Lumentum Holdings Inc. (LITE) Q4 2025 Earnings Call Transcript

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Overview

Despite growth in cloud and networking segments and strong product development, the company faces challenges. Q4 revenue guidance is significantly below the $750M target, indicating potential revenue shortfall. Additionally, operating margins and EPS guidance are below strategic targets. The Q&A section reveals supply constraints, vague timelines, and competitive pressures. While there are positive aspects like tariff exemptions and high demand, the overall sentiment is negative due to weak financial guidance and uncertainties, leading to a likely stock price decline.

Key Financial Performance

Fourth Quarter Revenue $480.7 million, increased 67% year-over-year, driven by exceptional demand from hyperscale cloud customers and strong performance in cloud-facing components and transceiver product lines.

Cloud & Networking Segment Revenue $424.1 million, increased 67% year-over-year, attributed to higher demand for cloud-facing components and transceiver product lines.

Industrial Tech Segment Revenue $56.6 million, increased 6% year-over-year, driven by strong demand for ultrafast laser shipments supporting high-volume solar cell manufacturing.

Non-GAAP Gross Margin 37.8%, up 1,000 basis points year-over-year, due to better manufacturing utilization and favorable product mix from increased Datacom laser shipments.

Non-GAAP Operating Margin 15%, up over 2,000 basis points year-over-year, primarily driven by improved Cloud & Networking profitability.

Non-GAAP Operating Profit $72.3 million, increased significantly year-over-year, reflecting higher revenue and improved operating leverage.

Non-GAAP Net Income $63.3 million, increased year-over-year, supported by higher revenue and profitability in Cloud & Networking.

Fiscal Year 2025 Revenue $1.65 billion, up 21% year-over-year, driven by higher overall demand and factory utilization.

Fiscal Year 2025 Non-GAAP Gross Margin 34.7%, up 450 basis points year-over-year, due to higher demand and improved factory utilization.

Fiscal Year 2025 Non-GAAP Operating Margin 9.7%, up 1,030 basis points year-over-year, reflecting higher gross margin and improved operating leverage.

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Operating Highlights

200-gig EMLs, 1.6T transceivers, optical circuit switches, and ultra-high power lasers: These technologies are essential for scalable, energy-efficient AI infrastructure. They are projected to become multibillion-dollar markets within 5 years.

PicoBlade Core ultrafast laser platform: Launched for industrial micromachining applications, enabling infrared, green, and ultraviolet wavelengths in a compact form.

Cloud & Networking segment: Revenue increased 16% sequentially and 67% year-over-year, driven by hyperscale cloud customers. Cloud revenue is growing over 20% annually, with expectations to surpass $600 million in quarterly revenue by June 2026.

Industrial Tech segment: Revenue decreased 6% sequentially but increased 6% year-over-year. Growth driven by ultrafast laser demand for solar cell manufacturing.

Wafer fab expansion: Progressing on schedule to support higher volumes of EMLs and other indium phosphide-based devices.

Cost reduction initiatives: Improved profitability in the Industrial Tech segment despite revenue decline.

Optical circuit switches (OCS): Recognized first revenue with shipments to two hyperscale customers. A third customer committed to deploy OCS in 2026. Accelerating in-house manufacturing capacity expansion.

Co-packaged optics (CPO): Received the largest single purchase commitment in company history. Investments in U.S.-based indium phosphide wafer fab to support significant revenue ramp by the second half of 2026.

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Risk or Challenges

Demand outpacing supply: Demand for narrow linewidth lasers and other components is outpacing supply, which is expected to continue through fiscal 2026. This could lead to potential delays in fulfilling customer orders and lost revenue opportunities.

Manufacturing capacity constraints: While manufacturing capacity for laser assemblies is ramping up, it is not sufficient to meet the high demand, particularly for narrow linewidth lasers and other coherent components.

Industrial Tech segment revenue decline: The Industrial Tech segment experienced a 6% sequential revenue decline, driven by lower demand for industrial lasers and 3D sensing products.

High capital expenditure: The company invested $59 million in CapEx during Q4, primarily to expand manufacturing capacity for cloud customers. This high level of investment could strain financial resources if revenue growth does not meet expectations.

Economic uncertainties: The company faces risks from broader economic uncertainties, which could impact customer demand and overall market conditions.

Regulatory and compliance risks: Forward-looking statements are subject to risks and uncertainties, including regulatory compliance and changes in laws that could impact operations.

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Guidance & Outlook

Revenue Expectations: Lumentum expects to surpass $600 million in quarterly revenue by the June 2026 quarter or earlier. For Q1 fiscal 2026, net revenue is anticipated to be in the range of $510 million to $540 million, with the midpoint representing a new all-time quarterly revenue record.

Growth Projections: Cloud revenue is growing well over 20% annually. The company expects 2026 to be a breakout year for laser chip sales of both 100-gig and 200-gig lane speeds. Shipments of narrow linewidth lasers are expected to continue growing, with demand outpacing supply through fiscal 2026.

Margin Projections: Gross margins are set to surpass 40%, and operating margins are targeted above 20%. For Q1 fiscal 2026, non-GAAP operating margin is projected to be in the range of 16% to 17.5%.

Capital Expenditures: Investments in manufacturing capacity are ongoing, including a $59 million CapEx in Q4 fiscal 2025 to support cloud customers. Additional investments in the U.S.-based indium phosphide wafer fab are planned to support a significant revenue ramp in co-packaged optics by the second half of calendar 2026.

Market Trends and Business Segment Performance: The company is positioned for sustained growth driven by the rapid adoption of AI and the global build-out of cloud infrastructure. Cloud & Networking revenue is expected to grow sequentially in Q1 fiscal 2026, with strong growth across products addressing cloud and AI applications. Industrial Tech segment revenue is expected to remain flat sequentially in Q1 fiscal 2026.

Strategic Plans: Lumentum is accelerating the expansion of in-house optical circuit switch (OCS) manufacturing capacity to meet high demand. The company expects a significant revenue ramp in co-packaged optics (CPO) by the second half of calendar 2026, supported by investments in U.S.-based facilities.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:Can you provide an update on the OCS award trajectory and potential of this new product category?

A:The company is doing better than expected, with three customers now online. The current and next quarters, along with the December quarter, are still ramping as capacity in Thailand is being built. Meaningful revenue is expected in Q1 and Q2 of 2026, with significant revenue in the back half of 2026. The ramp is gradual with inflection points in early and late 2026. The company is currently limited by production capacity despite high demand.

Q:What is the company's position in the CPO market and its competitive landscape?

A:The company feels confident in maintaining a competitive moat due to the unique power level and reliability of its lasers. It leverages development concepts from undersea lasers and Raman pumps. The company expects meaningful revenue from this in the second half of 2026 and is currently the sole-sourced supplier with significant early shipments.

Q:What are the contributions to the $600 million revenue target and the trajectory?

A:The components business is expected to remain strong, with cloud modules showing a 50% sequential gain this quarter. Cloud modules will see a dramatic acceleration in the December, March, and June quarters. OCS will contribute meaningful revenue in the first half and significant revenue in the second half of 2026. Transport business also remains strong. The main contributors are components, cloud modules, and optical circuit switches.

Q:What is the company's perspective on Apple's recent press release about U.S. investment and its competitor's lasers?

A:The company sees Face ID and 3D sensing as a minimal part of its business going forward. The focus remains on data center innovations. The company feels it has an innovation lead and is gaining share with decent gross margins. Design changes in the next few years are expected to further strengthen its position.

Q:What is the timeline for achieving the $600 million revenue guide for fiscal Q2 2026?

A:The company mentioned the June quarter or earlier as the timeline. Business across the board is performing well, with cloud modules, OCS, and components contributing to the growth. The slope is upward, and the company is on a good run.

Q:What is the impact of semiconductor tariffs on the company?

A:The company has determined that its products are exempt from the new tariff guidelines. While the situation is fluid, the company has seen minimal impact from tariffs in Q4 and expects no material changes in business operations due to tariffs.

Q:What is the timing and visibility for the 100G and 200G EML transitions?

A:100G is currently in run rate and primarily goes into 800G transceivers. 200G is associated with 1.6T and is in the early ramp stage. 200G will layer on top of 100G, which will continue to climb. The company has 6-9 months of visibility and is in a supply-constrained situation, with very low inventory and strong laser demand.

Q:How does the company view the EML competitive landscape?

A:The company believes it leads in performance and capacity. Its EMLs offer better module yields, allowing pricing latitude. The company is transitioning to 200G and CPO, leveraging its innovation and operational leadership. Its fab in Japan outputs more EMLs than competitors.

Q:What is the company's strategy for cloud modules and gross margins?

A:The company is focusing on high-margin opportunities and is constrained by production capacity. Gross margins improved due to mix and cost improvements. The company expects further gross margin step-ups in the coming quarters.

Q:What is the company's perspective on the ZR market and its opportunities?

A:The ZR market is growing rapidly, with a 30% annual growth rate. The company focuses on selling components like narrow linewidth lasers, which are capacity-limited. It sees opportunities in the 800 ZR market and expects strong demand for lasers.

Q:What is the company's position on transceivers and share for EML designs versus VCSEL and silicon photonics?

A:The company is not seeing a decline in EML demand despite silicon photonics' growth. EMLs are sold out for the year, and both EML and silicon photonics are being deployed in 1.6T. Supply constraints will determine the technology used.

Q:What is the company's EML wafer fab capacity and pricing dynamics?

A:The company is transitioning from 3-inch to 4-inch wafers and plans to move to 6-inch wafers in the future. Capacity is sold out for the year, and pricing discussions are expected to become more meaningful in the next quarters. Pricing increases are not yet incorporated into gross margin or revenue targets.

Q:What is the potential of the OCS product line?

A:The OCS product line is expected to be a multi-hundred million dollar contributor, with significant revenue starting in the first half of 2026. It is expected to be accretive to margins.

Q:What is the company's strategy for portfolio management?

A:The company is focusing on its cloud networking business and evaluating parts of the portfolio for profitability and growth. Portfolio management moves will be discussed in future calls.

Q:What is the company's perspective on cloud module business size and customer base?

A:The cloud module business grew 50% sequentially and is expected to grow further. The company is focusing on three customers and does not plan to add more in the near term. The business is expected to contribute to revenue growth and cash flow.

Q:What is the company's perspective on gross margins at the $600 million revenue level?

A:Gross margins are expected to be at the higher end of the 37%-40% range. NPI costs currently impact margins but will decrease as revenue grows. Pricing increases could provide additional upside.

Q:What is the company's perspective on the Nava facility capacity expansion?

A:The new building in Nava has three floors, with the first floor being outfitted. This will provide additional capacity and flexibility, especially for cloud modules currently produced in China. The facility is expected to come online next year.

Q:What is the company's perspective on the mix of transceivers and components?

A:The company is being selective in cloud module growth, focusing on three customers and high-margin opportunities. Components and OCS are expected to drive growth, with cloud modules contributing to revenue and cash flow.

Q:What is the company's perspective on the materiality of the OCS product line?

A:The OCS product line is expected to be a multi-hundred million dollar contributor, with significant revenue starting in the first half of 2026. It is expected to be accretive to margins.

Q:Review of Unclear Management Responses

A:Management avoided providing a direct answer to the question about the timeline for achieving the $600 million revenue guide for fiscal Q2 2026, only stating 'June quarter or earlier' without committing to a specific timeline. Additionally, the response to the question about portfolio management was vague, with no specific details or timelines provided.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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The earnings call summary highlights strong financial metrics, including record high revenue projections and optimistic guidance for future growth. The Q&A section reinforces these positives with a focus on high-margin products and strategic capacity expansions. Although management was vague on some specifics, the overall sentiment from analysts was positive, particularly regarding demand and margin improvements. Given the company's market cap and the positive catalysts, a stock price increase of 2% to 8% is likely in the next two weeks.

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