Prepared remarks
Good day, everyone, and welcome to the Lumentum Holdings Third Quarter Fiscal Year 2026 Earnings Call. Please also note, today's event is being recorded for replay purposes. At this time, I would like to turn the conference call over to Kathy Ta, Vice President of Investor Relations. Ms. Ta, please go ahead.
Thank you, Melissa, and welcome to Lumentum's Third Quarter Fiscal Year 2026 Earnings Call. This is Kathy Ta, Lumentum's Vice President of Investor Relations. Joining me today are Michael Hurlston, President and Chief Executive Officer; Wajid Ali, Executive Vice President and Chief Financial Officer; and Wupen Yuen, President, Global Business Units. Today's call will include forward-looking statements, including, without limitation, statements regarding our future operating results, strategies, trends and expectations for our products and technologies that are being made under the safe harbor of the Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations, particularly the risks set forth in our SEC filings under Risk Factors and elsewhere. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-Q for the fiscal quarter ended December 27, 2025, and in our most recent 10-Q for the fiscal quarter ended March 28, 2026, to be filed by Lumentum with the SEC. The forward-looking statements provided during this call are based on Lumentum's reasonable beliefs and expectations as of today. Lumentum undertakes no obligation to update or revise these statements, except as required by applicable law. Please also note that unless otherwise stated, all financial results and projections discussed in this call are non-GAAP. Non-GAAP financials have inherent limitations and are not to be considered in isolation from or as a substitute for or superior to financials prepared in accordance with GAAP. You can find a reconciliation between non-GAAP and GAAP measures and information about our use of non-GAAP measures and factors that could impact our financial results in our press release and our filings with the SEC. Lumentum's press release with the fiscal third quarter results and accompanying supplemental slides are available on our website at www.lumentum.com under the Investors section. We encourage you to review these materials carefully. With that, I'll turn the call over to Michael.
Thank you, Kathy, and good afternoon, everyone. Lumentum delivered an exceptional third quarter with revenue growing 90% year-over-year to a record $808 million. Top line growth was primarily driven by our transceiver business and laser chips. While revenue growth was impressive, our non-GAAP operating margin was more so, expanding by over 2,100 basis points year-over-year, fueled by a rich product mix and strong operating leverage. The margin expansion was primarily driven by our industry-leading scale-out portfolio, but another part of the story was our broad array of scale-across products. As hyperscalers exhaust the power and space limits of individual data center buildings, they are shifting to distributed architectures that link compute domains across disparate geographies. These scale-across networks require high-bandwidth synchronization across multiple data centers. To enable this, we provide critical hardware components that provide high-density optical interconnects while meeting aggressive power and performance targets. Our pump lasers allow scale-across architectures to amplify the light signal over 4, 8 or 16 fiber pairs simultaneously. Complementing this, our narrow linewidth laser assemblies provide the precision required for 1.6T speeds and a higher order modulation, all within highly compact pluggable form factors. To manage all this traffic, our wavelength selectable switches or WSS function as the optical traffic cops. WSS keeps traffic in the optical domain bypassing the latency of electrical buffers while enabling the high port counts essential for massive fiber routing between data center buildings. Looking forward, our emerging multi-rail technology will be vital for the increased parallelism required by the massive fiber counts and scale-across networks. While we have spent the last few calls detailing our revenue growth drivers, it is important to outline the considerable role the scale-across portfolio will play in our ability to expand gross and operating margins. As we look forward, we expect this part of our business to grow appreciably and the supply-demand imbalance likely improve profitability at the same time. Now let's look closer at the metrics that define our third quarter, starting with the components product category. Components revenue for the quarter was $533 million, reflecting a 20% sequential increase and 77% year-over-year growth. Shipments of our narrow linewidth laser assemblies grew for the ninth consecutive quarter, rising over 120% year-over-year, while pump laser shipments grew 80% year-over-year. These components remain effectively sold out for the foreseeable future, and we are actively working to secure long-term agreements that will help offset anticipated capital expenditures. Turning to laser chips. We achieved another quarterly company record in EML shipments, led by 100-gig lane speeds. 200-gig EML revenue more than doubled sequentially. We continue to ship CW lasers to 800-gig transceiver manufacturers, and starting in fiscal Q3, we began supplying CW lasers for internal use in our cloud transceiver business. Our wafer fab capacity in Japan remains at a premium and is fully allocated to meet surging customer demand. We shipped twice the number of laser chips as we did in the same quarter last year, and we are on track to achieve more than 50% growth in EML units by the December quarter of 2026 as compared to the December quarter of 2025. Our ultra-high-power laser chip manufacturing ramp for CPO applications is also proceeding according to plan. We achieved sequential growth this quarter and are on schedule to both deliver meaningful revenue in our December quarter and fulfill the multi-hundred million dollar purchase order slated for the first half of calendar year 2027. In addition, our development work continues with multiple CPO customers through collaborations that leverage our laser chip technologies within a pluggable turnkey ELS module solution. In mid-March, we announced our acquisition of a fifth indium phosphide fab in Greensboro, North Carolina, which provides the capacity needed for years of future growth. At our grand opening ceremony held just days ago, we highlighted our commitment to U.S. manufacturing and the significant job creation we expect to generate in the state. We onboarded the plant's team and plans to convert the facility from gallium arsenide to indium phosphide are well underway. Another positive note is that we expect to take advantage of a significant number of the tools that already exist in our Greensboro site. Now I'll move to our systems product category. Systems revenue reached $275 million, representing a 24% sequential and 121% year-over-year increase. Cloud transceivers accounted for the lion's share of this growth, increasing over 40% sequentially as we successfully leverage our expanded manufacturing footprint in Thailand. In addition, we are poised to ramp 1.6T-speed transceiver shipments in fiscal Q4 with a portion of this volume leveraging our own CW lasers. We are improving transceiver profitability through better yields and lower scrap rates. Despite these gains, supply constraints on critical components keep our shipments well below customer demand. In OCS, the multiyear, multibillion-dollar purchase agreement we recently announced ensures sustained long-term growth. Our OCS ramp is largely on track, although our pace and slope are gated by the supply chain. We are experiencing considerable tightness in this product area due largely to the significant step-up in requested output. On the other hand, the number of new opportunities we are seeing for optical switches is putting tension on our road map, and we are having to make choices across the company in order to service them. Rounding out our systems business, performance industrial lasers and cable access remains muted. Industrial lasers were approximately flat sequentially, while cable access shipments declined on quarter due to customer and timing factors. Looking ahead to Q4, we expect to set another quarterly revenue record. We anticipate that over half of the sequential growth will stem from our components business. The remainder will be driven by the continued ramp of our systems portfolio, primarily through high-speed transceivers and additional contributions from OCS. Our current numbers and guidance reflect continued success in EML lasers and our scale-across components. We are seeing improved performance in our cloud modules business, which has grown significantly across the last few quarters. In addition, while we're seeing initial contributions from both scale-out CPO and OCS, they are still relatively modest. Furthermore, our largest single growth driver, scale-up CPO is still very much in its infancy. Taken together, this gives us confidence that we are very much on track to reach our $2 billion quarterly revenue goal as we articulated at our OFC event. Now I'll hand the call over to Wajid.
Thank you, Michael. Third quarter revenue of $808.4 million was above the midpoint of our guidance range and non-GAAP EPS of $2.37 was above our prior expectation range, demonstrating the leverage of our business model. GAAP gross margin for the third quarter was 44.2%. GAAP operating margin was 21.6%. GAAP net income was $144.2 million and GAAP net income per share was $1.50. Turning to our non-GAAP results. Third quarter gross margin was 47.9%, which was up 540 basis points sequentially and up 1,270 basis points year-on-year due to better manufacturing utilization across the majority of our product lines, increased pricing on select products and favorable product mix. The improvement in product mix was primarily driven by growth in data center laser chips. Third quarter non-GAAP operating margin was 32.2%, which was up 700 basis points sequentially and up 2,140 basis points year-on-year, primarily driven by revenue growth in components products. While continuing to invest in critical R&D programs serving cloud and AI customers, we have maintained the rigorous cost controls necessary to optimize our business model. Third quarter non-GAAP operating profit was $260.7 million, and adjusted EBITDA was $293.5 million. Third quarter non-GAAP operating expenses totaled $126.2 million or 15.6% of revenue, an increase of $11.3 million from the second quarter and an increase of $22.8 million from the same quarter last year in support of expanding cloud opportunities. Q3 non-GAAP SG&A expense was $47.8 million. Non-GAAP R&D expense was $78.4 million. Interest and other income was $9.6 million on a non-GAAP basis. Third quarter non-GAAP net income was $225.7 million and non-GAAP net income per share was $2.37. Our diluted weighted shares for the third quarter was 95.2 million on a non-GAAP basis. Turning to the balance sheet. During the third quarter, our cash and short-term investments increased by $2.02 billion to $3.17 billion, with the increase primarily driven by NVIDIA's direct investment in Lumentum. Our inventory levels increased by $62 million sequentially to support the expected growth in our cloud and AI-related revenue. In Q3, we spent $125 million in CapEx, primarily focused on manufacturing capacity to support cloud and AI customers. Turning to revenue details. Components revenue of $533.3 million increased 20% sequentially in Q3 and 77% year-on-year. Systems revenue of $275.1 million increased 24% sequentially in Q3 and 121% year-on-year. Now let me move to our guidance for the fourth quarter of fiscal '26, which is on a non-GAAP basis and is based on our assumptions as of today. We anticipate net revenue for the fourth quarter of fiscal year '26 to be in the range of $960 million to $1.01 billion. The $985 million midpoint would represent another new all-time quarterly revenue record for Lumentum. We project fourth quarter non-GAAP operating margin to be in the range of 35% to 36% and diluted net income per share to be in the range of $2.85 to $3.05. Our non-GAAP EPS guidance is based on a non-GAAP annual effective tax rate of 16.5%. These projections also assume shares used for non-GAAP diluted earnings of approximately 102 million shares. With that, I'll turn the call back to Kathy to start the Q&A session. Kathy?
Thank you, Wajid. Now let's begin the Q&A session.
Questions and answers
We will now begin the question and answer session. Your first question comes from the line of Samik Chatterjee with JPMorgan. Our next question comes from the line of Ryan Koontz with Needham & Co.
Can you hear me?
Yes, we can.
Yes.
We do. Great. Maybe let's start with your strength in EMLs and laser supply. Clearly, demand is not a concern here, and you guys have just done an incredible job of executing. What are the dynamics both on the supply side as well as your ability to ramp production? Maybe give some color on kind of where you are in meeting demand, what the gap looks like as well as what are some of the puts and takes that you're battling with on a quarter-to-quarter basis?
Ryan, thanks for the question. Look, I think we're still chasing behind relative to demand. We are steadily increasing supply. I think we just gave the benchmark that we'd expect our supply line to increase 50% on year, meaning as measured from December quarter to December quarter. So we're actually stepping up our supply in a pretty significant way. That being said, as we've said kind of over and over again, we continue to lag demand. The supply-demand imbalance is probably even higher than we reported in our last call, somewhere greater than 30%. I think last time we gave a metric of 25% to 30%. We still seem to be behind significantly. We had conversations today with customers, significant customers looking to really up their demand and get output from us, and we simply can't service that. So we are stepping up. We're doing everything we can to step that up. I think you know that story pretty well, but we continue to lag demand.
And is that largely in your own control? Sorry, Michael, but is it largely in your own control in terms of executing on that and getting the equipment you need, or do you have input that is a big challenge?
Yes. Right now it's largely within our own control. For example, regarding the reported substrate shortages, you know our story better than most: we've executed long-term agreements that leave us in pretty good shape on substrates. That said, the number of lasers we'll have to produce in 2027 represents a massive step-up given the scale-out and scale-up demands we're seeing in that time frame. So it's certainly the case that, in the near term, it's mostly on us. As we head into 2027 we'll need to continue working on substrates; I think we have that mostly under control, but we have a lot of work to do to catch up to demand at this point.
That's great. And maybe on the scale-across part, you really highlighted that as, I think, something that's a market opportunity that's probably less appreciated with Lumentum. Obviously, you've got the kind of the components there among lasers, and you talked about the multi-rail opportunity. Can you expand on that in terms of where you fit in that supply chain in that value chain? And then how big you size that opportunity as it moves to multi-rail application densification?
Yes. Look, it's a significant opportunity. I think we chose this call to talk about it because I think it's a significant contributor to our margin enhancement. So we focus very much on sort of the 4 main growth drivers. I think you know those well, the transceiver business, OCS, optical scale-out, optical scale up. We spent less time, I think, on our scale-across components, and they are actually big, big contributors to the gross margin line. As we look out right now, we are probably more constrained in this area than even EMLs, particularly on things like pump lasers, narrow linewidth lasers for sure. And both of those are going into the coherent subassemblies that drive a lot of this scale-across activity, the synchronization and high bandwidth that we mentioned in the prepared remarks. Multi-rail increases that content, right, because you've got more pumps that need to go into those. We are focused right now on ramping our pump capacity. We expect to make pretty appreciable step-ups. And at the right time, we'll give you some color around that. But those numbers are going up from an output perspective, actually to a much greater degree than even our EML output. We would expect to output a lot more of these here in the near term because there's a little bit less constraint on the fab that puts these out. So we have a little more ability to inflect that line. Wupen, any more on the sort of the multi-rail and how you think about it?
Yes. A couple of things. First, the pump lasers go into the optical amplifiers, at what we call in-line amplifiers at the sites. That’s where a lot of the traffic is and density will need to increase to get the traffic through, so that’s one big area of growth. The multi-rail opportunities are huge, and with all the expansion plans Michael discussed, we believe multi-rail could be even larger. We don’t yet have full quantification and will share more when we’re ready, but we see a huge opportunity for Lumentum to grow our business and gross margins.
Our next question comes from the line of Samik Chatterjee with JPMorgan.
Can you hear me now?
We can hear you now.
Sounds like you figured out the mute button, good, good.
Still learning, Michael. So maybe on OCS, I know you mentioned sort of multiple customers that you're still working with and you had the customer announcement at OFC. Can you just talk about sort of where maybe the engagements are in terms of how close you are to finalizing additional sort of award wins on the OCS front? And do you see some of the wins being sizable compared to what you announced at OFC. How should we think about the additional wins that you can sort of lock in? And how should we size them relative to the win that you announced at OFC? I have a follow-up.
Yes. I mean I think, look, we continue to work with the 3 customers that we've been talking to. Two of those 3 are making up the majority of the volume, as we've been saying. I think that we are really making progress now on sort of additional wins. I think it's too early to call when we would be able to talk to those. But I would say that they're quite sizable. We really are, as I said in the remarks, working the road map to add differentiation, different port counts, different configurations to service these multiple opportunities. And these multiple opportunities are substantial. They're on the order of what we've talked to relative to this backlog that we're seeing for 2027. So it is our biggest area. Wupen and the engineering teams are working aggressively to drive those new designs.
Got it. Okay. Great. And for my follow-up, maybe I can ask you on the revenue guide a bit. You did deliver when I look quarter-over-quarter, like a $140 million increase, and you're expecting that to accelerate as you get into the June quarter, which is in the backdrop of sort of the supply constraints that you're also dealing with. So maybe if you can just sort of highlight which are the areas you see accelerating compared to the March quarter itself as you go into June? And where are the supply constraints maybe impacting you more than others, if you can sort of highlight that?
Yes. In the guide we contemplated the basic business increasing, meaning EMLs should go up and the scale-out components should increase. We continue to increment OCS, so that will rise as well. The big story, though, is transceivers, which will be quite strong. Although margins there have been relatively challenged, we expect margin improvement as the transceiver business grows. As we move into the back half of the year, you will start to see much bigger contributions from OCS, and in the fourth calendar quarter you will see more contributions from the scale-out CPO. There are a lot of things layering in, but specific to your question on the guide, the headline is transceivers. We appear to be ahead on 1.6T and seem to be executing relatively well. Wupen and the team have done a great job turning around our designs. Our constraint is going to be on transceivers, so we could have shipped quite a bit more in the quarter we just completed and could ship quite a bit more in the guide if we did not have the supply constraints we are seeing. Electrical components are driving that constraint, and laser diodes are part of the mix, which is necessitating a switch to our internal laser diodes. There are several factors contributing, but the main point is we are undershipping relative to demand quite significantly.
The next question comes from the line of Vijay Rakesh with Mizuho.
I have a question for the pump laser side about scale-across. Given the pickup in demand, it looks like those will be fairly high-power lasers as well. What is the mix of demand you're seeing for scale-across? And does the significant pickup in demand from that and 1.6T mean you continue to see a roughly 30% supply-demand imbalance into next year? I have a follow-up.
Yes, Vijay. A couple of things. First, constraints on pump lasers are probably the biggest issue and were somewhat unanticipated. We haven't discussed this in the past few quarters; it's hit us relatively suddenly. I don't think we've given a precise number for the supply-demand imbalance, but it's certainly greater than 30 percent. We are significantly under-shipping demand and have to make choices about which customers we support. We're trying to be fair and reasonable, but we must allocate pump demand. That said, we're trying to ramp capacity quickly. We have a plan to ramp capacity over the next four quarters out of our Rose Orchard facility in the United States, and we believe there is room to build significant capacity there. We're also investing heavily in CapEx to enable that, as Wajid highlighted. Hopefully that answers your question, Vijay.
Yes, sure. And just a quick follow-up too. Back on the OCS side, it looks like Google is now talking about the v8 inference rack with 1,152 TPUs and the training rack with roughly 130,000 TPUs. Should that drive your OCS, you would expect a pretty nice uptick back to the 300-radix or 500-radix OCS racks into next year, right? And it looks like there is also information suggesting Anthropic could do $200 billion with Google, which would be positive for you. But I am just wondering how you are looking at OCS into 2027 and 2028.
Yes. Look, I mean, we're not sort of commenting on specific customers and specific customer architectures. Based on what we know, I would say that Google is obviously doing very, very well in the market. I would say that Google is driving a lot of demand on our business, right? They're certainly one of our largest customers, and we benefited greatly from that relationship. As we know it, as we understand it, the sort of the difference in v7 and v8 in terms of OCS pull is a little bit. It's incremental. It's not that big, but we would expect, as you are correctly saying, that they are doing and look, hopefully, we can get engaged. I think it would drive significant upside for us just given the expansion of our business as they look at v8.
The next question comes from the line of Meta Marshall with Morgan Stanley.
Maybe a couple of questions. First, are you expecting to supply some of the CW lasers into the transceivers in the next quarter? Any further commentary on the path and progression of insourcing your own lasers into that part of the transceiver portfolio? And as a follow-up, can you disclose any details on the recent step-up in gross margins, specifically the rough breakdown between pricing, yield improvements, product mix, and how much each contributed?
Yes. To the second question on mix, it's sort of all of the above. The headline has been better factory absorption, which helps our mix, and over the past year we made significant decisions to drop product lines that weren't margin beneficial, so we worked on the portfolio extensively and that has helped considerably. There have also been price increases; pricing in this supply-demand imbalance is something we consider, and we have applied price increases where we see the biggest constraints and continue to consider doing so. We think there is continued room. Gross margin is something the management team has focused on tremendously; those who have followed my history know that gross margin is extremely important. Although we're trailing what we've done previously, I believe there's a lot of room for improvement on gross margin. Regarding in-sourcing the lasers, that is driven by margin, but we were forced to do it probably faster than planned, and that forecast oscillated. You followed our story closely: we initially forecasted introducing the lasers in calendar Q2, but we backed off because of tension on the EML line. Now we've seen some tension in securing lasers externally, and so we've allocated more fab capacity to CW lasers. In our mix, as reflected in the guide, roughly 20% of our modules would have our own CW lasers. It's still a minority, but we expect to increase that over time and realize associated margin benefits.
The next question comes from the line of Papa Sylla with Citi.
Congrats on the very strong results. Michael, I guess one a little bit longer-term question kind of on the CPO scale-up opportunity. It seems like even at kind of you mentioned kind of the longer-term target and most of it may be more ultra-high power lasers. But at a high level, it seems like there is also a real opportunity into becoming more kind of vertical and doing some more ELS. I'm curious if you are also getting engagement from the same customers you are providing ultra-high power lasers opportunities.
Papa, I don't know, hopefully it's not us, but at least your line seems to be cutting out a bit. I didn't catch the last part of your question. Sorry about that.
Sorry about that. Yes, I was just asking on just the opportunity around the kind of CPO market. Most of it, it seems like you are mostly around the ultra-high power lasers looking into maybe the second half of the year in 2027. I'm just curious on the opportunity around kind of being more vertically integrated as well, kind of providing more ELS type of product. I'm curious if you are also getting engagement from the same customers you are providing ultra-high power lasers opportunities.
Yes. Great question, Papa. And of course, I continue to thank you for following the company. Look, I think that on ELS, we definitely have a very significant opportunity. We have only discussed the opportunity there so far. I think we're getting ever closer to being able to convert and start thinking about that as part of our numbers. As we've outlined on previous calls, what I would say with ELS in particular is that non-primary customer engagements are largely driven by ELS. Simply put, the engineering teams there are less familiar with optics, although frankly everybody is becoming more conversant on optics. Our currency to engage those customers, at least initially, will be the ELS. So again, we haven't yet announced any significant wins there. I feel that's just around the corner, and it's something that at the right time we'll be able to articulate more deeply. But in particular, as we expand the CPO horizon, we are going to need the vertical integration strategy that you asked about.
Got it. That's very helpful. And for my follow-up, it might be for you, again, Michael, as well. On the kind of supply front kind of EML capacity, it seems like across the board demand continues to be very strong despite kind of the very strong effort you're making on raising supply. But we are also hearing kind of a lot of competitors also providing very large growth numbers. I'm just curious on the risk of oversupply, if any, I guess, where would you put that risk? Is it still very low at this point?
I mean, I feel it's low. We are engaging all sorts of transceiver customers right now. Wupen's team is out doing that, actually, as we speak. I just got a report this morning from our sales leader. The discussion is very much around extending the long-term agreements we already have. If customers expected to see an oversupply of any kind of laser, whether EML or CW, I think there would be a lot more reticence to engage in the conversations we're having. So yes, we're hearing the same things. We know that everybody is trying to add supply, but the reality on the ground now seems quite different. We definitely have some pricing flexibility, which indicates that the supply-demand imbalance won't be solved for a while, and we are certainly engaging in and extending some of the long-term agreements we currently have.
The next question comes from the line of Ruben Roy with Stifel.
This is Sahej Singh on for Ruben Roy. Maybe just, Michael, tagging on to the LTAs that you're mentioning there. Even on the scale-across portfolio, you sort of outlined that pump lasers, narrow linewidth lasers, WSS, these are not only supply constrained, but real margin levers for you guys distinct from the 4 growth levers and 9th consecutive quarter of narrow linewidth at, I think you said 120% year-on-year and pump lasers at 80%. That's impressive and you're still describing this as sort of an unanticipated bump up. And so you're talking about these LTAs. Maybe we can dive a little deeper there. You mentioned that the long-term agreements being negotiated are helping in some sense to offset CapEx. And I think that was with scale-across, but it sounds like more broadly. So could you maybe give us a sense of the structure? Are these prepayment style commitments maybe similar in maybe spirit, I would say, to the NVIDIA agreement? Or are they take-or-pay capacity reservations? Or are they volume commitments tied to ASP floors? How should we be thinking about the CapEx whether build, buy, offshore, these agreements are effectively underwriting? I'll stop there, and I have one other.
Yes. Look, it's all of the above. We're in active discussions right now about our pump lasers. We have a finite amount of capacity and we're being asked to add considerably more, so we are talking with major customers about how to help and to put some skin in the game for the CapEx we're planning to lay out. That can entail prepayment, take-or-pay commitments, or price increases. Wupen's team is actively negotiating with all of the scale-across suppliers on how that will look. We have some very large, important long-standing customers involved and we want to treat them as fairly as possible. Ultimately, it comes down to how these discussions play out and how Wupen and his team decide on the allocation.
Understood. And for the second, as I read through the print, the beat was really a margin beat and system sales, as you mentioned, was a driver and seems to be so. And this is happening all while sort of the capacity story is happening and new programs are ramping. And then as we look to the next quarter, I think the margin story kind of gets a little washed out with the diluted shares jumping up. So maybe could you help frame the waterfall dynamics on margins right now? I mean you set out the targets that you did during OFC. And I think this sort of ties into, I believe Meta asked a question around this as well. But the waterfall dynamics maybe more across a matrix of product mix and the program ramps within those segments, how CapEx is dragging on that, again, on the build buy offshore sort of dynamic? And then maybe also on the volume versus ASP conversation that is becoming more and more prevalent amid the supply constraint.
Yes. Look, I mean, as we said, there are many, many contributing factors to our margin improvement. I think we had a big step-up. It's an area of focus for us. I think we're going to continue to work the margin line. It obviously comes from mix, and we keep making mix decisions every single day allocated to the most margin-rich parts of the portfolio. It comes from factory utilization, right? We've historically been underutilized, and we're just now getting our utilization up to where it needs to be. As we've outlined, we have some of our fabs that are still underutilized, for example our fab in the United Kingdom that Wupen has now put products into; we expect to see margin-contributing output from them, helping fix some of the underutilization. And then, as we said, there are some price dynamics that are working in our favor. So we think there's a lot of room on the margin line. We gave a long-term target. We feel very comfortable with that. I think there's room from here to continue to really step up margin. We've been surprised to a certain extent by how quickly we've been able to move up that margin line. And again, people that know my history know that we had 30% type moves in my last company. So it's not a total surprise that you'd be seeing this kind of step-up on the margin line.
The next question comes from the line of Christopher Rolland with Susquehanna.
And Michael, I am familiar with the margin focus you have. My question is actually, I think in your prepared remarks, you might have also mentioned some constraints around OCS. So I guess, first of all, I wanted to dig a little bit more into that, but also at OFC, there were some Chinese competitors showing off some OCS boxes. I was wondering if you could speak to competition there, whether you think it's viable or whether you think the kind of MEMS market might be yours for quite some time.
Yes, Chris. I appreciate that. Look, one, my colleague to the right, Wajid Ali, is personally responsible for getting the supply chain right on OCS. We've assigned that to one of the most important people in the company. It's a challenge. Look, I mean, it's a big step up, right? We've gone in many instances, really from 0 to a significant number very, very quickly. We think we have things under control. We've outlined this sort of $400 million that we can ship in the back half of the year. We think we have that under control. As we look at 2027, that number continues to step up. We think we have that under control, but we are definitely on a tight rope on this product line, right? It's probably our biggest ramp now, honestly, pump lasers, CPO, all of these things are keeping us awake. The big 3 ramps are these pumps, right, OCS and the high-powered lasers. So we've got a lot of work on our hands and the biggest single tight rope that we're watching probably is OCS. I think relative to competition, we feel pretty good about our position. We really do. I think we feel like we're in a very, very strong position. That's not going to last forever, right? We know that. But I think certainly, in the next year, it's hard for me to imagine anybody is going to be able to ship one of these very innovative solutions. We are also not standing still. We are working on cost reducing. We are working on some innovative solutions in our OCS, which increases the complexity of the decisions that I was outlining relative to what Wupen is facing, right? Because we've got a lot of new customer demands coming on. And meanwhile, we are trying to focus on new architectures that would keep us in a leading position with MEMS, right? We do believe that, that's the right technology for us long term, but we do believe that there's cost we can take out simplification we can make to continue to compete with these very innovative solutions.
Excellent. And I do know you have your hands full with those 3 very large opportunities. But are there some more adjacencies for you guys to pursue? I think at OFC, you talked about maybe full module design and assembly. I don't know if this would involve silicon photonics chips, PICs, EICs, et cetera. Are there any other adjacencies or components that you may be able to absorb or organically create that you can bring into the organization as you look forward?
Look, there's a ton of stuff that goes into these transceivers or into a CPO-based solution that today we don't ship, right, PICs, photodiodes, right, laser drivers. There's a ton of stuff to your point. And we're looking at all of these areas. I mean I think we have road maps that contemplate all sorts of different things around our strength in lasers. And I think there is quite a bit more that we can do around that. A previous question asked, and I'd say, again, on ELS, which is a vertically integrated module that your question sort of led to, we believe that there's significant opportunity there, right? We think that we can integrate up and take more of the dollars by generating a vertically integrated ELS. And I think as we engage on CPO, we're finding that to be a more convincing and shorter path to market than is just supplying lasers.
The next question comes from the line of Vivek Arya with Bank of America Securities.
This is Michael Mani on for Vivek Arya. My first question is on the transceiver business. Number one, how large would it have been if you had been able to address all the demand that you saw in the quarter? Or if you could peg that number relative to the 30% overall imbalance for the entire company? And then on 1.6T specifically, you talked about how the margin structure is still a bit challenged and it's a work in progress. But as we move into 1.6T, what we're hearing from many of the suppliers in the ecosystem is that the margins are just significantly better, maybe led by pricing. So to what extent does that transition that's happening in the next quarter or 2 help your margin structure for transceivers?
Yes. On the first one, I don't think we've given a figure of merit around our own transceiver imbalance. It was significant. We had a lot of demand placed on us and we simply weren't able to ship, largely due to supply constraints. The 30% number I gave is on our EMLs, so it's a supply imbalance. It's not relative to our whole business; it's on that particular line of business. I'd say the supply-demand imbalance on our transceivers was somewhere in that ZIP code; it was definitely appreciable, although I don't know that we've calculated it. On the 1.6T question, no doubt the margins are better. When I said the margins are challenging, our transceiver business is definitely a challenge for us on the margin line. We are underperforming peers, we have room to grow, and we're getting better. We've certainly taken the lead in terms of design, and now in terms of margin I think we're improving, though we still trail. That said, 1.6T is definitely better; structurally, from a margin standpoint, it's better than 800-gig. We will see a step-up in our margin line. We have room as a unique Lumentum entity to do better, and we will do better.
And for my follow-up, on OCS specifically, you said you're still constrained, maybe that's more due to your current output right now relative to demand. How do you think about engaging with more contract manufacturers? I know you mentioned that OFC, but where are you in that process, maybe not just for OCS, but for other product areas as well? And then within OCS specifically, how do you think given the demand you're seeing from multiple customers, maybe multiple different applications and multiple types of products between medium radix, high radix products, how do you think about prioritizing all those different sources of demand, right, for applications based on your own competitiveness or share?
Yes. Look, I'm going to answer the first part of it, right, just in the interest of time to get some more questions. I think one of the levers we do have is contract manufacturing. We have historically in-sourced everything. And we found that working with good contract manufacturers, of which there are several, we can actually improve our margins. So as we have started to shift and we're early in those innings, back to a contract manufacturing base, we would actually expect to see improvement in our margins. The margins that we pay to those contract manufacturers are more than offset by the efficiency and cost benefit that they can drive on common components. So that ends up being a lever for us.
Melissa, I think we have time for one more question.
Our last question comes from the line of Ananda Baruah with Loop Capital.
Apologies if this has already been asked, but Michael, you announced last week the opening of the Greensboro facility you recently purchased, and the press release said that the capacity was new. As a clarification, is that capacity incremental to the revenue projections you gave at OFC? Also, what’s a good way to think about the capacity potential coming out of Greensboro? Appreciate that.
That is not in our numbers. It is very significant. We will have a massive supply-demand imbalance on CPO. We've seen multibillion-dollar orders that we discussed on previous calls come in mostly on scale-out. We expect scale-up to be significantly larger in terms of revenue opportunity. I think it will be greater than $5 billion of incremental revenue if we execute properly. The Greensboro fab will not come online until 2028, so you should expect it to start adding incremental revenue in early 2028. We're still about six quarters away from seeing a significant contribution from Greensboro.
I will now turn the call back to Kathy for closing remarks.
Thank you, Melissa. That is all the time we have for questions, and we look forward to connecting with you at upcoming investor conferences and meetings throughout this next quarter. And 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.