Lumentum Holdings Inc. (LITE) Earnings

Management highlights

- Overall Financial Performance - Total fourth quarter revenue grew 109% year-over-year, marking the eighth consecutive quarter of top-line growth and third consecutive quarter of over 20% sequential growth - Non-GAAP gross margin hit 50.4% (250 bps sequential expansion, 1260 bps year-over-year expansion), crossing the 50% threshold one quarter earlier than planned - Non-GAAP operating margin reached 36.6% (440 bps sequential expansion, 2160 bps year-over-year expansion), with non-GAAP EPS of $3.23, above the prior expected range - The company reduced outstanding convertible debt by $1.1 billion (35%) via proactive equity conversion, resulting in a one-time non-cash GAAP charge of $7.8 billion and a GAAP net loss of $7.2 billion for the quarter - AI Optical Connectivity Technology Roadmap - CPO (Co-Packaged Optics) customer production plans remain on track, with demand signals increasing since the last update; high-volume shipments of ultra-high power laser chips for CPO are expected in H2 2027, ahead of customer scale deployments in 2028, and the company received its first external light source (ELS) module purchase order for H2 2027 delivery - NPO (Near-Packaged Optics) is an additive opportunity that significantly expands the total addressable market (TAM) for optical products, with strong engagement momentum across multiple customers; Lumentum is well-positioned for NPO via its common platform of high-power and mid-power lasers tailored to both external light source and integrated optical engine designs - Capacity and Manufacturing Updates - Pump lasers: A four-fold increase in shipments is expected over the next several quarters to meet rapidly growing demand, supported by multi-year long-term customer agreements that offset planned capital expenditures - Indium phosphide wafer fab capacity in Japan is being expanded to support growing demand for EML and CW lasers; the Greensboro fab conversion from gallium arsenide to indium phosphide remains on schedule for first revenue in early 2028, with full ramp through the end of 2028 and into 2029 - OCS manufacturing: Internal expansion is progressing smoothly, with contract manufacturing capacity added to meet strong 2027 demand; the product roadmap has expanded to include higher and lower port count products, including specialized in-tray offerings - Product Development Highlights - 1.6T transceivers are ramping ahead of broader competitors, giving Lumentum a first-to-market market share advantage, with uptake expected to accelerate starting in fiscal Q1 2027 and continue through 2027 - New compact CW laser chips for 200 gig per lane applications deliver consistent narrow-spec performance that improves customer transceiver manufacturing yields, enabling premium pricing with margins approaching EML levels after die size reductions

Guidance

- For the first quarter of fiscal 2027, Lumentum guides non-GAAP net revenue to a range of $1.225 billion to $1.275 billion, with a $1.25 billion midpoint that hits the company's prior long-term target one quarter ahead of schedule. The midpoint represents over 130% year-over-year revenue growth. - Non-GAAP operating margin is guided to a range of 39.5% to 40.5%, which exceeds the high end of the company's prior target model for this revenue level, and represents over 2100 bps of year-over-year expansion at the midpoint. - Non-GAAP diluted EPS is guided to a range of $4.05 to $4.35, based on an effective tax rate of 16.5% and 102 million diluted weighted average shares. - The first fiscal quarter of 2027 is expected to deliver the company's first triple-digit OCS revenue quarter, with revenue coming in meaningfully above $100 million. - Ultra-high power lasers for CPO/NPO are expected to reach ~$50 million in revenue by the end of calendar 2026, with the first triple-digit revenue quarter expected in fiscal Q3 2027. - Management expects to release updated full company financial targets at the next OFC conference, as current results are running well ahead of prior framework.

Segment performance

Lumentum recorded total fourth quarter fiscal 2026 revenue of $1.01 billion, with two core product segments: 1. Components: Fourth quarter revenue of $649.4 million, representing 22% sequential growth and 103% year-over-year growth. This segment contributed 64% of total company revenue in the quarter. Key sub-segment performance: narrow linewidth laser assemblies grew 130% year-over-year (10th consecutive quarter of sequential growth); pump laser shipments surged over 80% year-over-year and remain sold out despite rapid capacity expansion; EML laser chips hit a new quarterly revenue record, with 200 gig EMLs accounting for over 25% of total EML revenue. 2. Systems: Fourth quarter revenue of $356.9 million, representing 30% sequential growth and 123% year-over-year growth. This segment contributed 36% of total company revenue in the quarter. Key sub-segment performance: cloud transceivers delivered record 800 gig shipments and initiated 1.6T transceiver production; OCS (Optical Communication Switches) doubled shipments quarter-over-quarter amid supply chain constraints; industrial lasers and cable access performance strengthened sequentially, with growing adoption of ultra-fast lasers for high-density PCB via drilling.

Risks & headwinds

- Supply-demand imbalance persists across key product lines: EML lasers remain 20% behind demand, and high-powered lasers for CPO/NPO have fallen further behind supply due to faster-than-expected demand growth, creating near-term delivery constraints. - Emerging competition from new Chinese indium phosphide fabs is expected to enter the market over time, though management has not yet seen any impact to results and believes its product differentiation and yield advantages will sustain pricing power. - Sustained faster-than-expected demand growth for indium phosphide substrates could create future supply constraints, even after the recently announced additional supply agreement with AXT.

Analyst Q&A

• Q: With results running ahead of all prior targets and new incremental opportunities like NPO and ELS emerging, what should investors expect for future financial targets? /

  A: Management will release new formal targets at the next OFC conference. The company is currently outperforming on almost all metrics, and new unplanned incremental opportunities (including NPO, CW lasers, and stronger-than-expected OCS growth) create additional upside for future revenue relative to prior frameworks. Management is focused on execution and expects to continue delivering incremental revenue growth in coming quarters.

• Q: How has repricing of backlog impacted gross margin, and how should we think about emerging competition from new Chinese indium phosphide fabs? /

  A: A portion of the recent gross margin expansion came from selective repricing, most of which impacts future rather than current backlog, with more room for price gains to flow through. Most of the recent quarterly margin expansion came from favorable product mix. Management has not seen any impact from new Chinese competitors to date, and notes that these suppliers have not yet delivered meaningful volume. Lumentum's consistent narrow-spec performance improves customer transceiver yields, allowing it to command a sustained price premium that will offset any new competition.

• Q: Confirm that the first triple-digit OCS revenue quarter will come this coming quarter, and when will ultra-high power lasers hit triple-digit quarterly revenue? What is the update on the Greensboro fab schedule? /

  A: The guidance does include the first triple-digit OCS revenue quarter for fiscal Q1 2027, with revenue expected to be meaningfully above the $100 million threshold. Ultra-high power lasers will reach ~$50 million in revenue by the end of calendar 2026, with the first triple-digit quarter coming in fiscal Q3 2027. The Greensboro fab conversion remains on the prior schedule: first revenue in early 2028, ramping through the end of 2028 and full capacity by 2029, with progress ahead of expectations on long-lead equipment.

• Q: What is the market dynamic and margin profile for CW vs EML lasers for 200 gig per lane applications? /

  A: EML demand remains strong with a continued large supply-demand imbalance, and EML margins still remain higher than CW. The margin gap between CW and EML has closed considerably recently due to significant CW die size reductions, and CW commands a price premium due to its superior consistent performance that improves customer yields. CW is ramping faster than initially expected for 1.6T transceivers, while EML is expected to regain share for 3.2T transceivers as silicon photonics loses some of its performance advantages at higher speeds.