Papa Sylla

Papa Sylla questioned Lumentum's visibility from key AI customers regarding EML supply, asking if the supply-demand gap has widened and how long-term contracts (LTAs) and pricing power have evolved. He also sought an update on the CPO opportunity versus EML/transceiver, specifically regarding content per accelerator/server, market share, and the potential for External Light Source (ELS) modules and scale-up Total Addressable Market (TAM).

Answer

President and CEO Michael Hurlston confirmed the supply-demand imbalance remains significant, with Lumentum undershipping demand by roughly 30%. He highlighted that all EML capacity is covered by tight LTAs through calendar 2027, which provide pricing leeway and have improved pricing overall. Executive Vice President and CFO Wajid Ali added that LTAs serve as a baseline, allowing for incremental pricing discussions for additional units. Michael Hurlston and President, Global Business Units Wupen Yuen explained that CPO math works favorably due to high market share, and the ELS module opportunity could significantly increase ASP and TAM, especially with the new scale-up market.

Papa Sylla inquired about Lumentum's visibility with key AI customers for EMLs, specifically asking if the supply-demand gap, previously quantified at 25-30%, has widened. He also sought details on how long-term contracts and customer commitments have evolved, including duration and pricing flexibility. In a follow-up, he asked for an updated perspective on the content per accelerator or AI server for CPO opportunities compared to EML/transceiver business, given increased sales and visibility.

Answer

Michael Hurlston, President and CEO, confirmed that the EML supply-demand imbalance remains significant, roughly 25-30%, despite added capacity. He emphasized that all EML capacity is covered by tight Long-Term Agreements (LTAs) extending through calendar 2027, which include pricing flexibility. Wajid Ali, Executive Vice President and CFO, added that LTAs provide a stable baseline, and incremental demand allows for further pricing optimization. Regarding CPO content, Michael Hurlston reiterated that the math works favorably for Lumentum due to high market share in CPO lasers, despite lower dollar value per laser compared to transceivers. He highlighted a new opportunity to participate in External Light Source (ELS) modules, which could offer a 2 to 2.5 times revenue content gain. Wupen Yuen, President, Global Business Units, further explained that the ELS and new scale-up CPO opportunities will meaningfully improve Lumentum's overall market share and TAM.

Papa Sylla asked for a characterization of the EML supply-demand imbalance this quarter versus last, considering Lumentum's increased investment and yield improvements against rising CapEx across the board. He also inquired about the company's approach to pricing for EMLs given the demand-supply imbalance and its impact on margin expansion.

Answer

President and CEO Michael Hurlston stated that while supply increased by over 10% in the guide, the demand-supply imbalance has worsened, with a shortfall increasing from roughly 20% to 25%-30%. President of Global Business Units Wupen Yuen echoed this, noting the mismatch has increased over the last 3-4 months due to newly announced projects, leading to long-term agreements with leading customers. Michael Hurlston confirmed that pricing is a lever, with targeted price increases in the current guide and more broad-based increases expected in 2026 agreements. EVP and CFO Wajid Ali added that margins benefit from improved manufacturing utilization and the increasing proportion of higher-margin 200G EMLs, with new product lines like 1.6T, OCS, and CPO further improving gross margins in calendar 2026.

Papa Sylla asked for a characterization of the EML supply-demand imbalance this quarter versus last, considering increased investment and yield improvements against rising CapEx. He also inquired about Lumentum's margin outlook for the December quarter relative to longer-term targets and whether the company has leverage to increase EML pricing due to the supply-demand imbalance.

Answer

President and CEO Michael Hurlston stated that while supply is up over 10% in the guide, the demand-supply imbalance has increased from a 20% shortfall last quarter to 25-30% now. President of Global Business Units Wupen Yuen added that newly announced projects extend the mismatch horizon, leading to long-term agreements and strategic allocation. Michael confirmed that pricing is a lever, with targeted increases in the guide and more broad-based increases expected in 2026 agreements. EVP and CFO Wajid Ali noted that margins benefit from improved utilization, a higher mix of 200G EMLs, and future growth drivers (1.6T, OCS, CPO) which will further improve gross and operating margins.

Papa Sylla requested more color on the telecom subsegment, asking if sentiment had improved and about the revenue mix between traditional telecom and Data Center Interconnect (DCI). He also asked about the primary driver of the Q3 margin outperformance and the progress on yield improvement efforts.

Answer

CEO James Anderson described the sentiment for traditional telecom as 'cautiously positive' with incremental improvement, but noted that DCI is the bigger growth driver, responsible for the majority of the telecom segment's 20% year-over-year growth. CFO Sherri Luther explained that Q3 margin benefits came from both cost reductions and pricing, with cost reductions being a slightly larger contributor. She added that yield improvement is an ongoing, continuous process across the company.

Papa Sylla of Citi inquired about the progress on 200-gig per lane VCSELs and whether they would be available for the 1.6T cycle or are more targeted for 3.2T. He also began a follow-up question on datacom margins before his line disconnected.

Answer

CEO James Anderson confirmed that Coherent is progressing well on 200-gig VCSELs and EMLs but declined to specify which technology would be used in 1.6T or 3.2T transceivers for competitive reasons. Answering the presumed follow-up, Anderson acknowledged that while progress has been made on datacom margins through yield improvements, there is still significant work to do on improving product costs across the company.