Thank you everyone for joining us today, and welcome again to day two of our ATET Tech Conference. My name is Papa Sylla. I am the U.S. Optical Networking Analyst here at Citi, and I am very pleased to welcome Wupen Yuen, who is the President of Global Business Units, and prior to that, President of Cloud and Networking. And of course, we have Kathy Ta, who you know very well, the VP of IR of Lumentum as well. First of all, I am very glad to still have you now. I would not be surprised if, Wupen, you cancel last minute to secure more capacity at this point.
Well, this is important. This is really important.
Yeah, thank you for joining us. Maybe to get started, I will ask questions, and then we will leave the last maybe 10 minutes for your questions as well, if you have any. To get started, Wupen and Kathy, I guess, given your role into AI, I am curious to first have your take around. Also optical and networking is playing a more and more important role into this AI infrastructure. So just if you can touch on that as well before we touch on the company in general.
Yeah. Let me jump in here. I think the AI really is, we are at the very beginning of AI, right? If you look at the whole industry here, yesterday we saw in this article talking about Anthropic in a year signed up $517 billion worth of compute, right? Today, the demand of AI way exceeds that of supply, and we are not seeing it changing. It is very different from the past cycles of optical, which is really for infrastructure, for communications. This is really for the intelligence, the generation, and also serving the intelligence. So, the demand is just absolutely crazy. We do not see that changing for the next at least couple of years, if not longer. As a result, as AI making progress into faster throughput, bigger models, more specification, the agentic AIs, the connectivity requirement is also increasing.
Every generation of GPUs or TPUs getting more and more bandwidth. With copper running into the limitations of physics, more of the optical has to be used for interconnecting this XPU. Therefore, we are seeing the demand for optical connectivity is also increasing as generations goes on. Therefore, we feel both the demand side and also the technical requirement continue to escalate, and all this actually is good for the optical world that we are in today.
Papa, if I could just add on to that. Thank you again for hosting us at the conference. It has been just a fantastic conference for us. We really appreciate that. I will just add on to what Wupe n just said. If we think of Data Center Interconnect or the telecom market being sort of a 1x multiple, what we are seeing now for scale-across is probably 10x of what we saw for DCI. What we are seeing now for scale-out is probably 10x of what we are seeing for DCI. What we are seeing for scale-up, starting in the second half of 2027 for the first instance of CPO going to scale-up, is probably 3x to 4x above the 10x that we are seeing for scale-out. Then when all of scale-up goes optical, it is probably a full 10x above the 10x of scale-out.
There are many multiples of optical bandwidth that we are needing to deploy in data centers, and we are not yet even talking about scale in. I think you may have a question for us later on scale in. There is another 10x multiple there, so it is mind-boggling in terms of what we are enabling in terms of enabling the compute.
Absolutely. It has been quite a fascinating journey. I am curious on, I guess it has been not too long since last earnings, but just curious on the state of supply-demand gap at this point. Where are we? Is it extending? Any general kind of update on that front?
Yeah, I think it is still extending, right? Today, we are still short everywhere, right? The laser, think laser, for example, we are short. DML is short. CW laser is short. We do not see the shortage going away in 2027, right? I think 2027 is going to be another major year. People forecast just the scale-out module is going to be doubling the volume on 2026 to 2027. Laser supply is not really catching up to it, right? In 2028, the scale up is going to happen, are going to drive yet another 3 to 4x of increase of demand. So we really do not see the laser supply-demand gap actually close within the next couple of years. We are doing the very best we can.
To this day, we are still allocating capacities, in some cases based on pricing, right, expedite fees and things like that in order to make sure that we serve to the most profitable opportunities. That is the case today. The pricing remains very healthy. All the deals we are making today are equal or higher pricing than the escalated pricing that we already had before. So overall, we are seeing the pricing environment continue to be very favorable, and that is a kind of a signal that the supply-demand gap still remains.
Absolutely. Maybe before diving deep into the different kind of segments, Kathy, maybe one question for you. Recently, you updated your 2028 target to $40. I think it probably came earlier than most expected because you typically do that, I think, at OFC.
Yeah.
Yeah. Just curious on the timing and, yeah.
Yeah, sure. Again, thanks for the setup there. Since our last earnings call, we learned that we have more opportunity in OCS than we previously had understood. That visibility in OCS enables us to be very confident about, for the first time I think ever, putting out a fiscal year 2028 guidance on EPS of $40. The upside that we are seeing from OCS enables us to get there, and that OCS upside is coming from our largest customer, and it is a function of more units. More units that we need to ship to them, and it probably is in large part due to their success in the market and in our success with them in enabling their success in the market as they begin to sell hardware.
Yeah. I will probably circle back to OCS, but just a quick follow-up. I guess, is that more back-loaded, more 2027, 2028, or is that every single quarter you are seeing more demand for OCS?
I think it does layer in as we move through the fiscal quarters of 2028. This is a $40 EPS in fiscal 2028, and it kind of pertains to all of the quarters of fiscal 2028. You should probably think of it as layering in linearly and increasing as we move through fiscal 2028.
Got it. Very helpful. But maybe, perhaps I can start with the CPO, NPO part, and we will get back to OCS. I think during last earnings, the discussion was around CPO, particularly for your main customer. Demand is coming even faster and stronger than expected. I was hoping you can pull the curtain a little bit and discuss, is it more unit than expected? Is it the winds are coming faster, or is the customer pulling forward his timeline? Just any color on what is driving that sentiment.
Yeah, that's a great question. There's a lot of noise about the CPO, NPO story. First of all, on the CPO piece. What we're seeing here is the schedule is the same. The schedule's not changing, but demand is higher. It appears that there is more demand for the CPO. First, it's going to be in the switch, the scale-out switch. Later, in the second half of 2027, as we talk about, it will be for the optical scale up. We're seeing both actually going up in volume. No change in timing, but intensity is actually increasing, which is a very good sign that CPO is doing well, getting good tractions in the market and technology is continuing to ramp well.
Yeah, no, that's very helpful. It seems like recently, NPO is even more popular than CPO, which is very hard to do. I'm curious, I guess, if you take 2027, 2028, 2029, is there a year in which you can see NPO potentially be bigger than CPO?
Okay, let me take the minute to describe the story. Let me sit straight and describe this. First of all, why is NPO even there in the first place? At OFC time, when we talked about the CPO, we thought the CPO was going to be a one customer only story. That's going to be one customer scale up story. Ever since then, what I found out here really is that the optical scale up is now industry-wide story. To support the level of volume and demand for optical scale up in the timeframe 2028, the industry is needing to use both CPO and NPO approaches to serve optical scale up. Okay? If you look at the overall market, we think it looks like the following. CPO will be half of the market. NPO is the other half of the market.
I would say, just from the volume point of view, it's kind of 50/50. Now, look at what we serve. We serve in the external light source, high power lasers. We see the CPO world being an exclusive external light source market. For the NPO market, half of that will also go with external light source. Okay? The remaining half, the customer are discussing between ILS, or integrated light source, versus external light source, but there's more and more of movement toward external light source. The reason is very simple. Because we have such a high optical density with optical engine being placed so close to the heat source, which is the accelerators, there's a great concern what happens to the laser when it's so close to the heat source.
Therefore, to ensure reliability being strong, there's a strong desire to move the laser outside, so that you don't have to worry about the laser being a reliability limiting factor. We're seeing that, and we discussed also in the earnings call, this is the reason why we believe that the NPO is a net addition to our opportunity. Because when we're thinking about the CPO before, we didn't think about the NPO being a mechanism for the industry to jump on the bandwagon of optical scale-up. I hope that explains the situation.
No, that's very helpful color. Just to double-click on NPO specifically, I think you discussed before there are two versions. One in which the laser is inside.
Right
More of a 100 milliwatt kind of laser is needed or so, and then outside, more of a 400. I'm curious, and then you mentioned it seems like most will be outside, but is that, like, 75%? The reason I'm asking is I think there's a lot of discussion around China competition.
Right.
Them being able to do the 100 kind of version of it.
Right.
Just curious if you can kind of paint
That's a great question. Let's go to the 25% overall market of the ILS piece. Even for the ILS, you really don't want to use low-power lasers. Why? Because imagine, if you look at a MPO engine, it's a size of this big. 1 in by half an inch. It will pack 6.4T inside. Compare it with a 1.6T module today, it's half of your iPhone size. So optical density is a lot higher inside this little package, and therefore you really don't want to use too many lasers inside. You want to use as few laser as possible so it doesn't fail. Therefore there's a very strong push to also use high-power lasers. It's not going to be 100 mW laser. It's going to be 150 mW lasers or 200 milliwatt lasers.
Therefore, I will categorically say that for the entire MPO CPO applications, it's going to be 120, 150 mW and above of high-power lasers, which is not the traditional 70 mW laser which is used in today's pluggable market. A lot of the chatter about the CW laser supply, from China in particular, is really targeted today to serve the pluggable market. Which we talk about earlier is short. But for the MPO CPO, what we see really is a strong push toward less lasers, more power, and then to fit both the ELS or ILS applications.
Good. Even in the U.S., I assume practically for the 400 ones, you don't see many competition at all?
Yeah. We see the one competitor, right, who is Coherent that AMB also signed an LTA with, right? And we are really not seeing anybody else in this high-power laser area.
Good. No, that is very helpful. Now that we, I guess, for the CPO NPO, you set a very clear picture on the demand front. I guess now the question is supply. And one important kind of aspect of that is the Greensboro, which is supposed to come in late 2028. I guess any potential kind of drivers for that Greensboro fab to come in faster? Any color on the timeline? What would pull it forward? What would pull it backward?
That is a great question. I think it may give you a holistic picture on how fast, how we are thinking about ramping our ultra-high power laser for CPO and MPO. Right? So first of all, we are ramping today in our San Jose fab. Right? We have a line of sight to ramp from today all the way through 2027. So that is the first ramp. Second ramp is we are ramping this ultra-high power laser also in our U.K. fab. That will come in in second quarter 2027. We will continue ramps through 2028. Okay, that is the second ramp. The third ramp is our Greensboro fab. We start to ramp in second quarter 2028 or mid 2028 as the third ramp.
Right? So in composite you can imagine there is a three wave of a ramp that continue to support the UHP laser for both the MPO and CPO application. Right? What can change that really I think is, so far we're on schedule for all these different ramps. What can really change the schedule is the qualification timing. We'll have to submit a PCN for customer to qualify the product. If we actually accelerate that qualification of the product, we can actually pull it in and vice versa. That would be the biggest variable. But we're definitely working really hard to ensure we get all the quality, all the data ready so that the PC approval can be a pretty straightforward process.
I'm curious on particularly the fab that exists already. I'm sure you are using it to some capacity or so for, let's say telecom and so on.
Right.
I guess it must be a very tough decision because demand is strong everywhere. I'm curious on how you think about allocation. Are you kind of giving priority where margin is strongest? Are you also looking into the future on, let's say CPO or NPO could be a bigger time than the other one?
That's a great question. We are, in principle, we're adding capacity. We're not taking away. For example, when we're ramping our UHP laser in our San Jose fab, we're adding capacity. We can actually keep our current product, which is also ramping. Also in the U.K., we're adding a clean room. We're putting the new equipment, the latest and greatest state-of-the-art equipment into that clean room and ramp the UHP laser that way. We don't sacrifice our current products. That's how we're thinking about it, really is to ensure, because all these product are ramping at the same time, the telecom scale-across is also ramping as Kathy just talked about, and therefore we don't want to sacrifice those. We're adding new capacity, 6 in capable capacity to ensure we have the highest efficiency possible when we start to ramp these products.
So by and large, we do not sacrifice. We add.
Beyond laser as well, now you are also doing ELS. Are you planning to do more ELS as well? I guess, how large do you see that opportunity relative to the laser look longer term and any color on, is it one customer mainly currently, or is it pretty diversified?
Want to take that question?
Yeah. We announced our first ELS win on our last earnings call, and that was with our existing CPO customer. We know that that is just a relatively small portion of their ELS total demand. We expect the timing of those first ELS shipments to take place in the second half of calendar 2027. Our estimate is maybe 15%-20% of their fleet is about the right amount of their share that we think that we will win. Looking forward to the NPO opportunity, I think we can be even more excited about our ELS capacity to take share, because it looks like as Wup en just described, the majority of the NPO opportunity seems to be on the ELS side of the equation rather than the ILS part of the equation.
Many of those ELS customers would also like us to be an ELS supplier, not just a laser chip supplier. I think we have both of those product opportunities to look forward to. We haven't yet announced any NPO wins, but I think that we can expect to see something in the next handful of months, at least in terms of a first customer that we may be looking at.
Got it. That's very helpful. Maybe jumping to the transceivers kind of EML CW part. Just curious there, it seems like there as well, demand is pretty strong. I guess, are you seeing it more for your 100G? Is it more 200G EML, or is it kind of CW? Just any color on what you're seeing on that front.
On the EML side?
On the, yeah, I guess the lasers for the transceiver.
The laser for transceiver. Okay.
Yeah.
Yeah, I think today, definitely 100G EML remains to be the workhorse. 1.6T or 200 per lane is ramping. I think we talk about, we exceed 25% of the mix. We think it will continue to go up. So that's going to be predominantly our output. We talked about before, we also are allocating strategically a portion of our capacity, minority of our capacity for CW lasers. Really for three purposes. One is that when our end customers are short and asking for some help on CPO lasers, we try to help them to ensure that they can kind of bridge over with the deployment.
Two, is that we want to make sure that we have CPO lasers also seeded at every opportunity we can, to ensure that, when we have more capacity in the future, we have a design win, design slot we can ramp to. The third piece really is that we're also supporting the internal modules. Because our modules are basically photonics, and the customers really need us to make sure we deliver our modules. We're also allocating a little bit of our laser to our own module need. But overall, I would say predominantly, our allocation today is still EML. Workhorse is 100G, but increasing amount of 200G. Then our own several lasers that use the three different purposes and the minority allocation of share.
Got it. Then for both, I guess 100 gig and 200 gig, similar question to earlier, the lasers on the CPO, NPO, what are you seeing in terms of competition, both U.S. and out of kind of China as well? Are you seeing much competition on 100 gig or, because again, there as well?
There's a lot. Yeah. Frankly, we're not seeing merchant competition on EMLs other than who we already know, right? The Japanese and some of the U.S. company, but we're not seeing new entrants of EML coming from China. There is one vendor who's producing EML internally for their internal module use. But their noises were heard in terms of putting EML into the marketplace. But we're not really seeing it on our radar screen in terms of being a competitor that we're fighting share with, right? To this day, our EML pricing remains very favorable. And if anything, we're really not seeing the competition.
Got it. That's very helpful. Maybe last question around the transceiver such kind of lasers going into the transceivers. It seems like for 1.6T, the idea is silicon photonics might have a bigger percentage of the mix. But I think there's a lot of debate on by the time we get to 3.2T, EML will come back. Can you just discuss, is that, I guess, your point of view? And two, can you kind of discuss why would that be?
Yeah, we got the question a lot today on this 400G per lane kind of technology, right? First of all, silicon photonics, while it's really good for integration, it has a material property limitation on the speed. So 400G is going to be really a stretch for silicon photonics. And can you do it? Yeah, probably can, but you have to pay a lot of price on power and power consumption, or output and power consumption. So, and indium phosphide for 400G is, we have already demonstrated it. We know it's rampable. So it's a sure bet for 400G per lane. So the industry is still trying to figure out. One technology people are thinking about really is not silicon, but something that's an albay. Right?
But as a new technology, unclear whether the supply side will be able to be there when the volume goes to millions, tens of millions, right? So I would say, if you look at today, for 3.2T, indium phosphide is a sure bet. Silicon photonics will be probably pretty challenged, and TFLN or symphony's now bay is promising, but the supply is a little bit challenged or a little bit questionable at this time, right? So really depending on 3.2T timing, right? But because of this, we think that indium phosphide has a good chance of regaining the share that it had at the 100G per lane generation.
Maybe switching to OCS, and we will open it for question, if any. Kathy, I know I bother you all the time on this question, but still very curious on any way. I think for the transceivers, most of investors and sell side are now able to do some type of bottoms up and so on. For OCS, I think everybody is still trying to get there. Any sense of, I guess, how should we think about kind of content per accelerator or kind of content per TPU? Just any color.
On a first order basis, I think you can still think of a 1.5 port to one XPU attach rate for the most part, for the major applications that most people are thinking about. There are nuances to the attach rate as we think about the new topologies coming down the pipeline. There are some puts and takes, but in general, I would say, Wup en, that it still ends up roughly 1.5 to one. By the time you get through all of the puts and takes on back end of network, fewer hops and some parts of the network, it nets out to be about the same attach rate.
Got it. That is very helpful. Maybe I can pause here for now and open it up for question. If you have a question, just raise your hand.
I want to get a better understanding. Is the edge of your product mode-hop-free window or is it peak power? Is that kind of driving the better yields? If you could just comment on that.
So loaded question. I think from the performance point of view, what Okay, let's start with what customer care about. The customer cares about power, obviously, that's a big one, but they care about the noise as well, right? The noise of the laser, we call the RIN noise. That has to be really low, right? And the third piece is linewidth, right? Because the customer uses ring modulator, any kind of wavelength excursion will cause it to be translated into intensity noise, which will then screw up the link, right? The fourth one is what you talk about here is mode hop, right? Because if you look at today's silicon photonics, the biggest problem with silicon photonics is the laser will mode hop. The mode will jump. Once you jump, you have link failure, right?
All these four things has to be achieved simultaneously in the laser at volume with good yield, and it doesn't change as it goes through the packaging processes. That's a pretty tall order. I think the jury is still out, right? We have already start ramping this lasers now. We're seeing real data. We're doing pretty well. But I think for anybody who's new to this market that has such a high power, such a different laser designs to meet all these criterias at the same time, it's not going to be easy, right? I think Coherent is also working really hard on this. I think they will overcome it at some point. But in some of the overall competition, it's not an easy laser to make. In addition, it's pumping multiple lanes, right?
You don't want to have the laser fail at all, in any way at all. Yeah, so I think that's a differentiated product. Very challenging to make.
What does that timeline kind of look like for when they catch up? Because as you said, their laser isn't necessarily stable, versus yours at set power. Is that 12 months? Is it 18 months?
We frankly don't know, right? I think from a demand point of view, holistically, the customer will need them to be ramping up sometime in 2027, right? We don't know if they're going to be there or not. I'm sure they're working hard on it. I think to keep this market going, we need a second source, right? As an industry, from a customer point of view, to have this capacity ready in 2027. Probably second half, I would guess. I think that would be needed. The reason why I'm saying that, because we need to support the scale-up in 2028, right? There's going to be a big need of lasers, right? I think that's the timeframe that if I was a customer, I would push Coherent to have the product ready for that ramp. Question?
Yes, I will get us kind of go from here. I guess on the OCS, I think often we think about, I guess the TAM, I think there was an $8 billion number, I guess in any way, probably upsiding that number, but just curious on how should we think about the TAM, and what do you think Lumentum could potentially capture of that TAM?
Yeah, and I think as, I mean, that $8 billion number isn't that old. It was something that we put on a slide just six months ago, but now I think we see upsides to that. Not only is our largest customer doing extremely well in the market, which is one source of upside, but there's also this sort of tray level in rack, different way to think about OCS from a dynamic partitioning perspective or an XPU player. They may want to not only have 576 XPUs in a cluster, they may want to have different numbers of XPUs in a cluster. So to dynamically partition that, you could use OCS. You could also use it as a resiliency network application where you route around underperforming accelerators.
We now see those applications kind of coming into very serious R&D, and we are working with customers on that, and I think that gives us better visibility to at least by late 2028, early 2029 type timeframe, we can see the advent of a lot more OCS that will be required for those types of applications. So that probably puts upside to that $8 billion number.
Got it. That is very helpful. Just on the $40 EPS for fiscal 2028, to my understanding, it was just the EPS number. Is there any way we can kind of reverse engineer to get to the EPS? What is the implied margin? Any color on how we should think about the other lines?
Yeah, I am hesitating to say that because we did see the sell side models out there, yours included, by the way, Papa, that had us a little bit lower on EPS for the fiscal 2028 timeframe, and we felt like, okay, well, we have all the confidence that we will be able to meet this $40 metric by that timeframe, based on the goodness of the additional orders and business that we are seeing in OCS.
Got it. Very helpful. Maybe going back to you, Wupe n. On CW, something that was really interesting that you mentioned, I guess, Michael, sorry, mentioned during the call was CW margins or kind of yields improving a lot. I am just curious on, I guess, how far can we think of kind of it getting. Can it get to EML level or kind of just any color on how should we think about that aspect?
Yeah, I think that is a good question. I think our CW laser yield has climbed up to be higher than EMLs. The pricing of our CW laser, believe it or not, is similar to EMLs. It is a little bigger than the EMLs, but as we discussed in our earnings call, we have also shrunk the size of the CW laser to be a lot closer to that of EMLs. So I would say the margin profile is not going to be as good as EMLs, but pretty close with CW lasers. Therefore, our past kind of hesitance in putting more CW lasers out there is really gradually diminishing, given that the progress we have made on the maturity of the CW laser technology from the yield and the die shrink perspective. So, it is still not as good as EMLs, but it is coming close.
That's very helpful. Maybe to finish it off, last question for maybe both of you. Obviously Lumentum is a name a lot of investors look at, but I'm sure from your point of view, there are part of the story that you believe maybe might be underappreciated or misunderstood. I want to give both of you the chance to maybe part of the technology or part of the story that you perhaps want to double click on.
First thing that comes to my mind is scale across, and this is partly our fault. We don't give it enough air time. We also see scale across really inflecting our pump laser business. We talked about in this last earnings call and the call before that we see a 4x multiplier on our volume of pump lasers that we're expecting over the next five quarters or so. We have signed up all of the major network equipment manufacturers in long-term agreements with us over a multi-year period, and we engage them with higher prices for pump lasers to help us underwrite the CapEx that we need to spend to expand that capacity. We really see scale across in pump lasers as well as narrow linewidth lasers. That really has been a story of growth.
I think this last quarter we had the 10th consecutive quarter in a row of growth in that business. It's really been a very strong foundational story for us.
Yeah, for me, I would just try to maybe reemphasize our position, right? Kathy talked about scale across is one, scale out is 10 in bandwidth, scale up is 100, scale in is 1,000. Lumentum's position today is going all the way from scale across to scale out, to scale up, and later to scale in. The position, the focus we're doing on whether it's the laser or pump laser, CW laser, EML lasers, OCS, right? Then later on the VCSEL, stuff like that. We're positioning ourselves to be kind of the technology of choice in all these different areas, right? As we ramp AI, as intensity of optical demand increasing, moving from scale out to scale up, to scale in, and with the whole demands going up because XPU number's going up, I would say Lumentum's best days are yet to come.
Because we see the positioning of our products and technologies. We see the roadmap of our customers and working hand in hand with them to facilitate the realization of these opportunities. We feel confident in that we will be well-positioned to capture the AI growth for the years to come.
Very exciting stuff. Thank you both for joining us, and thank you everyone for joining us.
Thank you.
Thanks, Papa.