Lumentum Holdings Inc reported fiscal fourth-quarter 2026 results that exceeded expectations, alongside a fiscal first-quarter 2027 outlook that also surpassed forecasts, driven by accelerating demand for optical interconnect solutions in artificial intelligence workloads.

Revenue for the quarter ended April 2026 reached $1.01 billion, representing a 109% year-over-year increase. The company noted this was its eighth consecutive quarter of year-over-year revenue growth and the third straight quarter with sequential growth exceeding 20%. Chief Executive Officer Michael Hurlston attributed the performance to the industry's accelerating shift toward optical interconnect solutions as AI workloads demand higher compute speeds and bandwidth.

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Component revenue was $649.4 million, up 103% year over year and 22% sequentially. Systems revenue reached $356.9 million, up 123% year over year and 30% sequentially. The company identified cloud transceivers and optical circuit switches as the primary drivers of systems growth. On a non-GAAP basis, gross margin was 50.4%, up 250 basis points sequentially and 1,260 basis points year over year. Non-GAAP operating margin rose to 36.6%, up 440 basis points sequentially and 2,160 basis points year over year. Executive Vice President and Chief Financial Officer Wajid Ali attributed the gross margin improvement to higher factory utilization, favorable product mix, and selective price increases.

Non-GAAP net income was $326.3 million, or $3.23 per diluted share, above the company's guidance range. On a GAAP basis, gross margin was 47.4% and operating margin was 27.8%. The company recorded a GAAP net loss of $7.2 billion, primarily due to a $7.8 billion non-cash charge related to the partial conversion of convertible notes. The transaction reduced debt by $1.1 billion, or about 35% of outstanding convertible notes. Capital expenditures were $167 million, mainly to support manufacturing capacity expansion for cloud and AI customers. Inventory increased by $59 million sequentially to support expected revenue growth in cloud and AI.

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Shipments of 800G cloud transceivers reached a record high in the quarter, and the company began initial production of 1.6T modules. Hurlston expects 1.6T transceiver adoption to accelerate in the first quarter of fiscal 2027 and continue through the 2027 calendar year, driven by hyperscale customers deploying custom AI clusters. Optical circuit switch shipments doubled between the third and fourth fiscal quarters. The company's guidance for the first quarter of fiscal 2027 includes the first quarter with OCS revenue exceeding $100 million. Hurlston said Lumentum is expanding internal capacity, beginning to work with contract manufacturers to add capacity, and developing OCS products with both higher and lower port counts, including embedded tray products expected to create new opportunities in 2028.

On the components side, narrow linewidth laser component shipments grew for the 10th consecutive quarter and were up over 130% year over year. Pump laser shipments grew over 80% year over year, and management said the business remains supply-constrained despite expanded capacity, expecting pump laser shipments to quadruple in coming quarters. EML laser chips set another quarterly record, driven by demand for 100G per channel products, with 200G EML products now accounting for more than 25% of total EML revenue. The company expects demand for EML and continuous wave lasers to continue growing through the second half of the 2026 calendar year and into 2027.

Management addressed the market discussion around co-packaged optics and near-packaged optics. Hurlston said the production plan for their leading CPO customer is on track, and the customer's demand signals have strengthened since the last update. Lumentum expects high-power laser chips for scale-up applications to begin high-volume shipments in the second half of the 2027 calendar year, ahead of customer deployment in 2028. The company also received its first purchase order for an external laser source module, with delivery planned for the second half of the 2027 calendar year. Hurlston positioned NPO as an incremental opportunity that could expand the company's laser chip addressable market. Wupen Yuen, President of Global Business Units, said NPO applications require efficient, high-density laser technology for compact optical engine designs, and he expects NPO to enter the market between late 2027 and 2028.

During the Q&A session, management said they have not yet felt the impact of potential new indium phosphide capacity from China. Hurlston said Lumentum believes it maintains differentiation in EML, high-power, medium-power, and CW laser products, including helping customers improve manufacturing yields through stringent specification requirements. Looking ahead, Lumentum expects fiscal first-quarter 2027 revenue of $1.225 billion to $1.275 billion. At the midpoint of $1.25 billion, the company expects year-over-year growth of over 130% and said it will achieve the $1.25 billion revenue target more than one quarter earlier than previously planned. The company also expects non-GAAP operating margin of 39.5% to 40.5% and non-GAAP diluted earnings per share of $4.05 to $4.35, based on a non-GAAP annual effective tax rate of 16.5% and approximately 102 million diluted shares. Ali said the midpoint of the operating margin guidance is near the company's previously stated target range of 38% to 42% for the $2 billion revenue level, and that continued gross margin improvement as revenue grows could support further operating margin expansion.