Bernstein: Lumentum results and guidance beat expectations as Marvell stock-for-stock deal faces approval hurdles

What stood out in the results and next-quarter guidance?

Lumentum reported revenue of 1.26 billion dollars for the first quarter of fiscal 2027, slightly above the market’s 1.255 billion-dollar estimate. Its non-GAAP operating margin was 42.3%, above the market estimate of 39.8%. Earnings per share were 4.57 dollars, also above the market estimate of 4.21 dollars.
Segment performance was uneven: components revenue was 754.2 million dollars, below the market estimate of 772.5 million dollars, while systems revenue was 508.4 million dollars, above the market estimate of 482.6 million dollars.
The company guided for second-quarter revenue of 1.575 billion to 1.625 billion dollars, an operating margin of 45% to 46%, and non-GAAP earnings per share of 5.90 to 6.20 dollars, all above market estimates of 1.48 billion dollars, 41%, and 5.07 dollars, respectively. At the midpoint of its revenue guidance, the company expects year-on-year growth of about 140%.

Marvell and Lumentum have announced a merger under which each Lumentum share will be exchanged for 4.5 Marvell common shares. Based on the opening price used in the report, the nominal offer value is about 862.65 dollars per share; its actual value changes with Marvell’s share price.
Lumentum said its components capacity is sold out through 2029. Management expects growth of more than 100% in the following year and further growth the year after. Investors therefore question why the company agreed to sell at a price below its all-time high in early October when its prospects look strong, and worry that indium phosphide (InP) supply and demand could weaken.
Bernstein noted that Lumentum contributed about 36% of the combined company’s earnings over the past 12 months, yet its shareholders will hold about 33% of the combined company. Lumentum investors who retain their shares therefore face earnings dilution when the deal closes.

The companies did not quantify long-term revenue synergies but estimated near-term cost synergies at 1 billion dollars, primarily from cost of sales. Bernstein forecasts Lumentum’s cost of sales in fiscal 2029 at 7 billion dollars; 1 billion dollars is about 14% of that figure.
Opportunities identified by management include replacing Broadcom digital signal processors in Lumentum modules with in-house products and supplying lasers internally for Marvell’s ZR and co-packaged optics (CPO) products. CPO solutions eliminate digital signal processors but still require lasers, so the merger could increase Marvell’s relevance as CPO adoption grows.
The merger also puts Marvell in direct competition with some Lumentum customers. Bernstein remains attentive to the impact on customers, but Marvell reported that major cloud customers and Nvidia were generally constructive, more positive than the firm had previously anticipated.

Based on rough estimates for deal completion and failure scenarios, Bernstein calculated that the share price implies a completion probability of about 75%, which it considers too high. The transaction requires approval from both companies’ shareholders and filings in relevant jurisdictions.
The firm expects the Lumentum shareholder vote could still pass, but sees greater controversy around the Marvell shareholder vote: at the opening price used in the report, Marvell was down 24% from before the deal, and investor feedback was generally negative. Chinese regulation is another potential obstacle, as the combined company will compete with Chinese optical transceiver makers.
Bernstein maintained its outperform rating and cut its Lumentum price target from 1220 dollars to 900 dollars. It remains positive on the fundamentals but sees little support for a share price significantly above the offer. The 900-dollar target represents 22.5 times its estimated 2028 earnings per share of 40 dollars, slightly above the nominal offer value of about 863 dollars.