Q1 2026 Lumentum Holdings Inc Earnings Call
Speaker #1: Good day everyone , and welcome to the Lumentum Holdings . First quarter Fiscal Year 2026 Earnings Call . All participants will be in a listen only mode .
Speaker #1: Please also note today's event is being recorded for replay purposes after today's prepared remarks , we will host a question and answer session .
Speaker #1: If you would like to ask a question , please raise your hand if you have dialed in to today's call , please press star nine to raise your hand .
Speaker #1: Star six to unmute . At this time , I would like to turn the conference call over to Kathy , Vice President of Investor Relations , Mr. .
Speaker #1: Please go
Speaker #1: ahead .
And that context will pain you into many of, you know, is now the head of global business units, owning all product roadmap decisions.
While this shift simplifies our reporting framework. It also gives investors more insight into our numbers by breaking the cloud and networking business down a bit.
In that vein, we will provide Revenue breakouts in our quarterly reports and commentary for 2 product types, components and systems.
We define components as the individual building blocks that enable larger Solutions such as laser chips. Laser sub assemblies line subsystems and wavelength management. Subsystems.
Systems, in contrast, are complete standalone products that develop and deliver full functionality to the end customer, including optical transceivers.
We provided historical views of those 2 product types in our earnings deck, that can be found on our investor relations website.
Using this breakout components Revenue in the quarter was 379 million.
which was up over 18% sequentially and up 64% from the same quarter last year.
Our component products delivered strong, broad-based growth across our laser chest, laser assembly, and line subsystem product lines, driven by robust demand inside the data center and from data center interconnect and long-haul applications.
We achieved another record in EML. Laser, shipments driven primarily by 100 Gig Lane speeds and supported by increasing 200 gig shipments.
We also initiated CW. Laser deliveries for 800 gig transceiver manufacturers.
Marking an important milestone in our product roadmap.
As we've shared before our Indian boss fight, wave of Fab has been fully allocated due to robust customer demand.
However, I am pleased to report that we have made better than expected progress on yields and throughput. And now see line of sight to add approximately 40% more unit capacity over the next few quarters, setting the stage for calendar 2026 to be another breakout year for laser chip, shipments, and solidifying, our leadership in indium. Phosphide based light sources for the data center,
Although still small and absolute terms, we saw sequential growth in our ultra high power laser shipments. As we continue the initial phase of our production ramp
We still expect the significant increase in shipment volumes in the second half of calendar 2026 as adoption continues to accelerate and we are seeing opportunities to expand our customer base.
You're seeing strong sustained momentum in our data center interconnect or DCI components. We support not only Optical links within campuses but also connections spanning up to 100 kilometers in scale across architectures.
Shipments of our narrow line, width Blazer assemblies for DCI. Transmission group, for the 7th consecutive quarter rising over 70% year-over-year, demonstrating both robust market, demand and our continued success in scaling manufacturing capacity.
Shipments of our line subsystems for data transport also delivered, strong sequential and year-over-year growth. Benefiting from the same macro trend.
We also saw sequential and year-over-year growth in coherent components for Long, Haul data transmission. And achieved a record quarter for pump lasers supporting subk and terrestrial Networks.
Finally, we saw a sequential rise in 3D sensing products consistent with the seasonality of a new smartphone line.
Even in our q1, historically, Peak shipment quarter, these products, contribute less than 5% of total company Revenue underscoring, that the broad strength of our components portfolio is driven almost entirely by the accelerating Global buildout of cloud infrastructure and highlighting momentum's essential role in powering that expansion.
In systems Revenue was 155 million.
Down 4% sequentially, but up, 47% year-over-year.
Revenue was roughly flat to the prior quarter as we use the quarter to increase manufacturing capability in Thailand to meet increasing customer demand.
From this point forward, we expect to see the end of the fifth and start in production capability. We've experienced in this product area and we now forecast period of sustained, Revenue growth,
Our guidance into Q2 provides our first proof point. But as new 800 gig and 1.6, T, products ramp, and future quarters, we expect to see the revenue. Layering benefits that are larger transit or competitors of experience.
Our initial ramp of optical circuit switches from Thailand is progressing. Well,
And we remain on track for a rapid acceleration in manufacturing expansion. Over the coming quarters, as expected. We saw a sequential decline in industrial laser shipments. Reflecting the continued softness in the broader industrial Market.
We expect approximately half of our sequential revenue growth and absolute dollars to come from our components products.
Driven by broad-based strength across product line, serving Cloud applications.
The other half is expected from our systems products serving Cloud. Customers primarily reflecting the ramp of high-speed Optical transceivers for data center applications and to a lesser extent the early phase of our Optical circuit switch rack.
As I highlighted at the start of my remarks, we are only at the beginning of our growth journey in cloud and AI infrastructure.
Momentum story has many chapters ahead and we are entering a period of sustained expansion fueled by the accelerating adoption of AI and the optical technologies that enable it.
Our components products will remain the Cornerstone but Revenue growth, and profitability. While our systems products are scaling rapidly with Cloud, transceivers Optical circuit switches and other high performance solutions.
With expanded manufacturing capacity and the ramp of new products, we are confident in our ability to drive continued Topline growth, margin expansion, and long-term shareholder value.
Now, I'll hand the call over to watch it.
Thank you. Michael, first quarter revenue of 533.8 million and non-gaap UPS of A110. We're at the high end of our guidance ranges. Gaap gross margin for the first quarter was 34% Gap. Operating margin was 1.3%. Gaap, net income was 4.2 million and gaap net income, per share, plus 5 cents.
Turning to our non-gaap results. First quarter non-gaap. Gross margin was 39.4%, which was up 160 basis. Point sequentially and up 660 basis points year on year.
Due to better manufacturing utilization and favorable product mix as a result of increased data center laser chip shipments.
First quarter, non-gaap, operating margin was 18.7% which was up, 370 basis points, sequentially and up 1570 basis points year on year, primarily driven by Revenue growth in components products.
First quarter, non-gaap operating profit was 99.8 million and adjusted IBA do was 127.6 Million.
First quarter, non-gaap operating expenses totaled. 110.5 million or 20.7% of Revenue.
An increase of 1.2 million dollars from the fourth quarter and an increase of 10.1 million from the same quarter last year.
This year-over-year, growth reflects, annual employee cash.
Incentives tied to company performance, along with ongoing investments to scale our operations, support expanding cloud opportunities.
Q1. Non-gaap sgna. Expense was 41.5 Million non-gaap R&D. Expense was 69 million interest. And other income was 3.7 million on a non-gaap basis.
First quarter non-gaap. Net income was 86.4 million and non-gaap net income per share was a $110.
Are fully diluted, share count for the first quarter was 78.3 Million shares on a non-gaap basis.
During the first quarter, our cash and short-term Investments increased by 245 million to 1.12. Billion dollars. Our cash position benefited from a convertible notes transaction completed during the quarter.
Which contributed 306 million in net proceeds, our inventory levels, increased sequentially to support the expected growth in our cloud and AI Revenue.
In q1, we invested 76 million in capex, primarily focused on manufacturing capacity to support cloud and AI customers.
Turning to revenue details, first quarter components Revenue at 379.2 million increased 18%, sequentially and 64% year on year.
Systems Revenue at 154.6 million was down 4%, sequentially, and up 47% year on year.
Now, let me move to our guidance for the second quarter of fiscal year 26, which is on a non-gaap basis. And is based on our assumptions as of today,
We anticipate net revenue for the second quarter of fiscal year, 26 to be in the range of 630 to 670 million.
The midpoint of this range would represent a new all-time quarterly Revenue record for momentum.
Our Q2 revenue forecast, reflects the following expectations.
Components expected to be up sequentially with strong growth across our portfolio of products, addressing cloud, and AI applications and systems to also be up sequentially with strong growth from cloud, transceivers and progress in the early phases of our Optical circuits wench brand.
We project second quarter, non-gaap operating margin to be in the range of 20 to 22% and diluted, net income, per share to be in the range of 1.30 to 1.50.
Our non-GAAP EPS guidance is based on a non-GAAP annual effective tax rate of 16.5 percent.
These projections also assume an approximate share count of 83.5 million shares.
With that, I'll turn the call back to Cathy to start the Q&A session.
Kathy thank you. Watching to allow as many as possible and opportunity to ask questions. Please keep to 1 question and 1 follow-up.
Now, Kevin let's begin with the Q&A session.
Thank you. We will now begin the question and answer session. Again, please limit yourself to 1 question from 1, follow up. If you would like to ask a question, please raise your hand. Now, if you have dialed in, to today's call a reminder, to press star 9, to raise your hand star 6 to unmute, please stand by while we compile the Q&A roster.
Your first question comes from the line of stomach chattery with JP Morgan. Your line is open, please go ahead.
Hi. Um, just making sure can you hear me?
Yeah, we can hear you. Yeah, we can hear you. Okay. Sorry. Getting used to the new system here. Um, so thank you, strong results, congrats on the Outlook as well. Um, maybe on the transceiver side, um, high confidence in relation to, um, sustaining that growth, uh, going forward and your calling for a pretty sizable growth into the next quarter as well. Maybe just talk a bit about what's driving that conference maybe more in addition to the capacity Ram that you talked about, uh, is there more diversification on the customer front as well? That's giving you visibility into that consistent growth. Um, and what's in particular driving this strong increase of about 60 million or so. I think that's what you're guiding to for the quarter over quarter. Sort of into the next, uh, December quarter. And I have a follow-up.
Yes. All right. This is uh this is Michael. Um you know I think we we highlighted this for the last couple of quarters we are Improvement in execution as beginning to bear fruit.
Um, if you remember, we said that we've been really missing the front part of customer ramps, due to some execution challenges. And that seems to have corrected off where we now are participating in the very early part of of customer WS.
Uh, we have
Expectation to be shipping 1.6t transceivers, uh, sometime, you know, middle-ish of next year and those will be at the early part of the customer ramp at as well. So for the first time we're getting this layering effect where we're not seeing a dip in Revenue as we sort of see 1 cycle ramp down and the next 1 ramp up. We're getting this layering effect that I talked to in the call.
Uh, that's predominantly with our largest customer. But we are seeing revenue from the 2 customers that we've talked about previously as well, but pretty much the majority of of, of, of all of this is coming from our, our largest customer.
Wondering if you can just help me think through what that means on a revenue basis, I would assume the mix would build more towards 200 GB MLS, but what is generally? The plan in terms of usage of that capacity and how should we translate that maybe into terms of what it means for Revenue increases. Thank you.
Yeah, I think you have you have 2 effects and, and those 2 effects will ultimately layer on top of each. Other 1 is just the raw output, uh, and we'd expect to see this 40% increase over the next couple of quarters. But then to your question, we also see, uh, a set a second effect. And that is that the 200 gig lasers will start to layer in. We talked about shipping 200 gig lasers in the last quarter. There's more in the guide, we'd expect to see about 10% of our mix in the early part of 2026, calendar 2026, B from 200 gig lasers, so you're going to get those 2 effects. Now, sort of adding to 1, another the fact that our capacity is increasing and then the second issue is the fact that uh, we would expect to see 200 gig lasers become a much more meaningful part of our mix in calendar 2026.
Thank you, thanks for taking my questions.
Yes. Thanks Tomac 7. I think we'll take our next question.
Thank you, your next question. Come from the line of Ryan Koontz with the human Co.
Your line is open, please go ahead.
Great. Thanks. I want to ask about the The Continuous laser output and height. That's a new product for you. How you think about that market opportunity is that something you're targeting for your own Optical transceivers? And um you want sort of customers who get wind up for that. Thank you.
Yeah, Ryan I mean uh you know we've talked about the CW lasers for a bid here, we have a 70 M CW laser that really started meaning shipping and and this quarter will be a reasonable part of our mix next quarter. We've characterized that as sort of a pipe cleaner
Shipping to other customers.
In an effort to eventually bring CW lasers into our own transceivers. So we have a 100 m CW trans laser that we'd expect we're actually sampling it. This month. We'd expect to be in full production in the middle of the year of 2026 that 100 millwheel in our internal transceivers. So as we've stated in previous discussions, we'd expect to be manufacturing, the CW, laser specifically, to use it in our own transceivers and that
That should happen. Sometime second quarter of a calendar 2026.
That's great. Exactly. I was hoping to hear. Um, so and then be shifting gears maybe to narrow line with lasers for the uh the DCI Elevate is that is that a different set of competitors, obviously, a different set of customers. But can you kind of educate a little bit on the competitive environment for the narrow linewidth lasers for coherent? Thank you.
Yeah, I'll uh maybe give some comments and then throw it to Wuhan. Um, you know, we we are we have very strong market share here, right? I, I think our our competitive landscape is is more limited, perhaps in this area than many of those we participate in to your point Ryan. They're, you know, the customer base is different. These are more of the traditional Telecom, guys, that now have shifted and pivoted, their business toward the hyperscalers. And so, we're providing a solutions to all of those guys in our narrow line, width offering. Um, but we have we pending, you can correct me if I'm wrong. Very, very high market share there and a and a strong competitive position.
Yeah, thank you, Michael. I think that's definitely true. I think that's the business we've had for the last 15 years. Uh, the company. Uh, and then, you know, the, the challenge is renting that basic capacity of is not easy, uh, and we have actually mastered that over the last 10 years, or or so. And you can see from our continuous progress in our Revenue quarter, uh, with strongly positioned there. We do see some competition there, but again, roughing the technology is going to be difficult. So we expect we're going to continue the the strong market share uh position going forward.
Great. Appreciate that very much.
Thanks Ryan.
Take your next question.
Thank you. Your next question comes from the line of 19 OB.
With rose and black Securities, please go ahead.
Like your line is open. Please go ahead. You may have to unmute yourself.
Sorry, just found a new button here. Thank you. Um, so as you increase Indian phosphine capacity, the output of that—how should we think about the split between, um, that going into components or that going into systems? Like what's the framework that...
Ya know it it the vast majority of our output will be sold into the external Market. Um we are shifting our mix towards 200 gig emls that has been in the middle of of that. And as I said about 10% of our mix in the first quarter of calendar 2026, the March quarter, we'd expect to see at 200 gig.
Uh, we will continue to sell a majority of our capacity out to external customers the small amount of capacity that we've allocated to CW, lasers, just to prove that we can do it. And, and then, as I say, a pipe clean a little bit, uh, we will probably end up reallocating that to internal consumption, and that percentage again, is relatively modest, right? We'll sell most of our capacity into the external Market.
Um, so I guess giving that, and I realize this is a tough question to answer but, but um, you know, 1:40, you know, outlook for EPS of the mid midpoint is it's a really impressive number, um, but it also could it even be higher. If if if I mean, if we've got a really high margin product, leading, leading the growth,
Yeah. Look. I mean, you know our we we feel like we have a very dominant position here. I think with our last call, we talked about being sold out that is absolutely the case the demand far exceeds even as we continue to add laser capacity. Demand is far outstripping, our ability to supply. And so our challenge right now is making these allocation decisions. Uh, we're trying to allocate the capacity to the highest dollar value components we have in the highest margin components. We have to your point Mike and that, you know, in order is 200, gig emls 100 Gig emls, and then CW lasers for internal consumption, and we're going to mix as much as we can to 200 gigs. The demand is certainly there.
100 Gig emls. We're going to continue to allocate as much as we can to that. And then to the extent, we can cleave a little bit off to improve our transceiver business. We'll do that as well.
Mike just say it's what I did here. Just just to add a little bit to that. So that 40% increase in Indian flash by capacity is focusing on laser chips which has as you know uh higher gross, margins than many more of our other product lines. So as that flows through uh in the coming quarters, that'll have a positive effect on our earnings per share. Uh, you know what, you're seeing this quarter is is without that increase capacity and increase, uh, gross margin contribution from the Indian cross light capacity that we talked about in our, uh, prepared remarks.
Perfect. Thank you gentlemen. Appreciate it.
Thanks Mike. Thanks Mike.
Thank you. Your next question comes from Christopher, Rowland with Susana. Please go ahead.
Christopher. Your line is open, please go ahead.
There we go. Cool. Uh so congratulations. Uh, particularly on the guy that was uh, that that's pretty incredible and congratulations to woo pain. Uh, could couldn't have happened to a smarter guy,
Um, but, uh, in terms of the, uh, transceivers and that market, it's my understanding that 102 key switches are not really ramping until next year. In fact, they won't have qualified A6 in a box until early next year. That's the precursor to qualifying 1.6T transceivers.
Um so uh perhaps for Michael, as you see this playing out, I I guess. My first question is, are you going to strategically use your what seems like Market limited EML Supply to drive new customers and new qualifications on the transceiver side? It sounds like maybe, yes.
Ahead of these, uh, qualifications, um, is this something that you see in the first half even before, 1.6, uh, starts ramping.
Yeah, Chris first uh thanks for that. Thanks for the kind words. And I I fully agree who has the smartest guy. We're very lucky to have him. Um,
Look, I a couple of remarks uh, maybe first on the last piece of it, which is the stockpiling, you know, for right now, what we're we're seeing happen is uh, demand as, as we said on the last call, as far as stripping Supply, even as we add this extra capacity, we're in a situation where we are making allocation decisions almost on a on a daily basis. Uh, and it's really putting a lot of strain, both on the business unit and on uh wooin as we try to make those calls and that Capac in that regard honestly, Chris we're actually probably shedding customers rather than adding we're trying to make our bets on. You know, the folks that we think are going to be good. Partners we've gone out and and worked a series of long-term agreements and the folks that are that are willing to step up and help us. We
Really want to help them. And so what we've actually tried to do is maybe counter to to your question a bit. And that's consolidate Supply and consolidate our customer base around a couple of folks that we think are going to be long-term winners, those customers in return have given us multi-year, commitments, that give us a lot of confidence that our our business is going to be sustainable, even as we continue to ramp capacity, uh, through the, through the next probably 6, or 8 quarters. So, that's kind of the dynamic. You want us to think a little bit about 200 gig and, and the dynamic there, because not all of it is 1.6.
Correct. Correct. Correct. Thank you. Michael again. Thanks for the comments. Uh, we appreciate the, uh, your your kind words, uh, as well. Um, so the on the 1.6t run, right? You have to correct 1 or 2 points, uh, 4T switch, but we'll hear the market until we need. I would say late to, to next year, calendar. And but today the application is already mostly, um, to the customer to, through the customers who do not rely on that, uh, switch to, to take place. And there are 2, uh, customers today can use the 200d MLS, uh, Optics, uh, in their systems, uh, today. And certainly I think you have a good point there that are we going to leverage our uh laser Supply position to increase our um, you know, 1.60 module opportunities.
Uh, we will say that, you know, the customer already knows that we have a such a laser, uh, you know, portfolio and therefore, I believe that it will have thought about it when they engage us on on the module side. Uh, but we again, like Michael said earlier, we will allocate our laser capacity based on the probability of uh metric more than to then to uh try to broaden our transceiver opportunities in 1.60, using all this.
Uh, very helpful. Thank you. And, um, and back to you Michael, uh, it at ofc. I remember you were somewhat, uh, reticent to put on more Indian, phosphide capacity. Um, and so, as I think about the industry, more largely, um, you know, competitors are ramping 6 inch Indian phosphide, kind of as we speak. Um, and it does seem like the early Market's going to be for emls here, which are large dye because you put the modulators on there. But as we move to CW, it's a smaller die. Uh, and um, I'm just wondering, you know, do you think we might end up in a, in, in an over capacity situation?
Particularly when we competitors ramp and eventually we move to cipo, uh, NCW. Um, and what do you think the timing might be around that? Um, and you know, just just putting all of this together into your decision to put more capacity on what, uh, what made you change your mind?
And that's really what's helped us. We are still transitioning between our 3-inch and 4-inch. Um, we made a decision.
To really focus on 4 inches as a sweet spot here, at least in the near term.
And and that's what's led to most of the improvements that you see here. So we've not put a lot of additional Capital into our Fabs.
To uh to expand output, that's number 1, number 2, I think on the the battle between CW and EML. It, it appears to us that CW is going to ramp with 1.16 but so will EML. And so the slope of the 2 ramps, I was hard for us to call but it looks like no matter how you slice it. The numbers will increase. So even if the mix shifts away from EML, based transceivers, at 1.6t the absolute number is seem to be
Stratospheric high. And at least in the near term, we see no end in sight. Um, you know, we watch it every day. Chris. It's like, you're, you're sort of cautioning. But, uh, I think for the next 6 quarters, we're completely sold out. And we have long-term agreements, as I said that, we've worked out with our customers to ensure that they're going to take any
That the additional capacity we put online.
So you know we we obviously think about it every single day but I I would have to say right now our concern is not when will this roll over? It's how do we get and service? The customer base that we have and the demand profile. We're looking at
And just 1 last comment, uh, addition to Michael what Michael said, right? The capacity was in place are interchangeable between several reasons dmls. Uh, no matter how the the market share of these 2 lasers change over time. Uh, you know, we're able to serve the overall Market. Uh, so that's also part of the investment decision and the fast, uh, kind of uh, um, implementation, uh, decision all along the way.
Yeah, understood. Thank you guys. Good strategy and congrats.
Thanks Chris. Thanks Chris.
Thank you. Your next question comes from the line of Simon Leupold with Raymond James. Simon, your line is open. Please go ahead.
Great. Thank you. I I wanted to first. Ask about the the OCS opportunity. I I know you said that it's currently a, a fairly small Market but coming out of the ecoc show. It's certainly sounded like the industry as a community was more upbeat. And I've heard second or third hand that you've suggested that this could be a 100 million by year. December 26th quarter. Now, I don't know that. That's true. Um, so I wanted to
To hear directly from you. How you see this Market evolving and then I've got a quick follow-up.
Yes I mean look uh I would say if anything our confidence is increased that we will ramp through the calendar year to that 100 million dollar a quarter Target in December of 2026 uh our engagement level with customers on this product is super high uh wool pan and I are spending probably more time in this product category than any other the number of use cases. We're seeing coming from customers and potential customers is growing and it you know, the virtues that you and I have talked about on a number of different occasions are really playing forward. So we are, you know, making no mistake. Uh we are more confident in this market than we were probably last quarter at this time. And that confidence is, is building every single day.
Thanks. And then just as the follow-up in the prepared remarks, you described the, the outlook for the December quarter as broad-based Improvement. I I would like to see if you could
Rank order. What does the biggest dollar increase? Come from sequentially in December versus September, uh, relative, you know, thinking about the data Comm transceivers, the Telecom devices, the data Comm, uh, chipsets. Where is the biggest dollar contribution coming from in your forecast?
Yeah, look, this is broad-based. I mean, I think the thing that probably caught us flat-footed,
Is contributing to the growth that you see I if I was to specifically answer the question Simon, I would say it is the transceivers, the transceivers are coming off the mat. We, you know, we had
As a characterizing, I think in the the prepared remarks fits and starts as a transceiver business, we finally see that turning a corner. Uh, we are I think last reported quarter we got back to the level that we had when we bought Cloud light in the guy that number is up significantly. Um but you know the the thing that
We we we expected people to ask is just given, not only exceeding, 650, 600 million, but doing so by a pretty wide margin in the guy, we had expected, you know, more questions on. Hey, what happened here? Why are you guys so surprised? And what, what really did happen was just the width of the demand that we saw.
Uh, and our ability to service it quite frankly, our execution is improved. I think woop has a team has done a really, really good job, getting in there and figuring out how to deliver these products.
As we think about the Ford look, you know, that's going to be a challenge. Supply chain will be be a big challenge but uh it is has been a surprisingly, surprisingly broad-based, uh uh demand signal.
Great. I'm surprised too. Thank you.
Thanks, Simon.
Thank you. Your next question comes from the line of Papaseea with City.
Your line is open, please go ahead.
Welcome. Thank you. Thank you for taking my question and congrats on a very strong result. I just wanted to kind of it was asked differently, but I just wanted to to double check on the supply demand imbalance for EML specifically. I think it's very clear, kind of demand is running ahead of Supply, but I guess, how would you characterize the supply demand this quarter versus last quarter? For instance, I I understand you kind of increase investment in yield Improvement on the other side, as well. It seems like capex is going up across the board. Just, if you could help us, understand kind of, how has that balance changed from last quarter to now
Yeah, I mean and I'll have uh have wool pain. Give some color pop up. But I, I would say the following, I mean, our in the guide are not our supply is going up, you know, more than 10%. So we definitely have some pretty good additive Supply even into the guide.
What I say though is the demand signal has the demand Supply inbounds is increased last quarter. I think we characterized it as roughly a 20% shortfall relative to Total customer demand even with this ad even with the ad in in Supply I would say that number is increased to 25 to 30%. We are quite a bit short right now relative to the customer demand and again, movement, I'll have you talked to it a bit right here. You're making bets on who, who you think is winning and trying to consolidate through lta's and other vehicles, uh, who our customer base will be as we look out the next 6, 7 quarters. Yeah. Thank you. Michael absolutely true. Uh, I will Echo that um the demand and Supply mismatch as increased uh the last 3 to 4 months, it's getting worse and we're seeing that all these annuity announced projects that you see you know.
Throughout the last couple of weeks. Uh, that results in uh extended.
Um, the horizon of the supply-demand mismatch, as we can see. And that's the reason why we're able to sign up the long-term agreements with our leading customers. We're also trying to be very careful in making sure that our devices are supporting the key hyperscaler customers too. Um, so those are the key kind of thoughts going into the application process.
And we realize that we cannot make everybody happy, but we, we try to make sure that we, uh, strategically, uh, maximize our, our shipment to the most important customers.
Are still being supplied, uh, kind of what's your approach in terms of pricing at this point. Do you have now more leverage, even increase for the pricing on, on EML and further expand margin as well.
Yeah. Let me let me have. Why did you talk to the gross margins? I mean in short you're right. I think we're moving the margin line up.
Uh, you know, pricing obviously, is is a lever. And uh, you know, when you look at that,
Very, very carefully. I think what you see in the guide is some pricing, very targeted price increases happening. I think, as you look out next year in 2026, our agreements with customers will include more pricing, more broad-based, price increases just given the supply demand imbalance. We're still obviously trying to do what we can to work with customers and, and make sure that they're, they're happy with us as a supplier. But we are, uh, we are using this demand Supply imbalance to to, uh, impact. The pricing. Why do you want to talk a little bit about the margin? Yeah, so, I mean, our, our margins are certainly benefiting, uh, from, you know, the improved manufacturing utilization that comes with, uh, the increase Revenue base as we move into calendar, 26, uh, we're expecting margins to continue to nudge up.
Uh, in line with the the ofg model that we had provided. Um, not just the the pricing impact but also what Michael talked about earlier with 200 gemls, becoming a larger proportion of our overall unit mix, uh, as our capacity, improves on indium phosphide. And then, as our, our growth drivers, uh, come into play in calendar, 26, 1.6t OCS and CPO. All of those uh, product lines will contribute to improving our gross margins once again. So we're set up very nicely, as revenues are expected to improve next year with these new product lines and increased capacity to further improve our gross margins, and our non-gaap operating margins.
That is very clear, and congrats. Again, and from here,
Thank you. Papa.
Your next question comes from the line of Georgia Noddar with Wolf Research. Georgia, your line is open. Please go ahead.
Hey guys, this is Taran on for George. I just wanted to say, double click on CPO. What are you guys seeing in terms of the demand Outlook there? I mean compared to the last few quarters. Um, and then, how is how or if
Um, or however is that um customer and Market expanding if at all? Thanks?
Yeah, let me take it. And, and again, I'll have loopen, add a little color. You know what? I I think between our last discussion and this 1 uh 2 things are true 1. I think demand is stronger than we had initially forecast, so we feel pretty good about uh the numbers in the second half of calendar 2026. Remember the ramp that we've basically talked about is early stages to 3 of the calendar quarter, a calendar year and then a a more meaningful contribution in the fourth quarter of the calendar year.
Uh so the demand of the forecast seems to be getting better timing same. So no real change in the timing but the forecast is better. The second thing that I say is that our customer
Conversations, have magnified and, and, and multiplied. So we're getting engaged now not only with the primary customer. Right? That's, uh,
Across the supply chain, uh, to kind of broaden our, our visibility and engagement into that uh uh, portfolio. And we're seeing now, much heightened, uh, interest in the area. We believe that later will transfer into even more demand for our uh, ultra high power. Laser chips, uh, going forward and we we are more optimistic than last quarter on the general or industry wide adoption of the CPO Solution, by putting our leaders.
Great. Thank you.
All right. Thanks John.
Your next question comes from the line of meta Marshall with Morgan Stanley. Please go ahead. Your line is open.
Great. Thanks. Um, maybe following up on Simon's question. This is you guys ramp uh, the OCS business to kind of that 100 million. Just trying to get a sense of kind of what are some of the the Milestones you're looking for, you know, or the is it kind of getting through their Labs, is it uh, testing the hardware. Is it the software just kind of, what are some of the key milestones? We should be looking at, uh, over the next year?
I mean, let me let me just give you, you know, restate sort of how we see the the revenue and then talk technically a little bit about
The the Milestones, um, you know, we've outlined sort of a revenue ramp of kind of mid single digit Millions. Here in the December quarter, getting to, you know, double digit. Very, very low double digits in the March quarter and then accelerating to kind of mid, you know, 50s 60s in the middle of the year and then getting all the way.
To 100 million dollar market in the December quarter, as I said to Simon, we feel increasingly confident just giving the level of customer engagement that that Revenue ramp would be there and and and perhaps there's there's even upside to it.
Um, you know what's going on right now? I mean, the hardware is generally qualified. We've got, you know, we talked about three different customers with our OCS product. In all three, that product is in their labs. We feel very good about the hardware piece of it and being through all the major gates relative to hardware qualification.
Uh, software is more difficult, right? There's a lot more software with this product than there is with anything that we've done in the past. We are on multiple, multiple calls with our customers, working side by side to get the software in. But I would say that's the thing that keeps me up at night, more than anything else, is just getting our software right and getting that.
Software qualified by the customer. We would expect to be qualified probably fully by both of our major customers in the first quarter in the March quarter, and then the Third customer probably in the, uh, the middle of the year. So we've got some more work to do on software, but, uh, that shouldn't meet, or the revenue ramp that, I just laid out.
Got it. Um, and then just in terms of the transceiver business, understanding kind of the ramp of that is primarily going to the first and major customer. Um, but just, you know, is the expectation that kind of the vast majority of this ramp going forward?
Will we only include that kind of primary customer, or just how should we think about any of the ramps of the additional customers of Cloud Light at this point?
Yeah, look, I I I think we're we're still ramping. Uh, the second and third customers. We've talked about were engaged with more customers now. But what we're really trying to do is bound this business. And when we talk about this, you know, again we've sort of said, hey we see this being a a 250 million dollar quarter opportunity for us.
I think we can do that more profitably than we have in the past simply by choosing the most margin Rich opportunities to go after. Yeah, I I made a, you know, 1.6t uh, margins are going to be significantly better than 800 G margins. That's our expectation. And so a lot of that 250 million a quarter of the Michael's talking about is going to come from the ramp of 1.65 products which will have a, a materially better margin profile than our 800 G products. Well, so that'll help us from both ends.
Great, thank you so much.
Thank you, Ma and Kevin. I think we have time for just 1 more analysts question.
Okay, your last question comes from the line of Carl acraman of BMP Paradox. Your line is open. Please go ahead.
Yes, thank you. Um Michael Oher was you you noted that your growth of transceivers should accelerate over the next 4 to 5 quarters? Is that a comment sequential or year-over-year and then is there a way to frame the quarterly opportunity of transceivers among your 3 hyper providers versus your initial expectations of 250 a quarter and how does your Fab capacity build out in Thailand support that? Thank you.
Yeah. I mean, um,
You know, we we obviously have line of sight to the the opportunities in front of us are just certainly lead to the 250 million dollars a quarter. So we could have we can see that and what we're trying to do as I said is really balance it out now. Among the customer opportunities, which 1 to choose such that we can really get the highest margin profile as a business. There's no question that the leading customer today will be the leading customer tomorrow in the into the future. They really partnered up with us. Well, we're better understanding that working Cadence and understanding their their, their, the road map.
and really trying to gear our road map to that, but that doesn't preclude us from from continuing to look,
And engage customers 2 and 3 and actually Beyond customers 2 and 3. But you know, Carl and and you and I had this have had this chat. A couple of times. I don't expect this business to to to run away, right? We we don't expect this thing to grow unbounded. We want to grow in a margin Ridge profitable fashion and we have enough other growth drivers and the confidence in our co-packaged Optics and our Optical circuit switch.
Is increasing to the at this point. So, yes, we want to grow our transceivers. We think there's great opportunity to do that. We think we can do that profitably.
and question our
But, you know, we're not we could take on a lot more of this business than, than, than we have.
Uh, if if we went after it in, in an unbridled fashion,
You know, you asked in the last part of your remarks about our Fab capacity. As you know, the transceivers are really manufacturing capacity.
And we've added manufacturing and capacity in Thailand to support.
That kind of, of, of sort of bounded number. Um, we could add a lot more. As I said, a customer opportunity. We're seeing a not just similar to the lasers is very, very strong, but our general view is less limited for now and let these other major growth drivers play out. And that, you know, the three growth drivers are on top of this broad-based growth you're seeing in all facets of our business. I mean, everything seems to be firing right now.
And I don't, I think we're not being given credit for the additional growth drivers, that will layer in to just the fact that the broad-based business is doing so very, very well.
Thank you.
Thank you so much, Carl.
Thank you. This concludes the Q&A session. I will now turn the call back to Kathy for closing remarks.
Thanks, Kevin. Thank you. That is all the time. We have some questions. We look forward to connecting with you at upcoming, investor conferences. And at meetings, this quarter 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.