Lumentum's Q1 2026 Earnings Call: Clashing Visions on EML Supply, OCS Growth, and Supply Chain Shifts Revealed

Date of Call: None provided

Financials Results

• Revenue: $533.8M, up >58% YOY (record quarterly revenue)
• EPS: Non-GAAP $1.10 per diluted share (at high end of guidance); GAAP $0.05 per share
• Gross Margin: Non-GAAP 39.4%, up 160 bps sequentially and up 660 bps YOY; GAAP 34%
• Operating Margin: Non-GAAP 18.7%, up 370 bps sequentially and up 1,570 bps YOY; GAAP 1.3%

Guidance:

• Q2 net revenue expected $630–$670M (midpoint ≈ $650M, a new all‑time quarterly record)
• Q2 non‑GAAP operating margin expected 20%–22%
• Q2 non‑GAAP diluted EPS expected $1.30–$1.50 (assumes ~16.5% non‑GAAP tax rate and ~83.5M shares)
• Components and systems both expected to be up sequentially; ~half of sequential dollar growth from components and half from systems (cloud transceivers + early OCS ramp)
• Company expects sustained transceiver growth as 800G/1.6T ramp; OCS and CPO are medium‑term growth drivers

Business Commentary:

* Revenue Growth and AI Integration: - Lumentum Holdings reported a record revenue of $533 million for Q1 FY2026, which is the highest in the company’s history. - This growth was powered by AI demand, with over 60% of total company revenue coming from cloud and AI infrastructure.

• Components Segment Growth:
• Components revenue was $379 million, up 18% sequentially and 64% year-on-year.

• The growth was driven by strong, broad-based demand across laser chip, laser assembly, and line subsystem product lines.

• Cloud Transceivers Outlook:

• The company expects sustained growth in cloud transceivers, with guidance calling for a revenue midpoint of approximately $650 million in Q2, exceeding previous targets.

• This outlook is supported by improved execution and capacity expansion, particularly in Thailand.

• Optical Circuit Switches (OCS) Ramp:

• Lumentum is progressing with the ramp of optical circuit switches, targeting $100 million in revenue by the December 2026 quarter.

• Customer engagement and demand signal have increased, with expectations of widespread adoption.

• Gross Margin Improvement:

• Non-GAAP gross margin improved to 39.4%, up 160 basis points sequentially and 660 basis points year-on-year.
• This was driven by better manufacturing utilization and favorable product mix, especially with increased data center laser chip shipments.

Sentiment Analysis:

Overall Tone: Positive

• Management: "revenues surged more than 58% year‑over‑year" and achieved "$533 million, highest revenue in a single quarter." CEO: "we expect to surpass this milestone well ahead of schedule, with the guidance calling for a revenue midpoint of approximately $650 million." Operating margins: "expanded by over 1,500 basis points."

Q&A:

• Question from Samik Chatterjee (JPMorgan): What gives you high confidence that transceiver revenue will sustain the sizable quarter‑over‑quarter increase (drivers beyond capacity ramp; customer diversification)? Follow‑up: what does the ~40% capacity increase mean for revenue and mix (role of 200G)?
  Response: Improved execution is enabling layering of customer ramps (majority from the largest customer), providing confidence in sustained transceiver growth; added Indium Phosphide capacity (+40%) plus rising 200G mix (≈10% of mix early 2026) will amplify revenue.

• Question from Ryan Koontz (Needham & Company): Please describe the new continuous‑wave (CW) laser opportunity — are you targeting use in your own transceivers and which customers? Follow‑up: competitive environment for narrow‑linewidth lasers for DCI/coherent?
  Response: CW lasers are shipping (70mW) and a 100mW CW laser is sampling now with full production expected mid‑2026 to support internal transceivers; narrow‑linewidth lasers are a long‑standing business with very high market share and limited, hard‑to‑ramp competition.

• Question from Mike DiNovo (Rosenblatt Securities): As you increase Indium Phosphide capacity, how should we think about split between external components vs internal systems and the implications for margins/EPS?
  Response: The vast majority of Indium Phosphide output will be sold externally (prioritizing 200G then 100G EMLs); only modest internal allocation to CW, and the higher‑margin laser chip mix will be accretive to gross margin and EPS.

• Question from Christopher Roland (Susquehanna): With constrained EML supply, will you strategically favor certain customers/qualify new transceiver customers, and do you expect stockpiling ahead of qualifications?
  Response: They are consolidating supply toward strategic, committed partners via multi‑year agreements and making allocation decisions that prioritize long‑term customers rather than broadly adding customers or enabling stockpiling.

• Question from Simon Leopold (Raymond James): How do you see the OCS market evolving (possibility of ~$100M/q by Dec‑2026)? And which product categories drive the biggest dollar increase into the December quarter?
  Response: Confidence in the OCS ramp to ~$100M/q by Dec‑2026 has increased given strong customer engagement, but the largest near‑term dollar contribution is from transceivers recovering and ramping.

• Question from Papa Sila (Citi): How has the EML supply/demand imbalance changed quarter‑to‑quarter, and does the current imbalance give you pricing leverage to further expand margins?
  Response: Supply remains tight and the imbalance has worsened (from ~20% shortfall to ~25–30%); management expects to capture targeted pricing and benefit from higher‑margin 200G mix to further improve margins while managing customer relationships.

• Question from George Notter / Taron On (Wolfe Research): What is the demand outlook for co‑packaged optics (CPO) compared to prior quarters and is the customer base expanding?
  Response: CPO interest and customer engagements have increased since the prior quarter; timing remains early stage but visibility and optimism around demand and subsequent ultra‑high‑power laser pulls have improved.

• Question from Meta Marshall (Morgan Stanley): For OCS to ramp to meaningful revenue, what milestones should investors watch (labs, hardware, software)? And for transceivers, will ramps extend beyond the primary customer?
  Response: Hardware is largely qualified and in customer labs; software integration/qualification is the main gating milestone (expect major customer qualifications in early 2026); transceiver expansion will be selective, targeting margin‑rich 1.6T opportunities with line‑of‑sight to scaled revenue.

• Question from Carl Ackerman (BNP Paribas): When you say transceivers should accelerate over the next 4–5 quarters, is that sequential or YOY, and how does Thailand fab capacity support the ~$250M/q transceiver opportunity among hyperscalers?
  Response: Acceleration is sequential over the coming quarters with a line‑of‑sight to roughly $250M/q; Thailand manufacturing capacity has been added to support a bounded, margin‑focused transceiver ramp while management remains selective to preserve margins.

Contradiction Point 1

EML Supply and Demand Scenario

It involves the company's stance on EML supply and demand, which is crucial for revenue projections and investor expectations.

Are you using EML supply to drive transceiver qualifications, and will customers stockpile EMLs before 1.6T qualifications? - Christopher Roland (Susquehanna)

2026Q1: EML demand currently far exceeds supply, leading to daily allocation decisions and a concentration on long-term partnerships. - Michael Hurlston(CEO)

Can you clarify the timeline for 100G and 200G EMLs, including lead times and demand visibility? - Ezra Gabriel Weener (Jefferies)

2025Q4: 100G EMLs are sold out, with 200G EMLs starting to ramp. The transition is layered rather than disruptive. We have 6-9 months of visibility, and inventory is low due to strong demand. - Michael Hurlston(CEO)

Contradiction Point 2

OCS Market Evolution and Revenue Projections

It affects the company's expectations and growth trajectory in the OCS market, which is important for strategic planning and investor confidence.

How does Lumentum expect the OCS market to evolve, and what drove growth in the December quarter? - Simon Leopold (Raymond James)

2026Q1: Lumentum is more confident in the OCS market, with significant customer engagement and multiple use cases. The OCS revenue ramp is expected to reach $100 million by December 2026. - Michael Hurlston(CEO)

Can you provide more details on the OCS award, which arrived earlier than expected, and how should we expect its trajectory to progress? - Simon Matthew Leopold (Raymond James)

2025Q4: OCS performance is better than expected, with now three hyperscale customers. The current quarter, next, and December quarters are ramping up in capacity. There's gradual revenue growth, with significant contributions expected in Q1, Q2, and Q3 2026. - Michael Hurlston(CEO)

Contradiction Point 3

Supply Chain and Tariff Impacts

It involves differing accounts of the impact of tariffs and supply chain shifts, which can significantly influence operations and financial performance.

How will Thailand's fab capacity support transceiver growth, and what are the growth targets? - Carl Ackerman(BNP Paribas)

2026Q1: This quarter, we're delivering more than 50% of all data center products from Thailand. - Michael Hurlston(CEO)

What assumptions underlie the 100-basis-point tariff headwind in the guidance? Are you shifting production from China to Thailand, and how will this impact your supply chain? - Simon Leopold (Raymond James)

2025Q3: We're starting to implement part of the production in Thailand. - Wajid Ali(CFO)

Contradiction Point 4

Transceiver Growth and Market Demand

It highlights differing perspectives on the growth trajectory and market demand for optical transceivers, which is a critical component of the company's revenue and growth strategy.

What's driving confidence in sustaining transceiver growth and the $60 million guidance increase for the next quarter, and how does the 40% data center chip capacity increase affect revenue? - Samik Chatterjee(JPMorgan)

2026Q1: Confidence in transceiver growth is driven by improved execution, with the expectation to participate in the early parts of customer ramps. - Michael Hurlston(CEO)

What's the growth outlook for the optical transceiver business and the strategy for in-sourcing vs. external sourcing of lasers? - Ezra Weener (Jefferies)

2025Q3: Our current transceiver business uses externally sourced CW lasers. - Michael Hurlston(CEO)

Contradiction Point 5

Product Demand and Market Opportunities

It involves the company's statements regarding product demand and market opportunities, which are crucial for investor perceptions and strategic planning.

What is the allocation of Indium Phosphide capacity between components and systems, and can EPS exceed $1.40 if high-margin products drive growth? - Mike DiNovo (Rosenblatt Securities)

2026Q1: For fiscal year '26, we expect our datacom business to grow to be within the range of $1.5 billion to $1.6 billion. - Wajid Ali(CFO)

What drove the $25 million sequential revenue increase for Cloud and Networking at the midpoint? - Samik Chatterjee (JPMorgan)

2025Q2: We expect to deliver over a billion dollars of Hyperscale datacom revenue in fiscal year 2025, a 50% growth year-over-year. - Wajid Ali(CFO)