Accelerated Optical Circuit Switch (OCS) Revenue Recognition and Capacity Expansion
Lumentum received its first revenue from optical circuit switches (OCS) in the quarter, with shipments to two hyperscale customers, and a third customer committed for 2026.
The company expects significant revenue contributions from OCS in the first half of 2026, with a more meaningful inflection point in the second half.
In-house OCS manufacturing capacity is being expanded rapidly to meet high demand, with a focus on 300x300 form factors that offer volume advantages.
The largest single purchase commitment in company history was received for ultra-high-power lasers supporting CPO, indicating strong strategic emphasis on this emerging technology.
Investments are underway in U.S.-based wafer fab to support CPO, positioning the company for a revenue ramp in the second half of 2026.
Management highlighted that OCS is expected to be significantly above company average margins and highly accretive as volume scales up.
Adjusted EBITDA was $877 million with a 28.4% margin, down 250 basis points year-over-year, impacted by a $46 million onetime RDOF giveback and special items totaling $152 million.
Fiber broadband revenue in Mass Markets increased 19.9% year-over-year, with 117,000 fiber-enabled homes added and 34,000 Quantum Fiber customers added during the quarter.
Free cash flow excluding special items was negative $209 million, with capital expenditures at $891 million.
Lumen reported total revenue decline of 5.4% to $3.092 billion in 2Q 2025, with business segment revenue down 3.4% to $2.49 billion and Mass Markets segment revenue down 12.8% to $602 million.
North American enterprise channels revenue declined 2.4% year-over-year, with Grow product revenue up 8.5%, Nurture down 18%, and Harvest up 2.1%.
Public Sector revenue grew 8.2% year-over-year, helped by Grow revenue up 9.4% and Harvest revenue up approximately 49%, though Harvest is expected to normalize in H2 2025.
Total business Grow revenue increased 6% year-over-year, with total IP sales up nearly 38% and IP revenue up mid-single digits.
Wholesale revenue declined approximately 5%, with Harvest revenue down 6.2% and Nurture revenue down 8.6%.
Cash, cash equivalents, and short-term investments totaled $900 million with no debt; $15 million spent on CapEx and $30 million on share repurchases in Q2.
GAAP net income was $7 million or $0.16 per diluted share; adjusted EPS was $0.30, above guidance range.
GAAP operating income was breakeven; adjusted EBITDA was $32 million, slightly above the top end of guidance.
Gross margin was 37.3%, flat year-over-year, with adjusted gross margin at 37.8%, at the top of guidance, driven by improved manufacturing cost absorption and lower inventory provisions.
Regional sales: North America up 31% sequentially but down 4% year-over-year; Europe stable sequentially but down 11% year-over-year excluding divestitures; Asia up 4% sequentially and 14% year-over-year.
Revenue from materials processing decreased 6% year-over-year due to divestitures and lower sales in cutting, welding, and additive manufacturing, partially offset by micromachining and cleanLASER acquisition.
Revenue from other applications increased 21%, driven by medical and advanced applications.
Second quarter revenue was $251 million, up 10% sequentially and down 3% year-over-year, excluding divestitures revenue increased 2% year-over-year, marking the first increase since 2022.
Tariff impact was 115 basis points, better than expected.
Supply Chain and Manufacturing Strategy for Capacity Optimization
The company is consolidating low-cost commodity capacity into supporting high-demand, high-margin products, with a focus on hybrid manufacturing strategies.
Progress in qualifying internal wafer fab capacity is ongoing, with key customers supporting this transition.
The strategy aims to support future growth, reduce dependency on external foundries, and improve manufacturing efficiency and margins.
Dafinchi