Coherent is not nearly as flashy as Lumentum when it comes to revenue growth or even data center growth, yet the company is sitting in a prime position moving through 2026 as the industry navigates extremely tight indium phosphide (InP) capacity coupled with elevated demand for InP-based EML lasers. This is because Coherent is preparing to double indium-phosphide capacity via a multi-faceted expansion plan with multiple facilities ramping output in unison, while shifting to a larger wafer size that can deliver 4X output per wafer at half the cost. 

This dynamic is expected to help drive a reacceleration in Coherent’s data center segment to 10% QoQ growth next quarter, a notable uplift from 4% this quarter, along with margin expansion driving solid adjusted EPS leverage. Management also stated they expect “strong sequential growth through the balance of this fiscal year given very strong demand and improving supply.” 

On the product side, Coherent sees strong demand for both its 800G and 1.6T transceivers, with 1.6T expected to drive a significant portion of the guided sequential growth. This first wave of 1.6T growth is expected to be split between both EML-based and CW laser-based silicon photonics transceivers, with Coherent able to benefit from both as it can quickly shift capacity for whichever customers prefer. 

For Coherent’s AI-related revenue exposure, Datacenter and Communications account for ~69% of total revenue. This also includes some contribution from telecom so is not an exact figure yet provides a rough idea as to Coherent’s AI exposure. 

InP Capacity to Double, Data Center to Accelerate to 10% QoQ in Q2 

Coherent has many products that participate in the AI-driven datacom transceiver and optical interconnects market. Primarily, the growth story centers around supplying pluggable optical transceivers (400G, 800G, 1.6T) including EML lasers, VSCEL lasers and CW lasers, and emerging co-packaged optics technologies for next-generation switches and interconnects.  Right now, the primary focus centers on EML supply and indium phosphide capacity, given Coherent, Lumentum and others have pointed out how imbalanced supply is relative to exceptionally strong demand.  

Electro-absorption modulated lasers (EMLs) have quickly become attractive for AI servers as these components help enable 100G and 200G per lane transmissions, thus enabling 800G and 1.6T data rates for optical transceivers. EMLs also leverage indium phosphide (InP) over silicon as InP reduces power consumption, although it is more expensive at the component level as four EMLs are needed compared to two lower-cost CW lasers for silicon photonics modules.  

Coherent’s data center segment growth was “constrained by the supply of indium phosphide lasers” and specifically EMLs in Q1, with Coherent reporting just 4% QoQ and 23% YoY growth in the segment. This was a slight uptick from 3% QoQ in Q4, where management cautioned that “sequential growth rates can fluctuate quarter-to-quarter based on lumpiness of demand from our customers or supply or capacity related things.” 

Notably, Coherent is guiding for the data center segment to grow ~10% QoQ in fiscal Q2, “followed by strong sequential growth through the balance of this fiscal year given very strong demand and improving supply.” Q2’s sequential growth guide also includes some unmet backlog that rolled over from Q1 due to InP constraints.  

6-inch InP Wafers to Produce 4X more than 3-inch InP Wafers 

Expectations for significant sequential improvements in internal and external supply through 2026 are the primary factors driving this strong QoQ growth outlook over the next few quarters, helping Coherent potentially absorb higher levels of EML demand. Much of the improvement in internal supply is tied to the company’s InP capacity expansion plans and shift to 6-inch wafers (the world’s first 6-inch fabs), aiming to double InP capacity again after recently tripling it:  

“We are aggressively ramping 6-inch capacity because a 6-inch wafer compared to a 3-inch wafer will produce more than 4x as many chips at less than half the cost. This will provide increasing benefit to our gross margin as we continue to ramp production.”  

Q2 is also the first full quarter of production on the 6-inch wafer, after production initially started mid-quarter in Q1.  

While the ability to produce 4x more chips at less than half the cost is certainly impressive in itself, 6-inch wafer yields are more important: “Our initial 6-inch indium phosphide production yields are actually higher than our current 3-inch indium phosphide yields.”  

The major takeaway here is not only that 6-inch wafer yields are better than 3-inch, but that these are the initial yields versus the ‘very mature’ 3-inch lines, suggesting that there is room for further improvement as production continues to ramp over the next four quarters and as 6-inch matures. As such, Coherent will likely be exceeding linear capacity growth over the next few quarters as 6-inch ramps and then matures. The cost advantages from 6-inch are also expected to drive more meaningful gross margin benefits in calendar 2026 and in each sequential quarter, though current margin tailwinds are minimal.  

Management also offered a bit more of a long-term picture on capacity in response to a question about milestones to track this doubling of InP capacity over the next 12 months. CEO Jim Anderson explained that some of Coherent’s largest customers are now showing forecasts through 2028, and “given that demand signal that we're seeing, not just for next calendar year, but now for '27 and '28, our plan is to continue to ramp indium phosphide capacity beyond the next 12 months as well. And certainly, we'll share more thoughts on the rate and pace of that ramp over the next 12 months.”  

Coherent Expanding InP Capacity, Targeting 2X Growth in One Year 

As mentioned briefly above, Coherent is aiming to double its InP capacity in roughly one year in order to meet higher levels of demand. This capacity growth is coming from a simultaneous capacity ramp in both Texas and Sweden, supported by strong initial yields: 

“Given the healthy yields we are seeing with 6-inch production, we began production of 6-inch indium phosphide at a second site in Jarfalla, Sweden …  With the ramp of 6-inch production at 2 sites in parallel, we expect to roughly double our total internal production capacity of indium phosphide over the next year.” Importantly, this ramp covers the three key transceiver components, EMLs, CW lasers and photodiodes. Management said they will share progress updates on the ramp as they occur, but added that “beyond the next 12 months, we expect to continue to expand capacity,” hinting that capacity could more than double by calendar 2027. 

Not only is Coherent’s InP capacity doubling, but external capacity is expected increase sequentially as well: “We expect our external supply of EMLs to increase sequentially this quarter and next calendar year through continued partnership with our key external suppliers.” 

This quick capacity expansion is critical in helping close the supply-demand imbalance, which theoretically will translate into an ability to capture more revenue and drive faster growth the smaller the gap becomes. 

More on 1.6T Transceivers and the EML vs CW Ramp Question 

As we have discussed previously, Coherent’s growth story centers around supplying Nvidia with pluggable optical transceivers (400G, 800G, 1.6T) including EML lasers, VSCEL lasers and CW lasers, and emerging co-packaged optics technologies for next-generation switches and interconnects. Coherent’s transceivers work with both Ethernet or InfiniBand, as well as proprietary protocols such as Nvidia’s NVLink and Nvidia’s interconnect chips NVSwitch. 

Coherent’s ability to now get 4X more chips per wafer while supplementing this with external supply can directly drive 800G/1.6T transceiver output much higher over the course of the fiscal year, as InP capacity is fully consumed internally for transceivers. More importantly, Coherent is early compared to some of its competitors – management pointed out that at OFC earlier this year, they were the “only company to demonstrate 3 different types of 1.6T transceivers based on 3 different types of laser sources; silicon photonics, EML and VCSEL.” 

Additionally, Coherent is already ramping its first EML and silicon photonics-based 1.6T transceivers, noting that a “significant portion of the sequential growth we expect in the current quarter is driven by 1.6T adoption.” This compares to Lumentum, who stated that they “have expectation to be shipping 1.6T transceivers sometime middle-ish of next year, and those will be at the early part of the customer ramp as well.” This gives Coherent a few quarters to ramp output and secure market share before Lumentum brings its products to market.  

Management provided ample discussion around 800G and 1.6T demand, summarized below: 

• 800G demand remains very strong with strong orders, and significant YoY growth is expected in calendar 2026. 
• 1.6T adoption is accelerating, with Coherent engaged with multiple customers with multiple ramping in parallel, with strong orders. Management also expects significant 1.6T growth in calendar 2026.  

As mentioned above, the first wave of growth for 1.6T transceivers will be a mix of both silicon photonics (which uses CW lasers) and EML-based, with 200G VSCEL-based 1.6T transceivers ramping much later in 2026. Similar to Lumentum, Coherent expects to be well positioned for whichever way this mix shifts and expects to benefit regardless of whether customers prefer CW laser-based or EML-based transceivers:  

“From our perspective, there's no significant profitability trade-off between those two. Really, what drives our production mix of EML versus CW is purely the demand from our customers, right? So if it's more silicon photonics-based transceivers, then we'll allocate more capacity to CW lasers. If it's more EML, we'll allocate it to EML. And I think in general, we can make those choices certainly 6 months ahead of time. We can even make those choices even 4 months ahead of time. So I would say somewhere to the kind of 4 to 6 months ahead of time, we have to do the capacity planning between EML and CW.” 

Although management has not outright confirmed this, it’s likely that the strength of demand means there will be more than enough content for Coherent (and Lumentum) to participate. 

Bookings Support Strong Ramp 

The strong demand and ramp signals for 1.6T transceivers are further supported by Coherent’s bookings, and while an exact bookings figure was not disclosed, commentary suggests bookings have moved substantially higher.  

Management explained that they “received direct bookings that represent a step function increase in already strong customer demand,” with record bookings for transceivers (primarily driven by 800G and 1.6T), as well as for DCI and telecom products. InP capacity growth allows more of this backlog to be converted to revenue over the coming quarters, which could translate to Datacenter revenue growth remaining stronger for longer.  

Management also explained that this includes both typical bookings for near-term supply, as well as orders more than a year in advance, as customers are already looking to lock in supply for 2027 due to strong demand forecasts they are seeing.  Some of Coherent’s large customers are providing strong forecast visibility into 2028, giving management the confidence in ramping capacity to meet multi-year demand growth.  

Initial Co-packaged Deployments on Deck for 2026 

In Q1, Coherent began sampling its 400mW CW lasers for co-packaged optics (CPO) and silicon photonics applications, with the lasers expected to address “a broad range of CPO form factors for both scale-out and scale-up data center applications with this new product.”  

Co-packaged optics (CPO) are not contributing to revenue now yet could materialize into a strong opportunity for Coherent as Nvidia begins to roll out its Spectrum-X photonics networking switches in 2026.  

Coherent expects initial CPO deployments in calendar 2026, though volume production and availability of the 400mW CW lasers is expected to start in Q3, meaning the ramp may be more geared towards 2027. Additionally, surging InP capacity growth with improved yields at 6-inch wafers also suggests that Coherent could be rather quick to ramp CPO when the time comes, as supply allocation allows. Outside of this, discussion on CPO was rather limited.  

Other Product Opportunities 

Coherent also has a handful of other upcoming product opportunities outside of EMLs, 1.6T transceivers and CPO: 

• Optical Circuit Switching (OCS) – Coherent maintains that they have a more advanced approach/advantage to OCS through liquid crystal technology versus the more mechanical MEMS technology that competitors offer, with OCS adding a >$2 billion addressable market over the next few years. Coherent said its revenue and backlog for OCS grew sequentially in Q1 and is expected to grow again in Q2, with the company shipping systems to seven customers. 
• Linear Receive Optics (LRO) and Linear Pluggable Optics (LPO): Coherent says LPO has potential to offer lower power consumption, lower cost and lower latency versus traditional retimed optics, while LRO are optimized for low power consumption in distances up to 500 meters, such as for network switch interconnects. Coherent says it has shipped both LPO and LRO 800G and 1.6T transceivers to customers. 
• Thermodyne – Coherent believes its experience in advanced materials for thermal management could help address thermal issues and cooling needs of future AI data centers as GPU racks get more powerful. Coherent said that its Thermodyne material “moves heat twice as effectively as copper which is a tremendous advantage in data center cooling applications,” and while it is engaged with hyperscalers on the tech, it’s too early in its emergence to project how this will pan out. 
• Data Center Interconnect (DCI) – Although recognized as part of telecom (under Communications), demand is driven by AI, as the long-distance data transmissions can range up to hundreds of kilometers, crucial for current data center buildouts. Coherent has seen five sequential quarters of growth for DCI along with strong orders in Q1. 

Streamlining Portfolio, Paying Down Debt 

Coherent has made steps recently to streamline its portfolio, notably with the $400 million sale of its Aerospace and Defense unit in early September. The sale was immediately accretive to gross margin and EPS, per management, with proceeds going to pay down debt. 

In Q1, Coherent also announced the sale of its materials processing product division based in Germany, which has averaged revenue of ~$25 million (1.6% of revenue) in recent quarters with gross margins well below corporate average. Coherent also expects to use proceeds to pay down debt, and once again the transaction is expected to be immediately accretive to gross margins and EPS upon closing, slated for fiscal Q3. 

Relating to its physical manufacturing footprint, Coherent has sold or exited 23 different sites and plans to “continue to streamline our footprint and exit additional underutilized or unnecessary sites over the coming quarters.” This will consolidate operations to its key plants and likely also create small margin tailwinds.  

As a result, Coherent has made substantial progress on its debt leverage ratio, paying down $400 million in debt in Q1. On that note, Coherent’s debt has declined approximately $1 billion over the last two years, from $4.29 billion in Q1 FY24 to $3.31 billion this quarter – a nearly 23% reduction.  

Coherent’s debt leverage ratio has now improved to 1.7x, down from 2x in the prior quarter and 2.4x a year ago. This is notably now below the company’s <2x target, implying that as further sales are recorded and used to pay down debt (such as the materials processing unit), debt leverage ratio will continue to improve. This is key to Coherent’s turnaround story as the company can better withstand potential cyclical whipsaws with a less-stressed balance sheet.  

Financials 

Revenue Growth to Inflect in Late FY26 

Coherent delivered 17.3% YoY and 3.4% QoQ revenue growth in fiscal Q1 to $1.58 billion, beating estimates by nearly 3%. On a pro-forma basis excluding the $33 million in Q1 revenue from the now-divested Aerospace & Defense unit, revenue growth was 19% YoY and 6% QoQ.  

For Q2, Coherent guided for revenue between $1.56 billion to $1.70 billion, which on the headline figure would be decelerating to 13.6% YoY and 3.2% QoQ at midpoint, before reaccelerating to 15.9% by Q4. 

However, our internal pro-forma estimate shows a better trajectory for revenue through fiscal 2026 – pro-forma growth may decelerate slightly to the 17.4% YoY and ~5.7% QoQ in Q2, before reaccelerating to nearly 21% by Q4, the highest growth rate in the past five quarters.  

For fiscal 2026 ending in June 2026, Coherent is expected to report 14.8% headline growth to $6.67 billion in revenue, though pro-forma growth would be higher at ~18.6% YoY based on our internal calculations. Fiscal 2027 is currently expected to see a slight deceleration to 14.1% growth to $7.61 billion. 

AI Revenue 

Coherent’s Datacenter and Communications revenue rose 26.2% YoY and 7% QoQ to $1.09 billion, accounting for ~69% of revenue. Growth has decelerated rather steadily since Q1 FY2025’s 68% YoY print. 

• Datacenter revenue rose 4% QoQ and 23% YoY. As mentioned previously, Datacenter growth was constrained by InP laser supply, with management expecting QoQ growth to accelerate to 10% in Q2 and remain strong through the end of the fiscal year
• Communications revenue, which includes telecom and data center interconnect (DCI) rose 11% QoQ and 55% YoY, driven primarily by DCI products. Management said they witnessed strong growth in demand for ZR/ZR+ DCI products, with 100G, 400G and 800G products expected to continue ramping through fiscal 2026. 

Adjusted Gross Margin Shows Improvement Towards 42% Goal 

Coherent made solid progress on the margin front and expects gross margins to strengthen towards 42% with the ramp of its 6-inch InP wafers and higher margin 1.6T transceivers, and continued cost cutting measures. While it may take multiple quarters to progress solidly above 40% for gross margin, margin improvement down the line is expected to drive strong EPS leverage through 2026 with adjusted EPS growth expected to outpace revenue growth by 2X to 3X.  

GAAP gross margin was 36.6%, expanding 2.5 points YoY and 0.9 points sequentially. Adjusted gross margin came in at 38.7%, above the midpoint of guidance for 37.5-39.5%, expanding two points YoY and 0.6 points sequentially. Management said the gross margin expansion was driven by “cost reductions and product input costs as well as yield improvements,” while pricing optimization was also a meaningful contributor.  

GAAP operating margin was 16.4%, up nearly 11 points YoY and 16 points QoQ, though this was impacted by a $115 million gain from the Aerospace divestment. Adjusted operating margin was 19.5%, up 3.4 points YoY and 1.5 points QoQ.  

GAAP net margin was 14.3%, up 12.4 points YoY and more than 21 points QoQ; adjusted net margin was 14%, up 3.8 points YoY and 1.4 points QoQ. 

Adjusted EPS Up 73% YoY and 16% QoQ 

Fueled by margin improvements, Coherent reported a solid adjusted earnings beat in Q1, with adjusted EPS rising 73% YoY and 16% QoQ to $1.16, beating estimates by 11.3%. 

For Q2, Coherent guided for adjusted EPS between $1.10 to $1.30, decelerating sharply to 26.3% YoY at the $1.20 midpoint, and only showing a small sequential improvement. As noted above, while it may take a few quarters for gross margins to progress solidly above 40%, steady margin improvement down the line (3-4 points YoY and ~1.5 points QoQ for adjusted operating margin and net margin) is expected to drive solid EPS leverage through 2026.  

For example, adjusted EPS growth is expected to reaccelerate to the low-40% range in both Q3 and Q4, and moving through the first half of fiscal 2027 (Dec 2026 quarter) adjusted EPS growth is expected to range between 28% to 32%, or 2X to 3X estimated revenue growth of 13% to 17% over the next five quarters. 

Coherent has not provided a guide for the full year, but current consensus estimates point to fiscal 2026 adjusted EPS of $5.05, up 43% YoY. Fiscal 2027 is currently expected to see growth decelerate to 25.5% to $6.34.  

GAAP earnings have been lumpy as Coherent reorganizes its business and sells off assets – Q1 saw GAAP EPS of $1.18, impacted by the Aerospace sale, though Q4 recorded a GAAP loss of ($0.83) impacted by impairment charges on assets held for sale. GAAP EPS is expected to remain positive in fiscal 2026 at $0.69 in Q2, $0.81 in Q3 and $0.92 in Q4 for annual GAAP EPS of $3.62, up from $(0.52) last year.  

Operating Cash Flow Shrinks, Free Cash Flow Negative in Q1 

Coherent’s balance sheet is beginning to improve, with the company using proceeds from the divestment to pay down debt, though debt to cash remains upside down. Cash flows were also thin with OCF margin down nearly 10 points YoY, and FCF widened deeper into negative territory due to capex for the upcoming capacity expansion. 

• Operating cash flow was $46 million in Q1, down from $130.3 million in Q4 and the first time falling below $100 million in the past seven quarters. OCF margin was 2.9%, down from 11.4% a year ago and 8.5% in the prior quarter. 
• Free cash flow was ($57.9 million), widening from ($1 million) in Q4 and a stark contrast to $61 million in the year ago quarter, driven by capex of $103.9 million. FCF margin was (3.7%), widening from (0.1%) in the prior quarter and down from 4.5% a year ago. 
• Cash and equivalent totaled $852.8 million, while debt was $3.31 billion, down from $3.69 billion in the prior quarter. Additionally, Coherent refinanced its debt at the end of Q1, reducing interest rate by 60bp, cutting down its quarterly interest expenses, which were ~$58.7 million in Q1.  

Valuation 

Coherent’s valuation is quite elevated on the topline, with the company trading at a peak 4X forward sales multiple, double its historical 5-year average of 2X. This is also a ~33% premium to the peak 3X multiple that Coherent found resistance at in late 2024 and early 2025.

On the bottom line, however, Coherent trades at a more reasonable 33x forward PE based on its adjusted EPS estimate of $5.05. While this does represent a ~30% premium to its 5-year average of 25.7x, it is around the midpoint of its recent range of 24.5x to 45x.  

Conclusion 

Coherent is positioning itself to capitalize on the growing imbalance of EML supply and demand, with the company aiming to double its InP capacity over the next year with a shift to 6-inch wafers which can deliver 4X more output per wafer at half the cost. Coherent will likely be exceeding linear capacity growth over the next few quarters as 6-inch ramps and then matures, further supporting the QoQ reacceleration management projects. 

Although the company’s Datacenter segment growth was soft in fiscal Q1 with growth of just 4% QoQ, Coherent expects to drive a reacceleration to 10% QoQ in Q2, driven by this supply growth and strength in 1.6T transceiver, followed by strong sequential growth thereafter. The ultimate pace of this sequential growth over the next few quarters will be important to track given the converging supply growth tailwinds and increasing demand for 800G and 1.6T products ahead of CPO and other contributions later in 2026.

Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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Lumentum’s Q1 provided more confirmation that EML laser shipments are ramping in full force, with another record quarter driven by 100G speeds and an increase in 200G shipments. EMLs have been the primary driver of growth so far for Lumentum, though the supply-demand imbalance is widening due to tight indium-phosphide (InP) capacity. Looking ahead to 2026, InP capacity will be a key factor to focus on as Lumentum is targeting 40% capacity growth over the next few quarters, with the potential for this to drive even stronger revenue growth.  

Outside of EMLs, Lumentum is beginning to work on CW lasers for silicon photonics and co-packaged optics. CW laser shipments for 800G have begun with 1.6T eventually layering in to growth next year, regardless if CW lasers or EMLs are the preferred component of choice for 1.6T rates. Management also remains confident in other growth opportunities in co-packaged optics (CPO) and optical circuit switches, though the latter is expected to be a late calendar 2026 story. 

On the financials side, the number one item was Q2’s impressive 22% QoQ revenue growth guide to $650 million at midpoint. This is significant as Lumentum is reaching its $600 million quarterly revenue target two quarters ahead of schedule, with this also marking its highest revenue in company history. The 22% QoQ guide would also reflect Lumentum’s fastest sequential growth since the September 2020 quarter. 

EML Lasers Driving Results, CW Lasers Ramping for Future Co-packaged Optics 

Electro-absorption modulated lasers (EMLs) have quickly become attractive for AI servers as these components help enable 100G and 200G per lane transmissions, thus enabling 800G and 1.6T data rates for optical transceivers. EMLs also leverage indium phosphide (InP) over silicon as InP reduces power consumption, although it is more expensive at the component level as four EMLs are needed compared to two lower-cost CW lasers for silicon photonics modules.  

EMLs are a critical component with Nvidia’s Blackwell generation, as the scale-up in GPU counts per rack from eight to 72 and subsequent increases in bandwidth and switch density will require low-power, efficient high-speed optics. The power advantages over SiPho also come to the forefront as power consumption becomes a central concern in scaling AI data centers, with Blackwell doubling power consumption versus Hopper at 140kW per rack.  

EMLs are the main driver for Lumentum’s growth as these are good for short-to-medium reach and a strong choice for 400G and 800G optical transceivers, with the company having begun its 100G EML ramp for these data rates in early 2024. EML laser shipments reached a fresh record in fiscal Q1 2026, driven once again by 100G speeds and an increase in 200G shipments.  

More importantly, Lumentum expects calendar 2026 to be another breakout year for laser chip shipments, anchored by a widening supply-demand imbalance, sharp capacity growth and mix shift to higher priced, higher margin 200G products. 

One important discussion on EMLs is that the supply-demand imbalance continues to widen, meaning that substantial growth in capacity through 2026 should quickly convert to revenue. CEO Michael Hurlston explained that “last quarter, I think we characterized it as roughly a 20% shortfall relative to total customer demand. Even with the add in supply, I would say that number has increased to 25% to 30%. We are quite a bit short right now relative to the customer demand.” 

Lumentum is not the only supplier commenting about this imbalance, with Applied Optoelectronics also echoing this in their Q3 earnings call; however, management hinted that despite industry-wide capacity increases, supply could still lag demand through 2027: “We've also said we see the supply and demand imbalance increasing we're falling further behind. And that accounts for all this other capacity that's being built out here or there and everywhere by our competition. So at least through 2027, we don't believe we catch up. We think we're still behind on supply.” 

On the positive side, Lumentum shared that while its indium phosphide fab is fully allocated due to high demand, it has made “better-than-expected progress on yields and throughput and now see a line of sight to add approximately 40% more unit capacity over the next few quarters.” CEO Michael Hurlston clarified at UBS’ tech conference that “we gave in the last earnings call a new benchmark saying, over the next 3 quarters, meaning our December, March and June quarters, we expected to add that 40%. So that's a forward-looking statement where we'd expect an increase in capacity of 40% on what already is a doubled number.” 

Breaking this down suggests that the yield and throughput improvements means Lumentum is exceeding linear capacity growth, which can translate to stronger than expected revenue from more capacity going to higher ASP products. It also has strong implications for Lumentum’s margins and EPS, driving strong expansion in operating margins that then flows through to EPS: 

“So that 40% increase in indium phosphide capacity is focused on laser chips, which has, as you know, higher gross margins than many more of our other product lines. So as that flows through in the coming quarters, that will have a positive effect on our earnings per share. What you're seeing this quarter is without that increased capacity and increase gross margin contribution from the indium phosphide capacity we talked about.” 

Lumentum is also now working on CW lasers for silicon photonics (SiPho) and co-packaged optics (CPO), which are expected to kick in with 1.6T transceivers and layer into topline growth even if CW takes share from EMLs at 1.6T.  

Management expects to be well positioned for both EML and CW lasers ramping for 1.6T transceivers, as its capacity is interchangeable between the two components, despite management noting a difficulty in forecasting how the two will ramp – the primary takeaway here is that even if faster data rates such as 1.6T are less dependent on EMLs, management believes there is more than enough content for them to do well: 

“On the battle between CW and EML, it appears to us that CW is going to ramp with 1.6T but so will EML. And so the slope of the 2 ramps was hard for us to call but it looks like no matter how you slice it, the numbers will increase. So even if the mix shifts away from EML-based transceivers at 1.6T, the absolute numbers seem to be stratospherically high. And at least in the near term, we see no end in sight. We watch it every day, Chris, just like you're sort of cautioning but I think for the next 6 quarters, we're completely sold out, and we have long-term agreements, as I said, that we've worked out with our customers to ensure that they're going to take any additional capacity we've got online.” 

For a bit more on CW lasers, its 70 mW lasers started meaningful shipments this quarter and will be a more reasonable part of the mix in the December quarter, while sampling for 100 mW CW lasers just began. 100 mW lasers are expected to be in full production by mid-year 2026, with Lumentum aiming to integrate these into its own internal transceivers, slated for the June 2026 quarter.  

Q2 Outlook of $650M, Two Quarters Ahead of $600M Target 

While Q1 produced a solid beat, the most impressive part of the report was Q2’s guidance, with the company forecasting revenue of $630 million to $670 million. This marks a sharp sequential acceleration of nearly 11 points to 21.8% QoQ growth at midpoint and 25.5% QoQ at the high-end of guidance.  

On a YoY basis, the midpoint of the guidance points to a more than 3 point acceleration to 61.6% YoY, while the high-end would reflect 66.6% YoY growth.  

Just last quarter, Lumentum had projected reaching $600 million in quarterly revenue by the June 2026 quarter (fiscal Q4) or earlier, with the company now two quarters ahead of that target. When looking at the company’s original guidance for the end of 2025, which was $500 million (and satisfied by Q1), Q2’s forecast is 30% ahead of that, reflecting the strength of the AI networking theme and the demand the company is seeing. 

For the strong QoQ guide, management said that “the thing that probably caught us flat-footed is the width of the customer demand. It's touching everything. We talked about pump lasers. We talked about narrow linewidth. We talked about the transceivers. We talked about even coherent components. So it is very, very broad-based. And every single one of our segments is up. Every single one of our segments is contributing to the growth that you see.” 

To put in perspective how strong Lumentum’s growth curve is, current estimates for the June 2026 quarter sit at $740.3 million, more than 23% ahead of the company’s target revenue. This is also up from $689.9 million on November 7, a 7.3% revision higher in less than one week. 

Out of Lumentum’s three outlined growth drivers through 2026 – cloud transceivers, optical circuit switches (OCS) and co-packaged optics (CPO) – only cloud transceivers are expected to meaningfully contribute to Q2’s growth. OCS and CPO are expected to see much stronger growth next year, with ultra-high power lasers for CPO more geared towards 2H 2026. More on this is discussed below.  

Lumentum Intentionally Keeping Customer Count Low 

Another important discussion circled back to supply allocation and possible customer consolidation. This is not something that is necessarily new to Lumentum, as we had covered in our previous analysis that the company is intentionally keeping customer count low and not taking on new customers in an effort to focus on the highest-margin opportunities.  

Analysts had asked if management would use EML supply constraints to drive new transceiver engagements and qualifications and expand the customer base. However, management countered this and said they are actually trying to “consolidate supply and consolidate our customer base around a couple of folks that we think are going to be long-term winners. Those customers in return have given us multiyear commitments that give us a lot of confidence that our business is going to be sustainable even as we continue to ramp capacity through the next probably 6 or 8 quarters.” 

Management made sure to emphasize again that they will aim to “allocate our laser capacity based on the profitability metric more than to trying to broaden our transceiver opportunities in 1.6T using our lasers.” 

This is a two-edged sword, as multi-year commitments give Lumentum security in the ramp phase with visible, long-term revenue growth, yet it also could increase customer concentration risk by tying Lumentum solely to handful of key customers and limit its opportunities to diversify its customer base. This concentration risk is already becoming a bit more evident, with two customers accounting for 45% of revenue, at 22% and 21% respectively in fiscal Q1. This is up from 31.4% of revenue in fiscal 2025, at 16% and 15.4% respectively for the two largest customers. 

Cloud Transceiver Ramp Expected to Begin Next Quarter 

Lumentum’s ramp for cloud transceivers is expected to begin next quarter, with management stating that they have a line of sight to transceivers eventually becoming a $250 million/quarter business, or a $1 billion annual run rate; this is double its $500 million annual run rate today. Lumentum does not plan to expand the business beyond that $1 billion run rate, stemming from its gross margin profile.  

Cloud transceiver revenue was roughly flat QoQ in Q1 with Lumentum focusing primarily on increasing manufacturing capacity in Thailand to meet rising demand. As a result, management expects to resume growth in Q2 with the upward trajectory accelerating for the next four to five quarters.  

Lumentum believes Q2 will serve as a ‘proof point’ that as its new 1.6T and 800G transceivers ramp, it will see “the revenue layering benefits that our larger transceiver competitors have experienced” around the middle of 2026. The ramp of 1.6T will be important to track, as Lumentum has been straightforward about 1.6T margins being “significantly better” than 800G. 

However, CEO Michael Hurlston made clear at UBS’ tech conference that Lumentum is “operating meaningfully below the mid-30s in terms of margin” for transceivers as manufacturing is “substandard” on throughput, scrap and yields. He added that there is a path to get to the mid-30s over the next few quarters as production ramps and Lumentum in-sources components (versus virtually zero in-sourced today), but this remains a headwind to the company’s target model of 42%.  

Because of the lower-than-target margins, Hurlston explained that while Lumentum has “aspirations to get it to $1 billion annually, to add another $500 million of incremental revenue. But we don't want it to run much higher than that, just given the margin headwinds we see. We think we can manage our business up from a margin perspective if we keep the business to about $1 billion top line. If it gets beyond that, it will be more challenging.” 

No Change to Co-packaged Optics Timing, But Demand is Stronger 

As we discussed in September, co-packaged optics (CPO) is not contributing to revenue now yet could materialize into one of the biggest opportunities among all of the components and subsystems that Lumentum supplies, as the company says it is enabling Nvidia’s Spectrum-X networking switches. As a reminder, CPO places optical transceivers directly on the chip package, rather than using separate optical modules, resulting in faster data transmission, reduced latency and higher bandwidth. This may be the best of both worlds: the performance of optical yet with reduced power consumption for increasingly power-hungry AI racks.  

Management provided a brief update on CPO, noting that the ramp is forecast to begin in the early stages of calendar Q3 2026 with a more meaningful contribution in calendar Q4. Hurlston explained in Q1’s call that the only change is that “demand is stronger than we initially forecast” and “getting better,” though the timing for the ramp is still the same. He clarified further that Lumentum expects “an inflection point on Ethernet-based switches. That's where we see the real step-up where our revenue would become more material” in the second half of 2026, continuing through 2027. Second-gen CPO products for 3.2T speeds are tentatively on deck for 2028.  

Ultra-high power lasers are still in the initial production ramp, though Lumentum expects significant growth in shipment volumes in 2H 2026 with accelerating adoption, with this providing further confirmation of the strength of the CPO opportunity. Lumentum had announced the production expansion in early August, giving the company multiple quarters to ramp.  

Optical Circuit Switching Also a Late 2026 Story 

Lumentum’s second upcoming growth driver, optical circuit switches, are not expected to meaningfully contribute in Q2, rather being a late 2026 story alongside CPO. Optical switches are a new kind of switch for AI clusters that handle the switching optically instead of using transceivers to convert photons to electrons, and back again. Optical switching and CPOs work together to allow for more flexibility for reconfigurations, to reduce energy and complexity while also increasing bandwidth.  

Management has outlined confidence in reaching a $100 million quarterly revenue target by the December 2026 quarter, with its two major customers expected to be qualified in the March 2026 quarter with a third customer potentially qualifying in the middle of the year. CEO Michael Hurlston provided more clarity about how Lumentum expects OCS to ramp beginning in this quarter through 2026:  

“We outlined sort of a revenue ramp of kind of mid-single-digit millions here in the December quarter, getting to double digit — very, very low double digits in the March quarter and then accelerating to kind of mid $50 million, $60 million in the middle of the year and then getting all the way to that $100 million mark in the December quarter.” 

This commentary implies that the largest ramp and impact from OCS will hit in fiscal Q2 2027, with management eyeing tens of millions of QoQ growth in the back half of next year. As seen in the revisions, current estimates only point to $59 million QoQ growth in that quarter, which may underestimate the tailwinds from simultaneous growth in OCS, transceivers and initial CPO growth in the second half of 2026.  

Financials 

Revenue Growth Maintaining >50% YoY 

Lumentum fulfilled its guidance for a >$500 million revenue quarter in calendar 2025, reporting a record $533.8 million in revenue in fiscal Q1, beating estimates by just 1.4%. Revenue growth accelerated 2.5 points to 58.4% YoY though QoQ growth slowed to 11%.  

As discussed previously, Lumentum guided for $630 to $670 million in revenue in Q2, accelerating to 61.6% YoY and 21.8% QoQ, whereas consensus estimates were pegged at almost 40% growth to $561.5 million.  

Looking ahead, growth is expected to stay strong in Q3 at nearly 61% YoY, but the more impressive number is Q4’s estimated 54% growth, as this comes against a much more difficult comp of 55.9% vs 16.0% for Q3. This underscores the strength of the demand ramp Lumentum is discussing for the back half of calendar 2026. 

On an annual view, Lumentum is estimated to report 57.3% growth in fiscal 2026 to $2.59 billion, before slowing to 29.6% YoY to $3.36 billion in fiscal 2027. Revisions are much stronger in fiscal 2027, up $600 million since the start of October versus a $300 million increase for fiscal 2026. 

AI Revenue 

Lumentum estimates that over 60% of total revenue comes from cloud and AI infrastructure customers, or above $320 million in Q1.  

Lumentum changed its reportable segments in Q1, dropping Cloud & Networking and Industrial Tech and instead transitioning to Components and Systems. Components include laser chips, laser subassemblies, line subsystems and wavelength management subsystems, while Systems includes full stand-alone products such as optical transceivers, optical circuit switches and industrial lasers. 

Components revenue rose 18.4% QoQ and 63.9% YoY to $379.2 million, fueled by “robust demand inside the data center”, strong momentum for DCI products with narrow linewidth laser assemblies for DCI transmission up 70% YoY, and record EML shipments. Lumentum expects Components to be the cornerstone for revenue growth and profitability while Systems will scale rapidly with transceivers, OCS and other high-performance solutions. 

Systems revenue declined (3.6%) QoQ but increased 46.5% YoY to $154.6 million. Cloud transceiver revenue was approximately flat QoQ as Lumentum worked to increase capacity.  

For Q2, Lumentum expects approximately half of its sequential revenue growth (or ~$60 million at midpoint) to come from Components, and the other half from Systems, “primarily reflecting the ramp of high-speed optical transceivers for data center applications and to a lesser extent, the early phase of our optical circuit switch ramp.” 

GAAP EPS Back to Positive 

Lumentum reported a razor thin $0.05 in GAAP EPS, while adjusted EPS of $1.10, up 511% YoY, beating estimates by 6.8%. For Q2, Lumentum guided for adjusted EPS in a wider range of $1.30 to $1.50, up 233% YoY, coming in well ahead of the $1.16 estimate at the midpoint. Fiscal Q3 and Q4 are expected to see adjusted EPS continue to increase, though YoY growth technically is decelerating to 162% in Q3 and 91% in Q4 as comps get more difficult. 

Lumentum did not provide a full year adjusted EPS guide, though consensus now sits at $5.63, up from $4.90 and pointing to growth of 173% YoY. Considering Q2’s estimate remains below the midpoint of management’s guidance at $1.38, there is room for upside revisions if Lumentum provides another beat and raise next quarter. 

Margins Show Strong Expansion 

Gross margin continued to expand both sequentially and YoY, helping drive GAAP operating margin back to positive territory.  

• GAAP gross margin was 34.0%, in Q1, up nearly 11 points YoY and 0.7 points QoQ. Adjusted gross margin was 39.4%, up 6.6 points YoY and 1.6 points QoQ.  
• GAAP operating margin was 1.3%, up nearly 26 points YoY and 3 points QoQ. Adjusted operating margin was 18.7%, up 15.7 points YoY and 3.7 points QoQ, ahead of guidance for 16-17.5%. For Q2, management guided for continued adjusted operating margin expansion to 20-22%.  
• GAAP net margin was 0.8%, up 25.3 points YoY and not comparable QoQ due to an income tax benefit in Q4. Adjusted net margin was 16.2%, up 12.6 points YoY and 3 points QoQ. 

Management provided a deeper discussion on margins moving through 2026, with product pricing from supply-demand imbalances serving as a strong lever for margin expansion:  

“I think we're moving the margin line up. Pricing, obviously, is a lever. And when you look at that very, very carefully, I think what you see in the guide is some pricing, very targeted price increases happening. I think as you look out next year in 2026, our agreements with customers will include more pricing, more broad-based price increases, just given the supply-demand imbalance.” 

CFO Wajid Ali added that margins are benefitting from improved manufacturing utilization, and moving into calendar 2026, gross margins are expected to move up in line with the company’s model from OFC (shown below) as OCS, 1.6T transceivers, and CPO ramp.  

Lumentum is currently tracking closer towards the $750 million model by mid-2026, which is expected to see adjusted operating margin above 20% and gross margin approaching 40%. Lumentum is currently ahead of targets for adjusted operating margin per Q2’s guide, which suggests that there could be further upside as higher-margin product ramps, or some stagnation from the initial ramp phases for OCS and CPO to remain within the target ranges.   

Cash Flows Muted 

Cash flows were rather muted, with operating cash flow margin shrinking both YoY and QoQ.  

Operating cash flow was $57.9 million in Q1 for a 10.8% margin, down from 11.8% a year ago and 13.3% in Q4. Free cash flow was ($18.3 million) for a (3.4%) margin, up from (10.2%) a year ago but down from 2.1% in Q4. 

Cash and equivalents were $1.12 billion while debt was $3.24 billion.  

Inventories for $531.6 million, up more than 13% QoQ, while accounts receivable surged nearly 23% QoQ to $307 million, both aligning with management’s commentary for strong product and revenue ramps over the coming quarters. 

Valuation 

Lumentum is trading at a stretched 6.9x forward PS multiple, more than double its five year average of 2.9x and above the 4.2x level that shares failed to break past in late 2024 and early 2025. 

On the bottom line, however, Lumentum is trading just above its average multiple, currently valued at 45x forward adjusted EPS versus its five year average of 40x. Shares have traded as high as 60x and as low as 18-20x.  

Conclusion 

A lack of InP capacity is causing a rather substantial shortfall in EML laser supply as demand continues to expand, with Lumentum one of two companies able to meet this demand. Evidence of this tight supply is seen in Lumentum’s QoQ acceleration from 11% in Q1 to 22% guided in Q2, as Lumentum was able to increase InP capacity by 40% a few quarters ago. Looking ahead, an additional 40% capacity growth is coming online over the next few quarters, and higher yields and throughput on the upcoming capacity expansion could translate into a higher revenue growth rate.  

Outside of EMLs, Lumentum is beginning to work on CW lasers for silicon photonics and co-packaged optics, which is expected to serve as the company’s next catalyst moving into 2026. This catalyst will hinge on whether Lumentum sees similar qualifications for SiPho and CPO as it has for EMLs for Nvidia’s Blackwell, or if it fails to be chosen as a lead supplier for CW moving through 2026.

Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.