Lumentum Bets on Capacity as AI Optics Demand Outruns Its Factories

Lumentum Holdings has spent 2026 buying factory space, reserving raw materials years ahead and taking money from its largest customer, all to make more of the indium-phosphide lasers that carry data between AI servers. The next test of whether that capacity is arriving fast enough comes on Nov. 5, when the San Jose, Calif., company reports results for its fiscal first quarter.

The company has guided to revenue of $1.225 billion to $1.275 billion for the quarter that ended in late September, with a non-GAAP operating margin of 39.5% to 40.5%. That compares with revenue of $1.01 billion in the fiscal fourth quarter that ended June 27 and $480.7 million in the fourth quarter a year earlier.

Fiscal 2026 revenue nearly doubled, to $3.01 billion from $1.65 billion. "Looking ahead, our trajectory continues to accelerate as AI demand drives our Q1 revenue guidance midpoint to $1.25 billion, reaching our target model more than a quarter ahead of schedule," Chief Executive Michael Hurlston said in August.

The constraint is manufacturing. Lumentum's components business, which includes the lasers used in optical transceivers, generated $2.01 billion of fiscal 2026 revenue, up 80%. The devices are made on indium-phosphide wafers, a specialized material with few suppliers and long waits for new capacity.

Lumentum has moved on several fronts at once. In March, Nvidia announced a multiyear partnership with the company and a $2 billion investment to expand research, capacity and U.S. manufacturing, along with a multibillion-dollar purchase commitment and rights to future laser supply. Nvidia received Series A convertible preferred stock in the deal.

The same month, Lumentum said it would buy an operating 240,000-square-foot plant in Greensboro, N.C., and retrofit it to make continuous-wave and ultra-high-power lasers on six-inch indium-phosphide wafers. The company said it plans to invest hundreds of millions of dollars there over several years and expects the site to ramp production in mid-2028.

Upstream, wafer-substrate maker AXT disclosed in a July 29 filing with the Securities and Exchange Commission that it had signed a six-year capacity reservation agreement with Lumentum on July 26 for indium-phosphide wafer substrates. Lumentum agreed to pay an initial deposit of $43.5 million and a second deposit of the same size, with terms to be set during 2028. The deposits are credited against future purchases.

Taken together, the moves show a supplier that expects demand to run ahead of capacity for years, and customers willing to help pay for the gap. They also show how long new capacity takes. The Greensboro plant will not reach volume until mid-2028, more than two years after the purchase was announced.

Lumentum's August release named the products it expects to drive the next leg of growth: optical circuit switches, cloud transceiver modules moving to 1.6 terabits a second, ultra-high-power lasers for co-packaged optics, and external laser source modules. "Increasing demand for ultra-high-power CPO lasers, an initial order for ELS modules, as well as our breadth of NPO engagements are the first signs that optics are starting to penetrate in-rack connectivity," Hurlston said.

That last point matters for the size of the market. Optical links have mostly connected racks and buildings. If they move inside the rack, replacing copper between chips, the number of lasers per AI system rises sharply.

The balance sheet has changed as well. Lumentum ended June with $2.7 billion of cash and short-term investments. It recorded a one-time, non-cash loss of $7.8 billion in the fourth quarter after exchanging shares to settle part of its convertible notes, which produced a GAAP net loss of $7.2 billion for the quarter even as non-GAAP net income rose to $326.3 million.

On Nov. 5, the figures to watch are revenue against the guidance range, gross margin as new capacity comes on, and any update on when Greensboro and expanded overseas lines will add meaningful output. Lumentum holds its annual meeting on Nov. 18.