actually think that this is something we want to enable rather than fight against.

I mean, yes, my next question would be basically exactly what you alluded to, which is if it would be to say -- if it would be fair to say that even in a bonded world, someone still needs to grow and supply the InP material, right? And so the integration doesn't actually threaten that much the laser makers. If anything, it just changes where the laser lives and actually who packages it. So in a way, you still need the laser -- yes, anyways. So great. Perhaps we -- I'll sneak one in on to the geopolitics, particularly on China. Now we know that there are some second order risks from the supply of raw materials to the Japanese substrate providers.

So perhaps can you give us a bird's eye view on both the upside and downside risks around China, whether that is in the form of the supply chain or export control restrictions that could potentially cut Chinese module makers' exports, which would make the Western module and merchant makers left with potentially added demand?

Yes. Look, I mean, again, a super thoughtful question. And for us, I think it plays in multiple dimensions. We are viewed, probably correctly so as a net beneficiary of a move by the United States government to ban Chinese transceivers. And I would view that as potentially a net positive. I think the challenge is that the Chinese transceiver suppliers make 70% of the transceivers in the U.S. market. It would be a problem to cut that off entirely if things aren't done in a thoughtful way.

So I'm thinking now more in the macro, right? In the entire hyperscaler industry, if you suddenly said there was no Chinese supply, that would be a challenge. That would certainly be a significant issue. Again, we think we can mobilize and respond to that challenge relatively quickly. Coherent, who's a great manufacturer of transceivers, I think, has probably mobilized and responded to that, but it will take us some time. And so in that gulf, right, what happens? So I think, however, the U.S. government is thinking about that needs to be done in a thoughtful manner and work with the industry at large, including the hyperscalers to institute the right set of parameters around it.

And then the concern, of course, is, is there some tit for tat? Right now, we've been able to really work well with the Chinese subcomponent suppliers to get us the supply we need, whether that be substrates, whether that be isolators, whether that be other raw material that we need on our manufacturing process. Is there any escalation that occurs that curtails, to the first part of your question, the ability for us to get Chinese supply, that would also be a bit of a struggle. Again, we have a nice attribute in that we have a global footprint. We have manufacturing, as you know, in Thailand. We actually have manufacturing in China itself, right, which can be an advantage when dealing with Chinese supply.

We have laser manufacturing in the United Kingdom, which is generally a safe harbor relative to substrates and things of that nature. So we have a lot of things that work to our advantage. But depending on how this all plays out, Gianni, again, we're definitely viewed as a net beneficiary, and I'd see myself in the asymptote that probably can work out just fine. But it's definitely something that I think needs a lot more thought than perhaps is being given at the moment.

Absolutely. We have 1 minute left, so I'll squeeze one last one. It is 2031, Lumentum rolled out an incredible super cycle and built out more capacity for an evolving landscape. So paint the picture. Does optical become the default fabric of computing the way copper was for the last 20 years? What does Lumentum look like? And what is the one thing in this room should watch over the next 12 to 18 months to say that we're on track towards this?

Yes. Look, I mean, there's no doubt -- you started with the question, you ended with the question. There's no doubt that optics is going to become a prevalent form of connectivity in the data center, no doubt, right? And I think as we look at 2031, huge adoption of NPO, huge adoption of CPO, huge adoption of OCS, all of which has high optical content. It's going to be a good time for anybody in the optics industry, and we're generally viewed as the leader.

I think the thing that is going to be significant is the scale in, and that's the thing to watch over the next 12 to 18 months. Does this thing really take hold? Are you going to see optics not only penetrate, which I think is largely a foregone conclusion, the backplane, are you going to see it actually go in tray and serve this high-bandwidth connectivity between memory and between GPUs? And I think we'll know more in 12 to 18 months around that particular opportunity.

Thank you very much, Michael. It's been a pleasure.

Gianni, thank you, as always. Appreciate it.

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

At this time, I would like to turn the conference call over to Kathy Ta, Vice President of Investor Relations. Ms. Ta, please go ahead.

Thank you, Matthew, and welcome to Lumentum's Fiscal Fourth Quarter and Full Year 2026 Earnings Call. This is Kathy Ta, Lumentum's Vice President of Investor Relations. Joining me today are Michael Hurlston, President and Chief Executive Officer; Wajid Ali, Executive Vice President and Chief Financial Officer; and Wupen Yuen, President, Global Business Units. Today's call will include forward-looking statements, including, without limitation, statements regarding our future operating results, strategies, trends and expectations for our products and technologies, that are being made under the safe harbor of the Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. We encourage you to review our most recent filings with the SEC, particularly the risks described under Risk Factors and elsewhere in our 10-Q for the fiscal quarter ended March 28, 2026, and in our most recent 10-K for the fiscal year ended June 27, 2026, to be filed by Lumentum with the SEC.

The forward-looking statements provided during this call are based on Lumentum's reasonable beliefs and expectations as of today. Lumentum undertakes no obligation to update or revise these statements, except as required by applicable law. Please also note that unless otherwise stated, all financial results and projections discussed in this call are non-GAAP. Non-GAAP financials have inherent limitations and are not to be considered in isolation form or as a substitute for or superior to financials prepared in accordance with GAAP.

You can find a reconciliation between non-GAAP and GAAP measures and information about our use of non-GAAP measures and factors that could impact our financial results in our press release and our filings with the SEC. Lumentum's press release with the fiscal fourth quarter and full year 2026 results and accompanying supplemental slides are available on our website at investor.lumentum.com.

We encourage you to review these materials carefully. With that, I'll turn the call over to Michael.

Thank you, Kathy, and good afternoon, everyone. Lumentum is positioned on the heart of a secular industry shift. As AI compute workloads increased in both speed and bandwidth, data center architects are turning to optical links as a primary means of connectivity. Our fourth quarter results reflect the early stages of this transition, driven by broad-based momentum across our scale-out and sell across product lines. Revenue surged 109% year-over-year to $1.01 billion, marking our eighth consecutive quarter of top line growth.

Additionally, we are maintaining revenue velocity as we saw our third consecutive quarter of greater than 20% sequential growth notable as the compare point is getting ever larger. While we experienced broad-based success, some of our previously highlighted growth drivers are just starting to layer in. Notably, in cloud transceivers, we achieved record 800 gig shipments, while initiating production of our next-generation 1.6T modules.

In OCS, we successfully navigated supply chain constraints to meet steep customer demand, ramping internal manufacturing shipments according to plan. In addition to strong top line performance, non-GAAP gross margin crossed 50%. We had originally targeted this threshold and a $2 billion quarterly run rate. So this milestone came quite a bit sooner than expectations. We expect gross margin expansion to continue driven by product mix and tight operational execution.

Non-GAAP operating margins expanded by more than 2,150 basis points year-over-year. These results prove 2 things: Our differentiated technology commands premium value, and our operating model delivers outsized leverage. Driven by sharp acceleration in AI revenue, the midpoint of our Q1 revenue guidance reaches our $1.25 billion target more than 1 quarter ahead of schedule. Additionally, our Q1 non-GAAP operating margin guidance exceeds the high end of our target model that we associated with this revenue level.

I'd like to address some recent market noise around co-packaged and near packaged optics. First, our lead CPO customers' production plans remain very much on track and their demand signal has increased since our last update. Our visibility into the timing of CPO scale-up deployments is also sharpened. We remain confident in the demand ramp for our ultra high-power laser chips in the second half of calendar 2027 ahead of customer scale up deployments in calendar 2028.

Because the first phase of scale-up optical connections will span across compute racks within the cluster, this demand ramp applies to any topology larger than one rack. Adding to our confidence, we have recently given our first external line source or ELS module purchase or delivery by the second half of calendar 2027. Second, the rest of our customer base is currently prioritizing near package architectures as an intermediate step to the eventual adoption of CPO.

The NPO opportunity is completely additive for us, significantly increasing optical TAM. We're seeing strong NPO momentum across multiple high-velocity engagements using our differentiated laser chips. Even our largest CPO customer is looking at NPO for specific new use cases, further increasing the optical TAM at that account. These architectural shifts represent a major market inflection that plays directly to our core strengths as a premier laser chip manufacturer, benefiting us as optics begin to penetrate the copper domain.

NPO offers a faster time-to-market option by placing optical engines on the board right next to the XPO accelerator, trading power and costs for simplicity and optical scale-up applications. Customers are evaluating 2 types of laser chips for NPO. In mid-power laser integrated directly with the optical engine and a high-power laser used in an external [ light ] source module. Our mid-power lasers inherent the reliability and engineering of our flagship high-power platform.

Our family of NPO and CPO lasers utilizes common design and process know-how to achieve industry-leading efficiency across 120 milliwatt, 150-milliwatt and 400-milliwatt output levels. Looking ahead, CPO continues to be viewed as the natural [ end state ] on the technology road map, placing optics directly on the substrate or interposer to maximum power efficiency through foundry level and mass packaging.

Now let's look closer at the metrics to define our fourth quarter, starting with the components product category. Components revenue for the fourth quarter was $649 million, reflecting 22% sequential and 103% year-over-year growth increases. Our laser portfolio continues to demonstrate strong momentum across every vector. Shipments of our narrow linewidth laser assemblies grew sequentially for the tenth consecutive quarter, and we were up over 130% year-over-year. Pump laser shipments surged more than 80% year-over-year, and we will remain effectively sold out for the foreseeable future despite our rapid capacity expansion.

Expanding, inferencing and training applications are driving full rate connectivity between data centers, while political and regulatory constraints favor smaller, more modular builds. These 2 factors among others, are substantially increasing the demand for our pump laser solutions. To put this in perspective, for one major hyperscaler, the network capacity connecting just 2 AI data center sites could double the total global backbone capacity they built over the entirety of the last decade.

To support the growth and scale across deployments, we have secured multiple long-term customer agreements that helped offset our planned capital expenditures. We continue to expect a fourfold increase in our pump laser shipments over the next several quarters to meet this escalating demand.

Turning to laser chips. We delivered another record-breaking quarter for EMLs, primarily driven by strong demand for 100-gig per lane devices. Momentum for our 200-gig EMLs is also accelerating rapidly, now accounting for over 25% of total EML revenue. Simultaneously, we are expanding our laser chip strategy to capture broader market opportunities in ways that align with our financial model. A key example is our CW laser chip for 200 gig per lane applications. which delivers high yield, proven reliability and industry-leading performance in a compact form factor to a multitude of customers.

Internal deployment of these lasers reinforces what our customers regularly confirm. We have a distinctive ability to deliver at scale to a very tight set of specifications which enables superior yields in transceiver manufacturing. Importantly, these new CW laser products will deliver margins that are accretive to our long-term financial targets. Looking ahead, we expect demand for both EML and CW lasers to grow significantly through the second half of calendar '26 and into 2027. To capture the 200-gig and 300-gig lane speed opportunities, we are expanding capacity across our 2 indium phosphide wafer fabs in Japan, qualifying both CW and EML process flows on our newest tools as they come online.

Even as we allocate additional capacity to CW lasers, we remain on track to deliver over 50% EML unit growth by the December 2026 quarter compared to the year ago quarter. Wrapping up our components commentary, we have visibility to an expanding set of 3D sensing applications. These new opportunities are expected to drive growth in upcoming product cycles with our primary customer.

Now I will move to our systems product category. Systems fourth quarter revenue reached $357 million, representing a 30% sequential and 123% year-over-year increase. Both cloud transceivers and OCS were major drivers of the revenue growth quarter-over-quarter. While pockets of supply chain tightness for certain components cap shipments below total market demand, our factories executed to our aggressive plan for both product lines. The bulk of our cloud transceiver shipments in the quarter were at 800 gig speeds, and we began shipping 1.6T transceiver as planned.

Meanwhile, profitability across our transceiver lines continues to improve, driven by gains in both yield and capacity utilization as well as the initial rollout of higher ASP 1.6T transceivers. Our visibility into future cloud transceiver demand is clearer than ever. In fact, we expect the 1.6T transceiver uptake to intensify starting in fiscal Q1 and sustain through calendar 2027. This momentum is anchored by our lead Tier 1 hyperscale customers whose strong rollouts of custom AI clusters are driving a rapid transition from 800 gig to 1.6T technology.

For the use of improved design engineering techniques, we appear to be first to market in many instances ahead of larger competitors, giving us a market share advantage that we should be able to maintain through the cycle. The degree of difficulty with 1.6T designs, again, is playing to our strengths as our Signal Integrity team is widely acknowledged as the best in a competitive field.

Turning to OCS. Our internal manufacturing expansion is progressing smoothly. After doubling shipments from fiscal Q3 to Q4, our guidance includes our first triple-digit OCS revenue quarter. The demand signal for 2027 continues to be incredibly strong, and we have started the initial work to add capacity with contract manufacturers as well as continuing to increase output in our internal factories.

Since our last call, the road map for OCS has also come into better view. We are now planning higher and lower [indiscernible] products, including specialized in-tray offerings. rounding out systems category. Performance in industrial lasers and cable access strengthened quarter-over-quarter. Within industrial lasers, we are seeing increased adoption of our ultrafast lasers targeting high-density PCB via drilling that supports advanced AI XPU boards and 1.6T optical modules.

Looking ahead to Q1. We expect to set another quarterly record and as stated earlier, reach our $1.25 billion revenue target more than 1 quarter ahead of the plan outlined at the last OFC. We anticipate that approximately half of the sequential growth will stem for our components portfolio driven by continued expansion in scale out and scale across applications. The other half will be powered by the ongoing ramp of our systems portfolio of about 1.6T transceivers and accelerating OCS deliveries. Now I'll hand the call over to Wajid.

Thank you, Michael. Fourth quarter revenue of $1.01 billion was at the high end of our guidance range and non-GAAP EPS of $3.23 was well above our prior expected range, demonstrating the leverage of our business model. GAAP gross margin for the fourth quarter was 47.4% and GAAP operating margin was 27.8%. Both metrics exemplify the company's exceptional performance.

As disclosed previously, in the fourth quarter, we proactively equitized a portion of our convertible notes, which were in the money following the appreciation of our stock over the past year. This action reduces our debt by $1.1 billion or approximately 35% of our outstanding convertible debt. This transaction resulted in a onetime noncash GAAP charge of $7.8 billion, bringing our fourth quarter GAAP net loss to $7.2 billion.

Turning to our non-GAAP results. Fourth quarter gross margin was 50.4%, which was up 250 basis points sequentially and up 1,260 basis points year-on-year due to better manufacturing utilization, favorable mix and increased pricing on select products. Fourth quarter non-GAAP operating margin was 36.6%, which was up 440 basis points sequentially and up 2,160 basis points year-on-year. We continue to invest in critical R&D programs serving cloud and AI customers while maintaining the rigorous cost controls necessary to optimize our business model.

Fourth quarter non-GAAP operating profit was $368.8 million and adjusted EBITDA was $406.4 million. Fourth quarter non-GAAP operating expenses totaled $138.1 million or 13.7% revenue an increase of $11.9 million from the third quarter and an increase of $28.8 million from the same quarter last year in support of expanding cloud and AI opportunities. Q4 non-GAAP SG&A expenses were $50.6 million. Non-GAAP R&D expenses were $87.5 million.

Total interest and other income net was $22 million on a non-GAAP basis. Fourth quarter non-GAAP net income was $326.3 million and non-GAAP net income per share was $3.23. Our diluted weighted shares for the fourth quarter were 101.1 million on a non-GAAP basis. I will now turn to the balance sheet.

During the fourth quarter, our cash and short-term investments decreased by $0.43 billion to $2.74 billion, with the decrease primarily driven by convertible debt conversions. Our inventory levels increased by $59 million sequentially to support the expected growth in our cloud and AI related revenue. In Q4, we spent $167 million in CapEx, primarily focused on manufacturing capacity to support cloud and AI customers.

Turning to revenue details. Components revenue of $649.4 million increased 22% sequentially in Q4 and 103% year-on-year. Systems revenue of $356.9 million increased 30% sequentially in Q4 and 123% year-on-year. Now let me move to our guidance for the first quarter of fiscal year '27, which is on a non-GAAP basis and is based on our assumptions as of today.

We anticipate net revenue for the first quarter of fiscal year '27 to be in the range of $1.225 billion to $1.275 billion. The $1.25 billion midpoint reflects more than 130% year-over-year growth, setting yet another all-time quarterly revenue record for Lumentum. We project first quarter non-GAAP operating margin to be in the range of 39.5% to 40.5% and diluted net income per share to be in the range of $4.05 to $4.35. At the midpoint, this operating margin represents an expansion of more than 2,100 basis points year-over-year. Our non-GAAP EPS guidance is based on a non-GAAP and annual effective tax rate of 16.5%. These projections assume shares used for non-GAAP diluted earnings of approximately 102 million.

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

Thank you, Wajid. [Operator Instructions]

[Operator Instructions]

Your first question comes from the line of Joseph Cardoso with JPMorgan.

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

Joe, this is Michael. Firstly, thanks for your continued support. Look, we'll come out with some new financial targets, probably in the next OFC. We're obviously running well ahead on almost every metric on revenue, on margin, on operating margin. We seem to be doing quite a bit better. And you're right. Look, I think there are some new things that we didn't factor into our discussion at OFS NPO.

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

Got it. Fair. And then maybe just a follow-up and specifically on the NPO. Curious if you could provide any further details there, specifically how you're thinking about the time here, just given that it does sound like some of these opportunities are performing a little bit earlier than expected. And I know you talked about the different form factors or the different kind of content opportunities as it relates to the laser opportunities there.

But any way to kind of flesh out like where you guys are seeing maybe the architecture of choice by your customers and is that biased in any direction? And how we should think about content as it at least relates to maybe your large customer on the CPO side -- relative to the ultra high power laser.

Yes. I'm going to say a couple of things and then actually Wupen to comment a little bit on the differentiation in mid-power Certainly, the timing of these opportunities is plus or minus what we have talked about for our lead CPO customer. Our lead CPO customer, just said in the prepared remarks, we expect to start shipping in high volume for scale up. We're already, of course, shipping for scale-out. For scale up, we expect to be shipping in the second half of calendar '27 for their deliveries in '28.

Our leading customers on NPO, plus or minus, probably maybe minus 1/4 are in that ZIP code. The first. A couple of those are more the same kind of ELS high-power laser and then maybe followed by a couple that are integrated. We're in the optical engine of a mid-power laser is integrated inside the optical engine, and it's all 1 unit. So I would say that the ones that we have the best line of sight on is there are sooner, more of the high-power laser type, very consistent with what we've been talking about for our largest CPO customer.

With that said, I wanted Wupen, maybe to give a few seconds of color because I think there's a little bit of a mischaracterization. We think that these mid-power lasers that are going inside the lot of things going on there in terms of differentiation. Do you want to give 2 seconds on that?

Yes, definitely. Thanks, Michael. So definitely, the -- it is the -- to do the kind of the NPO optical engine. Imagine these NPOs had about 6.4T of bandwidth, which is really equivalent to 4x that of 1.6T module. The level of integration and the power density that's required and efficiency required to fit everything to a small optical engine is immense. Therefore, you need really the best laser technology and the best efficiencies in order to reflect everything in a small package.

So [indiscernible] this year, really is to leverage our 400-milliwatt kind of design principle and leverage the higher efficiencies of the interesting design process and scale it to an application, right, around 150, 200-milliwatt range, that enables that application. This is actually based on our ultra-high power technology that we uniquely positioned to address this market, and we believe that by late 2027-2028 time frame, that NPO will hit the market to enable our [indiscernible] scale up, and this becomes an interesting opportunity for us to increase our laser business.

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

First thing I wanted to try, ask is to what extent we're able to reprice backlog with your customers? And how did that affect this quarter's gross margin as well as your gross margin outlook? And then I've got a quick follow-up.

Yes. Thanks, Simon. Look, we did reprice a little bit. I think most of our sort of LTAs are more forward-looking in terms of the price impact. We saw some benefit, as Wajid said in his prepared remarks, on the gross margin line on pricing. We think that, that still has some room to play through. But I'd say the low pole this quarter was more on mix, right, where we were shipping a lot more of our high mix components and I think as we said, we'd expect that to continue to play through as well. So we think we have some room to run on gross margin line side. .

Great. Appreciate that. And the other thing I've been hoping to ask you about is we've been hearing more about Chinese-based companies coming to market with new indium phosphide fabs. What's your take on this developing and future competition?

Yes. Look, I mean, I think we're hearing the same thing. We obviously haven't seen any impact on our numbers as yet and I don't expect there to be any impact. We think we have differentiation honestly, on EMLs. We were very strong in there. And these high and mid power lasers that are necessary for NPO and CPO, again, very strong differentiation there. And then even in CW, we've been surprised at our ability to price up given what we said in the prepared remarks that customers are seeing far better yields given our ability to deliver consistent performance on our lasers.

They just simply don't deviate the width of the spec is very narrow, and that results in far better transceiver yields for the customers that we've actually started shipping CW lasers. And so as a result, we are able to command a nice price premium that we'd expect to sustain as these Chinese -- if these Chinese guys come online. I caution people also -- I think people are -- some of these Chinese laser suppliers are not delivering in the market today. So they have very -- there's no recourse when they throw out these big numbers. We have not seen anything like that to date in terms of their output.

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

Really good to see the guide for a triple-digit OCS revenue quarter, I think, in the current quarter, I think, is what you said. So could you just confirm that? But also the question is, any comment on when we could expect to see that happen for ultra high-powered CW scale-out lasers where we'd get triple-digit quarter? .

Yes, Mike, again, first, I want to thank you for the support of the company and really following our details really well. Yes, you've got it right. So in the guide, which is the first quarter, we expect our first triple-digit OCS revenue quarter. We'd expect to be meaningfully above the 3-digit mark.

We're executing well on OCS, as I said. And then for ultra-power lasers, we have said, hey, we expect by the end of the year to be sort of in the $50 million mark. I think the third quarter is when you'd see the first triple digit quarter for at high-powered lasers. So we are executing. We're shipping today. We had good shipments in this -- in the reported quarter, Q4. We'd expect that to build somewhere in the $50 million range by the of the calendar year and then to really meaningful impact in fiscal Q3.

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

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

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

Congrats on the strong bids as well. Marcel, I was kind of double quickly on the OCS. I was hoping perhaps you can refresh -- I know this quarter, you mentioned it hit triple digit. But if you can refresh us on the $400 million plus OCF guide for the second half of 2026. So are you trending well ahead of it? Or just any update on that side? And perhaps tied to that, how should we think about your key OCS customers build versus buying from you calculus? Do you expect Lumentum to eventually absorb most of their internal programs? If so, any time line in life?

Yes, Papa, Look, what I'd say is we're definitely tracking to the $400 million. I would not say tracking ahead. I mean we definitely, as you know, had some problems early on in the ramp with supply chain. We're out of that now. I think we're executing, as I said, to plan, we are plus or minus about where I would have expected to be for the guide, right?

So that contributes -- takes a dent out of the $400 million and that leaves us some room to run in the fourth quarter. Fourth calendar quarter. Relative to one customer that partly has an internal source of supply, we are, I think, executing extremely well. I don't think we -- I think they'll continue to use an internal version. But I think as they ship more and more OCS, we will absorb the vast majority of that. So I would expect sometime in early '27 that we cross over and be the #1 supplier and actually have momentum from there in terms of our OCS shipments.

So we're definitely -- I think we surprised the customers. We are continuing to ship to a number of different customers, our execution back on track, but most importantly, like on software and things like that, where I expect it to us to have more difficulty, Papa, we've done well. So I think our customers, in general, if you talk to them, would say, we've been an incredibly, incredibly strong supplier.

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

Yes. So I would say on EML, probably no change, right? So I don't think that it's gone up, but it hasn't come down. We're still shipping behind customer demand on EML. I think what surprised us is high-powered lasers, right, high-powered lasers, again, there's been a lot of noise in the system on what's happening on various co-package and near package opportunities. We are way behind our shipments, unfortunately, on high-powered lasers. So we -- if 1 vector has really changed since the last time you and I talked, I'd say it's high-powered lasers. And we are very much further behind. The demand signals increased and we are very much further behind relative to our ability to supply.

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

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

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

Yes, Chris. Yes. No, we -- again, first, appreciate how much time you're spending on the company. Yes, we've got our first ELS module order right, which from an ASP standpoint is meaningfully higher than the set of lasers that we ship in. So we're very excited about the revenue opportunity, small to start, right? And we said that we'd be shipping sometime midyear, early second half of '27 to be honest, a little bit later.

We felt like we see more opportunity on sort of scale-out applications than we have to date. But we're very pleased to be participating in the early phases of scale up with both lasers and now with the ELS module. As I said a minute ago, the ELS module meaningfully higher from an ASP standpoint, but the margins are not quite as good, above corporate average but not quite as good as the lasers. So we're trading a little bit of margin to get some revenue bump. We think -- I think Simon asked earlier in the call, we think we have enough drivers on the margin side that we can keep the margin vector moving but help our revenue acceleration. .

Also If you recall that we've positioned ELS module to be really enabling the customers who don't want to deal with individual lasers. So this is really a great first step for us to take to ship to 1 customer and then go from there, we enable other end users to use the ELS, enable their CPO and NPO systems.

Excellent. Maybe as a follow-on I think, Michael, you've talked about, I think it's the 1.6T cycle or 200 gig per lane and perhaps CW and SIFO working into the supply chain maybe earlier and being a larger part of transceiver shipments ultimately. I guess, first of all, where are we on that? Is this on the [indiscernible] CW side accelerated even faster than you originally spoke about. And can you kind of describe the difference in economics for you between CW lasers and EMLs, which would be, I think, larger because they contain the modulators as well. That will be great. .

Okay, Chris, yes, good question, and I'll give some commentary, and then have Wupen comment as well. So one, no slowdown in our EML demand. I mean we are I think it was Papa that asked a minute ago, we see still a significant supply/demand imbalance on CW or EMLs. As Kathy put in the prepared remarks, we're still very much on track to increase our EML output year-over-year.

But even at the end of the year, we'd expect to be significantly behind demand. So no slowdown at all in the demand that we're seeing from EML. We acknowledge and we've said this before, that we would expect and are seeing CW lasers take a significant portion of transceiver output. Silicon photonics is a viable solution at 1.6t. Of course, we've also said, and it also seems to be bearing out that as we think about 3.2T, silicon photonics loses some of its advantages, and we'd expect to see EMLs come back in a meaningful way.

What I comment is a little bit of a shift in stance is that we are allocating some of our output now because we're actually doing quite a bit better in Japan than we expected in terms of output. And so what we're doing is part of that is allocating some of this excess output to CW lasers and we're now shipping CW lasers in a relatively meaningful way in this 200-gig per lane silicon photonics opportunity. What's also changed for us is we have significantly reduced the die size of our CW laser.

So before when you and I talked, we said, hey, probably from a margin standpoint, EML's better. Now we brought things much more in line. CW lasers are smaller. They're better performing. We are commanding a significant price premium, as I said in a previous question, against what we view as the market price because of the performance of these lasers. And as such, the margin opportunity is still better EMLs, but that gap has closed considerably, I think since the last time we talked. Wupen, do you want to talk a little bit about the dynamic that you're seeing on CW the EML?

Yes, I think we're accurate, right? There's a couple of things to add to that. Number one, if you look at the application today, there's a lot of 200 G per lane volume that's on 800 gig. And then in that, we actually see a much higher EML share versus [indiscernible] laser share. So let me talk about dynamics. I think this will continue. EML will remain a very important player in [indiscernible] lane. But at 1.6T front, I think we will see [indiscernible] lasers as Michael talked about, our new design 200 G CW laser is much more efficient, therefore smaller and give us a much better gross margin profile. And I think [indiscernible] here is that in a constrained environment, we'll also see customers' behavior wherever they can get the laser source, we will use that solution to support their buildout. So the dynamics of EML [indiscernible] lasers is not only a technical one, but also a supply versus demand situation.

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

A good quarter and guide here. Just a quick question on the an EML and CW, it looks like that's ramping very nicely. Is it fair to assume both the EML and CW laser should be accretive to your margins? And when do you see this 1.6T crossover, it looks like it's already greater than 25% revenues. But when do you see that crossing over with the 800 git, I guess, and a follow-up.

Yes. Mr. Rakesh. Good to hear from you, my friend. Look, no change really in the forecast on the crossover. What we said is -- and I think you're referring to 200 gig per lane lasers. We have said that for us, we'd expect 200 gig EMLs to be the majority volume shipments by the middle of 2027. We just said in the prepared remarks that now 200 gig per lane EMLs are 25% of our mix. We'd expect it to be 50% or more of volume by midyear of 2027. So we seem to be tracking to that. No real change in that.

I think generally speaking, yes, you're right, lasers are one of our bed businesses. And the lasers are more than our corporate accretive, the CW or EML. And as I said to Chris a minute ago, we've closed the margin gap quite considerably since our last call, on EMLs versus CW by shrinking the die size of the CW laser. So EML seems to be better, but we close the margin gap quite considerably.

Got it. Very helpful. And then on the operating leverage side, Wajid, it looks like solid improvement there year-on-year, you audit have 40% target. How should we look at -- how should we think about it as you go through fiscal '27?

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

Your next question comes from the line of George Notter with Wolfe Research.

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

And as I extrapolate that kind of look at Greensboro, are you making more progress towards filling the rest of that facility looking forward?

George, yes, look, I would agree. I mean I think what we tried to hint to in a previous question is the ultrahigh-powered laser demand has surprised us. and that cuts across a couple of customers. So what we're trying to do, I think really in the last 3 months is secure even more substrate supply. We were doing well. We felt like we had given the baseline of demand that we were seeing from ultrahigh-powered and then, of course, the EMLs, the CW lasers that go into our scale-out products. We felt pretty good, right? -- as you said. But I think we've seen a pretty big surge in demand, as we said. And in order to respond to that, we went out and we found additional substrate help from AXTI the great partner, WooPenns worked with them for a good number of years. And we think we're going to need their help just given the surge in demand.

So that's what drove that deal. If this vector continues, we're probably going to need to look for more help on substrate we feel we're good at this moment. We're probably pretty comfortable just given our lead in arrangement with the Japanese supplier and now of the announced deal with AXTI. But given the rate of change in the demand vector that we're seeing, that may not be true a quarter or 2 from now either.

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

Yes. Look, we're looking to do that. I think we've sort of reported consistently that we have capacity in Greensboro. We have room there and Wupen has been out talking to a number of customers about helping them with their laser demands, which are, again, changing minute by minute is that everybody starts to look to adopt your packaged or co-packaged solutions. And so I would expect that we have some things to talk about over the next couple of quarters relative to new arrangements to in Greensboro that speak to more of this capacity we have there.

Your next question comes from the line of Tom O'Malley with Barclays.

Great to be on the call. My first is on the MPO side, where you spend a little more time on the preamble talking about the technology. I was curious, when you look at ASIC and GPU road maps. When you see the intersection of NPO, did that need to be with a new generation of silicon? Or can you intersect an existing ramp. If you were to see a big customer today ramping in the beginning of next year, were you able to ship NPO solutions where they originally started off as electrical-only solutions just for the timing aspect of your ramp, that be superhot. .

Yes. Tom, super to speak to you. Again, we really appreciate this chat, as always as always. Look, I think what we're seeing now is an inflection in the ASICS and in the SerDes speed, and that's driving the need for NPO and I don't know, and Wupen can comment a little bit on this. I don't think there are existing TPUs, XPUs, GPUs that are shipping that have a fast enough serve speed that we could suddenly plop in NPO or CPO solution, which I think is what you're asking. But as these new generations come online, really seeing silicon in mid-'27 toward the end of 27 and early '28 all those new silicon solutions, again, GPUs, XPUs, TPUs all seem to be driving survey speeds that are consistent with the adoption of NPO or CPO. Wupen, any color you can add for Tom?

No, thank you, Michael. I think that's very accurate. Really, I don't think, Tom, we are not seeing kind of the retrofit of NPO onto the current SKUs. We're seeing really like the as Michael talk about, there is a broad momentum towards the '28, kind of '28 ramp of NPO and CPO and really driven by optical scale-up. So it's not -- this is beyond just the XPU itself. This also goes into a rack-based multi-rack system that requires optical scale up, right? And therefore, we believe this is going to be new processor, new racks and 2028 event for optical product from the industry's evolution point of view.

Super helpful. And then on the other side of things on OCS, you talked about [indiscernible] OCS. I was curious, is the competitive dynamic there similar for you guys? In terms of the timing, is that in your current TAM? Or would that be additive to the TAM? And when do you see that intersecting in terms of that technology hitting the market?

Tom, additive, right? So anything that Kathy's presented at OFC, it's above and beyond that. It's a very new set of opportunities. We've come to find out. There are a number of different folks that are looking at this kind of approach, and it's all very additive. It would hit for us time frame Tom. It's not something that's super imminent, but it's imminent enough that we're working on it aggressively. It requires a lot of redesign on our -- from our engineers. But look, we're the only guy shipping. I mean I know a lot of people are talking about OCS a lot of start-ups for us to be now at $100 million and beyond types of quarters, we're the only ones that have a track record outside of a contract manufacturing relationship with a large OCS users.

So we're really the only merchant supplier today of OCS. And by virtue of that, we're going to get every single call and have the first look, I think, in every single opportunity out there.

And Matthew, it looks like we have time for just 1 more question.

Great. Your next and final question will come from the line of Ruben Roy with Stifel.

Yes. Great. Thanks for sticking me in here.

Michael, maybe just to drill into the Pump Laser commentary a bit, growing quite nicely. I think you said 80% year-over-year for the second consecutive quarter and fourfold increase coming still effectively sold out you talk a little bit about where you are in the resort should ramp and what actual capacity looks like. And then you talked about some long-term supply agreements that you're putting into place for scale across. Can you characterize maybe high level what the structure of those agreements are and the duration?

Yes, Ruben, Best for last. We really always appreciate your questions. I think this is an area of incredible strength for us, right, which really I think is underappreciated. We have a very large market share here. And what we've done is really worked hard with, for example, a lot of the NEMs, the network equipment manufacturers to form strategic partners.

And we're super pleased with how people have come to work with us on helping offset some of the CapEx, and it's considerable that we have to put out to ramp in Rose Orchard. You got it right and to then bring that into our Thailand manufacturing for packaging tests. We formed a series of arrangements that for the most part, our 3-year arrangements. And those arrangements as our normal arrangements, have pricing built into them, there are pricing levers that we can exercise if certain conditions are met.

So we think we have some room there on the price line. But these are giving us a lot of surety in terms of that demand not evaporating. And in most instances, I think they're take-or-pay comments since you had the middle of that. But we feel really, really good about where we're sitting Ruben on the pumps again, rough order, we're somewhere between 70%, 80% share. And we believe we have a technology road map that our customers want to engage in that will afford us the opportunity to work on price to further increase output. But this is a darn exciting area for us.

Wupen, any additional color?

No, thank you.

That's really helpful for the last 30 seconds here. A lot of discussion on NPO. My quick follow-up on that is, are the discussion of engagements that type of thing associated with some of the open or standards-based NPO kind of, yes, I guess the standard-based NPO versus custom. And I'm asking, I'm just wondering if there's a better alternative for you given your technology and positioning to matter...

Look, I'll have Wupen to comment just in the interest of time. I mean there are OCI, like different standards that are coming out that are talking about the way the interface between the ASIC and the optical engine, for example, that's great for us because that opens up switch opportunities, for example, that may not be open to us before.

So the standards-based approach is -- opens up optical TAM. But we are engaged to be honest with you in both, right? There are a lot of custom, very specific types of implementations that our customers are driving to. And we are -- that's really going to be our first wave of NPO engagement moment. Any color?

Maybe a little bit of color. I think just the -- to the extent what Michael just talked about, right, there is actually 2 things. One is that today, right, the physical level, the optical level, they're all so called fast narrow, 200 gig per lane, massive lanes. And the next generation, right, as Michael talked about will be like OCI and [ MSA ] based, right? So that's on the optical side. But on the form factor side, it is very much proprietary, right? Everybody has a different design. Again, we talked about already mass to their rack design, their system design, and that actually is different from customer to customer, right? So again, optically, they are kind of standard based, but then on the competition side, they're different between different customers.

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

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

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

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.

Many of you have traveled across the country and across the world to be here, and we're generally grateful for your time and for the trust you have in us, it means everything to me and for the franchise. We're convening here at a remarkable moment in time. Technology has always been a driver of change. But what we're witnessing today with artificial intelligence feels different in kind. It's reshaping. AI is reshaping how we live actually, you know how businesses operate, how consumers engage in the world and how capital flows towards opportunities.

Last week at Mizuho, we did a 2-day mandatory offsite for the leadership team, and many of our members of our management teams under us. And importantly, we focused on AI and how we want to continue to adopt it. For a global institution like Mizuho, technology sits at the center of everything that we do. And our CIO, John Buchanan, who also will be here and our IT teams are essential partners as we invest in our capabilities to remain at the forefront of this transformation.

This conference wouldn't be possible without the exceptional work of our organizing team. So my sincere thanks goes to our research and sales leadership under Bill Featherston and Shaival Patel, respectively. A big thank you to Jessica Meys and her corporate access team and also to Melissa Mendel and Hannah Zeitlin, who are in the audience as well, who have a tremendous partnership with equities and investment banking, who help shape what we'll deliver to you today.

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.