What happened

Shares of Lumentum Holdings (LITE 1.57%) tumbled 12.6% as of 12:40 p.m. ET on Tuesday, even though the laser maker released financial results that beat on both the top and bottom lines earlier in the day.

For its fiscal first quarter of 2023, Lumentum reported adjusted earnings of $1.69 per share and quarterly sales of $506.8 million, instead of the respective $1.56 and $503.6 million that Wall Street had expected. Turns out, it wasn't the company's earnings that were the problem -- it was its guidance.  

So what

Actually, that's not 100% correct. Although Lumentum did beat on earnings and said demand among its customers remains "robust," the company's profit margins in Q1 were still kind of a disappointment when calculated according to generally accepted accounting principles (GAAP). The gross profit margin for the quarter declined by more than 12 full percentage points, and operating margin plummeted 23 points, to just 2.7%.

As a result, despite growing revenue 13% year over year, Lumentum ended up reversing last year's $1.08-per-share net profit and reported a GAAP loss of $0.01 per share. (Note that the "adjusted" earnings that both Wall Street and Lumentum emphasized was significantly better than the company's actual GAAP number.)

Now what

Still, it seems Wall Street had been expecting even worse news. And given that Lumentum's earnings surprise was of the upside variety, it's more likely that investors today are selling the stock in response to management's warning that Q2 revenue ($490 million to $520 million) will fall short of the Street consensus projection of $540 million -- and that earnings will be no more than $1.45 per share, where Wall Street wants to see $1.60.

Long story short, Lumentum beat earnings by $0.13 in Q1. But if it's going to miss by at least $0.15 in Q2 (and in fact, management warned that earnings could miss by even more -- as much as $0.40 per share), then the net result is that  Lumentum is on track to fall short of expectations across the first half of this year. Given that the stock already isn't particularly cheap -- at 23.5 times earnings, it's about 15% more expensive than the average S&P 500 stock -- it's little surprise that investors' reaction to this morning's earnings can be summed up in one word: sell.