Introducing Lumentum (LITE)

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Introducing Lumentum Holdings Inc (LITE)

Lumentum was incorporated in 2015 and is headquartered in San Jose, CA. LITE manufactures and sells optical and photonics products on a global scale. Their two main segments are Components and Systems. Components is comprised of laser chips, laser assemblies, and line subsystem product lines. Systems includes optical transceivers and circuit switches. Their major customers are in AI/cloud including hyperscalers as well as network equipment / optical transceiver manufacturers that embed LITE components in their solutions.

With the build-out of data centers, LITE has seen significant tailwinds. Reporting earnings for their Q1 FY26 yesterday, the financials and story were both very impressive.

Revenue came in at 533.8M which was a record and was up 58.4% YoY. Adjusted Gross Margin was 39.4% (versus 37.8% LQ and 32.8% LY - an annual increase of 660 bps!). OpEx is decreasing as a % of revenue while Operating Margins continue to skyrocket: adjusted OM was at 18.7% versus 3% LY!

Adjusted diluted EPS was 1.10 vs 0.18 LY.

LITE has a solid balance sheet with a positive current ratio and greater assets than liabilities.

Revenue over the past few quarters has been:

337→402→425→481→534

Perhaps even more astonishingly, they just guided to 630-670M in revenue next quarter. This would be up 62% YoY and 22% sequentially at the midpoint and a significant acceleration! In their words, their growth is powered by AI demand “spanning our laser chips and optical transceivers inside data centers, as well as the interconnected long-haul networks that link them.”

Some of my highlights from the earnings call include:

3 major drivers of future growth expected:

  1. Cloud transceivers
  2. Optical circuit switches
  3. Co-packaged optics

Notably, of those 3 they are not even expecting #2 or #3 to contribute meaningfully to revenue even by next quarter (future ramping potential).

They said they are “…setting the stage for calendar 2026 to be another breakout year for laser chip shipments and solidifying our leadership in Indium Phosphide-based light sources for the data center”. They expect a ramp in shipment volumes in ultra-high-powered lasers in H2 2026 (calendar) and see opportunities to expand their customer base.

They already had all Indium Phosphide Wafers allocated to buyers and were supply constrained, but announced they managed to obtain better-than-expected yields with 40% more unit capacity in the next few quarters, which will translate to greater sales.

Overall, I feel the Pros strongly outweigh the Cons of this company. Revenue growth is steady and amazing with phenomenal guidance in a market segment that is experiencing significant tailwinds with AI build-out. LITE has strong tracks for future growth with 2 of 3 of their main drivers not even yet making meaningful contributions to their top-line. Margins are strong and improving, demonstrating operating leverage and profitability. Their balance sheet is steady.

I do want to keep a close eye on dilution as this has been creeping up and has been guided to continue to do so at least for next quarter. However, they appear to be using their resources efficiently as they continue to grow the business on multiple fronts and scale into 800 gig and 1.6.

They are up over 25% as of this writing, but I see a long runway ahead if they continue to execute at this clip.

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Why our investing criteria have changed again
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I tend to agree, looks like you’ve found a good one…what even are the cons? I guess the 37% Gross Margin (but, rising!) is pretty low, leaving not a ton of room for error or growing OpEx. And the 1.10 EPS non-GAAP is against just 0.05 GAAP earnings. SBC is part of the reason (ergo, diluation as you point out).

But at a fwd non-GAAP PE of ~40 it’s not like you’re paying a huge premium for a possible 60% grower. Again, if non-GAAP is the right metric here. (FCF for example, doesn’t look as good.)

Still, I think this one might be worth a starter position. If anyone has more thoughts to add, please do. And of course that includes you @DoctorRob – and thanks for bringing this to the board!

Bear

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Nice writeup and summary! Overall I find the accelerating top line very interesting especially with the big step up in guidance. My two areas of concern fall into two categories here,

  1. They have 10,500+ employees and are a spinoff from the one growing division of JDSU. This is an incredibly high number of employees for how much revenue they are getting. For example, some other names we follow with employees counts: Nvidia 33,000 employees, Astera Labs 700 employees, AppLovin 1600 employees, Reddit 2200 employees. Normally, I would not focus too much on stock comp and employee salaries, but this is a big drag on the company to be carrying this much head count.

  2. They have 3B+ of debt, 37% margins, and barely getting to profitability. To me that indicates there are still a lot of inefficiencies in this business. I would normally expect a company manufacturing a physical product at 500M+ quarterly revenue to be highly and consistently profitable at this point. Take for example companies like Nova NVMI or Rambus RMBS which are in the semiconductor space. They have half the revenues but still get ~50M of GAAP earnings per quarter with much higher margins.

From my perspective this is a company worth following. I would want to see them prove they can become more profitable and not just scale up the top line only. It would be great if they could trim some head count, but I doubt that will happen with this type of spin off business.

Lastly, I will add this stock has a huge run-up recently and not sold off with the other semiconductors in tandem. What I mean is that that just back in August it was a 9B company, and now it is a 16B company. Granted they had a strong result with a step up in guidance but other growing AI based semiconductors sold off huge while this one did not.

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Nvidia, Astera Labs and Rambus are all fabless semiconductor companies. They do NOT manufacture their product. To compare Nvidia or Astera Labs to LITE in terms of employee head count would require you to include the thousands of employees (percentage wise) at the Fabs (TSMC), Packaging and Test houses that they use (for example).

Comparison to software companies such as AppLovin or Reddit is completely apples to oranges as well as they do not build a physical product.

Rambus derives most of it’s margin from selling the Intellectual property to Chip Designers, and the rest from chips that they design but do not make (same as NVDA and ALAB and most chip companies today). So again, they will have completely different looking financials.

As for LITE, there is a ton of R&D and tech breakthroughs happening today as it applies to Cloud Datacenters (where the growth will come from) and it’s very unclear who the winners will be from here. JDSU was a long time player of the laser chips, but it’s mind boggling what is currently under development and thus I find it difficult to look out in time as they could continue to be major players in a very large growth market, or they could be also-rans, and this could change quickly.

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