Our main takeaway from Lumentum’s Q2 was “capacity constrained and loving it”, and that theme was just as evident, if not more so, this quarter. Supply-demand imbalances for EMLs widened, transceivers face a similarly large imbalance, but the largest supply constraint arose in an unexpected area – pump lasers for DCI.
For OCS and CPO, revenue remains modest for both, though Lumentum expects to satisfy its $400 million OCS target in calendar 2H 2026 and realize the first significant scale-out CPO revenue in calendar Q4 (FQ2 27). More importantly, the scale-up CPO opportunity was discussed as multiple times larger than scale-out, with output significantly larger than the company’s new fab capacity, with expectations it will add >$5 billion in incremental revenue capacity as it ramps in 2028. Management stated CPO will be a significant driver for meeting their $2B per quarter revenue goal that was announced at the OFC event.
Fundamentally, Lumentum is firing on all cylinders, with YoY growth forecast to accelerate to 105% YoY and sequential growth guided to maintain >20% QoQ for a third straight quarter in FQ4. Margins showed strong expansion, with GAAP gross margin up more than 15 points YoY to 44.2% and GAAP operating margin up more than 30 points YoY to 21.6%.
200G EML Revenue Doubled QoQ, Supply-Demand Imbalance Widening
As we had noted in last quarter’s write-up, Lumentum is benefiting from outsized demand for its EML lasers, reaching a quarterly company record in EML laser shipments with 200G ramping faster than expected. Lumentum reached another quarterly record for EML shipments in FQ3, driven by 100G but with 200G EML revenue more than doubling QoQ.
While Lumentum remains capacity constrained in EML, the company is working quickly to expand in Japan, noting that it expects to achieve >50% YoY growth in EML units by the December 2026 quarter versus the December 2025 baseline. Layering in higher-ASP 200G EML units in the back half of 2026 is likely to drive revenue at a higher rate than the >50% YoY growth in capacity. However, the primary challenge with this capacity expansion is that it may not be coming soon enough to alleviate widening supply shortages:
“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.”
There are a couple puts and takes here – on a positive note, the fact that the supply-demand gap is widening suggests pricing power can drive sequential margin expansion as new capacity comes online in 2H. Additionally, management believes that increasing supply in the near-term is largely within its own control and not reliant on external factors, based on the amount of InP substrates it has secured within the supply chain.
However, the main challenge is that 2027 EML output represents “a massive step-up just given the scale-out and scale-up demands,” meaning that future capex for capacity expansion, and some InP substrate procurement, will likely be required to help close this supply-demand imbalance. This may pressure free cash flows as Lumentum is already investing heavily to ease pump laser supply tightness.
Lumentum’s acquisition of the Greensboro fab from Qorvo earlier this year will serve as its fifth InP fab, capable of supporting >$5 billion in annual run rate capacity, though first material contributions from this fab are not expected until 2028.
Scale-Across Components Grow 120% and 80% YoY
While the EML constraints are rather widely known at this point in time, it’s important to touch upon pump and narrow linewidth lasers serving scale-across applications. Not only is Lumentum effectively sold out of both for the foreseeable future, but pump lasers were highlighted as an “unanticipated” constraint this quarter.
Both products serve scale-across applications and witnessed robust growth in Q3, with narrow linewidth lasers recording a ninth consecutive quarter of growth, up 120% YoY, and pump lasers up 80% YoY. However, Lumentum detailed in Q3 that pump lasers are even more constrained than EMLs, with this hitting suddenly:
“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.”
For more color on the output front, Lumentum explained that near-term output should rise rather substantially as there are less constraints on the fab front for pumps versus EMLs. This near-term uplift in capacity is crucial in minimizing the supply imbalance, as well as helping meet elevated demand in the near term.
Because capex is high, Lumentum explained that they are “talking to the major customers around trying to help, right, and put some skin in the game around the CapEx that we're going to try to lay out. One, that can entail prepayment, that can entail take-or-pay, that can entail price increases,” minimizing capital and risk associated with expansion, or in the case of price increases, aiding growth and margins.
This connects over to what we have discussed regarding a long-haul networking stock for our Discovery members. Narrow linewidth lasers support high-bandwidth, low-power 800G/1.6T coherent pluggables for scale-across and data center interconnect (DCI) applications. Pump lasers are key components in amplifying signal strength over four, eight or 16 fiber pairs simultaneously, essential for DCI, long-haul or subsea links and more so for multi-rail optical systems. For example, by scaling from one rail per module to four, multi-rail systems could deliver up to 32X the density of current single-rail solutions.
To learn more about this networking stock, the robust demand it is seeing for scale-across applications and upcoming catalysts for 2027, sign up for Discovery here or click to email us at premium@io-fund.com.To learn more about this networking stock, the robust demand it is seeing for scale-across applications and upcoming catalysts for 2027, sign up for Discovery here or click to email us at premium@io-fund.com.sign up for Discovery here or click to email us at premium@io-fund.com.
For Lumentum, solving or at least easing this unanticipated constraint in pump lasers by late 2026 is essential as multi-rail platform content is higher, due to needing more lasers per system. Being able to meet higher levels of multi-rail demand would likely act as a stronger revenue growth and margin lever next year, as management was explicit in pointing out both as significant gross margin drivers.
1.6T Transceivers Ramping in Q4, Insourcing CW Lasers
Another bright spot for Lumentum was its transceiver business, accounting for the majority of growth in its Systems segment, which was up 121% YoY and 24% QoQ to $275.1 million, or 34% of revenue. Cloud transceivers grew more than 40% QoQ with record shipments, with this likely largely driven by 800G as the ramp of 1.6T transceivers is slated for FQ4.
As should be expected by now, Lumentum said that the “the supply-demand imbalance on our own transceivers was somewhere in that ZIP code” of EMLs at >30%. Management said that they could have actually shipped quite a bit more in Q3 and in Q4’s guide had supply constraints for electrical components or laser diodes not been this tight, and that its pricing power suggests the supply-demand imbalance “isn't going to be solved for a while,” shooting down concerns over laser oversupply.
To help alleviate some of the external laser supply constraints, Lumentum began insourcing CW lasers in Q3, a quarter earlier than originally expected. Insourced supply is expected to scale further in Q4, accounting for ~20% of transceiver modules in the quarter. This pivot is expected to augment transceiver margins as 1.6T ramps, alongside better yields and lower scrap rates.
Pricing power can act as an important lever in Q4 — having stronger pricing power on 800G while leaning into the 1.6T ramp in Q4 should help further improve margins, as 1.6T already carries higher margins versus 800G.
OCS Supply Considerably Tighter, Scale-Up CPO Opportunity Multiples Larger
As we discussed in Q1, OCS and CPO are expected to emerge as strong growth contributors in fiscal 2027, with revenue contribution at the moment remaining modest. OCS is expected to begin contributing more heavily in calendar 2H, with scale-out CPO arising in calendar Q4 (FQ2 27).
There were a handful of key insights this quarter for both. OCS is now seeing considerable supply tightness. For CPO, Lumentum projects scale-up opportunity to be substantially larger than $5 billion, and believes it could see a faster path-to-market from vertical integration.
For OCS, the ramp remains largely on track, with management confident in meeting its $400 million target in calendar 2H 2026 and ramping to >$1 billion in calendar 2027. The pace of this ramp will be determined by the supply chain, with Lumentum “experiencing considerable tightness” in OCS due to a substantial step-up in requested output, tied to both new OCS opportunities and likely Google’s upcoming TPU v8 chips (as its key OCS customer).
This could create some volatility or lumpiness in the ramp phase if the supply chain tightness fails to resolve easily. However, the ramp of TPU v8 later this year could provide additional upside as there is incremental OCS content growth versus TPU v7.
Moving to CPO, Lumentum noted that its ultra-high-power (UHP) laser ramp is progressing to plan, driving sequential growth in Q3. Meaningful revenue is slated for calendar Q4 (FQ2 27), with Lumentum on track to satisfy its multi-hundred million dollar purchase order in the first half of calendar 2027.
These near-term opportunities for CPO are primarily for scale-out applications, yet Lumentum foresees the opportunities in scale-up CPO to be multiples larger. And if you weren’t tired of hearing this by now, Lumentum expects a massive supply-demand imbalance with CPO due to scale-up:
“We will have a massive supply-demand imbalance on CPO. It's going to be very, very significant. We've seen multibillion-dollar orders that we've characterized on previous calls come in mostly on scale-out.
We expect to scale-up to be significantly more than that in terms of revenue opportunity. I think it's going to be somewhere greater than $5 billion of incremental revenue that we can add [with the new Greensboro facility] if we execute properly.”
First scale-up CPO shipments are not expected until late 2027, per Lumentum’s OFC briefing, though commentary here suggests that scale-up CPO demand could materialize as Lumentum’s largest revenue driver come 2028 and beyond.
Financials
Revenue Accelerates to 90.1% YoY in FQ3
Lumentum's Q3 FY2026 ending March revenue came in at $808.4 million, missed estimates marginally by (0.2%), but represents a strong reacceleration on a YoY basis from the previous quarter. Revenue grew 90.1% YoY and 21.5% QoQ and accelerated 24.6 percentage points from 65.5% on a YoY basis although decel’d slightly from 24.7% QoQ growth in the previous quarter.
Sequential dollar growth of $142.9 million reflects the scale of Lumentum's ramp, with the company now approaching the $1 billion quarterly revenue threshold. Management issued a strong guide for Q4 FY2026 of $960 million to $1.01 billion, implying a YoY growth of 104.9% YoY and 21.8% QoQ at the midpoint.
While this beat estimates by 7.4% and signals that the hyperscaler-driven demand cycle remains firmly intact, the more impressive part is that sequential dollar growth was guided to be higher next quarter despite worsening supply constraints. At the midpoint, Q4’s guide implies nearly $177 million in QoQ dollar growth, driven primarily by transceivers, EMLs, scale-across components (narrow linewidth and pump lasers), and incremental OCS revenue.
During the OFC conference held in March management also provided the $2.0 billion revenue target to be achieved in the 18 to 24 months period. Management remains confident in reaching this target, leveraging EMLs, scale-across, and upcoming OCS and CPO ramps, with consensus currently expecting Lumentum to reach its $2 billion quarter in December 2027.
Key Segments
Components Revenue grew by 77%
Components revenue grew by 77.3% YoY and 20.2% QoQ to $533.3 million. However, was below the guidance of $536.7 million. Revenue growth accelerated from 68.3% YoY and 17% QoQ growth in the previous quarter.
As noted above, shipments of the narrow linewidth laser assemblies grew for the ninth consecutive quarter, rising over 120% YoY, while pump laser shipments grew 80% YoY. EML shipments reached another quarterly record led by 100G, while 200G EML revenue more than doubled QoQ.
Lumentum also shipped twice the number of laser chips compared to the same period last year and on track to achieve more than 50% growth in EML units by the December quarter of 2026 as compared to the same period last year.
Systems Revenue grew by 121%
Systems revenue grew by 121.1% YoY and 24% QoQ to $275.1 million. The strong growth was primarily due to the cloud transceivers revenue that grew by over 40% sequentially as the company successfully leverage the expanded manufacturing footprint in Thailand. The supply constraints on critical components are keeping the shipments well below customer demand.
The company is poised to ramp poised to ramp 1.6T-speed transceiver shipments in FQ4 with a portion of this volume leveraging the company’s own CW lasers. Management highlighted that they are improving transceiver profitability through better yields and lower scrap rates.
Looking ahead to Q4, Lumentum expects more than half of Q4’s sequential growth to be driven by Components, and the remainder from Systems.
Margins Showing Pronounced Expansion
One of the most compelling aspects of Q3 FY2026's report is the continued margin expansion primarily driven by better manufacturing utilization, favorable product mix, and operating leverage.
However, management admits their margins are not as strong as peers due to the transceiver business – although as noted, should improve with 1.6T: “I think we are underperforming peers. We have room to grow. We're getting better. I think we are — we've certainly gotten the lead in terms of design. And now in terms of margin, I think we're improving. We still trail.”
- FQ3 adjusted gross margin improved by 12.7 percentage points YoY to 47.9% primarily due to better manufacturing utilization, increased pricing on certain products, and favorable product mix. GAAP gross margin was 44.2%.
- FQ3 adjusted operating margin improved by 21.4 percentage points YoY to 32.2% primarily due to operating leverage along with product mix and improving factory utilization. GAAP operating margin was 21.6%.
- FQ3 adjusted net income grew by 184.8% YoY to $225.7 million with an adjusted net margin of 27.9% compared to 9.6% in the same period last year.
- Adjusted EBITDA margin also improved significantly by 19.6 percentage points YoY to 36.3% primarily due to strong operating leverage.
For FQ4, management expects the adjusted operating margin to further improve to 35.5%, up more than 3 points QoQ and more than 20 points YoY, despite growth being driven by transceivers. Insourcing CW lasers is expected to help improve gross margins on that product line in Q4 as 1.6T layers in, alongside growth in narrow linewidth and pump lasers.
Looking further ahead, Lumentum has other strings to pull for margin expansion, with management discussing that they will turn to contract manufacturers (like Fabrinet) to improve 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.”
EPS Showing Strong Growth Trajectory Ahead
FQ3 adjusted EPS grew by 315.8% YoY to $2.37, beating estimates by 4.6% reflecting favorable product mix and operating leverage. Management also provided a strong adjusted EPS guide of $2.85 to $3.05 for the next quarter, implying a YoY growth of 235.2% at the midpoint and beat estimates by 9.7%.
Looking ahead, analysts expect adjusted EPS to grow 200.1% YoY to $3.30 in FQ1 and 138.2% YoY to $3.98 in FQ2.
Cash Flows and Balance Sheet
The company’s cash flows improved significantly, driven by higher profits.
- FQ3 operating cash flow was $203.8 million or 25.2% of revenue compared to an operating cash outflow of ($1.6 million) or (0.4%) of revenue in the same period last year.
- FQ3 free cash flow was $79.1 million or 9.8% of revenue compared to a free cash outflow of ($64.4 million) or (15.1%) of revenue in the same period last year.
- The company had cash and short-term investments of $3.17 billion compared to convertible notes of $3.28 billion at the end of the quarter. Cash and short-term investments increased from $1.16 billion at the end of FQ2 primarily due to the $2.0 billion investment by Nvidia in March.
- Inventories grew by 10.9% QoQ to $632.8 million to support strong growth.
Conclusion
Lumentum is firing on all cylinders with revenue growth accelerating more than 25 points sequentially to 90% YoY alongside substantial margin expansion in Q3. The more impressive piece was Q4’s guidance for substantially higher sequential dollar growth for revenue despite supply constraints tightening in EMLs and unexpectedly arising in pump lasers.
OCS and CPO remain bright spots for future growth, with management expecting both to begin layering in more materially in calendar 2H and calendar Q4, before ramping more significantly in 2027. The scale-up CPO opportunity, while still six to seven quarters away, will be one we’re watching with anticipation as it is expected to be perhaps the largest single upcoming opportunity ahead for Lumentum.
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 company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in LITE at the time of writing and may own stocks pictured in the charts.
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