目录
I. Opening Remarks
II. Chief Executive Officer’s Remarks
Data Center and Communications
Data Center
OCS and Integrated Optics
Communications
Industrial
Summary
III. CFO Financial Review
Revenue
Gross Margin
Operating Expenses
Operating Margin and EPS
Cash, Debt, and Capital Expenditures
Fiscal 2027 First-Quarter Guidance
IV. Q&A
Six-Inch Indium Phosphide Capacity Ramp
CPO, NPO, and PhotonLink
Optical Transceiver Import Restrictions and U.S. Manufacturing
Quarterly Revenue Above $3 Billion and Gross Margin Target
Internal Laser Sourcing and External EML Sales
200G VCSEL Opportunity
Primary Capacity Bottleneck
Communications Product Layers and Monetization
OCS Applications and Market Demand
NPO Programs and Content per System
Drivers of Quarterly Revenue Exceeding $3 Billion
Orders, Backlog, and Long-Term Agreements
Cost Structure of the Six-Inch Platform
Timeline for Scale-Up CPO
Fiscal 2027 Incremental Gross Margin
CPO Laser Volume Production and Customer Qualification
Pricing Visibility Under Long-Term Agreements
V. Closing Remarks
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I. Opening Remarks
Operator: Good day, and welcome to Coherent’s fiscal 2026 fourth-quarter and full-year earnings call. I will now turn the call over to Paul Silverstein, Coherent’s Senior Vice President of Investor Relations.
Paul Silverstein: Thank you, operator. Good afternoon, everyone. Joining me today are Jim Anderson, Coherent’s Chief Executive Officer, and Sherri Luther, our Chief Financial Officer.
During today’s call, we will discuss the company’s financial and operating performance. Please note that we may make projections or other forward-looking statements regarding future events or the company’s future financial performance. These statements are subject to significant risks and uncertainties, and actual results could differ materially. Please refer to today’s earnings release, the company’s most recent Form 10-K and Form 10-Q filings, and any Form 8-K filings the company may submit to the U.S. Securities and Exchange Commission for factors that could affect its future financial and operating performance.
All statements made today are as of August 12, 2026, and are based on currently available information. Except as required by law, the company undertakes no obligation to update any such statements.
We will also discuss non-GAAP financial measures during today’s call. Reconciliations of these measures to their corresponding GAAP measures are included in the company’s earnings release and investor presentation, available in the Investor Relations section of coherent.com.
I will now turn the call over to our Chief Executive Officer, Jim Anderson.
II. Chief Executive Officer’s Remarks
CEO: Thank you, Paul, and thank you all for joining us today.
Fiscal 2026 was an outstanding year for Coherent. On a pro forma basis, revenue grew 28% to a record $7 billion. Revenue growth, combined with gross-margin expansion and sustained operating leverage, drove approximately 59% growth in non-GAAP earnings per share—more than twice the rate of revenue growth.
We also exited the fiscal year with strong momentum. In the fourth quarter, pro forma revenue growth accelerated significantly, rising 14% sequentially and 42% year over year, while non-GAAP earnings per share increased 74% year over year. This acceleration reflects exceptionally strong demand and the progress we have made in rapidly expanding production capacity.
We are very pleased with our fiscal 2026 performance and even more excited about the year ahead. We expect growth to accelerate significantly in fiscal 2027. Having just delivered our first quarter with revenue above $2 billion, we now expect to achieve our first quarter with revenue above $3 billion by the end of fiscal 2027.
Coherent is a global leader in photonics. Our broad photonics technology platform is foundational to the performance and scalability of AI data centers. AI depends on compute, and compute depends on connectivity. As AI advances rapidly, connectivity shifts from copper to optical, and increasingly large and complex data centers demand greater bandwidth and energy efficiency, optical networking infrastructure is undergoing extraordinary expansion—with Coherent at the center of this trend.
Our confidence in fiscal 2027 rests primarily on three factors.
First, customer demand continues to increase, with bookings reaching another record this quarter.
Second, supply capacity—including critical components—is expanding. As planned, our internal indium phosphide output will double year over year by the end of this quarter.
Third, several new revenue streams will begin scaling over the next few quarters, including optical circuit switching, co-packaged optics, multi-rail systems, and advanced materials for data-center thermal management and power management.
Alongside strong revenue growth, we expect continued gross-margin expansion and greater operating leverage, driving earnings-per-share growth significantly above revenue growth. We expect fiscal 2027 to be another outstanding year for Coherent.
Data Center and Communications
Data Center and Communications remained the company’s primary growth engine, accounting for 79% of total revenue in the fiscal fourth quarter. Revenue from this business increased 40% in fiscal 2026. Growth accelerated significantly in the fourth quarter, with revenue up 19% sequentially and 59% year over year.
Demand continues to strengthen, driving record bookings for another consecutive quarter and extending our forward visibility. Order coverage for calendar 2027 is exceptionally strong, with customer orders now extending into calendar 2028 and long-term customer agreements extending through the end of the decade. We continue to see no signs of weakening customer demand.
Coherent’s broad photonics portfolio, manufacturing scale, and extensive U.S. production footprint are becoming increasingly important competitive differentiators, translating into deeper, longer-term customer relationships and revenue opportunities.
Data Center
Data Center revenue grew 41% in fiscal 2026. Growth accelerated significantly in the fourth quarter, with revenue up 24% sequentially and 66% year over year. This marked the third consecutive quarter of double-digit sequential growth for the Data Center business, and we expect another quarter of strong sequential growth this quarter.
Demand in the Data Center business remains exceptionally strong across a broad range of customers and product categories.
In optical transceivers, we expect growth to be driven by both 800G and 1.6T. We expect 800G revenue to continue growing year over year in calendar 2026, while 1.6T optical transceivers should ramp rapidly through the remainder of calendar 2026 and into calendar 2027 as adoption broadens across customers.
Beyond optical transceivers, OCS revenue grew sequentially in the fourth quarter. We expect further growth over the next several quarters as production capacity expands.
In line with our established production ramp, we expect CPO to begin contributing to revenue growth in the second fiscal quarter. Expanding six-inch indium phosphide capacity is a key driver of both revenue growth and gross-margin expansion.
We remain on track to double internal indium phosphide output capacity year over year by the end of this quarter, one quarter ahead of our original plan. This capacity ramp was already a meaningful contributor to fourth-quarter Data Center revenue growth, and we expect it to remain an important growth driver in the first quarter.
Looking further ahead, we plan to more than double indium phosphide output capacity again by the end of calendar 2027. The substrates and other critical inputs required for this expansion have already been secured. Given strong customer demand, we are also planning additional capacity beyond 2027.
This expansion is being driven primarily by our transition to a six-inch indium phosphide manufacturing platform. Our six-inch production lines in Texas and Sweden are manufacturing EMLs, CW lasers, and photodiodes, with yields continuing to exceed those of our three-inch lines.
We remain on track to launch six-inch production in Zurich during the first half of calendar 2027, further extending what we believe is a material manufacturing advantage.
Our Texas facility has also begun ramping production of ultra-high-power CW lasers for CPO solutions, including products developed through our collaboration with NVIDIA. We expect the associated revenue to begin growing in the second fiscal quarter.
OCS and Integrated Optics
OCS revenue increased in the fourth quarter, and we continue to ramp production.
Customer demand is very strong for the 320×320 platform and systems in other configurations, supporting our expectation that OCS revenue will grow significantly throughout fiscal 2027. We continue to estimate an addressable market of more than $4 billion for OCS across data-center interconnect, scale-out, and scale-up networks.
As we expand output across two manufacturing sites, we expect OCS to become an increasingly important contributor to revenue growth and gross-margin expansion.
CPO, NPO, and other forms of integrated optics represent major growth opportunities for Coherent. These technologies will drive the transition from copper to optical connectivity, creating an incremental addressable market of more than $15 billion over the next several years.
At the ECOC industry event in September, we plan to introduce Coherent PhotonLink, our new platform for integrated optics.
PhotonLink spans the complete optical signal chain—from light generation and beam shaping through signal transmission and detection, and ultimately conversion back into electrical signals for use by an XPU or switch chip. The platform supports CPO, NPO, and other forms of optical integration.
PhotonLink leverages Coherent’s broad photonics portfolio and manufacturing capabilities to enable higher bandwidth, performance, and energy efficiency through optical links in next-generation data-center architectures.
We are engaged in deep collaborations with multiple customers across both CPO and NPO applications. We believe the two applications offer Coherent comparable content-per-system opportunities. PhotonLink-related products are expected to begin generating initial revenue in the quarter ending December. We will share further details about PhotonLink at our launch event on September 21.
Communications
Customer demand in the Communications business remained exceptionally strong in the fourth quarter. Full-year fiscal 2026 revenue grew approximately 54%. Fourth-quarter revenue increased 11% sequentially and 56% year over year, driven primarily by continued strength in data-center interconnect, inter-data-center scale-out, and traditional telecom applications.
We expect another quarter of strong sequential growth in the first quarter.
Demand is broad-based across the portfolio, with particular strength in DCI solutions, including ZR and ZR+ optical transceivers, pump lasers, and sophisticated high-end optical subsystems.
Multi-rail systems represent an important new growth opportunity for the Communications business. As workloads increasingly span multiple data centers and require higher bandwidth between locations, multi-rail systems can address the connectivity requirements of cross-data-center AI networks.
We estimate that this market’s addressable opportunity will exceed $2 billion by calendar 2030 and continue to expect initial revenue to begin growing in the first half of calendar 2027. To prepare for the anticipated revenue ramp, we recently delivered samples to multiple customers.
Given our broad technology portfolio, differentiated density and energy efficiency, and deep customer engagement, we believe Coherent is well positioned in this market. We expect multi-rail systems to become an increasingly important contributor to revenue growth and gross-margin expansion.
Industrial
On a pro forma basis, Industrial revenue was approximately flat in both fiscal 2026 and the fourth quarter.
In the fourth quarter, both semiconductor capital equipment and display capital equipment revenue grew sequentially and year over year, offset by continued weakness across the broader industrial market.
We expect the Industrial business to return to growth over the next several quarters, driven primarily by semiconductor capital equipment, where bookings continue to strengthen.
Over the longer term, we see significant growth opportunities across several emerging applications.
One example is thermal management for data-center XPUs. Our proprietary Thermadite material improves thermal performance and enables higher XPU performance, increasing the AI-token generation capacity of each XPU.
We are working with multiple strategic customers and have already delivered samples of our Thermadite thermal-management solutions. We expect the associated revenue to begin growing in the second half of calendar 2027, significantly expanding the company’s long-term market opportunity.
We also see long-term opportunities in fusion energy, quantum technologies, and capital equipment for microLED displays.
Overall, we believe the Industrial business is positioned to return to growth and become an increasingly important source of revenue diversification.
Summary
In summary, Coherent enters fiscal 2027 with exceptionally strong customer demand, record business visibility, expanding production capacity, and several new growth platforms poised to scale.
With our broad photonics portfolio, manufacturing scale, and extensive U.S. production footprint, we believe Coherent is uniquely positioned to capitalize on the multiyear expansion of AI data-center infrastructure.
I would like to thank the entire Coherent team for its outstanding execution and innovation in fiscal 2026. I will now turn the call over to Sherri.
III. CFO Financial Review
CFO: Thank you, Jim.
Fiscal 2026 was an outstanding year for Coherent. We delivered record revenue of $7.12 billion, expanded gross margin by more than 150 basis points, improved operating margin by nearly 300 basis points, and grew non-GAAP EPS by 59%, significantly outpacing revenue growth.
We also strengthened the balance sheet, reducing leverage from 2x at the end of fiscal 2025 to 0.7x, while continuing to invest in capacity and our product road map to support growing demand from AI data centers and communications.
I will now review our results.
Revenue
Fourth-quarter revenue reached a record $2.05 billion, up 13% sequentially and 34% year over year, primarily driven by increased demand from AI data centers and communications.
On a pro forma basis, excluding the Aerospace and Defense business divested in the first quarter and the Munich, Germany product business divested in the third quarter, revenue increased 14% sequentially and 42% year over year.
Full-year fiscal 2026 revenue was $7.12 billion, up 23% from fiscal 2025 and 28% on a pro forma basis. Strong performance in AI data centers and communications was the primary driver of full-year revenue growth.
Fiscal 2026 also marked the first time in Coherent’s history that annual revenue exceeded $7 billion.
Gross Margin
Fourth-quarter non-GAAP gross margin was 40.2%, up 66 basis points sequentially and 215 basis points year over year.
Full-year fiscal 2026 non-GAAP gross margin was 39.4%, an improvement of 152 basis points from fiscal 2025.
Gross margin continued to improve both sequentially and year over year as we advanced our initiatives throughout fiscal 2026. The benefits of our gross-margin expansion strategy were most pronounced in the Data Center and Communications business.
These gains reflected lower product input costs, improved manufacturing yields and efficiency—including continued progress on the six-inch indium phosphide platform—and benefits from pricing optimization.
As our pricing optimization and cost-structure initiatives continue to take effect, including expanded capacity for the six-inch indium phosphide platform, we expect gross margin to improve further over the next several quarters.
Operating Expenses
Fourth-quarter non-GAAP operating expenses were $377 million, compared with $348 million in the prior quarter and $307 million in the year-ago period.
Non-GAAP operating expenses declined to 18.4% of fourth-quarter revenue, from 19.2% in the prior quarter and 20.1% in the year-ago period. We remain focused on improving operating leverage and efficiency.
Full-year fiscal 2026 non-GAAP operating expenses increased to $1.35 billion from $1.17 billion in fiscal 2025, primarily reflecting increased investment in our product portfolio.
Operating expenses as a percentage of revenue declined from 20.1% in fiscal 2025 to 19% in fiscal 2026.
Fourth-quarter R&D; expenses increased to 10.2% of revenue, from 9.9% in the prior quarter and 9.8% in the year-ago period. Full-year R&D; expenses represented 9.7% of revenue, compared with 9.5% in fiscal 2025.
The sequential and year-over-year increases in R&D; expenses were primarily driven by investment in the Data Center and Communications product portfolio. R&D; investment remains concentrated in our strongest long-term growth opportunities, including optical transceivers, CPO, OCS systems, and thermal-management solutions.
We will continue to prioritize projects that address customer needs, generate attractive returns, and support future growth.
Fourth-quarter selling, general and administrative expenses declined to 8.2% of revenue, from 9.4% in the prior quarter and 10.3% in the year-ago period. For the full year, SG&A; expenses declined from 10.5% of revenue in fiscal 2025 to 9.2%, reflecting continued progress in improving efficiency and generating operating leverage.
During fiscal 2026, we made significant progress in simplifying our operating model and improving operating efficiency. The expansion of our regional shared-services structure lowered costs, increased process consistency, and improved operating leverage across our global operations.
Full-year benefits exceeded our initial expectations, and we expect those benefits to increase further in fiscal 2027.
Operating Margin and EPS
Fourth-quarter non-GAAP operating margin was 21.8%, compared with 20.3% in the prior quarter and 18% in the year-ago period.
Full-year fiscal 2026 non-GAAP operating margin increased to 20.5% from 17.8% in fiscal 2025.
The improvement in operating margin for both the fourth quarter and full-year fiscal 2026 was driven by strong revenue growth, continued gross-margin expansion, and improved operating leverage.
Fourth-quarter non-GAAP diluted EPS was $1.74, up 23% sequentially and 74% year over year.
Fiscal 2026 non-GAAP EPS was $5.61, up 59% from fiscal 2025.
For both the quarter and the full year, EPS growth continued to outpace revenue growth, primarily driven by strong revenue performance, gross-margin expansion, and improved operating leverage.
Cash, Debt, and Capital Expenditures
At the end of fiscal 2026, our cash balance was $2.59 billion, compared with $3.05 billion at the end of the prior quarter and $1.63 billion at the end of fiscal 2025.
Consistent with our capital-allocation priorities, we continued to invest in opportunities expected to drive long-term growth and profitability. These investments were primarily directed toward expanding capacity in the Data Center and Communications business and advancing our product-development road map.
During fiscal 2026, we repaid $513 million of debt and ended the fiscal year with leverage of 0.7x, compared with 2x at the end of fiscal 2025.
Capital expenditures increased to $556 million, from $290 million in the prior quarter and $131 million in the year-ago period. This acceleration in capital spending will directly support future growth in the Data Center and Communications business.
We expect these strategic investments to generate outstanding financial returns. For example, investments in our data center business have a payback period of approximately 18 months.
Our confidence in these high-return investments is underpinned by excellent customer visibility, including a strong purchase-order backlog and long-term agreements.
The associated capital expenditures are primarily for advanced tools and state-of-the-art manufacturing equipment designed to accelerate manufacturing scale-up and optimize production yields.
In addition, as a vertically integrated manufacturer, we have substantial flexibility to allocate capacity, allowing infrastructure to be dynamically redeployed across multiple product lines.
Given exceptionally strong demand and clear visibility into investment returns, we expect first-quarter capital expenditures to increase again sequentially.
These results reflect strong customer demand, disciplined operational execution, continued progress on gross-margin expansion initiatives, and investment in the products and technologies expected to drive future growth.
Fiscal 2027 First-Quarter Guidance
Our guidance for the first quarter of fiscal 2027 is as follows:
Revenue is expected to be $2.2 billion to $2.4 billion.
Non-GAAP gross margin is expected to be 39.5% to 41.5%.
Total non-GAAP operating expenses are expected to be $400 million to $420 million.
The non-GAAP tax rate is expected to be 18% to 20%.
Non-GAAP EPS is expected to be $1.85 to $2.05.
We enter fiscal 2027 with strong momentum, supported by a record backlog, excellent visibility into customer demand, and a significantly strengthened financial position.
As we support future growth and create long-term shareholder value, we will remain focused on expanding capacity, improving profitability, and allocating capital with discipline.
That concludes my prepared remarks. Operator, please begin the Q&A; session.
IV. Q&A;
Operator: Thank you. We will now begin the Q&A; session. Our first question comes from Joe Cardoso of JPMorgan.
Six-Inch Indium Phosphide Capacity Ramp
Joe: Good afternoon, and thank you for taking my questions.
First, it sounds like the company continues to make solid progress ramping the six-inch platform and has even discussed further capacity expansion beyond 2027. Could you provide an update on the ramp, particularly how we should think about its impact on revenue and gross margin? I have one follow-up. Thank you.
CEO: Thank you, Joe.
I am very pleased with the progress of the six-inch indium phosphide platform ramp. The team has done an outstanding job increasing output.
As noted in our prepared remarks, we are on track to double our indium phosphide output capacity this quarter, one quarter ahead of the original plan. By the end of the next calendar year, we expect to more than double capacity again.
We are therefore expanding capacity at a fairly rapid pace, execution has been strong, and we are actually running slightly ahead of plan. I am very pleased with the progress.
One data point may help put that progress into perspective. In the quarter ended June, the number of indium phosphide lasers we produced increased approximately 80% year over year.
These lasers are used specifically in our 800G and 1.6T optical transceivers. I believe the approximately 80% year-over-year increase is a useful indicator of our continued progress in expanding indium phosphide capacity.
You also asked how this translates into revenue. The lasers produced in the quarter ended June will largely support optical transceiver shipments this quarter.
For example, in our data center business, we expect revenue to grow more than 80% year over year this quarter. We already have enough lasers to achieve that target. That is one way to assess the impact on revenue growth in data center optical transceivers.
I would add a few points. I remain very pleased with yields. Yields on the six-inch line continue to exceed those on the three-inch line across all three device categories currently in volume production: CW lasers, EMLs, and photodiodes. Six-inch yields are higher than three-inch yields in all three categories.
Our prepared remarks also highlighted another milestone: we have begun production and are ramping output of ultra-high-power CW lasers for CPO applications. We expect the associated revenue to begin contributing in the quarter ending December.
The facilities currently ramping are in Texas and Sweden, our two six-inch manufacturing sites. We expect to bring a third six-inch manufacturing site online in the first half of calendar 2027.
Overall, I am very pleased with the progress to date. Joe, I believe you have a follow-up?
CPO, NPO, and PhotonLink
Joe: Yes, that was very helpful. Thank you, Jim.
My second question may relate to the first. The company expects CPO revenue to begin contributing in the quarter ending December. Could you elaborate on the near- and long-term outlook for this opportunity?
In particular, given recent market discussion of CPO delays and the possibility that NPO could be adopted sooner, what additional perspective can the company share? Thank you.
CEO: Certainly. Thank you, Joe.
First, we are seeing absolutely no delay in CPO demand. In fact, the opposite is true: demand is increasing, and customers are requesting earlier deliveries. The trend we see in CPO is entirely in the other direction.
Another major change over the past three to six months is that customers have significantly increased their level of engagement not only in CPO, but also in NPO.
We are engaged with multiple customers on several highly significant CPO and NPO programs. The intensity of customer engagement has increased materially over the past three to six months, and we are very pleased with that development.
It is important to remember that, in integrated optics—whether CPO, NPO, or any other architecture—Coherent can provide customers with a very broad product portfolio, not merely a single component.
That includes lasers, where we have very strong capabilities, as well as external laser modules and optical components for those modules, including isolators.
We manufacture polarization-maintaining fiber, which can connect the laser module to the device or connect the device back to the front panel.
We can assemble complete fiber connectivity solutions and also supply products such as silicon photonics PICs. This gives us a comprehensive integrated-optics capability for customers.
For us, NPO and CPO are simply different form factors and mounting configurations. Coherent’s content per NPO deployment is very similar to its content per CPO deployment.
Accordingly, whether customers prefer CPO or NPO, we will support their chosen architecture.
In September, we will also launch a new technology platform called Coherent PhotonLink. Our discussions with customers about CPO and NPO have shown that they do not want only discrete components such as lasers or isolators; they also want the support required to build a complete solution.
Coherent PhotonLink is a comprehensive integrated platform designed to serve as a one-stop solution for integrated optics. It covers the full signal chain, from light generation, beam shaping, and transmission through signal detection and conversion back into an electrical signal.
We will provide further details at the September product launch. Based on initial customer feedback, we believe this is a compelling solution for customers seeking a more complete offering.
We are therefore very excited about this platform as well.
Joe: Thank you. I appreciate the detailed response.
Optical Transceiver Import Restrictions and U.S. Manufacturing
Operator: Our next question comes from Simon Leopold of Raymond James.
Simon: Thank you very much for taking my questions.
First, while nothing has been finalized, the media has reported on potential import restrictions for optical transceivers.
My question has two parts. First, what would this mean specifically for Coherent? I believe part of the objective of such measures would be to create U.S. jobs.
From a practical standpoint, could the company shift optical transceiver manufacturing to the United States, and would it do so? I have one follow-up. Thank you.
CEO: Thank you, Simon. At this point, the report remains speculative.
Such measures would, of course, benefit us. As the largest U.S. supplier of optical transceivers, we would clearly stand to gain.
That said, we always want to win customers on the strength of our own technology and manufacturing capabilities. We believe we have the broadest and deepest photonics technology portfolio in the industry, as well as the most extensive manufacturing footprint.
We are very proud of our manufacturing network. Coherent is a global manufacturer with production facilities around the world, which provides resilience. At the same time, we are vertically integrated and manufacture many critical components internally.
As you noted, we have an excellent U.S. manufacturing footprint, with more than 20 production sites in the United States. I consider that an important strategic advantage.
Our Sherman, Texas facility is one example. We manufacture highly critical components there for optical transceivers as well as CPO and NPO applications.
Other U.S. facilities manufacture key components such as fiber-optic cable and grow the garnet material used in optical transceiver isolators.
We are already investing in U.S. manufacturing. If further expansion of domestic manufacturing capacity becomes necessary, we would certainly be willing to make those investments.
Coherent was founded more than 50 years ago as a U.S. manufacturing company. We have a very strong domestic foundation on which we can continue to build.
Quarterly Revenue Above $3 Billion and Gross Margin Target
Simon: Thank you. As a follow-up, the company appears to have set a target of more than $3 billion in revenue for the fourth quarter of fiscal 2027, the quarter ending June 2027.
I believe that is materially above current consensus. I would like to better understand the company’s gross margin outlook. The company has previously discussed a 42.5% target. Given the growth outlook and changes in product mix, could you update us on the expected gross margin trajectory? Thank you.
CEO: I will ask Sherri to address the gross margin question.
Briefly, I believe we have made substantial progress over the past several quarters and will remain intensely focused on driving further improvement. Sherri, please add your perspective.
CFO: Certainly. Thank you, Jim, and thank you, Simon.
First, I am very pleased with the progress we have made in improving gross margin. Gross margin increased 66 basis points sequentially and 250 basis points year over year.
Gross margin has improved in eight of the past nine quarters. This is more than a trend; it demonstrates that we are actively driving gross margin expansion.
Across those eight quarters, gross margin increased by more than 660 basis points. This is clearly an area where we are taking decisive action and maintaining a strong focus.
Simon, the target presented at our Investor Day was gross margin above 42%. The midpoint of our first-quarter guidance is 40.5%, so we are clearly still in the early stages and have further to go.
I believe our gross margin expansion strategy remains in its early innings, but we will stay highly focused on exceeding the 42% target.
I am confident because most of the benefits from ramping six-inch indium phosphide products are still ahead of us and have not yet been fully realized.
In addition, the ramps of new products—including 1.6T, OCS systems, CPO, multi-rail systems, and thermal management solutions—have not yet begun in earnest. The associated benefits are also still ahead.
We will, of course, continue to drive cost reductions and pricing optimization. Most of the improvement achieved to date has come from these areas, and we have a clear plan to capture the substantial improvement opportunities ahead.
Once we exceed the 42% target, we will unquestionably raise the bar again.
Simon: Thank you.
CEO: Thank you, Simon.
Internal Laser Sourcing and External EML Sales
Operator: Our next question comes from George Nader of Wolfe Research.
George: Hello, everyone, and thank you very much.
I would like to better understand the company’s current optical transceiver mix. Clearly, the company is working to source as many datacom laser chips internally as possible.
What proportion of the datacom laser chips used in its optical transceivers is currently sourced internally?
In addition, the company previously appeared to plan for output to exceed its own internal requirements, allowing it to sell EMLs externally. What is the roadmap for commercial EML sales to the broader market? Thank you.
CEO: Thank you, George.
On your last question, given current demand in our data center optical transceiver business, I do not expect us to sell indium phosphide lasers externally in the near term.
Data center optical transceiver demand is absorbing all of our capacity and exceeds our current capacity. We therefore do not have the ability to sell externally in the near term, though that may become possible over a longer horizon.
Today, we use a combination of internally manufactured and externally sourced products. Over the long term, I still expect a portion of our datacom optical transceivers to be supported by external suppliers. That is advantageous to the optical transceiver business for several strategic reasons.
However, as internal production expands rapidly, I expect the proportion of optical transceivers supported by internally produced indium phosphide products to increase gradually.
In the quarter ended June, our laser output increased 80% year over year. Production will rise further as the indium phosphide capacity ramp continues.
200G VCSEL Opportunity
George: Great, thank you. As a brief follow-up, how is the company progressing with VCSELs?
There appears to be considerable new market enthusiasm for using VCSELs in scale-up applications. Coherent is developing a 200G VCSEL. Could you discuss current progress and how the company views the opportunity? Thank you.
CEO: The 200G VCSEL is a very important technology in our toolbox, and we continue to make solid progress.
I believe 200G VCSELs will be adopted in integrated optics and NPO-type applications. We are actively working with customers to develop NPO or integrated-optics applications involving VCSELs.
It is clearly an important technology, and we believe it will ultimately be deployed.
Primary Capacity Bottleneck
Operator: Our next question comes from Ryan Koontz of Needham & Company.
Ryan: Thank you. I would like to ask about the company’s capacity constraints.
Could you discuss both external input constraints and internal manufacturing capacity constraints? How should investors think about where the company is investing today? What is the largest bottleneck to growth over the next 12 months?
CEO: Thank you, Ryan.
Indium phosphide capacity remains our primary constraint, which is why we are so focused on increasing six-inch output.
In optical transceivers, for example, we are not currently constrained by assembly and test capacity; that capacity is already in place. The real constraint is the pace of the indium phosphide production ramp.
As indium phosphide output continues to increase, we expect it to keep driving optical transceiver revenue growth. It is quite straightforward: indium phosphide is currently the principal bottleneck.
Communications Product Layers and Monetization
Ryan: Very helpful, thank you.
Considering the telecom market, multi-rail systems, pump lasers, and all the related products, how does the company view its monetization opportunity in this market? Will the company sell discrete components, or complete systems?
CEO: Thank you, Ryan.
We participate across multiple product layers in this market. We sell components and what could be described as subsystems, including amplifiers and line cards; in some cases, we also sell complete systems.
We therefore participate at multiple layers, and growth in this area is extremely strong.
The communications business includes scale-across-data-center and DCI applications. Revenue in this business increased 56% year over year in the quarter ended June.
Looking ahead, I believe growth will continue to accelerate, similar to the trend we have seen in data center applications.
Growth is being driven by a range of products, including ZR+ optical transceivers, components such as pump lasers, and related products used with pump lasers.
As noted in our prepared remarks, multi-rail systems should also begin contributing revenue soon. The technology is already in customers’ hands, samples have been delivered, and we expect multi-rail system revenue to begin contributing in the first half of calendar 2027.
This market spans a very broad product set. Demand continues to rise for everything related to DCI or scale-across-data-center applications.
Ryan: Great, thank you, Jim.
OCS Applications and Market Demand
Operator: Our next question comes from Blayne Curtis of Jefferies.
Blayne: Good afternoon, everyone. I have two questions.
First, could you discuss OCS demand? The company has cited a potential market exceeding $4 billion and appears to have begun shipping at a relatively modest scale.
Could you discuss the sources of demand and the breadth of customer engagement? I believe the range of applications is also expanding, including use within the rack. Could you comment on that?
CEO: Certainly, Blayne.
We are indeed seeing the range of applications expand. When we initially began developing OCS, we primarily viewed the technology through a scale-out lens.
We now clearly believe it will also be adopted for scale-across-data-center applications, with a clear path into scale-up deployments. We are already working actively with customers on scale-up applications.
These developments prompted us at OFC earlier this year to double our market-size estimate from $2 billion to more than $4 billion.
Even our estimate of a market exceeding $4 billion may remain fairly conservative. That estimate applies to approximately 2030.
Compared with six or twelve months ago, the application set continues to broaden, and demand is stronger than we originally anticipated. The overall outlook is very favorable.
In terms of execution, I am pleased with our progress. Demand clearly already exists, so our current priority is to expand manufacturing capacity as quickly as possible.
OCS revenue increased in the quarter ended June. Over the next several quarters, we expect to continue expanding production capacity and accelerate revenue growth.
We believe OCS will ultimately become a very important product line for the company.
NPO Programs and Content per System
Blayne: Thank you. I would like to return to NPO.
Could you provide a broad indication of how many programs the company is currently involved in? There are also many questions in the market about content per system.
The company has said NPO content is similar to CPO content, but it has also discussed integrated solutions and previously mentioned VCSELs in response to a question.
Could you discuss the value content of these products in more detail? Where is demand coming from today? Is it already reflected in the projects the company is currently involved in, and how might it evolve over time?
CEO: For virtually every customer we work with—particularly our large strategic customers—we have either a CPO or NPO program underway. In some cases, the same customer is pursuing both CPO and NPO programs.
The level of engagement around CPO, NPO, or both has increased significantly over the past three to six months. All of these programs are very active today.
As noted earlier, we provide more than just the laser component. We offer a complete platform solution encompassing lasers, interconnects, and a wide range of optical components.
We are therefore working with all major customers in this area.
In terms of value content, we believe CPO and NPO are comparable. From our perspective, the main distinction is where the connection is made: either directly adjacent to the chip or on the motherboard—the difference between CPO and NPO.
We believe the value content is very similar, potentially because we can offer a broad range of solutions for both applications.
It is also important to note that all of this represents incremental addressable market for both Coherent and the optical industry as a whole.
Most programs are focused on scale-up applications. Over the next several years, more copper electrical connections will transition to optical connectivity.
This will significantly expand the company’s addressable market, and we expect it to become a major growth area.
Blayne: Thank you, Jim.
Drivers of Quarterly Revenue Exceeding $3 Billion
Operator: Our next question comes from Karl Ackerman of BNP Paribas.
Karl: Thank you. I have two questions.
First, Jim, you said quarterly revenue would exceed $3 billion by the end of fiscal 2027, which is a very strong target.
Could you break that target down further? How much of the incremental revenue could come from 1.6T optical transceivers? The company has also discussed OCS demand and multirail systems. How much could come from backlog or pricing?
A rough breakdown by category would be very helpful. I have one follow-up afterward.
CEO: Thank you, Karl.
First, the primary drivers are our data center and communications businesses. We expect some improvement in industrial, but because data center and communications account for approximately 80% of revenue, the vast majority of the growth will come from those two businesses.
Optical transceivers will clearly be an important driver. 800G continues to deliver very strong year-over-year growth, while 1.6T is ramping extremely quickly.
In fact, we continue to see 1.6T demand being pulled forward and strengthening. The ramp is now progressing even faster than we expected three months ago.
Accordingly, 800G and 1.6T optical transceivers will clearly be important components of the target.
Beyond that, OCS will continue ramping throughout this fiscal year; CPO will begin making a meaningful revenue contribution in the December quarter and continue growing over subsequent quarters; and we have also discussed multirail systems.
The company is also driving pricing improvements through both normal price optimization and contractual price adjustments under long-term customer agreements that are gradually taking effect.
Multiple factors across the data center and communications businesses are therefore contributing to growth.
I am trying to think of any product line within data center and communications that is not supply-constrained. In reality, demand is exceptionally strong for virtually every product.
At present, we can sell products as quickly as we can increase output. The company therefore remains intensely focused on scaling production as rapidly as possible.
Orders, Backlog, and Long-Term Agreements
Karl: Thank you. The company also noted that customer orders now extend into 2028, while long-term agreements extend through the end of the decade.
For the long-term agreements extending into 2028, are committed volumes in 2028 higher than in 2027?
Could you provide some broad parameters around current volume commitments and describe how they have improved over the past 90 days? Thank you.
CEO: Thank you, Karl.
First, when discussing near-term demand, we are referring to purchase orders or backlog.
Bookings in the June quarter were truly remarkable and once again reached a record level.
Our backlog now extends well into the future. Capacity for fiscal 2027 is essentially fully booked, and orders in fact extend through the end of calendar 2027.
Customers are now beginning to reserve capacity for calendar 2028. These are purchase orders for specific products.
That is very important because it provides high-quality visibility into near-term demand.
At the same time, many customers are also entering into parallel long-term agreements with the company for multiyear supply arrangements, many of which extend through the end of the decade.
Supply volumes under these agreements generally increase each year as we expand capacity to support customers’ growing future demand.
As the company expands capacity, customers increase their demand. The agreements also include pricing commitments and minimum customer demand guarantees, sometimes referred to as take-or-pay provisions.
These long-term agreements are equally valuable, providing excellent visibility into the business beyond 2028.
They give us a clear view of which critical products we need to manufacture and where we need to expand capacity over the remainder of the decade.
Cost Structure of the Six-Inch Platform
Operator: Our next question comes from Meta Marshall of Morgan Stanley.
Meta: Thank you very much.
Sherri, I know you cited yields on the six-inch platform as an important component of gross-margin expansion. Looking into the next fiscal year, how much of the gross-margin improvement will actually come from higher yields, and how much from product mix or pricing?
My second question is for Jim. Potential constraints have already been discussed, but has the company seen any change in customers’ urgency to secure products?
I know the company’s capacity is sold out, but have customer discussions changed over the past several weeks? Thank you.
CFO: Thank you, Meta.
Regarding the six-inch platform, my key point was actually its cost structure.
As we have previously said, each six-inch wafer produces four times the output of a three-inch wafer at only half the cost of the three-inch solution. That cost structure is what benefits the company.
As we consider the drivers of future gross-margin improvement, the ramp of six-inch indium phosphide products is very important because the company will benefit from the platform’s cost structure.
Jim, please add your thoughts.
CEO: I would reiterate a point made earlier: yields on the six-inch line are actually higher than on the three-inch line.
The principal benefit of the six-inch platform is its cost-structure advantage.
On the second part of the question—customer reactions to recent media reports—some customers have proactively contacted us to discuss manufacturing arrangements and alternative sourcing options.
This has indeed led to new customer demand and supply discussions, which remain ongoing.
Meta: Great, thank you.
Timeline for Scale-Up CPO
Operator: Our next question comes from Vivek Arya of Bank of America.
Vivek: Thank you for taking my questions.
First, Jim, what is Coherent’s timeline for CPO in scale-up applications? Is it the second half of 2027 or 2028? How broad is the customer base?
For customers reluctant to adopt CPO early, what are the primary barriers?
CEO: Thank you, Vivek.
The company has discussed this timeline before, and our view has not changed. We continue to expect CPO for scale-up applications to begin contributing revenue in the second half of calendar 2027.
That has consistently been our view for some time.
The CPO products currently ramping will initially be deployed in scale-out applications and will continue to grow. Scale-up applications will then begin contributing revenue in the second half of 2027.
In scale-up, any customer not discussing CPO with us is at least evaluating NPO or already working with us on an NPO program.
Virtually every customer—particularly our large strategic customers—is discussing either CPO or NPO with us.
Customers have different initial preferences between NPO and CPO depending on their architectures.
For some customers currently collaborating with us on NPO development, I expect they will ultimately transition to CPO at a later stage. Others have chosen to move directly to CPO.
The specific choice is ultimately the customer’s and depends on its particular architecture.
Fiscal 2027 Incremental Gross Margin
Vivek: Understood, thank you. My follow-up is also about gross margin and may be overly detailed.
In the first half of this fiscal year, incremental gross margin appeared to be in the mid-40% range or higher. The company’s guidance for the September quarter seems to imply the low-40% range.
Are there any specific factors affecting the September quarter? More broadly, now that the company has provided a rough full-year revenue range, how should we think about incremental gross-margin conversion in fiscal 2027? Thank you.
CFO: Vivek, as we consider future gross-margin improvement, the focus remains on advancing the initiatives we just discussed, including continued cost reductions and pricing optimization.
The timing of those benefits will vary depending on when each initiative takes effect.
As the company continues to scale through the remainder of this fiscal year, Jim noted that quarterly revenue would reach $3 billion by the end of fiscal 2027 and outlined the underlying revenue opportunities.
These include new products. 1.6T, OCS, CPO, and other products will begin contributing revenue and should have a positive impact on gross margin, supporting further improvement over time.
However, when considering incremental margin conversion, I would also remind you to consider operating expenses.
At the midpoint of the company’s first-quarter guidance, operating expenses as a percentage of revenue are already below our target model.
The company established an operating-expense target of 18% of revenue last year, and the midpoint of first-quarter guidance is already below that level.
We will continue improving operating efficiency. The company has made tremendous progress on selling, general, and administrative expenses, while research and development still offers room for additional operating leverage.
That should also be considered when assessing overall profit conversion.
For the reasons just discussed, I continue to see substantial opportunity for the company to generate further operating leverage.
Vivek: Okay, thank you.
CPO Laser Volume Production and Customer Qualification
Operator: Our next question comes from Mike Genovese of Rosenblatt Securities.
Mike: Thank you.
Jim, it is encouraging that the company expects CPO lasers to contribute revenue in the second fiscal quarter, as this suggests either that the product has already been qualified or that the company has clear visibility into qualification.
That also appears to rebut some market rumors about problems with the company’s lasers.
Could you elaborate on why the company is confident the product will be ready that quarter and that customers will accept it for revenue recognition? What progress has been made recently? Thank you.
CEO: I am very pleased with the progress, and the team has done an outstanding job.
I believe this particular laser has an excellent design, with several meaningful advantages in both technology and manufacturing.
We have already begun producing the wafers that will support shipments in the December quarter, and customers continue to ask us to accelerate shipments and increase volumes as much as possible.
We therefore feel very good about the outlook.
It is also important to remember that the company supplies more than just lasers. We also provide external laser modules, various optical connectors, fiber-optic cables, and fiber connection units.
The company offers many other products in addition to lasers, although the laser is of course a critical component.
Pricing Visibility Under Long-Term Agreements
Mike: Great, that sounds encouraging. One final question.
The company has repeatedly discussed how long-term agreements provide revenue visibility. Do they also provide pricing visibility?
More specifically, considering the long-term agreements, new capacity additions, and potentially greater market competition over time, how long does the company believe laser prices can continue rising?
How confident are you about the length of time before investors need to worry that laser prices will stop increasing?
CEO: That is a very good question, Michael.
When the company signs long-term agreements, they almost always include both volume commitments and agreed pricing.
I believe all or virtually all of the company’s long-term agreements specify pricing for the duration of the contract.
Some agreements have three-year terms, while many cover the remainder of the decade.
These agreements therefore provide clear visibility not only into the volume of products we need to supply, but also into the pricing we can expect.
They offer very good visibility on both volumes and pricing.
Mike: Thank you for taking my questions. I appreciate it.
CEO: Thank you.
V. Closing Remarks
Operator: This concludes the Q&A; session. I will now turn the call over to Jim Anderson for closing remarks.
CEO: Thank you, operator, and thank you again to everyone for joining today’s call.
Coherent enters fiscal 2027 with strong momentum and exceptionally robust customer demand. Its growth outlook is accelerating as capacity expands and new growth platforms begin to ramp.
With its photonics technology and manufacturing scale, I believe the company is exceptionally well positioned for the future.
I would again like to thank all our employees for their outstanding work in fiscal 2026, as well as our customers, partners, and shareholders for their support.
Thank you. We look forward to updating you again next quarter.
Operator: This concludes today’s call. You may now disconnect. Thank you for participating.