Good morning. I'm Samik Chatterjee. I cover the hardware and networking companies at JPMorgan. For the next session, I have the pleasure of hosting Lumentum and Michael Hurlston from Lumentum, CEO of Lumentum. Michael, thanks for taking time to come to the conference, and thank you to the audience as well for attending. Michael, I'll start you off with a few questions. We're getting mostly on the macro from investors, and I think this is based on sort of overall hesitation or concerns we see from investors more around the macro than anything else at this point. You obviously get a lot of feedback from your customers in terms of how they're thinking. How would you characterize sort of the likelihood that we see a significant slowdown in demand later in the year or see, potentially, a recession?
How are you thinking about those sort of risks to the overall business?
No, thanks for the question, Samik. First, thanks for having me. Good event. We haven't seen any slowdown at all in ordering patterns. Book-to-bill remains positive. Generally speaking, I just finished a round with all the customers. As you know, I'm new to the seat, so I've been spending quite a bit of time with the customers, and at least what they're reflecting to us is no slowdown. We'll see how it plays out. Of course, we're continuing to monitor and modulate our spending, but at least over the course of the next four or five quarters, we don't see a slowdown in sight.
Yeah. This, I'm gonna sort of hit some of these macro topics first. There's also, and I'm sure you get questions on this all the time, is a lot of concern whether the cloud companies continue to invest in AI to the same extent that they've had in 2024, for example, or in the first half of 2025. How do you sort of, when you look at your pipeline of engagement with the hyperscalers, how do you get comfort around that magnitude or even sort of a robust spend continuing, which entails then you to sort of be focusing more resources on that front as well?
Yeah. Again, as you, you know, having spent time with Kathy and with the company over a long period of time, we're somewhat indifferent to AI and just data center in general. We don't see any slowdown in CapEx. I think everybody's come out with their CapEx spend for 2026, and it looks same or better than we saw in 2025. We have opportunity in our landscape, as you know, to pick up share in a couple of areas. Our transceiver share is relatively modest, and we have opportunities out in front of us on OCS and some other things that we can see that give us maybe a unique set of tailwinds. Generally speaking, you know, similar to the first question, we're not seeing any appreciable slowdown in spending.
Okay. Okay. and then, talking about tariffs specifically, and things keep changing every day, but, maybe talk about one, sort of, how you're navigating the unpredictability here of tariffs, and then, overall, how are you planning to mitigate the impact?
Yeah. I mean, we characterized on our call—our call was last week, and you and I had a really good discussion following the call. The impact that we characterized was 100 basis points to margin. And that 100 basis points to margin was largely coming from the reverse tariff, where we are importing goods to make our different optical goodies in China. As things come into China from the United States, that reverse tariff was hitting us to the tune of 100 basis points. Interestingly enough, as you know, we have manufacturing footprints both in China and Thailand, and we did not see appreciable impact from the tariffs on our ship out. Most of our impact was actually on ship in. You know, obviously, the situation has gotten slightly positive even since last week, and it is something we continue to monitor.
We have a fairly unique situation as a company in that we do have two manufacturing locations. We think we can steer around tariff impacts by using that supply chain flexibly. In events where tariff might be imposed on goods coming out of China, we think we can maneuver into Thailand. Even beyond that, we have good relationships with a set of contract manufacturers where, if need be, we could skate our manufacturing and our supply chain to that, where we could actually utilize the contract manufacturers more than we currently do. We have a lot at our disposal on the manufacturing line that helps us mitigate outgoing impact on tariff.
Okay. Got it. Some investors asked us after the investor, after your earnings call itself, about how to think about plan B for Lumentum. I know you're talking about moving capacity to Thailand more and more, and you've also said in most of those cases, you're not the importer of record, so you're not the one paying the tariff as such. If there is a tariff on Thailand as well that's in play eventually after some of this 90-day sort of pause goes away, is there a plan B in terms of capacity that you need to then address, or would you just more than focus on contract manufacturers that are not impacted by the same?
Yeah. I mean, look, our first plan is to continue to scale up in Thailand. As you and others that follow the company know very well, we've enlarged our manufacturing footprint there. We're still not at capacity. We still have room to grow in Thailand, and we would intend to do that as sort of plan A. Even for some of our flows, which you and others have covered well, where we manufacture in China and actually goods flow out of China, we have the opportunity to steer that such that we do finishing work and have the country of origin be Thailand rather than China. Beyond all of that, and that's a lot of moving pieces, we probably uniquely in the optics industry have a strong relationship with contract manufacturers.
It wouldn't be overnight, but over the course of a few quarters, we could move more of our manufacturing footprint to the contract manufacturers and have them pick up some of the work, in countries that were more tariff favorable in the event that, you know, a significant tariff, for example, was applied to Thailand.
Got it. Okay. Okay. Great. So now going back to more sort of company-specific drivers, but maybe we'll start with your sort of experience at the new seat. You were in the optical industry before going to Synaptics, and you've come back to the optical industry. Most investors I talk to are always concerned about the historical trends of the optical industry, where if you take the industry in aggregate, like finding a period of sustained revenue growth and revenue growth at healthy margins is pretty few. You don't really find that, over multiple time periods that the optical industry has delivered that. So one, do you see the industry as something that's changed from what the historical trends were in the prior years? And what drove, what was, was the motivation for you to then come back to the optical industry and try to change that overall?
Do you see a period of healthy growth and healthy margins at the same time?
Good, complex question there. You've, you've done your work. Look, I, I maybe I'm crazy to come back to the optics industry. I think that that, I mean, that's the headline. I think three things have changed. I mean, we sold Finisar to 26, which has become Coherent, and now, of course, the majority of the revenue coming from Coherent actually is from Finisar. I understand the business over there pretty well. I think three things are different. First, Lumentum has a much higher component mix. The thing that I like about Lumentum is the components, and Kathy and others have characterized our laser footprint as being second to none. As we look out at co-packaged optics, opportunities like Scale-Up, it's gonna be very component-centric. Having that strong foundation, I think, is a differentiator and something very attractive.
To your question, I think two things are now different about the industry that were, you know, drivers when I ended up selling Finisar and are now sort of attractive forces. One is globalization, right? That was not a thing in 2018 and 2019. There was an equal playing field in Broadcom, with Hock, Avago originally. Lumentum and Coherent were all major transceiver suppliers. Lumentum actually dropped out, as did Broadcom. Coherent and Finisar were the last people standing. We could see a lot of pressure coming from the Chinese. I, Alan Lowe is a smart guy, and Hock is obviously a smart guy, and I felt probably they are reading the signals right, time to withdraw. That has changed. I mean, I think there is a big push from the hyperscalers to source from U.S.
Names, even though the Chinese names now have moved their manufacturing footprint to other jurisdictions for security concerns, both security of supply and actual security. There is a big push for the U.S. hyperscalers to source from the U.S. The second dynamic that has changed, and you have covered it well, is just the rate of change in the market. The market is moving much more quickly, which speaks to innovation, which is typically a strong suit of U.S. customers and U.S. companies. As the hyperscalers have become an increasing part of the overall market in optics, the rate of change that is being driven is very, very advantageous to a company that is willing to invest, to innovate, which is typically the hallmark of a U.S. company. Dynamics in the five years since Finisar and now coming back into the market are appreciably different.
Okay. Okay. Fair. What's your early assessment of the data com assets that Lumentum has? Even CloudLight is a relatively newer acquisition. If you were to sort of think about allocating capital today, is the focus going to be more on the transceiver side with CloudLight, or is the focus going to be more on the chip business or the component business, as you call it?
You know, near term, obviously, a lot of our growth is gonna come from transceivers. We're a small player in the transceiver market. We have, you know, low single-digit share in the market. We have a high degree of exposure to one customer, as you know. Our plan certainly in the next four, six, eight quarters is to grow in the transceiver market. I see transceivers as a means to an end. We wanna grow our component business, and we see such an opportunity with co-packaged optics coming online sometime in the next year or so, Scale-Up being a big opportunity that's in front of us from a component standpoint. In a sort of five-year, six-year asymptote, I'd like to skew the company much more to components. I think that that's higher gross margin, higher shareholder returns if we can do that.
In the interim, I'm gonna use the transceiver business to build cash flow, to allow me to invest, to sort of fix the clean up the balance sheet and get to a place where we can have an even higher majority of our shipments be components than we see today.
Okay. On the transceiver side of the business, how do you think about how critical vertical integration is? I mean, particularly given that you have capabilities on both ends in terms of the transceiver assembly as well as components of your own, do you see that as a prerequisite to sort of drive more vertical integration and deliver shareholder return, or do you think shareholder returns are independent of driving vertical integration on the transceiver business?
It certainly helps. I mean, I think you and I had a discussion last night over dinner. The transceiver business for us is definitely operating at margin levels right now that we do not like, right? It has a lot of room for growth. Even in the asymptote, I do not see the transceiver business getting anywhere above mid-30s gross margin, and that includes vertical integration. We would include today, as you know, we do not use our own components in the transceivers that we ship out. We want to fix that. We want to change that. We have a strategy to now put our own components in our own transceivers. I do not know that that is a differentiator. Innolight, Eoptolink, Hisense, right? All Chinese competitors, none of those guys have vertical integration.
Frankly, they're doing better than us in the market, both in terms of market share and margin. We have room to run for sure. I think the vertical integration strategy gives us a level of differentiation and a level of help on the gross margin line that will be appreciated in the asymptote. I do not think it's a prerequisite to your question. I mean, the other guys are doing a fantastic job without having that vertical integration. In fact, as you know, we supply some of the critical components to most of the players.
On the transceiver side, you've been pretty busy. Or Lumentum's been pretty busy even before you joined in terms of announcing new wins with hyperscalers. Should we largely take that as a reflection of already some of the move from the Chinese suppliers starting to materialize in your wins, or how would you encourage us to interpret the amount of wins that you've announced recently in relation to CloudLight with hyperscalers?
Yeah. I think it's definitely driven by a desire to have a domestic name. I think between us and Coherent, you know, if everything's running seamlessly, we're still able to supply less than half the market. Although there's a big push to have U.S. suppliers, and I think we're taking share from overseas suppliers, it still is not a situation where we will be able to fulfill 100% of the demand. The demand is still very hot to the first set of questions you asked. There's a lot of runway ahead of us in terms of building share and momentum in the market. You know, look, we're a very, very small minority player today. Where we're moving the share needle, we're certainly moving it from China, less so from Coherent.
Okay. Got it. Got it. Let's talk CPO. Everyone's focused on that transition. How should we think about, sort of, the drivers in terms of how to think about revenue versus margin? What does that impact on Lumentum look like if the industry were to hypothetically go to CPO very quickly?
Yeah. Let me, maybe the more difficult question first. Certainly from a revenue perspective for us, and this is probably unique to us among all the suppliers, we would see it being neutral, right? Because the number of lasers that we supply as a transceiver, assuming in a transceiver architecture, and then our share of the transceiver market is relative, is unequal to what we would get in CPO. In CPO, I think we're gonna get a very, very high share, certainly from the leading deployer of CPO. If you look at it on a revenue line, and Kathy's done the calculations, it's roughly the same, right? The difference comes in the fact that our share is so high, relative to transceivers and relative to lasers that we might supply into third-party transceivers. The margin dollars are considerably higher.
It's a real benefit for us for the world to go CPO. Revenue neutral, margin significantly accretive. We have learned a lot from Nvidia in terms of how they're thinking about architecture. We hope to extend that relationship into transceivers, into other things that we might do with them, from this point forward.
Okay. I know we had this discussion last night, but wanted to get you, get this, have this discussion in this forum as well. Primarily when you discuss share in transceivers being low and then the offset being the high share you have on the laser side, maybe just flesh that out a bit more. Where's your market share today, or what are your aspirations in terms of market share when it comes to the lasers that support the CPO solution?
Yeah. I mean, out of the chute, we think we have 100% share. I mean, we've already started shipments into the single-announced CPO opportunity. We think we can maintain that given the differentiation we have. You know, I think Kathy pointed this out last night. We are coming from a place of real history in CPO. We are leveraging a laser that we've typically used for submarine products, high power to go transmit along long distances on undersea cable, and an unbelievably high reliability. Those two things are key factors because as you think about the argument against CPO, it has often been, "Look, I have to go in and sort of detach a bunch of things from the motherboard," where before I had a pluggable, right?
This is, if we're able to generate a truly high, highly reliable laser, which we have, we have a long history of that with the underlying technology for this UHP, the laser we're deploying in CPO, and we're able to generate the power levels that are required when you abut the optics with the switch, you know, we think we have a very unique differentiator. I do think it's gonna take a long period of time for somebody else to catch up. It's not insurmountable. I mean, if people put their mind to it, but it's not an overnight thing. It's really a long, long investment cycle that we've had in this product. We think that's gonna be a real competitive moat as we look at CPO.
Okay. Got it. You outlined that your long-term roadmap is to move more towards components. I mean, if technologies like CPO become more relevant, that's moving more revenue dollars to components. I mean, in 10 years' time or even 5 years' time, how does Lumentum look relative to a semiconductor company that's vertically integrated from the design to the fab level?
Yeah. I mean, look, I think, you know, we've certainly outlined a near-term path to get our margins above 40%. In that structure, 500 going to 600, going to 750, there's a big element of transceivers that fold in there. In our calculus, certainly in the very near term and intermediate term, transceivers are gonna play a significant role. I think as you go at for 750 and beyond, and we'd like to get this thing to, you know, a $5 billion plus revenue company, we are going to tip a lot more to components. We're gonna use cash that's generated to start pursuing opportunities and scale up in different parts of the optics market. We don't have a DSP today, for example.
There's a lot of things we think we can do to inflect our component content such that when you start talking about revenue levels of $1 billion a quarter, we would be much more biased as a company toward components.
Okay. Okay. Got it. Going back to sort of the technology level, on the component side, you have either design capabilities or even fab capacity when it comes to VCSELs, EMLs, CW lasers. I know you'll be sort of, it does not matter to you where the industry goes because you have capabilities across all three. Do you have a view on where the overall sort of optical landscape, when it comes to inside the data center, which technology sort of gets more adopted relative to the other? What are you hearing from your customers on that front?
I think if you look at the mix now of transceivers, it's definitely biased to CW. Silicon Photonics is a decent share, a significant share of the overall transceiver that are deployed. That doesn't mean that our EML capacity, which is completely sold out, is going to change anytime soon. The world supply of EMLs can't keep up with EML demand. If you look at the landscape right now, there's no doubt that the majority of deployments at 800 and 1.6T are CW. That's why we said, "Hey, we're gonna put our toe in the water with CW." We've not deployed it. We've deployed, but not in this construct, a DataCom transceiver. We've not deployed a CW laser. We would certainly look, we are planning to do that in the fourth quarter.
I think you know that over the calendar year, start shipping production CW lasers. That is mostly strategic because we would be insourcing those CW lasers into our Silicon Photonics-based transceivers for shipment to our largest customers, such that we can start on this journey. Again, the world supply of EML, we are completely sold out for the foreseeable future. We will bias our manufacturing to the extent we can toward EML, as that is a better margin opportunity, a better ASP opportunity for us overall.
Okay. Got it. Let me take a pause there and see if there are any questions in the room. We have just getting the mic.
Contract manufacturers are making transceivers directly for clouds. That could be a good opportunity for you, but also competition if you're making your own. How do you think that's gonna evolve over time? Do you think the clouds will eventually design most of their own and not use third parties and do it with a contract manufacturer and you can sell components? Or do you think that'll be a small part 'cause there's a lot of innovation that you guys can bring to the table as we move on these speeds moving up?
It's always gonna be a mix. I mean, if you actually look at it, how did we get into the transceivers? We bought a CloudLight, which was arguably a contract manufacturer for a large customer, right? This has been around, this is nothing new. This has been around for a long time where there's a mix of contract manufacturing opportunities. As you correctly point out, that's a great opportunity for us to sell components. Then there's a mix of, "Hey, we're gonna go to the open market and source it for somebody who can give us, bring us a more turnkey solution." We have a mix today. We have some things that we're doing on spec. We have some things that are where we would look somewhat like a contract manufacturer. We have some things that are done as turnkey designs.
It really depends. To us, that landscape has been there. It'll continue to be there. We feel like we have opportunities in both.
Okay. Any other questions in the audience? Go ahead.
You mentioned on the gross margins, I think, did you say mid-30s?
For transceivers is, is probably the right place to be thinking about, 'cause that's where the guys like Innolight are. And then you're gonna bring in some of your own vertical integration. But even with that, like, that's probably the right level to think about. Yeah. I think so. I mean, today we're behind that, right? We're not at, nowhere. We're unfortunately nowhere near that. So we have a lot of room to run. I mean, if you look at Coherent, I think they're sort of mid-30s, perhaps high, high 30s, 35, 36. Innolight actually reportedly is in the 40s, but they think they have different ways of accounting for depreciation and, and some other things that give them a, an artificial tailwind. We would expect to be low to mid-30s. I, I think somewhere 33-35% is gonna be where we end up.
Our job is to manage the rest of the business to gross margin levels significantly higher than that. We think we can run the rest of the business, even as this is growing at margins much higher than 40% to bring our overall average to 40% and beyond. We have a lot of levers we think in the business to continue to improve and work on gross margin in the rest of the business. Components are obviously at semiconductor-type margins, but there are other parts of our business that are operating at levels we think we can improve to get our gross, the gross margin line moving above 40% in a pretty rapid fashion.
Okay. So if I continue, we have not discussed OCS yet. Maybe, help us think about the revenue opportunity that you are sort of envisioning around OCS. You mentioned product shipping later this year, I think. When do we start to see that become material where it is more noticeable to the P&L?
Yeah. Look, this is a, this is a great opportunity for us. I mean, we think Greenfield data centers are transitioning very clearly to optical at the spine layer and in some cases in the leaf layer. We will not supplant all the electrical switches. I think we have given out numbers like 10-15% of the opportunity that could go to optical. It makes sense because the more transitions you have from electrical to optical, the more power you end up consuming. Every one of those transitions, power is an issue. OCS has advantages in cost. It has advantages in power. It has advantages in latency. I think if you start looking at, again, Greenfield deployments, and there are many now coming online, those are strongly considering OCS as an alternative to electrical for a number of the layers inside the data center.
You know, the way we see it playing out is we think we'll kind of get early, early revenue toward the end of the calendar year and then really material revenue starting to build probably in the second quarter of fiscal 2026, calendar 2026, and then really starting to impact our fiscal 2027. We really like this. I mean, you think about the ASPs, you're talking somewhere between $75,000 and $90,000. You don't have to sell too many of these things to really impact the top and bottom line. They are, for us, accretive even to these high margin targets we've set out. If we can make a dent in this market with the OCS, we will really be able to move the needle.
Got it. Got it. Okay. Margins on OCS?
Yeah. It's above, it's above even the targets we've set out. So very accretive for on the margin line on OCS.
Got it. Okay. Telecom, seeing quite a bit of revival recently. How much of that is traditional telecom equipment versus what is more purpose for ZR or DCI applications?
Yeah. I mean, it's fascinating. I mean, really, I would argue that the buildout from the hyperscalers is actually trailing the in-data center. The majority of our revenue is actually, although we would sell it to traditional telecom people like a Nokia, a Cisco, a Ciena, our traditionally strong customers, they in turn are reselling to the hyperscalers. If you look at the dollars that are being deployed, there's been so much to build out the data center, but very little to connect, to build backbone, to really facilitate DCI. That spend is starting to pick up. We certainly see it from other traditional telecom guys, but it's not the AT&Ts, the Verizons, the traditional telcos that are driving that. It's much more the hyperscalers that are causing our revenue line to move.
Okay. Any views on what the sort of then underlying telco spend is on their own network? Because that obviously used to be a big driver of revenue for Lumentum in the past. Like, is that starting to continue to moderate or is that now just stable at this point?
I would say, generally speaking, as you know, having been around the company, there's a big inventory problem. That was mostly coming from the traditional telco and MSO type of customers. I think we're largely through the inventory. There's still pockets, but that business has yet to fully revive. It is flattish, right? There are pockets where we're up, pockets where we're down. If you look at telecom in general, it's becoming more and more driven by the hyperscalers rather than the traditional carriers.
Okay. Got it. Maybe lastly, just on industrial tech, outline sort of what do you, where do you see opportunities in both industrial applications, but also vis-à-vis that, like the traditional Face ID business that you had? Do you see opportunities on either of those that would be material in terms of a incremental opportunity?
Yeah. I mean, face ID has been, I played it on both sides, right? I, as you know, I was, built the face ID factory for Finisar that now, Coherent's taken on. You know, I think that story has mostly played out. I think we're at the, we went through a boom and, and now I think the market is relatively flatline. I think you've got rational behavior in the market, but I don't expect to move the needle all that much. I think there's some opportunity for us as a company to improve profitability. We have probably too many engineers deployed on it given the size of the opportunity. I think we'll look at, you know, how we can rationalize that and make it a bit more profitable. The other component that you correctly talked to is industrial lasers.
You know, again, I think there's opportunity there to grow the business. We really are driven largely by one customer, particularly on our fiber laser side. We think that as the semiconductor and semiconductor packaging industry grows and is looking more and more at laser deployment, there's opportunity to do better there. There's definitely opportunity to improve the margins, right? That business has sort of traded sideways over the last few quarters. We have not done a lot either on our cost or on our prices. I think there's some opportunity to improve the business by looking at those kind of levers.
Okay. I will wrap it up there before we run out of time. Thank you everyone for coming to the conference. Thank you, Michael.
Yeah. Thank you so much. Good seeing you.