Source: Motley Fool transcript (published 05/06/2026); call date Tuesday, May 5, 2026 at 5:00 p.m. ET. Participants: Michael Hurlston (CEO), Wajid Ali (EVP/CFO), Wupen Yuen (President Global Business Units), Kathryn Ta (VP IR).
Michael E. Hurlston, CEO: Thank you, Kathy, and good afternoon, everyone. Lumentum delivered an exceptional third quarter with revenue growing 90% year-over-year to a record $808 million. Top-line growth was primarily driven by our transceiver business and laser chips. While 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 the 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 compute domains across disparate geographies. These scale-across networks require high-bandwidth synchronization across multiple data centers. Our pump lasers allow scale-across architectures to amplify the light signal over 4, 8 or 16 fiber pairs simultaneously. Complementing this, our narrow linewidth laser assemblies provide the precision required for 1.6T speeds and higher order modulation. Our wavelength selective switches (WSS) function as the optical traffic cops.
Looking forward, our emerging multi-rail technology will be vital for the increased parallelism required by the massive fiber counts of scale-across networks. We expect this part of our business to grow appreciably and the supply-demand imbalance likely to improve profitability at the same time.
Now let's look at the metrics that define our third quarter. Components revenue for the quarter was $533 million, reflecting a 20% sequential increase and 77% year-over-year growth. Shipments of our narrow linewidth 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 lasers to 800-gig transceiver manufacturers, and starting in fiscal Q3, we began supplying CW lasers for internal use in our cloud transceiver business. We shipped twice the number of laser chips 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 versus December 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 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 mid-March, we announced our acquisition of a fifth indium phosphide fab in Greensboro, North Carolina, which provides capacity needed for years of future growth. Plans to convert the facility from gallium arsenide to indium phosphide are well underway, and we expect to take advantage of a significant number of the tools that already exist in the Greensboro site.
Now to our systems product category. Systems revenue reached $275 million, 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 leverage 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 gated by the supply chain. We are experiencing considerable tightness in this product area due largely to the significant step-up in requested output. Rounding out our systems business, performance industrial lasers and cable access remains muted — industrial lasers were approximately flat sequentially, 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 from our components business, with the remainder driven by the continued ramp of our systems portfolio, primarily through high-speed transceivers and additional contributions from OCS. 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 event.
Wajid Ali, CFO: 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 was 44.2%, GAAP operating margin was 21.6%, GAAP net income was $144.2 million and GAAP EPS was $1.50.
On a non-GAAP basis, third quarter gross margin was 47.9%, 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 (primarily growth in data center laser chips). Third quarter non-GAAP operating margin was 32.2%, up 700 basis points sequentially and up 2,140 basis points year-on-year, primarily driven by revenue growth in components. Third quarter non-GAAP operating profit was $260.7 million and adjusted EBITDA was $293.5 million. Non-GAAP operating expenses totaled $126.2 million, or 15.6% of revenue. Non-GAAP net income was $225.7 million and non-GAAP EPS was $2.37 on 95.2 million diluted shares.
During the third quarter, our cash and short-term investments increased by $2.02 billion to $3.17 billion, primarily driven by NVIDIA's direct investment in Lumentum. Inventory increased by $62 million sequentially to support expected growth. In Q3 we spent $125 million in CapEx, primarily focused on manufacturing capacity to support cloud and AI customers. Components revenue of $533.3 million increased 20% sequentially and 77% year-on-year. Systems revenue of $275.1 million increased 24% sequentially and 121% year-on-year.
For the fourth quarter of fiscal '26, on a non-GAAP basis, we anticipate net revenue in the range of $960 million to $1.01 billion — the $985 million midpoint would represent another new all-time quarterly revenue record. We project non-GAAP operating margin of 35% to 36% and diluted EPS of $2.85 to $3.05, based on a non-GAAP annual effective tax rate of 16.5% and approximately 102 million shares.
Operator: [Q&A — selected]
Ryan Koontz (Needham): What are the dynamics on EML/laser supply, and how big is the demand gap?
Michael Hurlston: We're still chasing behind relative to demand. We're steadily increasing supply — we gave the benchmark that our supply line would increase 50% year over year (December to December). The supply-demand imbalance is probably even higher than we reported last call, somewhere greater than 30% (last time 25-30%). We had conversations with significant customers today who want to up their demand, and we simply can't service that. Near term it's largely within our own control; as we head into 2027 we'll have to continue working substrates.
Ryan Koontz: Scale-across / multi-rail opportunity?
Michael Hurlston: It's a significant contributor to our margin enhancement. We are probably more constrained in this area than even EMLs, particularly pump lasers and narrow linewidth lasers going into coherent subassemblies. Multi-rail increases content. We expect to output a lot more pumps here in the near term because there's a little less constraint on the fab that puts these out.
Samik Chatterjee (JPMorgan): How close to finalizing additional OCS wins, and what drives the June quarter?
Michael Hurlston: We continue to work with the 3 customers, two making up the majority of volume. We're making progress on additional wins — too early to call, but they're quite sizable, on the order of what we've talked about relative to the 2027 backlog. It is our biggest area. On the guide: EMLs up, scale-across components up, OCS incremental — but the big story is transceivers, which will be quite strong. We're undershipping demand there quite significantly.
Vijay Rakesh (Mizuho): Pump laser mix and whether the 30% imbalance persists into next year?
Michael Hurlston: The constraints on laser pumps are probably the biggest we face — somewhat unanticipated, hit us relatively suddenly. We're significantly undershipping demand and having to make choices about how we allocate pump demand. We have a plan to ramp capacity over the next 4 quarters out of our Rose Orchard facility in the U.S. On Google's v7 vs v8 OCS pull — the difference is incremental, not that big, but Google is driving a lot of demand on our business and v8 would drive significant upside.
Meta Marshall (Morgan Stanley): In-sourcing CW lasers into transceivers, and the mix/pricing/yield split of GM?
Michael Hurlston: It's all of the above — better factory absorption, we dropped certain non-margin-beneficial product lines, and price increases where we see the biggest constraints. There's continued room on gross margin. On laser in-sourcing: roughly 20% of our modules in the guide would have our own CW lasers; still a minority, but we'd expect to step that up through time.
Papa Sylla (Citi): CPO / ELS vertical integration opportunity?
Michael Hurlston: On ELS we definitely have a very significant opportunity and we're getting ever closer to converting that into our numbers. Non-primary CPO customer engagements are largely driven by ELS. Our currency to engage those customers initially will be the ELS — I feel that's just around the corner. On oversupply risk: we feel it's low — customers are extending long-term agreements; if they expected oversupply there'd be more reticence. We definitely have pricing flexibility, which indicates the imbalance won't be solved for a while.
Sahej Singh (Stifel): Structure of the scale-across LTAs?
Michael Hurlston: It's all of the above — prepayment, take-or-pay, price increases. We're in active discussions on pump lasers; customers are being asked to put skin in the game around the CapEx we're laying out. It's really coming down to how these discussions play out.
Christopher Rolland (Susquehanna): OCS constraints and Chinese OCS competition?
Michael Hurlston: Wajid is personally responsible for OCS supply chain. We've gone from 0 to a significant number very quickly. We've outlined ~$400 million we can ship in the back half of the year; for 2027 that number continues to step up. We're on a tight rope — the big 3 ramps are pumps, OCS, and high-power lasers, and OCS is probably the biggest single tight rope. On competition, we feel very good about our position; it's hard to imagine anyone shipping one of these very innovative solutions in the next year.
Michael Mani (BofA): Transceiver imbalance and 1.6T margins?
Michael Hurlston: We haven't given a figure for our own transceiver imbalance, but it was appreciable. The 30% number is on our EMLs specifically. On 1.6T: the margins are definitely better — structurally better than 800-gig. We have room as a unique Lumentum entity to do better, and we will do better.
Ananda Baruah (Loop Capital): Is the Greensboro capacity incremental to the OFC revenue projections?
Michael Hurlston: It is not in our numbers. The supply-demand imbalance on CPO will be very significant — we've seen multibillion-dollar orders on scale-out, and we expect scale-up to be significantly more. It's going to be somewhere greater than $5 billion of incremental revenue if we execute properly. Greensboro won't come online until 2028 — early 2028 line start, so still 6 or so quarters away from significant contribution.
Kathryn Ta: That is all the time we have for questions. Thank you for joining us today.