Lumentum has been on our radar for more than one year, as the company supplies components for datacom transceivers and optical interconnects with tech that has caught the attention of heavyweight Nvidia. We’ve been closely monitoring Lumentum and waiting patiently for their EML lasers for 200G to ship, enabling 800G and 1.6T bandwidths.

As discussed in the past, optical interconnects help data centers accelerate data throughput between data centers and inside the data center between servers or racks, while reducing latency and power consumption. AI is driving cloud demand higher from the hyperscalers, leading to more data being created and processed, thus helping drive a need for these interconnects to meet demand for high-speed, low power data transmission in data centers.

Specifically, Q4’s report provided confirmation of the EML laser ramp, as EMLs achieved an all-time high for shipments with revenue more than doubling versus its June 2024 baseline. Management also cited a “substantial” 200G EML order to be fulfilled in the December quarter, although offered little additional clarity on the size of the order.

Overall, Lumentum was quite confident in its growth opportunities from EML lasers, optical circuit switches and co-packaged optics heading into 2026. The company provided a new $600 million quarterly revenue target it expects to reach by next June or earlier, up from $424 million in the current quarter.

Lumentum also was arguably much stronger than peer Coherent with accelerating QoQ growth of 16.1% growth in its data center segment compared to Coherent at 5% QoQ. We break all of this down below.

Revenue Growth Re-accelerating after Tough FY24

Lumentum reported Q4 revenue of $480.7 million, beating analyst estimates by a modest 2.29%. This was a notable uptick on the top-line, with growth of 13.1% QoQ, accelerating 7 points, and 55.9% YoY, accelerating 42 points. This growth begins to support the thesis that Lumentum is past the cyclical low it experienced in FY24, including US imposed trade restrictions that resulted in lost revenue.

Guidance for Q1 FY26 came in at $510 to $540 million, representing 55.8% growth YoY and a slight moderation to 6% QoQ growth. Management attributes the strong forward revenue guide to surging AI workloads and the “shift toward high-speed photonics for hyperscale cloud operators.” Looking beyond the Q1 guide, analysts' expectations for Q2 and Q3 of FY26 reflect growth decelerating to 39.2% and 38.2% YoY, respectively. Regardless, this is still very strong growth.

FY25 revenue came in at $1.65 billion, with growth rebounding to 21% YoY from FY24’s (23%) YoY decline. FY26 is expected to see revenue growth accelerate nearly 20 points to almost 40% YoY, with current estimates at $2.29 billion.

The turnaround is from AI helping to drive a rebound in the Cloud and Networking segment, and is also due to the end of a deep trough in the telecom-exposed segment of Industrial Tech.

Key Segments: Cloud & Networking QoQ Growth Accelerates to 16%

Lumentum has two key segments: Cloud and Networking & Industrial Tech. Cloud and Networking continues to lead as the company’s primary growth source, representing ~85% of total revenue last quarter.

Cloud & Networking Q4 revenue came in at $424.1 million, representing 66.5% YoY growth. Additionally, the segment’s QoQ growth of 16.1% accelerated sharply from 7.6% QoQ in Q3, coming in much stronger than Coherent, where growth decelerated from 10% QoQ to 5%.

Management cited a few factors behind the outperformance in Q4: strong hyperscaler demand driving more than 50% QoQ growth in cloud modules, all-time high in EML shipments, and strong transceiver demand. Of these, EML drove the results this current quarter: “In Components, we achieved an all-time high in EML shipments, nearly doubling the revenue compared to our June quarter 2024 baseline.”

For Q1, management expects Cloud & Networking to be up QoQ, and based on guidance, this would likely correspond to approximately 10% QoQ growth at midpoint. Management indicated there was potential for strong growth starting in the upcoming December quarter: “Recently, we received a substantial order for 200-gig lane speed EML chips, which we expect to fulfill in the December quarter. Overall, we expect 2026 to be a breakout year for laser chip sales of both 100-gig and 200-gig lane speeds.”

Industrial Tech revenue came in at $56.6 million in Q4, representing 6% growth YoY but a (6%) QoQ decline. Management acknowledged that the segment revenue is seasonal and therefore volatile.

For Q1, management guided for Q1 revenue to be approximately flat QoQ, or a marginal 2-3% YoY increase.

It is worth noting that, like many of the AI names we cover, customer concentration is a risk present in Lumentum: two customers currently represent 31% of total revenue. This figure is consistent with the customer concentration reported last year. As the company continues to grow revenues, we would look for this ratio/concentration to decrease, signaling less reliance on any one customer and increased market penetration.

When asked about customer concentration for specific products, such as cloud modules and OCS, they stated that due to their being capacity constrained, it was unlikely they would take on new customers.

Operating Margin Recovery

The re-acceleration in revenues mentioned above drove solid in GAAP gross margin to 33.3%, higher than the 28.8% percentage seen in Q3 and double the 16.6% margin from Q4 FY24. Continued improvement in margins will confirm that management is not only capturing market share in a cost-effective manner but also effectively integrating previous acquisitions in a shareholder-friendly manner.

Non-GAAP gross reiterates this story, as Q4’s 37.8% margin continued to expand versus the prior quarter comp of 35.2% and prior year comp of 27.8%.

It is worth noting that in 2024, gross margins were negatively impacted due to US-imposed trade restrictions which limited the Company’s ability to sell to certain products to one customer. This resulted in roughly $20 million of inventory obsolescence write-offs, a temporary but negative impact to gross margins.

The revenue growth and improved unit economics lead to continued progress on operating margins as well. Q4’s GAAP operating loss of ($8.4 million) represents a (1.7%) operating margin, compared to (8.9%) in Q3 FY25 and (43.3%) in Q4 FY24.

Non-GAAP operating margin of 15.0% expanded nicely compared to prior quarter of 10.8% and prior year quarter of (5.1%). Most of the profit margin is driven by the Cloud and Networking segment, which boasted a margin of 23.6% in Q4, up more than 13 points YoY, whereas Industrial Tech’s margin improved 6 points to just 6%.

For Q1, management guided for continued expansion in adjusted operating margin to 16.0-17.5%, demonstrating continued operational efficiencies alongside strong top-line growth.

Regarding margin expansion, it’s likely to continue the closer Lumentum gets to the $600 million goal with a gross margin of close to 40%: “So because of that and the focus really being on the components business, getting us to $600 million, we should see a nudge-up again on gross margins, getting us close to the 40% that we outlined in the April OFC presentation where we said that we thought at $600 million would be between 37% and 40%. And just given the mix that we're seeing in front of us, we should be at the higher end of that range when we get to $600 million.” The opening remarks reaffirmed this goal: “Cloud revenue is growing well over 20% annually […] gross margins are set to surpass 40%” with the goal of seeing another 220 bps minimum by June 2026.

Adjusted Net Income Margin Continues Path of Expansion

Lumentum reported adjusted EPS of $0.88 in Q4, beating estimates of $0.81 and improving against the $0.57 reported in Q3 and $0.06 reported in the year ago quarter. Q4’s adjusted net income margin of 13.1% reflects continued operational improvements and the fourth consecutive quarter of sequential improvement (from 9.6% in Q3, 7.5% in Q2, and 3.6% in Q1).

As seen below, revenue growth when combined with operating margin expansion leads to sizable increases in the bottom-line returns. Management guided for $0.95 to $1.10 in adjusted EPS in Q1, up nearly 470% YoY, while Q2 is expected to see 176% growth to $1.16.

Cash and Balance Sheet: Positive Operating Cash Flow = Operational Flexibility

As we look at the business and its cash flow, the turn to positive operating cash flow this quarter and continuation of that trend will help alleviate any investors’ concerns about liquidity. Cash flows have been lumpy, though Q4 saw Lumentum report the highest operating cash flow margin in the past two years. However, free cash flows are pressured as Lumentum reinvests to expand manufacturing capacity.

Operating cash flow increased 80% YoY to $64 million, representing a 13.3% margin. This expanded nearly 2 points from 11.5% in the year ago quarter and was a notable uptick from (0.4%) in Q3.
For FY25, operating cash flow was up ~5x to $126.4 million, for a 7.7% margin, improving from a 1.8% margin in FY24.
Free cash flow declined (7%) YoY to $10.1 million, for a 2.1% margin, down from 3.5% in the year ago quarter.
As a result of elevated capex, FY25 free cash flow was ($104.7 million), for a (6.3%) margin, improving only slightly from (8.3%) in FY24.
Cash and equivalents of $877.1 million in Q4, largely in line with the $866.7 million reported in Q3. Debt remained largely consistent with the prior few quarters at $2.57 billion.
Inventory came in at $470.1 million, which continues to grow compared to the $422.9 million reported in Q3’25 and $398.4 million reported in Q4’24. Management stated that the inventory increase will support expected growth in Cloud & Networking. EML laser inventory was quoted as “very low” with management saying they are “basically shipping everything that we can make.”

The company uses significant financing in the form of convertible debt to fund day-to-day operations and investment. This capital structure (e.g. high debt to equity ratio) will amplify shareholder returns but can also put a strain on operating cash flow should the company run into short-term cash constraints.

Another key point to continually monitor will be levels around inventory. Significant increases in inventory levels or increases in DIO (Days Inventory on Hand) may be a warning signal of future write downs with P&L impact. For now, we would give the company a healthy balance sheet rating while acknowledging that Lumentum may need to access capital through markets should liquidity become tight.

Earnings Q&A:

New Medium-term Revenue Target at $600M

Given that Q1 would satisfy Lumentum’s May 2024 guidance to reach $500 million in quarterly revenue in calendar 2025, management has provided a new near-term revenue target, now projecting $600 million in quarterly revenue by Q4 FY26 or earlier.

The new target received a fair amount of attention on the earnings call Q&A, namely regarding what products drive this growth and the outlook for margins. Given the strong language from management, the current takeaway is this guidance could be conservative. Of course, we need a few more earnings reports to see if a higher number materializes, yet strong growth all around is being forecast.

There are four areas that will help Lumentum meet and potentially exceed this forecast. Given the company is expected to report strong 30%+ growth while expanding its margins over the next few quarters, it makes sense to break out management commentary by each product to help organize the many moving parts:

EML Lasers: Management stated there was a large order that is ramping soon: “Recently, we received a substantial order for 200-gig lane speed EML chips, which we expect to fulfill in the December quarter. Overall, we expect 2026 to be a breakout year for laser chip sales of both 100-gig and 200-gig lane speeds.”
This space is highly competitive. When asked why Lumentum is gaining market share over competitors, management stated the following: “Our customers typically report a significantly higher yield on their cloud modules using our EMLs over competitors. That allows us some pricing latitude, which has been super favorable.”
Cloud modules drove half of the sequential revenue growth in the period with over 50% QoQ growth in the quarter. Regarding future growth, it was stated the September quarter would not be as strong, yet would ramp quite quickly in the December quarter and beyond: “The cloud modules will definitely be a step-up. I think we had a really big step-up this quarter, a 50% sequential gain in terms of top line. I think we'll hit a little bit of an ebb here in the next quarter, but then we'll see a pretty dramatic acceleration in cloud modules in our December quarter, March quarter and June quarter.”
Regarding optical circuit switches, it was stated during the Q&A that the ramp will result in significant revenues: “I think that we'll start to see more meaningful revenue, meaning very, very significant revenues in Q1, Q2 and then certainly in the back half of calendar 2026. So it is a ramp. There's some gradualness to it. There's a couple of inflection points. The first inflection point is probably early in '26, but then a more meaningful inflection point in the back half of '26. Right now, we're honestly limited by how many we can build, right? We're trying to ramp this thing very quickly. We see a tremendous level of demand, but we are limited by how much we can supply.” Something similar was later echoed, indicating FY2026 will see more OCS revenue as the year progresses: “We start to see revenue — meaningful revenue contributions in the first half, significant revenue contributions for OCS in the second half.”
Co-packaged optics (CPOs) are not contributing to revenue now yet could materialize into one of the biggest opportunities among all of the components and subsystems that Lumentum supplies. This is one to keep a close eye on.

In the current quarter, management announced “Our commitment to co-packaged optics or CPO is stronger than ever. We just received the largest single purchase commitment in company history […] Our investments in this facility will position us for a significant revenue ramp in CPO by the second half of calendar 2026.”

An analyst asserted in the call that Lumentum has the leading technology for co-packaged optics, which is an important statement given Nvidia is rumored to be rolling out their own internal CPOs in the coming year.

Here’s the original announcement from Nvidia. We covered it here.

“Simon Matthew Leopold

And then as a follow-up, I wanted to check in on the CPO opportunity as well. So that sounds like it's progressing. Last we spoke, it sounded like you were the only approved supplier in the ecosystem for the high-powered laser. Wondering how you're thinking about your position in that market in terms of quantifying as well as your ability to remain a sole source supplier? How is the competitive landscape?”

Optical Circuit Switching Ahead of Schedule and Margin Accretive

We pointed out in Coherent’s post-earnings analysis, Coherent Q4: Data Center Growth Slowing QoQ; Competitive Concerns, that optical circuit switching would increase COHR’s TAM by ~$2 billion, while booking its first revenue last quarter.

Similar to Coherent, Lumentum also booked its first OCS revenue in the fourth quarter with shipments to two hyperscaler customers, yet there were more positives revealed.

What’s more notable is this OCS revenue is two quarters ahead of expectations with more customers; as Raymond James analyst Simon Leopold pointed out: “you previously suggested you'd see first revenue in the December quarter. So this is 2 quarters earlier than what we were thinking and we're thinking one customer, not two.”

Lumentum stated that its OCS order book is expanding with both customers, and it now has a third hyperscaler committed to deploy its OCS in calendar 2026. Management believes that their “leadership in optical performance, particularly in 300×300 form factors has allowed us to capture volume opportunities earlier than competitors.” This hints at possibly winning customers from Coherent, who only said that customer engagement in OCS was “very strong” but did not explicitly state hyperscaler wins.

CEO Michael Hurston also offered clarity on the ramp trajectory for OCS and when revenue is expected to inflect:

“I think the current quarter, next quarter and the December quarter are still ramping. We're ramping because we're building our capacity in Thailand to support the customers. I think that we'll start to see more meaningful revenue, meaning very, very significant revenues in Q1, Q2 and then certainly in the back half of calendar 2026. So it is a ramp. There's some gradualness to it. There's a couple of inflection points. The first inflection point is probably early in '26, but then a more meaningful inflection point in the back half of '26. … We see a tremendous level of demand, but we are limited by how much we can supply.”… We see a tremendous level of demand, but we are limited by how much we can supply.”

Supply constraints aside, OCS is an attractive growth lever for Lumentum as it is accretive to margins. Management said that OCS enjoys margins “significantly above corporate margin averages,” and will be accretive in 1H 2026 as volumes will then begin offsetting dilutive impacts from the factory ramp. This will need to be watched closely considering Lumentum is walking a fine line by simultaneously accelerating in-house OCS manufacturing capacity and expanding indium phosphide production for co-packaged optics (CPO).

800G and 1.6T Shipping, EMLs Sold Out; Company Capacity Constrained

Given the similarities between Coherent and Lumentum as neck-and-neck competitors, it’s interesting to see some of the nuances in commentary for the ramp of 800G and 1.6T over the coming quarters.

Notably, Lumentum shared that it had received a “substantial” 200G EML chip order that it expects to fulfill in the December quarter (Q2 FY26), though management offered little clarity on the size or revenue potential of this order.

Management shared that EML shipments on the 800G transceivers (100G per lane) are continuing to climb, while they are “starting to see the early ramp of 1.6T.” For 1.6T specifically, management said growth would “feather in next year” with the first 200G shipments just now arising. Overall, Lumentum expects 2026 to be a breakout year for laser chip sales on both 100G and 200G speeds.

This is more subtle than Coherent in saying that 800G is “ramping very quickly,” with 1.6T growing on top of that. However, Lumentum made the point of saying that most hyperscalers remain on 800G platforms “probably the next couple of years at a minimum,” as 1.6T is “just getting started,” hinting that the stronger growth for 1.6T may not be seen until 2026 to 2027 and beyond.

Lumentum also dropped an important tidbit relating to competitive pressures, growth and margins. Management said that “customers typically report a significantly higher yield on their cloud modules using our EMLs over competitors,” which has given them “super favorable” pricing. This is likely a key factor behind expanding margins in Cloud & Networking and why capacity is sold out for the year.

Capacity Constraints:

Although Lumentum pointed out that they are the largest supplier in terms of capacity with their Japan factory outputting more EMLs than any other location, capacity constraints were a frequent mention throughout the call.

Lumentum stated outright that while capacity is ramping, demand continues to outpace supply and is expected to remain that way through fiscal 2026. Hurlston said that EMLs are sold out for the balance of the year, and management is being selective in choosing customers based on that limited capacity. He added that completing the transition from 3-inch to 4-inch wafers should help boost capacity, though he did not comment on an estimated completion date. It’s likely that Lumentum will continue to invest in expanding capacity over the next few quarters to help meet high demand, after spending $59 million in capex primary for capacity expansion in Q4, or 12% of revenue.

Limited Cloud Module Customer Engagement

Despite management’s optimism on cloud modules delivering substantial growth into calendar 2026, CEO Michael Hurlston emphasized that three customers would likely be their limit with little room to bring new customers onboard in the near-term. This stems partially from a focus on the highest margin opportunities (OCS being accretive and cloud modules not being accretive), as well as being supply constrained. This is similar to what we discussed in our April analysis, Lumentum at Inflection Point with 20% QoQ Growth in AI-Related Segment, where management pointed out that yield and supply issues were hindering growth.

Hurlston said that Lumentum is focused primarily on these three customers, and that new customer additions in the near term will be minimal. He was straightforward in saying that while Lumentum does expect cloud modules to be beneficial from a revenue growth perspective over the next four to eight quarters, they will drag on gross margins — in the best case scenario, Hurlston said the company expects cloud modules to maybe push 30% gross margins, nearly 10 points lower than corporate gross margins.

Tariff Impacts from Japanese Fabs, China-Sourced Cloud Modules

Tariffs are important to touch upon given the recent fluidity in tariff policy, considering Lumentum is inherently much more exposed to tariffs than Coherent with its supply chain presence in Japan and China.

When asked about the recent 100% tariffs on semiconductor imports and impacts from its Japanese fab presence, management clarified that they “determined that our products are exempted from any of the tariffs that would be applicable in that new guidance” and are “fairly comfortable” that Lumentum will not be impacted.

Additionally, management stated that at the start of fiscal Q4, they believed they would have had “up to a 100 basis point negative impact from tariffs. And yet in Q4, we actually had minimal impact of tariffs.” For Q1’s guidance, management said they included a slight impact “just in case something new pops up in the remaining part of August and September, and we'll see at the end of the quarter where that ends up. But for now, no material changes in our business.”

Lumentum also commented on its expansion efforts in Thailand at its Nava facility, as this is expected to help diversify away from China. CEO Michael Hurlston acknowledged that “a lot” of Lumentum’s cloud modules are sourced from China, and the Thailand footprint should offer some flexibility when it comes to tariffs.

Additional Points:

Apple’s partnership with Coherent: We covered the multi-year partnership between the two in our COHR analysis, with COHR’s revenue expected to see a more meaningful boost in 2H 2026 and into 2027. Analysts asked if Lumentum saw that business area becoming more significant in the future, to which management responded that “Face ID and 3D sensing will be a minimal part of our business on a go- forward basis.”

Conclusion

Lumentum delivered a solid Q4 report with accelerating sequential growth in its Cloud & Networking segment, whereas Coherent fell short of the mark with data center growth decelerating. Q4’s report gave more confirmation and confidence in Lumentum’s EML strength and ramp, with a substantial 200G EML order on the deck for fulfillment in Q2 FY26.

Management appeared quite confident in capitalizing off a trio of growth opportunities from EML lasers, optical circuit switches and co-packaged optics heading into 2026, though there are still lingering concerns about capacity constraints and tariff impacts given manufacturing concentration in Japan and China.

Of the opportunities mentioned above, CPOs are a key catalyst that could provide upside to this stock. CPOs will offer the performance of optical yet with reduced power consumption, with a company like Lumentum supplying the lasers and optical engines that are mounted closer to the switch ASICs. Overall, this would mark a shift in the current AI networking architectures with Lumentum downwind of that shift come 2026. We will be watching this very closely and have a trade setup in mind for this stock.

Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock and crypto entries and exits. Beth Kindig offers weekly deep dives including lesser-known cryptocurrencies and AI stocks, plus the team offers trade alerts. The I/O Fund team is one of the only audited portfolios available to individual investors. To receive $100 off our Advanced tier use ADVANCED100 or click here and email your request to upgrade.4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock and crypto entries and exits. Beth Kindig offers weekly deep dives including lesser-known cryptocurrencies and AI stocks, plus the team offers trade alerts. The I/O Fund team is one of the only audited portfolios available to individual investors. To receive $100 off our Advanced tier use ADVANCED100 or click here and email your request to upgrade.

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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