Lumentum Lifts the Curtain: OCS Upside Drives Early $40 EPS Target as NPO Emerges as a Net-New Growth Vector
Citi TMT Conference, September 9, 2026: Executives detail supply constraints extending through 2028, laser demand outpacing capacity across CPO, NPO and OCS
Lumentum used its appearance at Citi's 2026 Global TMT Conference to reveal that the company's decision to pull forward its fiscal 2028 EPS target to $40 was driven almost entirely by unexpected upside in optical circuit switching, a business that management now believes is being significantly underestimated by the sell side. Kathryn Ta, Lumentum's VP of Investor Relations, told analysts that "since our last earnings call, we learned that we have more opportunity in OCS than we previously had understood," adding that the visibility gave the company confidence to issue a fiscal 2028 guidance figure "for the first time, I think, ever." The upside is concentrated with Lumentum's largest customer and is a function of higher unit volumes tied to that customer's own commercial success selling hardware into the market.
Ta was direct that current sell-side models, including Citi's own, had underestimated the trajectory: "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 '28 time frame and we felt like, okay, well, we have all the confidence that we'll be able to meet this $40 metric." The EPS ramp is expected to build linearly through fiscal 2028 rather than arrive as a step-function in any single quarter.
OCS TAM Getting Revised Higher, With New Use Cases Emerging
Management indicated that the widely cited $8 billion OCS total addressable market figure, itself only six months old, is now stale and biased to the upside. Beyond stronger-than-expected uptake from its largest customer, Lumentum is seeing OCS pulled into new applications: dynamic reconfiguration of XPU cluster sizes beyond the standard 576-accelerator pod, and resiliency use cases where switches route traffic around underperforming accelerators. Ta said these applications are "coming into very serious R&D" with customers, giving the company better visibility into a meaningfully larger OCS opportunity by "late '28, early '29." On accelerator attach rates, Wupen Yuen, President of Global Business Units, and Ta pointed to a roughly 1.5-to-1 XPU-to-OCS-port ratio as the right first-order approximation, net of topology-driven puts and takes.
NPO Reframed as Incremental, Not Cannibalistic, to CPO
Perhaps the most important framing shift in the discussion was management's clarification that co-packaged optics and near-package optics are not competing for the same dollars but rather expanding the total addressable market together. Yuen explained that at OFC, Lumentum had assumed CPO would be "a one customer only story" tied to a single scale-up architecture. That assumption has since broken down: "the optical scale-up is now industry-wide story," and to hit the volume requirements expected in 2028, the industry needs both CPO and NPO architectures. Lumentum now sizes the scale-up market as roughly 50% CPO and 50% NPO by volume. Critically, Lumentum expects to participate in effectively 100% of the external light source portion of CPO, and in roughly half of NPO, since the remaining half of NPO customers are still deciding between external and integrated light sources, with the swing factor being reliability. As Yuen put it, "there's a great concern what happens to the laser when it's so close to the heat source," pushing more customers toward external light source architectures that keep the laser away from the accelerator's thermal envelope.
Lumentum also pushed back on the market narrative around Chinese competition in continuous-wave lasers, arguing that the competitive pressure is confined to the lower-power, 70-milliwatt laser segment used in today's pluggable transceiver market. CPO and NPO applications require far higher-power lasers in the 100 to 200 milliwatt range, a segment where Yuen said Lumentum sees only one credible competitor: "we see one competitor, right, who is Coherent that NVIDIA also signed an LTA with, right? And we're really not seeing anybody else in the high-power laser area." Management was skeptical Coherent will be ready to scale in this segment before the second half of 2027, a timeline the industry needs met to support the 2028 scale-up ramp, and framed a qualified second source as necessary for the market rather than a near-term competitive threat.
Laser Shortage Extends Through 2027, Pricing Stays Firm
Yuen was unambiguous that the supply-demand gap in lasers is not closing anytime soon. "Today, we're still short everywhere," he said, citing shortages in standard EMLs and in CPO-grade lasers alike, with 2027 shaping up as "another major year" as scale-out module volumes are expected to double year over year while laser supply fails to keep pace. Lumentum is still allocating scarce capacity based on pricing and expedite fees to prioritize its most profitable opportunities, and Yuen noted that "all the deals we're making today are equal or higher pricing than the escalated pricing that we already had before," reinforcing that the favorable pricing environment remains intact rather than eroding as new capacity comes online.
Capacity Build-Out: Three Waves of Ramp Through 2028
On the supply side, Lumentum laid out a three-phase capacity ramp for its ultra-high-power lasers: an ongoing ramp at its San Jose fab through 2027, a second ramp at its U.K. facility beginning in the second quarter of 2027 and continuing through 2028, and a third ramp at the previously announced Greensboro, North Carolina fab starting around mid-2028. Yuen said all three phases remain on schedule, with the primary variable being the speed of customer qualification processes rather than construction or equipment timing. Notably, management stressed that new capacity is additive rather than a reallocation away from existing telecom and scale-across product lines, a point aimed at addressing investor concerns about whether AI-related capital spending would come at the expense of legacy business lines.
Scale-Across Business Quietly Delivering a Decade of Growth
Ta flagged the company's scale-across pump laser business as an underappreciated part of the story, noting Lumentum has now posted ten consecutive quarters of growth in that segment and expects a 4x multiplier on pump laser volumes over the next five quarters. The company has locked in long-term agreements with all major network equipment manufacturers at higher prices, which management is using to help fund the capacity expansion required elsewhere in the business.
Silicon Photonics Faces A Ceiling at Higher Speeds
On the debate over next-generation transceiver architecture, Yuen argued that silicon photonics, while attractive for integration, runs into a material property ceiling as speeds increase toward 400 gigabits per lane, requiring costly power tradeoffs to hit that mark. Indium phosphide, by contrast, has already been demonstrated at that speed and is described as "a sure bet." Thin-film lithium niobate is viewed as a promising alternative technology for 3.2T transceivers, but Yuen flagged open questions about whether that supply chain can scale to the tens of millions of units required. The upshot, in his view, is that indium phosphide has a credible path to reclaiming transceiver market share it once held at the 100 gigabit-per-lane generation, a dynamic that favors Lumentum's existing technology base over silicon photonics-heavy competitors.