Earnings Call Highlights: Coherent (COHR) | FY26 Q3

1. Summary | Coherent Hits a SiPh + InP Double Play as AI Capacity Expansion Starts Paying Off

Coherent delivered record revenue of $1.8B this quarter, up 21% YoY, driven mainly by strong AI data center demand for optical modules. Management said the 6-inch InP (indium phosphide) capacity ramp is ahead of schedule and the capacity-doubling target will be reached a quarter early. Backed by a deep strategic partnership with NVIDIA (including a $2B equity investment and long-term agreements), Coherent has extended order visibility into 2028. Going forward, growth will be driven by three engines, 800G/1.6T modules, OCS optical switches, and CPO (co-packaged optics), with FY2027 growth momentum expected to exceed this fiscal year's.

2. Financials (Non-GAAP)

• Revenue: $1.8B (QoQ +7%, YoY +21%).

• Gross margin: 39.6% (QoQ +57 bps, YoY +105 bps), rising for 8 consecutive quarters.

• Operating margin: 20.3% (QoQ +40 bps, YoY +170 bps).

• EPS: $1.41 (YoY +55%), with profit growth far outpacing revenue growth.

• Opex: $348M (R&D share up to 9.9%, focused on 1.6T and CPO).

• CapEx: $290M (prior quarter $154M), with spending going all-in on capacity expansion.

• Cash position: $3B (including NVIDIA's $2B investment), with leverage down to 0.5x (from 1.7x).

• Segment performance:

  • Data Center & Comm: 75% of revenue, up 40% YoY.

  • Industrial: flat overall, though semiconductor equipment orders are recovering.

3. Outlook (FY26 Q4)

• Revenue guidance: $1.91B – $2.05B (midpoint $1.98B).

• Gross margin guidance: 39% – 41%.

• EPS guidance: $1.52 – $1.72.

• Growth drivers: mainly the fast ramp of 1.6T modules and rising OCS system shipments.

4. Product Updates

• InP platform (core competitive advantage):

  • 6-inch transition: the capacity-doubling target will be met a quarter early, in Q4. A 6-inch wafer yields 4x as many devices as a 3-inch wafer at less than half the cost.

  • Yields: EML, CW laser and PD yields on the 6-inch line now all exceed the legacy 3-inch line.

  • Expansion plan: in addition to the Texas and Sweden fabs, a third 6-inch fab will start up in Zurich, with capacity expected to double again in 2027.

• Optical transceivers:

  • 800G: will keep growing through calendar 2026.

  • 1.6T: ramping faster than expected; it will be the main growth engine this fiscal year and next.

• OCS (optical circuit switching):

  • Bottleneck cleared: the internal component supply bottleneck is gone, and output is ramping at two factories in parallel.

  • Market size: market opportunity raised to $4B, mainly for AI data center interconnect.

• CPO and the NVIDIA partnership:

  • Timeline: Scale-out CPO is expected to contribute revenue in 2H CY26; scale-up CPO starts in 2H CY27.

  • Scope of supply: not just CW lasers but also ELS modules, isolators, thermoelectric coolers, and fiber array units (FAU).

5. Forward Outlook

• Capacity advantage turning into margin: as the share of 6-inch InP rises, production costs will fall significantly, supporting the long-term gross margin target of >42%.

• New solutions:

  • Multi-rail systems: aimed at distributed AI workloads, expected to contribute revenue in 1H CY27, with an estimated market of $2B.

  • Thermal solutions: using Thermadite material with 2-5x better thermal conductivity than copper, expected to start generating revenue in 2H CY27.

• Supply chain strategy: locking in customer demand through LTAs (long-term agreements) and securing customer prepayments to fund CapEx.

6. Q&A Highlights

• Question: Why hasn't InP capacity doubling shown up in revenue immediately?

  • Management: There is a lead time of about 3 months (one quarter) from component production to module shipment. This quarter's growth reflects last quarter's capacity ramp, and next quarter's revenue is expected to benefit noticeably.

• Question: Which technology path for 1.6T products (EML vs SiPho)?

  • Management: Margins are similar for both. Coherent has both EML and silicon photonics (SiPho) technology, and the mix is ultimately determined by customer applications.

• Question: What about technology readiness for 3.2T?

  • Management: 400G-per-lambda silicon photonics was demonstrated at OFC and can support 3.2T needs, while 200G/400G VCSEL development is also on track.

7. Risks and Watch Points

• Vertical-integration inventory lag: the time gap between component production and module assembly may make revenue respond somewhat slowly.

• Industrial recovery weaker than expected: semiconductor equipment is strengthening, but traditional industrial applications remain soft.

• Technology path risk: if CPO adoption is slower than expected, long-term valuation will be affected.

• Geopolitics and capacity allocation: 6-inch capacity is highly concentrated in Texas and Europe; regional capacity allocation bears watching.

8. Bottom Line

• In one sentence: Coherent is at the sweet spot of shifting from a capacity-investment phase to a revenue-acceleration phase.

• Core moat: the world's only vertically integrated 6-inch InP production capability, combined with LTAs deeply tied to NVIDIA, creates very high cost and technology barriers.

• Investment takeaway: the dual ramp of 1.6T modules and OCS will carry FY2027 into a strong growth cycle. As high-margin 6-inch components make up a larger share, the profit structure will keep improving, with strong potential for upward revisions.