Lumentum is benefiting from outsized demand for its EML lasers, reaching a quarterly company record in EML laser shipments. While EMLs are largely spoken for with InP wafer fab capacity fully allocated with long-term agreements, the company is expanding its capacity with additional supply expected to come online in the second half of this calendar year.
The transition to 1.6T is moving faster than management originally anticipated, which contributed to the beat/raise with management stating: “We achieved another quarterly company record in EML laser shipments led by 100 gig line speeds and bolstered by a ramp in 200 gig devices. Simultaneously, we expanded our footprint in next-generation architectures shipping CW lasers for 800 gig manufacturers and increased volumes of ultra-high-power laser shipments for CPO applications.”
There are additional growth levers for Lumentum as we look further out, driven by optical circuit switches and co-packaged optics. Optical circuit switches are beginning to move the needle now with a $400 million backlog, although currently at around $10 million in revenue. In 2027, co-packaged optics (CPOs) will represent another important market for Lumentum alongside UHP chips and ELS modules will help expand the company’s serviceable addressable market.
To learn more about upcoming networking shifts, read our Top 15 report here.our Top 15 report here.
Increasing Capacity for H2 2026
Management emphasized that indium phosphide wafer fab capacity is fully allocated, with the company indicating they have already delivered half of their expansion target over one quarter alone due to strong customer demand necessitating they pull forward delivery. Thus, the natural question for an investor is whether Lumentum can add more capacity. The company stated they foresee more capacity coming in the second half of the calendar year:
“We are scaling rapidly through precision tool optimization and yield gains. This execution will help to ensure that additional capacity comes online as planned over the next two quarters and beyond. While not able to size it, we now have line of sight to a significant block of additional capacity starting in the second half of 2026 both recurrent activities in Sagamihara and better utilization of our Caswell, United Kingdom and Takao, Japan fabs.”
200G/1.6T Ramping Faster than Expected
Although minimal right now, 200G is ramping faster than expected, representing 5% of unit volume yet represents 10% of laser chip revenue. According to management, demand for 200G EMLs is about a quarter faster than they originally anticipated with the goal of ending the year with 25% of unit volume from this new product mix – with these seeing higher average sales prices than the 100-gig.
Management stated the following: “Our 200-gig line speed, as we said, is actually doing a little bit better than we expected. I think on the last call, we had said that the 5% revenue of — 5% of mix would be this quarter. It was a quarter earlier than we had expected, and that's primarily because 1.6T is coming on, I think, faster than we initially anticipated, and that is heavily being driven by 200-gig EMLs.”
This was discussed further in the call with management stating 1.6T was stronger than it was 90 days ago:
Ruben Roy Stifel, Nicolaus & Company, Incorporated
Great. Just a very quick follow-up. Has anything changed with the way you guys are thinking about 800 gig versus [ 1.6T ] module mix this year one way or the other? Is it accelerated towards 1.60T for any reason in terms of volumes from a single customer or multiple customers? Or is it relatively unchanged from how you're thinking about it 90 days go?
Michael E. Hurlston President, CEO & Director
Yes. 1.6T is definitely stronger than we felt than we felt 90 days ago. So 1.6T is definitely accelerating. Our 800-gig volume actually is doing better than we would have expected. So an 800-gig that what you're seeing right now from us is an acceleration in revenue on our 800-gig shipments. But in the market, to your question, Ruben, 1.6T is definitely going better. We have exposure to a couple of customers, a couple of large customers on 1.6T, and we've been surprised by how quickly they're trying to push us to deliver and their forecast to us relative to the different SKUs that we're being asked to deploy.
OCS Starting to Move the Needle, CPOs Incoming for 2027
Optical circuit switches are starting to move the needle. By the end of fiscal 2027, management now expects roughly $400 million in revenue, up from the $100 million originally guided—representing an incremental $300 million upside to prior expectations.
Management stated the following on the call:
“If you remember, you and I discussed last time, we believed our calendar Q4 would be around $100 million. It looks like it will be quite a bit higher than that, although we're not breaking up that $400 million between the two quarters. So we — it's a broad-based — there's multiple customers making up that backlog. We've talked about shipping to three customers, and that continues — but those customers are increasing their demands rather significantly. And thus, the demand on us has gone up quite appreciably. So we feel pretty good about that. I think as we enter calendar year 2027, it should go up from there in terms of what we see in our backlog and in terms of our revenue.”
Co-packed optics are expected to contribute early 2027 with stronger contribution by year-end 2027: “An industry pivot is underway to bypass the scaling limits of copper. By late calendar 2027, we would expect our first scale-out CPO shipments, replacing longer copper connections.”
Financials
Revenue Growth to Accelerate to 89% in Q3
Lumentum delivered Q2 revenue at the upper end of its guided range, yet its guidance stands out as it not only points to YoY growth accelerating almost 24 points to 89.3% YoY, but it also was a larger magnitude beat in dollar terms versus last quarter.
Q2 revenue was $665.5 million, a modest 2% beat to estimates and in the upper end of Lumentum’s guidance for $630-$670 million. Revenue growth accelerated 7.1 points to 65.5% YoY, while sequential growth was robust at 24.7% QoQ, its fastest growth in eight years and accelerating 13.7 points.
For Q3, Lumentum guided for revenue between $780 million and $830 million, accelerating 23.8 points to 89.3% YoY at midpoint. Sequential growth will remain strong with guidance pointing to growth of 21% QoQ at midpoint. What’s impressive here is that Lumentum’s guidance beat consensus by a larger margin than it did last quarter – at the $805 million midpoint, this would be nearly $99 million ahead of the $706.4 million estimate, whereas Q2’s guide for $650 million at midpoint beat by ~$88 million.
Considering the scope of this raise for Q3, it’s likely that estimates for Q4, which currently are pegged at just $770.4 million, are revised much higher in the coming days/weeks. As a result, it’s likely that consensus estimates for FY26, currently at $2.64 billion, move ~8-10% higher.
Segment Breakdown
As we had noted in our prior analysis, Lumentum: EMLs Driving Results, CW Lasers Ramping with Q2 Guided for 22% QoQ Growth, Lumentum changed its reportable segments in fiscal Q1, dropping Cloud & Networking and Industrial Tech and transitioning to Components and Systems.
For a brief recap, 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.
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.
Components Revenue Accelerates Slightly
Components revenue was $443.7 million in Q2, up 68.3% YoY and 17% QoQ. YoY growth accelerated 3.4 points, though QoQ growth decelerated 1.4 points from last quarter. Components accounted for 66.7% of revenue in Q2, down from 71% in Q2.
Driving this growth were EML shipments, with Lumentum saying both 100G and 200G EMLs reached new company records. Ultra-high-power lasers for CPO continued to grow, with Lumentum outlining a broader ramp in the second half of calendar 2026, aligning with Nvidia’s Spectrum-X switch roadmap with its Vera Rubin platform.
Lumentum also noted that Q2 saw an eighth consecutive quarter of sequential growth for narrow linewidth lasers for data center interconnect (DCI) applications, while pump lasers for scale-across and sub-sea applications reached a record.
Systems Revenue up 43% QoQ, New Record for Transceivers
Systems revenue saw much stronger sequential growth than Components as it is coming off a much smaller base, with cloud transceivers likely to be the main driver as optical circuit switching (OCS) is still very early in its ramp.
Systems revenue rose 43.5% QoQ and 60.1% YoY to $221.8 million, a sharp acceleration from a (3.6%) QoQ decline and 46.5% YoY increase in Q1. This was driven by record cloud transceiver shipments.
Lumentum did note that OCS shipments exceeded a $10 million quarterly run rate in the quarter, while manufacturing readiness is proceeding ahead of schedule as the company prepares to begin fulfilling its >$400 million OCS backlog later in 2026.
Margins Expand Substantially, Operating Margin up 22.5 Points YoY
Complementing the strong revenue growth is substantial margin expansion, with Lumentum showing GAAP operating margin expand 22.5 points YoY to nearly crack into double digit territory. Lumentum’s cost profile also shows that operating margin expansion will continue as costs rise at a much slower pace than revenue growth.
Lumentum reported solid expansion in gross margins in Q2, with GAAP gross margin up 2.1 points QoQ and 11.3 points YoY to 36.1%, and adjusted gross margin up 3.1 points QoQ and 10.2 points YoY to 42.5%.
However, operating leverage was quite prevalent and visible in the quarter as opex rose just 0.6% QoQ and 16.3% YoY. This, combined with gross margin expansion, drove significant expansion in operating margins on a YoY and QoQ basis.
GAAP operating margin in Q2 was 9.7%, up 8.4 points QoQ and 22.5 points YoY, while adjusted operating margin was 25.2%, up 6.5 points QoQ and 17.3 points YoY (and ahead of guidance for 20-22%). Lumentum forecast this operating margin to continue at a similar rate, projecting adjusted operating margin of 30-31% in Q3, up 5.3 points QoQ and 19.7 points YoY.
To note, Lumentum is well ahead of its target financial model, which called for >20% adjusted operating margin and 39-42% adjusted gross margin at a $750 million/quarter. Lumentum is already above both metrics on $665 million/quarter base.
Net margins followed, with GAAP net margin expanding 11 points QoQ and 26.9 points YoY to 11.8%. Adjusted net margin expanded 5.4 points QoQ and 14.1 points YoY to 21.6%. An important takeaway here is that this AI-driven growth is driving strong earnings leverage for Lumentum, as adjusted net margin was single-digits just three quarters ago.
Adjusted EPS Beats by 18%, Q3 Guided 40% Above Estimates
As just mentioned, this AI growth and margin expansion is driving visible earnings leverage for Lumentum. Not only did adjusted EPS beat estimates by 18% in Q2, but Lumentum’s Q3 guide was more than 40% above estimates, signaling >290% growth will be maintained for another quarter.
Q2 GAAP EPS was $0.89, up from just $0.05 in Q1 and beating the $0.50 consensus estimate by 78%. Adjusted EPS was $1.67, up 51.8% QoQ and 297.6% YoY, and beating the $1.40 estimate by 18.4%.
For Q3, Lumentum guided for $2.15 to $2.35 in adjusted EPS, pointing to YoY growth of 294.7% and QoQ growth of 34.7%. At midpoint, this represented a 40.6% beat to the consensus estimate of $1.60.
Combined, Q3 and Q4 adjusted EPS came in $0.91 ahead of estimates, and if Q4 is to see a similar ~$0.60 to $0.70 upward revision to match Q3’s beat, full-year adjusted EPS estimates could move to around the $7.50 range, up from the current $5.92 prior to the report.
Cash Flows and Balance Sheet
Cash and equivalents increased slightly to $1.16 billion while debt was $3.29 billion.
Inventories were $570.4 million, up more than 7% QoQ, while accounts receivable surged nearly 23% QoQ (again) to $376.8 million, supporting the upcoming product ramps over the coming quarters.
Conclusion:
AI networking is entering a new phase, one where silicon photonics plays a much larger role alongside system-level shifts such as optical circuit switches and co-packaged optics.
The goal is to continually optimize for AI workloads rather than rely on traditional networking as ever-expanding AI clusters seek speed, lower latency and reduced power consumption. Pluggable optics work well enough today but are quickly becoming a limiting factor as power and port density doesn’t scale well with traditional optics. This dynamic is pushing hyperscalers to rethink network architectures, and positions Lumentum well, as its solutions help future-proof AI networks for the years ahead.
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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