Earnings Highlights: Coherent (COHR) | FY26 Q2

4 days ago

3 min read

Summary | Coherent enters an AI and silicon photonics boom, with capacity and orders stepping up sharply

Coherent delivered a strong FY26 Q2, beating expectations on both revenue and profit thanks to robust AI data center demand for 800G and 1.6T optical transceivers. CEO Jim Anderson noted that the data center book-to-bill ratio exceeded an astonishing 4x, with visibility now extending into 2027. The company's momentum rests on three growth engines: high-volume production of 1.6T products, the cost advantage from its industry-first transition to 6-inch InP (indium phosphide) wafers, and new business wins in CPO and OCS (optical circuit switching). Management explicitly expects FY2027 revenue growth to exceed FY2026, underscoring strong momentum.

2. Financials (Non-GAAP)

Revenue: $1.69B (YoY +22% pro forma, QoQ +9%), a record high.
Gross margin: 39.0% (QoQ +24 bps, YoY +77 bps).
Operating margin: 19.9% (QoQ +40 bps, YoY +140 bps).
EPS: $1.29 (QoQ +11%, YoY +35%).
Opex: $321M (19% of revenue), with improved SG&A efficiency.
CapEx: $154M, rising further to support capacity expansion.
Leverage: net leverage down to 1.7x.
Segment performance:
- Data Center & Comm: $1.2B+ (QoQ +11%, YoY +34%), over 70% of revenue.
- Industrial: about $480M (QoQ +4%, YoY flat), with semicap orders starting to recover.

3. Outlook (FY26 Q3)

Revenue guidance: $1.70B - $1.84B (midpoint $1.77B).
Gross margin guidance: 38.5% - 40.5%.
EPS guidance: $1.28 - $1.48.
Growth drivers: the data center business is expected to sustain double-digit sequential growth.

4. Product Updates

Data Center

800G & 1.6T Transceivers: demand is extremely strong. 1.6T initially relies on EML and Silicon Photonics (SiPh), with a 200G VCSEL solution expected to enter volume production in 2H26.
InP (indium phosphide) capacity: the core competitive advantage. Yields on the 6-inch InP line now exceed the legacy 3-inch line, with output per wafer up 4x and cost down 50%. The goal is to double capacity again by the end of 2026.
OCS (optical circuit switching): more than 10 customers to date, a growing backlog, and the TAM raised to $2B+.

CPO / New Technologies

CPO (co-packaged optics): won a large purchase order from a leading AI customer for high-power CW lasers built at the Sherman fab, expected to contribute meaningful revenue in 2026.
DCI (data center interconnect): ZR/ZR+ demand is strong, benefiting from the scale-across trend.

Industrial & Semicap

Semiconductor equipment: orders jumped sharply and are expected to start contributing revenue in 2H26.
New applications: including XPU cooling solutions and 300mm SiC technology.

5. Long-Term Outlook

Long-term trend: AI network architectures are extending from scale-out to scale-up, driving demand for CPO and high-performance lasers, a market expected to be several times larger than traditional networking.
Margin expansion: as the 1.6T mix rises and 6-inch InP vertical integration pays off, gross margin is moving toward the 42% target.
Global footprint: beyond the Sherman fab in the US, Coherent continues to expand assembly capacity in Malaysia and Vietnam to strengthen supply chain resilience.

6. Q&A Highlights

Key question: Will capacity expansion lead to oversupply?
- Management: InP and transceivers remain severely supply-constrained; customers are signing LTAs (long-term agreements) and even paying prepayments to lock in capacity. The supply gap is unlikely to close in 2026 or even 2027.
Key question: How competitive and profitable are 1.6T products?
- Management: 1.6T carries higher ASPs and margins than 800G. Coherent offers all three technology paths, EML, SiPh, and VCSEL, to meet different customer architectures.
Key question: What is the CPO commercialization timeline?
- Management: orders from key customers are already in hand, with volume ramp starting in 2026; CPO will be key to bringing the "all-optical network" into the server rack (scale-up).

7. Risks and Watch Items

Technology transition risk: the stability of high-volume production as InP moves from 3-inch to 6-inch wafers.
Customer concentration: demand swings at top AI hyperscalers could affect near-term revenue.
External supply dependence: despite aggressive vertical integration, some EML components still rely on external suppliers.

8. Bottom Line

In one sentence: Coherent is in a sweet spot as it transitions from 800G to 1.6T and capacity expansion drives a surge in profitability.
Core moat: the world's only 6-inch InP volume production capability plus vertically integrated technology barriers, securing its leadership in critical optical components.
Investment takeaway: with twin engines of rising volume and pricing plus falling costs, and with 6-inch utilization rising and CPO landing, valuation has room for continued upward revision over the next 6-8 quarters.