Citi: Innolight’s third-quarter net profit misses expectations; orders cover 2027, Citi cuts growth forecasts

Why did revenue miss expectations while operating profit was broadly in line?

In the third quarter of 2026, Innolight reported revenue of 27.769 billion yuan, up 172% year on year and 25% quarter on quarter, about 3% below both Citi’s forecast and the Bloomberg consensus. Growth came mainly from increased shipments of 800G and 1.6T products, with revenue growth from 1.6T accelerating further.
Operating profit was 11.748 billion yuan, up 210% year on year, about 1% below Citi’s forecast and 2% above the Bloomberg consensus. The operating expense ratio was 4.3%, 1.6 and 1.4 percentage points below Citi’s forecast and the consensus, respectively. Expense leverage from increased scale offset part of the revenue shortfall.
Gross margin was 46.6%, up 0.2 percentage points quarter on quarter but 0.8 percentage points below Citi’s forecast.

Third-quarter net profit was 8.587 billion yuan, 9% and 4% below Citi’s forecast and the Bloomberg consensus, respectively; net margin fell quarter on quarter from 35.5% to 30.9%.
The main drags were a decline in the fair value of an earlier strategic investment in an upstream supplier and foreign exchange losses, with after-tax impacts of approximately 450 million yuan and 300 million yuan, respectively. Management said core net profit excluding one-off items was about 9.4 billion yuan, with a margin of about 34%.
Cash flow showed some recovery: free cash flow was negative in the second quarter due to concentrated capital spending and material prepayments, but turned positive in the third quarter.

Management said binding customer purchase orders cover the whole of 2027, with no order cuts or downward revisions to customer guidance at present. The company expects demand for 800G and 1.6T to continue growing rapidly, with 1.6T shipments growing faster than 800G shipments in 2027.
Supplies of key materials remain tight. The company is responding by building inventory in advance, signing long-term agreements, making prepayments and bringing in new suppliers. Digital signal processor (DSP) chips are in tight supply across the industry; the company said it is receiving all the allocation it needs and that prices are stable.
The company expects 2.4T, NPO and XPO products to ramp up gradually from the second half of 2027 and is preparing capacity and materials. Some key customers have already provided demand guidance for further growth in 2028. Capacity expansion remains focused on Thailand and other parts of Southeast Asia, and management expects capital spending to continue at a high level in 2027.

Citi cut its 2027 revenue and net profit forecasts by 6% each, to 260.69 billion yuan and 91.428 billion yuan, respectively, while raising its 2028 forecasts by 2.3% and 1.8%, respectively. The revisions reflect the bank’s updated view of the timing of the 2.4T and NPO product ramp-up and its assessment of improved visibility into demand for next-generation products in 2028.
Despite the cuts, Citi’s 2027 revenue and net profit forecasts remain 30.5% and 41.7% above the Bloomberg consensus, respectively.
Citi maintained its buy rating and lowered its A-share and H-share target prices to 1212 yuan and 1394 Hong Kong dollars, respectively, based on a 2027 forecast price-to-earnings multiple of 15.8 times. The bank noted that price competition, the demand cycle, and supply-chain and manufacturing factors could affect its assessment.