Lumentum expects $650M Q2 revenue milestone, advances AI-driven optics growth

Earnings Call Insights: Lumentum Holdings Inc. (LITE) Q1 2026

MANAGEMENT VIEW

* Michael E. Hurlston, President and CEO, highlighted, "In Q1, revenue surged more than 58% year-over-year, while operating margins expanded by over 1,500 basis points. $533 million represents the highest revenue achieved in a single quarter in the company's 10-year history by significant margin." Hurlston attributed this growth to AI demand, stating over 60% of total company revenue now comes from cloud and AI infrastructure. He emphasized, "we expect to surpass this milestone well ahead of schedule, with the guidance calling for a revenue midpoint of approximately $650 million, 2 quarters earlier than we previously targeted."
* Hurlston also announced a reporting change: "We will now discuss our financials as a single reportable segment, aligning with our current organizational structure." He introduced Wupen Yuen as Head of Global Business Units, responsible for all product road map decisions, and explained that revenue will be broken out as components and systems going forward.
* Hurlston reported, "components revenue in the quarter was $379 million, which was up over 18% sequentially and up 64% from the same quarter last year." He added, "We achieved another record in EML laser shipments, driven primarily by 100-gig line speeds and supported by an increase in 200-gig shipments."
* Wajid Ali, Executive VP & CFO, stated, "First quarter revenue of $533.8 million and non-GAAP EPS of $1.10 were at the high end of our guidance ranges." Ali reported, "First quarter non-GAAP gross margin was 39.4%, which was up 160 basis points sequentially and up 660 basis points year-on-year due to better manufacturing utilization and favorable product mix as a result of increased data center laser chip shipments."

OUTLOOK

* Ali provided Q2 guidance: "We anticipate net revenue for the second quarter of fiscal year '26 to be in the range of $630 million to $670 million. The midpoint of this range would represent a new all-time quarterly revenue record for Lumentum." He added, "We project second quarter non-GAAP operating margin to be in the range of 20% to 22% and diluted net income per share to be in the range of $1.30 to $1.50."
* Hurlston noted that, "within our Q2 outlook, we are not yet expecting meaningful contributions from optical circuit switches and co-packaged optics. In cloud transceivers, we are set to resume sustained growth in fiscal Q2, and this upward trajectory should accelerate over the next 4 to 5 quarters."

FINANCIAL RESULTS

* Lumentum reported first quarter non-GAAP operating margin of 18.7% and non-GAAP operating profit of $99.8 million. Adjusted EBITDA was $127.6 million. Non-GAAP operating expenses totaled $110.5 million. Cash and short-term investments increased by $245 million to $1.12 billion, benefiting from a convertible notes transaction. CapEx was $76 million, focused on manufacturing capacity for cloud and AI customers.
* Components revenue reached $379.2 million, an 18% sequential and 64% year-over-year increase. Systems revenue was $154.6 million, down 4% sequentially but up 47% year-over-year.

Q&A

* Samik Chatterjee, JPMorgan Chase & Co: Asked about sustaining transceiver growth and customer diversification. Hurlston responded, improvements in execution now allow participation in early customer ramps, "We're getting this layering effect that I talked to in the call. That's predominantly with our largest customer, but we are seeing revenue from the 2 customers that we've talked about previously as well."
* Ryan Koontz, Needham & Company: Asked about CW laser market opportunity. Hurlston explained, "We have a 70-millowatt CW laser that really started meaning shipping in this quarter will be a reasonable part of our mix next quarter." He noted, "We'd expect to be in full production in the middle of the year of 2026."
* Michael Genovese, Rosenblatt Securities: Inquired about capacity allocation and EPS potential. Hurlston said most output will be sold externally, and that demand far exceeds supply. Ali added, "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."
* Christopher Rolland, Susquehanna: Asked about customer stockpiling and overcapacity risk. Hurlston said, "we're actually probably shedding customers rather than adding," and noted confidence in long-term agreements. Hurlston also commented, "right now, our concern is not when will this roll over. It's how do we get and service the customer base that we have and the demand profile we're looking at."
* Simon Leopold, Raymond James: Asked about OCS market evolution. Hurlston stated confidence in ramping to $100 million a quarter for OCS by December 2026 and described demand as broad-based, with transceivers as the largest dollar increase.
* Papa Sylla, Citi: Probed supply-demand imbalance for EML. Hurlston said the imbalance has increased, with a 25-30% shortfall relative to demand.
* Meta Marshall, Morgan Stanley: Asked about OCS milestones and transceiver customer ramp. Hurlston explained OCS software qualification is a focus, and margin-rich transceiver opportunities are being prioritized. Ali noted, "1.6T margins are going to be significantly better than 800G margins."
* Karl Ackerman, BNP Paribas: Queried transceiver growth timeline and Thailand capacity. Ali said, "we obviously have line of sight to the opportunities in front of us are -- certainly lead to the $250 million a quarter."

SENTIMENT ANALYSIS

* Analysts expressed positive sentiment, with multiple congratulations on results and outlook. Questions focused on growth sustainability, supply-demand imbalances, and product ramp confidence.
* Management maintained a confident tone in both prepared remarks and Q&A, repeatedly emphasizing execution improvements and strong demand. Phrases like "we feel like we have a very dominant position here" and "we are only at the beginning of our growth journey" were common.
* Compared to the previous quarter, both analysts and management displayed heightened positivity, driven by earlier-than-expected revenue milestones and improving operating metrics.

QUARTER-OVER-QUARTER COMPARISON

* Guidance for surpassing $600 million in quarterly revenue was moved forward by two quarters compared to the previous call, now expected in Q2 rather than June 2026 or later.
* Management's tone has become more assertive, with increased confidence in meeting ambitious milestones. Strategic focus shifted further toward maximizing high-margin opportunities and securing long-term agreements with key customers.
* Analysts' questions shifted from timing of growth and capacity expansion (in Q4 2025) to sustainability of demand, transceiver layering, and OCS/CPO ramp specifics.
* Key financial metrics such as non-GAAP operating margin and gross margin continued to improve, with a notable increase in the company’s cash and investments.

RISKS AND CONCERNS

* Supply-demand imbalance for EMLs has worsened, with management reporting a 25-30% supply shortfall relative to demand.
* The company is prioritizing allocation to highest-margin customers and securing long-term agreements to manage capacity constraints.
* OCS software qualification remains a challenge, with management working closely with customers to meet ramp milestones.
* Management acknowledged ongoing efforts to optimize pricing as a lever in response to persistent demand-supply imbalances.

FINAL TAKEAWAY

Lumentum’s first quarter of fiscal 2026 marked a significant inflection point, as management reported record quarterly revenue and accelerated operating margins, driven by strong AI and cloud infrastructure demand. Looking ahead, the company expects to surpass $650 million in quarterly revenue as early as Q2, well ahead of previous targets, and continues to focus on expanding capacity, ramping new products, and prioritizing margin-rich opportunities. Persistent supply constraints for key laser components and a robust pipeline across components and systems underscore management’s confidence in delivering sustained growth and long-term value for shareholders.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/lite/earnings/transcripts]

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