Q2 2026 Earnings Call Transcript

Good day, everyone, and welcome to the Lumentum Holdings Second Quarter Fiscal Year 2026 Earnings Call. Please also note this event is being recorded for replay purposes. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand.

If you have dialed in to today's call, please press 9 to raise your hand and 6 to unmute. 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 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 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 the statements except as required by applicable law. Please also note that unless otherwise stated, all financial results and projections discussed in this call are non-GAAP.

Non-GAAP financials have inherent limitations and are not to be considered in isolation from or as a substitute for or superior to financials prepared in accordance with GAAP. You can find a reconciliation between non-GAAP and GAAP measures, 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. 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 as the 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 year-over-year increase. We previously identified three primary catalysts for Lumentum's future growth: cloud transceivers, optical circuit switches (OCS), and co-packaged optics (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 and 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 three 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 is 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-$100 million purchase order for ultra-high-power lasers that support optical scale-out applications. We expect shipments for this incremental order in 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 ships in the second half of this calendar year. Furthermore, we have established a clear line of sight into the broader external light source (ELS) market, which would enable us to participate more holistically than as a standalone laser chip supplier.

By expanding into pluggable external light source modules, we would dramatically increase our serviceable market. In addition, the ELS allows us to diversify our customer base as several new partners adopting next-generation scale-out architectures are looking for more turnkey solutions. We have built significant momentum through our leadership in cloud 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-up.

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 dominate scale-up connectivity, referring to the ultra-short reach high-speed paths within a single rack or a cluster. While copper has long been the gold standard for scale-up 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-up 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 have 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 roadmap.

Now, let's look closer at the key performance metrics that defined 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 standalone 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 inline 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 lane 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-powered 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 2026, both through current activities in Sagamihara and better utilization of our Caswell, United Kingdom, and Takao, Japan fabs.

Beyond sheer volume, our Q2 revenue was propelled by a favorable mix shift toward 200 gig lane speeds, which provide a meaningful ASP uplift. While these high-speed devices represent 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 inter-campus to longer-reach topologies. Shipments of our narrow linewidth 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 aligned 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 the 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 remained 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, our guidance midpoint exceeding historical revenue levels by a substantial margin.

Within this outlook, we anticipate that approximately two-thirds of the sequential increase in revenue will be driven by our components portfolio, reflecting broad-based strength across cloud applications. The remaining one-third 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 a 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 820 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 were 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 Q3 2026, which is on a non-GAAP basis and is based on our assumptions as of today. We anticipate net revenue for Q3 2026 to be in the range of $780 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.

Thank you, Wajid. To allow as many people as possible an opportunity to ask questions, please keep to one question and one follow-up. Kevin, let's now begin the Q&A session.

We will now begin the question and answer session. A reminder that if you would like to ask a question, please raise your hand. If you have dialed in to today's call, please press 9 to raise your hand and 6 to unmute. And your first question comes from the line of Simon Leopold with Raymond James. Your line is open. Please go ahead.

Hopefully, you can hear me okay? Great. Thank you for taking the question. Yeah. We can hear you, Simon. Yeah. Yeah. Yeah. I can work Zoom. 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 diversifications. 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? Thank you.

Yeah. Hey, Simon. Yeah. The OCS market is definitely developing a lot better than we believed.

It's accelerated 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 2027. We're really going to exit the calendar year on quite an increased velocity. If you remember, you and I discussed last time we believed our Q4, the calendar Q4, would be around $100 million. It looks like it'll be quite a bit higher than that, although we're not breaking up that 400 between the two quarters.

So it's a broad-based, you know, that there's multiple customers making up that backlog. You know, 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, you know, obviously, price increases are definitely having an impact both on top line and gross margin. You know, 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, expect a little bit of an impact in December, and we'd had a little bit, but not a lot.

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, you know, in terms of the overall revenue margin, certainly a little bit more, but, you know, we're doing a lot of things to benefit margin, including cost down, a lot of work on manufacturing scrap and yield. There's 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, you know, for the first time, we're moving up into the forties.

Thank you. And thank you, Simon.

And your next question comes from the line of Samik Chatterjee with JPMorgan. Your line is open. Please go ahead.

Thank you. Thanks for taking my questions. Now, Michael, Wajid, Kathy, good to speak to you. 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 had planned, and we're gonna see the effect of that in the March 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 had planned? Does that change the end state in terms of how much capacity you can add in 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.

Thank you.

Yeah, Samik. Look. You know, we're definitely doing better than expected. I think that we characterized in the last call that we'd see a 40% impact from our September 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 alone. So in the results in December, and the guide, you know, 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'd outlined, that we were gonna do a little bit better than 40%, but we haven't quantified that.

You know, what we are saying is now we have line of sight to more capacity increases through 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 that 40% is all Sagamihara, but we would now start to see some impact from our Caswell facility in the United Kingdom. Also contributions from our second fab in Japan, Takao. 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. 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 December.

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 a $250 million quarter run rate. I mean, is that still sort of how you're thinking about it? Or because most of the demand is from one customer, you sort of can scale further than that.

Any updated thoughts on that? Thank you.

Yeah. I mean, on the transceiver question, I do think that it's gonna be more difficult than we outlined in the last call to sort of cap that to a billion dollars. 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, you know, 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 executions, 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 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 a billion dollars.

Am I wrong? Yeah. No. That's fair.

I mean, I think when we made the comments about $250 million a quarter or a billion dollars 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-$100 million 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 the operating margin profile as revenues grow. So, you know, the fact that the rest of the business is growing faster than we expected allows us to grow the transceiver business.

And then, you know, because 1.6T margins are significantly better than 800G, that's also helping us, you know, say yes to more orders that are coming in. And Michael's right. They're coming in substantially higher than we had expected.

Kathy, what was Samik's first part of the question? New fabs.

New fabs. Okay. Yeah. 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, you know, acquisition or something of that nature. So it's an active discussion of the company. You know, nothing to talk about at this particular point, but it is certainly something that's top of mind for us.

Thank you. Thanks for taking my questions.

Yeah. Thanks, Samik.

And your next question comes from Ryan Koontz of Needham and Co. Your line is open. Please go ahead.

Great. Thank you. Wanna double click on the transceiver market if we could in the transition to 1.6T. Obviously, some great progress at 800 here.

Is that primarily being driven by EMLs today? How do you see the readiness of Sypho at 1.6 being prepared? And then what are your kind of derivative, you know, laser supplier opportunities? How are they stacking up overall for the 1.6T transition?

Thank you.

Yeah. Ryan, let me talk a little bit to the laser part of the market and then maybe throw the ball to Wupen. It's two separate things, and certainly for our business, 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 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 lane speed, as we said, is actually doing a little bit better than we expected. I think in the last call, we had said that the 5% of mix would be this quarter. It's a quarter earlier than we'd 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, you know, consistent with what we've said over the past, would expect silicon photonics to be the majority of the transceiver shipments at the 1.6T node. We think the numbers are so large, you know, 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, you know, 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 wanna talk about our transceivers and how we're thinking about 1.6?

Yeah. Thanks, Michael. So, you know, on the transceiver of 1.6T product, there's still really by and large two groups of applications. One group requires a WDM-based solution.

One group requires basically a parallel fiber-based solution. And therefore, you will see that EML is pretty dominant in the WDM-based architectures. And then the single topic is starting to take more share on a kind of parallel fiber application. We see these kind of hand in hand grow at a similar pace.

And that's why, you know, Michael was talking about EML continuing to grow despite the fact single photon will take up more share in the 1.6 generation. But overall, as what you talk about, see 1.6 generation products having a higher gross margin at the module level. And then we'll, of course, benefit continuously on the laser front in this generation as well.

Right. And any update on your plans on, you know, vertically integrating your own CW lasers at 1.6? Is that still the plan?

Still the plan. Yeah. We had shipped, you know, 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 timeline is pushed out a bit in terms of that introduction. We were talking about introducing our own CW lasers and our own transceivers kind of Q2-ish, and I think it's probably pushed out to late Q2, early Q3. It's probably been a two to three-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?

Yeah. 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 can do. Perhaps more importantly, remember when you and I have talked about this, and 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 gained real customer confidence. I mean, it is much more broad-based, I think, than people think in terms of customer engagement now on CPO, and that is primarily driven by the reliability we're able to prove out.

Perfect. Thanks for the commentary.

Thanks, man. Good question.

Thanks, Ryan.

And your next question comes from Vijay Rakesh of Bank of America. Your line is open. Please go ahead.

Yeah. Hi. Thanks, Wajid, and Kathy. This is Vijay from Mizuho.

On a great fantastic set of numbers here. Just a quick question. I know you're on CPO. You mentioned another multi-million, multi-$100 million order there.

And, you know, also your own SIP ramping well. Can you size what the CPO quarterly run rate would be with the new multi-million dollar, multi-$100 million order? And, also, I believe, CPO for scale-up as you mentioned, sir.

Yeah. 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, you know, somewhere around $50 million in the fourth calendar quarter.

Perhaps more, but we're, you know, we're kind of pegging it there. And then this multi-$100 million 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 but multiple customers.

The strain on our fab is high. Right? We're very much sold out in our powered laser fab. And this is one of actually Wupen's primary tasks 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 gonna be really a matter of servicing that.

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, new technology EML, and also in what you're seeing on the transceiver side, would you expect pricing to be a tailwind most of this year and into next year too? Thanks.

Yeah. 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 I'm gonna have 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 gonna 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 two to one 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 for a story for us, I think, is the differential 200 gigs, which offers significant price power reductions for customers, that is yet another tailwind on ASP that we'd expect to see. And another big, big enhancer on gross margin. Wupen, I mean, how are you thinking about it?

Yeah. Thanks, Michael. So, yeah, in addition to what Michael described, right, in terms of capacity increase, and I think our team continues to really drive the yield up. Reduce the die size of the chips.

For example, the capacity output that we can get. Definitely, we're trying to squeeze every bit of the from our current fabs. As Michael already pointed out, the demand-supply imbalance continues 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 as better chips and more chips.

Got it. Thanks. Fantastic. Thanks, Michael, Wajid, Wupen, and Kathy. Thank you.

Thank you, Vijay. Good speaking.

Thanks. And your next question comes from Papa Sylla of Citi. Your line is open. Please go ahead.

Thank you. Thank you for taking my questions, and congrats on the impressive result. 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 changed now versus one to two years ago? Are new commitments, for instance, kind of longer in duration?

Are we able to add more pricing versus before? Just any color.

Yeah, Papa. Look. First, I wanna 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.

You know, number one, obviously, the 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 or 30. We're undershipping our customers' demand by somewhere around 30%. It's a relatively big gap, and, again, tremendous pressure, you know, 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, you know, Wajid and I got involved in the business and started seeing that there was a lot of value to institute these long-term agreements. 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, everything is spoken for.

So we projected out what we could 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. 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, you know, our products are just in high demand right across the board. I think it gives us some pricing latitude. And we'll certainly look at that. I mean, Wajid, any comments from you on the LTAs?

No. I mean, I think you've captured it. Actually, the whole LTA process has actually helped us from a pricing standpoint overall because 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.

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, you know, concerns about their continuity of supply because we are allocating to those partners that are committing to us first, and then whatever's left over, then we can talk to those that are not.

Got it. Thank you. That's very helpful. And thank you, 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 sales, you have more visibility, any change on how you are thinking about content or CPO versus the transceiver business?

Yeah. I mean, it's exactly as you said. I mean, obviously, the dollars are lower for our lasers than they 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 wanna 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, the external light 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, you know, somewhere around two, two and a half times content gain from a revenue standpoint as compared to just our lasers. Wanna give two seconds of color?

Yeah. Certainly. Thanks, Michael. Yeah.

Not only the possible ELS opportunity, but we talked about earlier, actually, this scale-up opportunity there. I think that's brand new. Right? When we compare before, the module opportunities, double module opportunity versus the CPO opportunity, it was a wash.

Just from a scale-out kind of a comparison. But now in the scale-up opportunity here is a brand new market that didn't exist before. So, therefore, I will say that, you know, our overall market share on the scale-up market will be improving because of 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.

Therefore, overall, I think this scale-out and scale-up with CPO will benefit us meaningfully going forward.

Very helpful. Thank you so much.

Thank you, Papa.

And your next question comes from Ruben Roy of Stifel. Your line is open. Please go ahead.

Yeah. Hi. Thank you. Michael, apologies if you answered this already, I just wanted to go back to the OCS momentum and just seeing 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? And, you know, 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? Thank you.

Yeah. Hey, Ruben. And, you know, thanks again for your support over the quarter. Appreciate some of the things you've helped us with.

You know, number one, the strength in the backlog. We did this previously. It is coming from multiple customers, not just one. We feel very good about our volumes in the business.

You know, 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 a $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. It's broad-based. Right?

It's three customers making up that backlog. And, you know, we definitely have stepped on the accelerator relative to deliveries even this quarter to all three of those customers. On the applications. Right?

Again, fairly broad-based, but why don't you give color to Ruben?

Yeah. I would say no changes to the recall. I think we talked about before, they were primarily, you know, four different applications. Right?

One is the spine replacement, as you mentioned. One is the, you know, the scale-across applications. We also talk about two more are really the optical scale-up application. And the for protection or redundancy in the network.

Actually, we see these applications in all the customers to different degrees. 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. Thanks. Just a very quick follow-up. Has anything changed with the way you guys are thinking about 800 gig versus 1.6 terabit module mix this year? One way or the other? Is it accelerating towards 1.6 for any reason? In terms of volumes from a single customer or multiple customers? Or is it relatively unchanged from how you were thinking about it ninety days ago?

Yeah. It's 1.6T is definitely stronger than we felt, you know, than we felt ninety 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, 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. You know, we have exposure to a couple of customers, a couple of large customers on 1.6, 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 from Wupen?

Yeah. Definitely, I think the two factors there. Right? So one is the 800 is still a very large market today.

However, you know, our market share of 1.6, as I was talking about earlier, is actually higher as we kind of get all acts together on the development side. So we definitely are seeing for our business, the 1.6T growth trend is a lot stronger than 800G, though the 800G continues to be going forward, but the surge in 1.6 business is coming our way for this calendar year.

Very helpful. Thank you, guys.

Thanks, Ruben.

Thanks, Ruben.

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

Alright. Your next question comes from George Notter of Wolfe Research. Your line is open. Please go ahead.

Hi, guys. Thanks very much. I just wanted to kind of get in here and ask some questions about supply. You know, it just seems like, obviously, there's a tremendous amount of demand here.

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, you know, given the demands you're seeing? Walk us through kind of, you know, how you plan to ship all this product.

Thanks.

Yeah, 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, you know, in addition to fab capacity, which is well documented, is our factory capacity.

And there, we're starting to look a lot more to contract manufacturing than we have in the past. We did hire a new leader for our back-end operations. They 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 contract manufacturers 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 would be unwise.

Got it. Then just one quick follow-up. You mentioned the LTAs, I think, more in the context of the EML supply that you have. But, you know, 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 and 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? Thanks a lot, guys.

Yeah. We are. I mean, that is definitely been a pain point because I think that there's been a lack of recognition from the historical telecom customers as to, you know, 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 gonna look at that, you know, and pick some partners that really are working with us. Quite frankly, and those customers, I think, we're gonna treat favorably, and, you know, we'll figure out how to service the rest with the volume that's left over.

Thank you.

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 an 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.