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.