Lumentum released its fiscal fourth-quarter 2026 results, delivering total revenue of $1.01 billion, surpassing the consensus estimate of $988 million. This marks the eighth consecutive quarter of revenue growth, with sequential growth exceeding 20% for the third straight quarter and a year-over-year increase of 109%.

Adjusted earnings per share came in at $3.23, above the expected $2.97 and representing a 267% year-over-year surge. GAAP gross margin was 47.4%, while non-GAAP gross margin hit 50.4%, up 250 basis points sequentially and 1,260 basis points year-over-year. GAAP operating margin stood at 27.8%, with non-GAAP operating margin at 36.6%, a sequential increase of 440 basis points and a year-over-year jump of 2,160 basis points. Adjusted EBITDA was $406.4 million, and non-GAAP net income reached $326.3 million.

Cash and short-term investments totaled $2.74 billion, decreasing by $430 million sequentially due to convertible note conversions. Inventory rose by $59 million as the company stockpiled for AI-related business. Quarterly capital expenditure was $167 million, entirely allocated to expanding indium phosphide wafer capacity. The company completed the conversion of $1.1 billion in convertible notes, reducing outstanding convertible debt by 35%. This process resulted in a one-time non-cash GAAP charge of $7.8 billion, leading to a GAAP net loss of $7.2 billion.

Guidance for the fiscal first quarter of 2027.

For the period from July to September 2026, Lumentum projects revenue between $1.225 billion and $1.275 billion, with a midpoint of $1.25 billion. This implies approximately 24% sequential growth and over 130% year-over-year growth, setting another all-time high and achieving the company's previously set OFC roadmap target one quarter earlier. Non-GAAP operating margin is expected to be between 39.5% and 40.5%, with adjusted EPS forecasted between $4.05 and $4.35, well above the market expectation of $3.61. The diluted share count is estimated at approximately 102 million, with an effective tax rate of 16.5%. Of the sequential revenue increase, half is expected to come from the photonics segment, and the other half from the optical modules and OCS systems business.

Margin core logic.

Gross margin has surpassed the 50% threshold earlier than anticipated, a milestone originally projected to be reached at $2 billion in quarterly revenue. This achievement is driven by a higher mix of high-margin laser products, improved capacity utilization, price increases on certain products, and yield optimization for continuous-wave lasers. The long-term target has been revised upward. The original target of a 38% to 42% operating margin on $2 billion in revenue has been met and exceeded. The company now expects the overall operating margin range to shift up by 100 to 200 basis points, with 42% becoming the new baseline.

Photonics segment performance.

The photonics business generated $649 million in revenue this quarter, up 22% sequentially and 103% year-over-year. The core driver is explosive demand from AI data center scale-out and scale-across architectures, leading to a broad shortage of lasers and a widening supply-demand gap. Shipments of 100G and 200G electro-absorption modulated lasers hit a record high, with 200G EMLs now accounting for over 25% of total EML revenue. The supply-demand imbalance is structural, with a persistent gap of over 30%. The company is expanding capacity, targeting a 50%-plus year-over-year increase in EML shipments by the December 2026 quarter. It is projected that by mid-2027, 200G EML shipments will account for over 50% of total EML volume.

Continuous-wave lasers, which are compatible with silicon photonics for 1.6T optical modules, are now in volume production for 200G per lane applications. These are used internally in Lumentum's own 1.6T modules. The laser chip size has been significantly reduced, and yield and efficiency have improved, narrowing the margin gap with EMLs. The overall gross margin for CW lasers is above the company average. Customers rely on Lumentum's high-quality CW lasers to improve their own module yields, allowing for premium pricing. Narrow-linewidth lasers, used for data center interconnect across long distances, have grown sequentially for ten consecutive quarters, with a year-over-year increase of over 130%. Pump laser revenue grew 80% year-over-year, and current capacity is fully sold out. Shipments are expected to grow fourfold over the next few quarters. The company holds a 70% to 80% market share and has signed numerous three-year take-or-pay supply agreements to offset the capital expenditure needed for capacity expansion. The capacity of just two major AI data center interconnects is equivalent to double the total global backbone network capacity a customer deployed over the past decade. The Rose Orchard wafer fab is expanding, while the Thailand factory handles packaging and testing.

CPO and NPO lasers.

For ultra-high-power co-packaged optics light sources, shipments will continue throughout 2026, with a full-year revenue target of approximately $50 million. Revenue for this product is expected to surpass $100 million in the fiscal third quarter of 2027, representing a triple-digit figure. A leading CPO customer is expected to begin volume deliveries in the second half of 2027, supporting large-scale CPO cluster deployments in 2028. The company has secured its first external laser source order, scheduled for delivery in the second half of 2027. The supply-demand imbalance is worsening, as demand growth outpaces capacity ramp-up, and the gap continues to widen. For near-packaged optics lasers, a transitional step before CPO that expands the total addressable market, two product roadmaps are being pursued: an on-board, medium-power laser (150-200mW) and a high-power external laser source (400mW). Both share a common 400mW high-power chip process platform. Volume ramp-up is expected from late 2027 through 2028, designed to be compatible with next-generation GPU/XPU chips that are expected to launch in mid-2027. Current computing chips cannot be retrofitted for NPO. Leading cloud customers are evaluating NPO as an intermediate solution to CPO. Standardized optical interfaces will run in parallel with customer-specific hardware designs.

Capacity expansion.

Two indium phosphide wafer fabs in Japan are undergoing expansion, with CW and EML production lines undergoing simultaneous qualification to allow flexible capacity allocation. The company has added a new indium phosphide substrate supplier, AXT, to mitigate supply chain risks for high-power lasers, though long-term supply bottlenecks remain a concern. The 3D sensing business is also opening up new long-term growth opportunities.

Systems segment performance.

The systems business generated $357 million in revenue, up 30% sequentially and 123% year-over-year. The Cloud Light optical module division is currently shipping 800G modules and has begun volume deliveries of next-generation 1.6T modules, which incorporate internally developed CW lasers. The penetration rate of 1.6T modules is expected to accelerate throughout fiscal 2027, driven by custom AI cluster deployments at leading hyperscale cloud customers. The transition from 800G to 1.6T is rapid, giving Lumentum an advantage in signal integrity technology, enabling it to be the first to market and capture market share with optimized average selling prices and gross margins. The company believes that silicon photonics with CW lasers is the most cost-effective solution for the 1.6T era, but EMLs are expected to regain dominance for the 3.2T generation. The optical circuit switching business is a key high-growth driver. The company expects to achieve quarterly revenue of over $100 million from OCS in the fiscal first quarter of 2027, marking its first triple-digit quarter. The full-year 2026 guidance for OCS is $400 million, with shipments doubling quarter-over-quarter. This is supported by multi-year, multi-billion-dollar long-term supply agreements. Lumentum is the only company with the capability to scale OCS shipments. While a leading cloud customer has internal production lines, Lumentum expects its OCS shipments to surpass that customer's internal capacity by early 2027, making it the largest OCS supplier. New product variants include additional high- and low-port-count models, as well as an in-tray OCS designed for deployment within accelerator trays, which is expected to contribute incremental revenue in 2028 and is not included in the previous total addressable market calculation. The company is expanding internal production capacity and partnering with third-party foundries. Demand for industrial ultrafast lasers is also increasing, driven by applications in AI chip and high-density PCB drilling for 1.6T modules. The wired access business is also showing sequential improvement.

Core factory capacity plans.

The Greensboro, North Carolina, indium phosphide wafer fab is being converted from gallium arsenide production. Equipment has been pre-ordered, and the conversion is ahead of schedule. The fab is expected to start generating revenue in early 2028, with a continuous ramp-up throughout the year, reaching full capacity by the end of 2028 or early 2029. The company is negotiating long-term supply agreements to absorb the new wafer capacity, aligning with long-term demand for NPO and CPO. The Thailand factory will handle packaging and testing for pump lasers. The Japanese wafer fabs will remain the primary production sites for EMLs and CW lasers, with flexible capacity allocation.

Competitive landscape.

The expansion of indium phosphide capacity by Chinese manufacturers is not expected to have a material near-term impact. Lumentum has differentiated performance advantages in EMLs, as well as in high- and low-power lasers for NPO and CPO. Its CW lasers can maintain pricing power through superior yield. Most Chinese manufacturers currently have no record of volume shipments. Comparing product profitability, discrete lasers are the highest-margin products, with EML margins still exceeding those of CW lasers, though the gap has narrowed significantly. EML-integrated modules have a higher average selling price than bare laser chips but lower overall gross margins. These modules are used to capture incremental low-end customers for CPO and NPO, with initial volume shipments expected in the second half of 2027. In summary, the EML supply-demand gap remains stable at 30%, with capacity expansion lagging behind demand. Demand for high-power CPO and NPO lasers is exploding, and the supply-demand gap is widening, making this the key constraint. Pump laser capacity is fully utilized, with demand locked in by long-term agreements.

Key technology roadmap timeline.

Ultra-high-power CPO lasers are expected to generate $50 million in revenue for fiscal 2026, break $100 million in a single quarter by fiscal Q3 2027, begin customer volume deliveries in the second half of 2027, and achieve large-scale CPO commercialization in 2028. The NPO near-packaging solution is slated for volume ramp-up from late 2027 through 2028, to be compatible with next-generation GPUs and XPUs. By mid-2027, 200G EMLs are expected to account for over 50% of EML shipments. 1.6T optical modules are in small-volume shipment in 2026, with a rapid penetration rate increase throughout 2027. The in-tray OCS will contribute incremental revenue in 2028. The Greensboro wafer fab will begin generating revenue in early 2028 and reach full capacity by 2029.

Core investment thesis.

The company's strong earnings growth is highly certain, driven by a three-pronged engine of AI computing interconnect demand for lasers, optical modules, and OCS. Revenue is showing high sequential growth, and profit margins are consistently improving, with medium- to long-term financial targets being met and exceeded ahead of schedule. The product mix is continuously optimizing, with the share of high-margin products like 200G EMLs, CWs, and high-power CPO lasers increasing, leading to both volume and price growth. The company's full-stack laser chip capabilities provide a strong moat, covering all data center lighting scenarios with technological leadership and deep customer relationships, with long-term supply agreements securing demand. The dual future growth drivers of CPO and NPO are significant, with NPO serving as a near-term TAM expansion and CPO as the long-term endgame, and the company is well-positioned with both high- and low-power light sources to benefit from the evolution of optical interconnect architectures. The company holds a unique commercial advantage as the only OCS supplier capable of scaling, with new in-tray products opening up an entirely new incremental market. Continuous capacity expansion across multiple indium phosphide wafer fabs, with substrate supply secured in advance, positions the company to meet the explosive demand expected over the next two to three years.