Coherent (COHR.US) Q4 conference call: No CPO delays were seen, orders for the 2027 fiscal year were basically full

The Zhitong Finance App learned that photonics giant Coherent (COHR.US) handed over a perfect report card for the fourth quarter of FY2026 after the market on Tuesday — revenue and profit both crushed Wall Street expectations. The guidance for the first quarter of fiscal year 2027 also strongly exceeded expectations, announcing to the market that demand for AI optical connectivity is far from peaking.

For the fourth fiscal quarter ending June 30, 2026, Coherent handed over a report card worth recording in the company's history: revenue of US$2.05 billion, up 34% year on year, about 3.5% higher than market expectations of US$1.98 billion; adjusted earnings per share of US$1.74, up 74% year over year, more than 7% higher than analysts' expectations of US$1.62; adjusted gross profit margin of 40.2%, up 215 basis points year on year; GAAP earnings per share increased by 381 basis points year on year. Losses of $0.83 improved significantly in the same period last year.

The expansion of production capacity is the core bottleneck in revenue growth, and the increase in gross margin is still in its early stages. The data center and communications sector has become the absolute mainstay, with Q4 revenue reaching US$1.62 billion (+59%), accounting for 79% of total revenue. CEO Jim Anderson made it clear that indium phosphide production capacity is still the most important growth constraint at present — the company is on track to double its internal indium phosphide production capacity year over year by the end of this quarter (one quarter ahead of schedule), and plans to more than double again before the end of the calendar year 2027. Production of Q4 indium phosphide lasers increased 80% year over year, directly supporting the continued growth of 800G transceivers and the “faster than expected” climb of 1.6T products.

Regarding gross profit margin (currently 40.2%, still far from the 42% + target), CFO Sherri Luther emphasized that the strategy to increase gross margin is still in its early stages — most of the 6-inch indium phosphide product climb has yet to arrive, and new product climbs such as 1.6T, OCS systems, CPO, multi-track systems, and thermal management solutions have not been fully implemented. The output of 6-inch wafers is 4 times that of 3-inch wafers, and the cost is only half that. As production capacity continues to be released, the cost structure improvement will gradually be realized. At the same time, the company has reduced SG&A's share of revenue from 10.5% to 9.2% through a regional shared service structure, and operating expenses have fallen below the target model of 18% of revenue.

Demand for CPOs/NPOs is not decreasing but increasing, and several new growth platforms are about to expand. In response to the market's recent concerns about CPO delays, Anderson clearly responded during the Q&A session: “We have not seen any delays in CPO demand; on the contrary, demand is increasing and customer requests are ahead of schedule.” Over the past 3 to 6 months, the intensity of customer cooperation between CPO and NPO has “increased significantly”, and almost all large strategic customers have related projects in progress. CPO revenue is expected to start contributing in the December quarter, and CPO revenue for vertical expansion is expected to begin flowing in the second half of 2027. A new integrated optical platform, PhotonLink, will be released in September, covering the complete signal chain from light generation to electrical signal conversion.

On the OCS side, the company has doubled the addressable market from 2 billion US dollars to more than 4 billion US dollars, and “may still be conservative”, and the application scenario has been extended from horizontal to vertical expansion. Samples of the multi-track system have been delivered to customers and are expected to start contributing revenue in the first half of 2027. In terms of order visibility, almost all bookings have been made for fiscal year 2027, customer orders have been extended to calendar year 2028, and long-term agreements have been extended until the end of this decade. The CEO clearly stated the goal: to achieve revenue of more than 3 billion US dollars in a single quarter by the end of fiscal year 2027 — this goal is far higher than the current market consensus, and is based on accelerated capacity expansion and the concentration of new product platforms.

Conference content

presenter

Hello everyone, welcome to the Coherent fourth quarter and fiscal year 2026 earnings conference call. Now I'm excited to introduce the host, Paul Silverstein, senior vice president of investor relations at Coherent. Please continue.

Paul Silverstein Senior Vice President of Investor Relations

Thank you to the host and good afternoon everyone. I am attending today with Coherent CEO Jim Anderson and Coherent CFO Sherri Luther. In today's conference call, we'll be providing a financial and business review for the fourth quarter of fiscal year 2026, as well as our business outlook for the first quarter of fiscal year 2027. Our financial press release can be found in the investor relations section of our corporate website at consistent.com.

I would like to remind everyone that during our conference call, we may make predictions or other forward-looking statements about future events or the future financial performance of the company. These statements are subject to a number of significant risks and uncertainties, and our actual results may vary materially. For a discussion of factors that may affect our future financial results and business, please refer to the disclosure in today's earnings press release, our latest Form 10-K and 10-Q, and our possible Form 8-K report to the U.S. Securities and Exchange Commission.

All of our statements are based on information available to us today (August 12, 2026). We are under no obligation to update any such statement except as required by law. During this conference call, we'll be discussing non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures with GAAP financial measures in our earnings press releases and investor presentations. These materials can be found in the investor relations section of our website on consistent.com.

Now let me give the call to our CEO Jim Anderson.

James Anderson CEO, President, and Staff Director

Thank you Paul, and thank you all for joining today's conference call. FY 2026 was an outstanding year for Coherent. Based on exam preparation, revenue increased 28% to a record $7 billion. Our revenue growth, combined with expanded gross margin and continued operating leverage, drove non-GAAP earnings per share growth of approximately 59%, more than double the revenue growth rate. We also maintained strong momentum at the end of the year. In the fourth quarter, our exam preparation revenue growth rate accelerated significantly. Revenue increased 14% month-on-month and 42% year over year, rather than GAAP earnings per share increased 74% year over year. Our accelerated growth rate reflects an excellent demand environment and the continued rapid expansion of our production capacity.

While we're very happy with our 2026 performance, we're even more excited for the year ahead. We expect growth to accelerate significantly in the 2027 fiscal year. After achieving the first $2 billion revenue quarter, we now expect to achieve our first quarter of over $3 billion in revenue by the end of fiscal year 2027. Coherent is a global leader in optoelectronics technology. Our broad optoelectronics technology platform is the foundation for AI data center performance and scalability. AI runs on computation, but extends to optical connections. Coherent is at the center of an extraordinary expansion of optical network infrastructure driven by the rapid growth of AI, the shift from copper to optical connectivity, and increasing demand for bandwidth and energy efficiency in increasingly large and complex data center architectures.

Our confidence in FY2027 is based on three factors: first, customer demand continues to grow, as evidenced by another record pre-order quarter; second, our supply of key components is increasing, including plans to double internal indium phosphide production year over year by the end of the quarter; and third, several new revenue streams are expected to start growing over the next few quarters, including optical circuit switching, co-packaged optics, multi-track systems, and advanced materials for data center thermal management and power management. With strong revenue growth, we expect gross margin to continue to expand and generate operating leverage, enabling us to grow earnings per share significantly faster than revenue. We expect fiscal year 2027 to be another outstanding year for Coherent.

Our data center and communications division continues to be a major driver of our growth, accounting for 79% of the company's total revenue in the fourth fiscal quarter. The division's revenue increased 40% for the full 2026 fiscal year. In the fourth quarter, our division's revenue growth rate accelerated significantly. Revenue increased 19% month-on-month and 59% year-on-year. Demand continues to strengthen, driving another record booking quarter and extending our visibility further into the future. Our order coverage for the 2027 calendar year was outstanding. Customer orders have now been extended to calendar year 2028, and customer long-term agreements have been extended until the end of this decade. We continue to see no signs of weakening customer demand. Our broad portfolio of optoelectronics technology, manufacturing scale, and significant US production footprint are increasingly differentiating Coherent from customers and translating into deeper, longer-term partnerships and revenue opportunities.

In our data center business, revenue for the full fiscal year 2026 increased by 41%. In the fourth quarter, our data center revenue growth rate accelerated significantly, with revenue growth of 24% month-on-month and year-over-year [66%]. This is our third consecutive quarter of double-digit month-on-month growth, and we expect continued strong month-on-month growth this quarter. Demand for our data center business remains extremely strong and spread across multiple customers and product categories. On the transceiver side, we expect growth to be driven by both 800G and 1.6T. We expect 800G revenue to continue to grow year over year 2026, while 1.6T transceivers will rapidly rise for the rest of the 2026 calendar year and calendar year 2027 as customer adoption expands.

In addition to transceivers, OCS revenue grew sequentially in the fourth quarter, and we expect to continue growing in the next few quarters as production capacity expands. We also expect the CPO to begin contributing to revenue growth in the second fiscal quarter, in line with our production climbing plan. Our 6-inch indium phosphide capacity expansion is a key driver of revenue growth and profit margin expansion. We are still on schedule to double our internal indium phosphide production capacity by the end of this quarter, one quarter ahead of schedule. This climb contributed significantly to our data center revenue growth in the fourth quarter, and we expect it to continue to be a significant growth driver in the first quarter. Looking further into the future, we are still on schedule to more than double our internal indium phosphide production capacity by the end of the 2027 calendar year. We've obtained the substrate and other critical inputs needed to support this climb. Due to strong customer demand, we are planning additional production capacity beyond 2027.

Our capacity expansion was driven by a shift to 6-inch indium phosphide production. Our 6-inch production lines in Texas and Sweden are producing EML, CW lasers, and photo-detectors, and yield continues to exceed our 3-inch production line. We are still on schedule to begin 6 inch production in Zurich in the first half of the 2027 calendar year, further expanding what we believe is a meaningful manufacturing advantage. Our Texas plant has also begun to produce ultra-high peak power CW lasers for CPO solutions, including those covered by our partnership with NVIDIA, and revenue is expected to begin growing in the second fiscal quarter.

Switch to OCS. Revenue increased in the fourth quarter as we continued to expand production. Given strong customer demand for our 320x320 platform and other system sizes, we expect OCS revenue to grow significantly in the 2027 fiscal year. We anticipate that OCS has a potential market opportunity of over $4 billion in data center interconnections, horizontal scaling, and vertical scaling networks. As we expand production at our two manufacturing sites, we expect OCS to be an increasingly important contributor to revenue growth and margin expansion. CPO, NPO, and other forms of light integration represent significant growth opportunities for Coherent. These technologies have enabled a shift from copper to optical connectivity and represent an incremental addressable market opportunity of more than $15 billion over the next few years.

At the ECOC industry event in September, we plan to launch Coherent PhotonLink, our new integrated optical platform. PhotonLink covers the complete optical signal chain, from light generation and beam shaping, transmission, and detection to converting the power back signal to an XPU or switching chip. The platform supports CPO, NPO, and other forms of optical integration. PhotonLink leverages the breadth of the coherent optoelectronic technology portfolio and manufacturing capabilities to enable next-generation data center architectures to achieve new levels of bandwidth, performance, and energy efficiency using optical links. We have deep collaboration with multiple customers on CPO and NPO applications, and we believe this provides a comparable content opportunity for Coherent. We expect the first revenue from PhotonLink-related products to begin in our December quarter. We'll be sharing more details about Photon Link at the launch event on September 21st.

Switch to our communications business. Customer demand remained strong in the fourth quarter. Communications revenue increased by approximately 54% in the 2026 fiscal year. Fourth-quarter revenue increased 11% month-on-month and 56% year-over-year, driven by continued strong data center connectivity, horizontal expansion, and traditional telecom applications. We expect another strong month-on-month growth in the first quarter. Demand is widely distributed across our product portfolio, and is particularly strong for DCI solutions (including ZR and ZR+ transceivers) as well as pump lasers and complex high-end optical subsystems. Multi-track is an important new growth opportunity in our communications business, aimed at scaling AI networks horizontally, as workloads increasingly span multiple data centers and require greater bandwidth between locations.

We estimate that the addressable market will exceed $2 billion by calendar year 2030, and we expect initial revenue to continue to grow in the first half of fiscal year 2027. In preparation for anticipated revenue climbing, we recently delivered samples to several customers. We believe Coherent is well-positioned with its broad technology portfolio, differentiated density and power efficiency, and strong customer engagement. We expect multi-track to be a meaningful contributor to revenue growth and margin expansion over time.

Turn to our industrial sector. In fiscal year 2026 and the fourth quarter, exam preparation revenue was roughly the same. In the fourth quarter, semiconductor capital equipment and display capital equipment both grew month-on-month and year-over-year, offset by continued weakness in the broader industrial market. We expect growth to resume in the next few quarters, led by semiconductor capital equipment, where bookings in this sector continue to strengthen. Over the long term, we've seen meaningful growth opportunities in several emerging applications. One example is data center XPU cooling. Our proprietary Thermadite material can improve thermal performance and achieve higher XPU performance, which translates into a larger amount of AI tokens per XPU.

We are working with several strategic customers and have delivered samples of Thermadite cooling solutions. We expect revenue to begin growing in the second half of the 2027 calendar year, which represents a meaningful expansion of our long-term market opportunities. We are also seeing long-term opportunities in fusion energy, quantum technology, and micro LED display capital equipment. Overall, we believe the industrial sector will resume growth and become an increasingly important source of diversified revenue over time. In summary, we entered fiscal year 2027 with rare customer demand, record visibility, expanding production capacity, and several new growth platforms that began to climb. We believe that with the breadth of its optoelectronic technology portfolio, manufacturing scale, and our significant US production footprint, Coherent is uniquely capable of seizing the opportunities of AI data center infrastructure expansion over the years.

I want to thank the entire Coherent team for their outstanding execution and innovation in FY2026. I'll give the phone to Sherri now.

Sherri Luther CFO and Treasurer

Thanks Jim. FY 2026 was an excellent year for Coherent. We achieved record revenue of $7.12 billion, increased gross margin by more than 150 basis points, increased operating margin by nearly 300 basis points, and increased non-GAAP earnings per share by 59%, significantly faster than revenue growth. We've also strengthened our balance sheet, reduced our debt leverage ratio from 2 times at the end of fiscal year 2025 to 0.7 times, while continuing to invest in production capacity and our product roadmap to support growing demand for AI data centers and communications.

Let me now sum up our performance. Fourth-quarter revenue was a record $2.05 billion, up 13% month-on-month and 34% year-over-year, driven by increased demand for AI data centers and communications. Based on exam preparation, revenue increased 14% month-on-month and 42% year-on-year, excluding the aerospace and defense business sold in the first and third quarters, respectively, and the Munich product division, Germany. Revenue for the full year of 2026 was US$7.12 billion, an increase of 23% over 2025, and an increase of 28% on the basis of exam preparation. The strength of AI data centers and communications was a key driver of our revenue growth for the full year 2026. FY2026 was the first time in Coherent's history that its revenue surpassed $7 billion.

Our fourth quarter non-GAAP gross margin was 40.2%, 66 basis points higher than the previous quarter and 215 basis points higher than the same period last year. Our full 2026 non-GAAP gross margin was 39.4%, an increase of 152 basis points over 2025. Gross margin performance continued to improve month-on-month and year-over-year, as a result of various initiatives we implemented throughout the 2026 fiscal year. We are seeing benefits from gross margin expansion strategies, mainly within the data center and communications sector. These improvements are driven by lower product input costs, increased manufacturing yield and efficiency (including our continued progress on the 6-inch indium phosphide platform), and the benefits of our pricing optimization efforts.

We expect gross margins to continue to improve over the next few quarters as pricing optimizations and cost structure improvements (such as increased production capacity of the 6-inch indium phosphide platform) continue to take effect. Non-GAAP operating expenses for the fourth quarter were $377 million, compared to $348 million in the previous quarter, compared to $307 million in the same period last year. Non-GAAP operating expenses as a share of revenue fell from 19.3% in the third quarter and 20.1% in the same period last year to 18.4% in the fourth quarter as we anticipate continued growth in initial revenue in the first half of 2027. Non-GAAP operating expenses for the full year 2026 increased from $1.17 billion in fiscal 2025 to $1.35 billion, mainly driven by increased investment in the product portfolio. As a percentage of revenue, operating expenses fell from 20.1% in 2025 to 19% in 2026.

R&D expenses as a share of revenue rose from 9.9% in the previous quarter and 9.8% in the same period last year to 10.2% in the fourth quarter. Looking at the full year, R&D expenses as a share of revenue rose to 9.7% from 9.5% in FY2025. The month-on-month and year-over-year growth was mainly driven by investments within the data center and communications sector's product portfolio. R&D investments remain focused on areas where we see the strongest long-term growth opportunities, including transceivers, CPO, OCS systems, and thermal management solutions. We continue to prioritize investments that meet customer needs while generating significant returns and supporting future growth.

Sales and management expenses fell as a share of revenue from 9.4% in the previous quarter and 10.3% in the same period last year to 8.2% in the fourth quarter. Looking at the full year, sales and management expenses fell to 9.2% from 10.5% in FY2025, reflecting continued progress in driving efficiency and generating greater operating leverage. During the 2026 fiscal year, we made significant progress in streamlining our operating model and driving greater operational efficiency. The expansion of our regional shared services structure has reduced costs, increased process consistency, and improved leverage in our global operations. Earnings realized this year have surpassed our initial expectations, and we expect these to continue to increase in the 2027 fiscal year.

Our fourth quarter non-GAAP operating margin increased to 21.8%, compared to 20.3% in the previous quarter and 18% in the same period last year. Our full 2026 non-GAAP operating margin increased to 20.5% from 17.8% in FY2025. Growth in the fourth quarter and throughout 2026 was driven by strong revenue growth, continued gross margin expansion, and improved operating leverage. Fourth-quarter non-GAAP diluted earnings per share were $1.74, up 23% from the third quarter and 74% higher than the same period last year. Non-GAAP earnings per share for FY2026 were $5.61, up 59% from FY2025. Profit growth continued to outpace revenue growth during the quarter and throughout the year, driven by strong revenue performance, expanded gross margin, and improved operating leverage.

Our cash balance at the end of fiscal year 2026 was $2.59 billion, compared to $3.05 billion at the end of the previous quarter and $1.63 billion at the end of fiscal year 2025. In line with our capital allocation priorities, we will continue to invest in opportunities we believe will drive long-term growth and profitability. These investments are mainly focused on expanding data center and communications capacity and advancing our product development roadmap. During the 2026 fiscal year, we paid back $513 million in debt, and our debt leverage ratio was 0.7 times when we left the current fiscal year, compared to 2 times at the end of fiscal year 2025. Our capital expenditure increased to $556 million, up from $290 million in the previous quarter and $131 million in the same period last year. This acceleration directly supports the future growth of our data center and communications business.

These strategic investments are expected to yield excellent financial returns. For example, our investments in the data center business have a payback period of approximately 18 months. Our confidence in these high-return investments is supported by superior customer visibility and a strong pipeline of purchase orders and long-term agreements. These capital expenses are mainly invested in advanced tools and state of the art manufacturing equipment to accelerate our mass manufacturing capabilities and optimize production yield.

Furthermore, as a vertically integrated manufacturer, this production capacity is significantly interchangeable because our infrastructure can be dynamically reused to support multiple product lines. Given the excellent demand situation and clear ROI visibility, we expect another month-on-month increase in capital expenditure in the first quarter. These results reflect strong customer demand, disciplined operational execution, continued progress in our gross margin expansion initiatives, and our investments in products and technologies we believe will drive future growth.

I'll now turn to our guidance for the first quarter of fiscal year 2027. We expect revenue between $2.2 billion and $2.4 billion. We expect non-GAAP gross margins of 39.5% to 41.5%. We anticipate total operating expenses of between $400 million and $420 million on a non-GAAP basis. We expect this quarter's tax rate to be between 18% and 20% on a non-GAAP basis. We expect earnings per share between $1.85 and $2.05 on a non-GAAP basis. We are entering the 2027 fiscal year with strong momentum, with a record backlog of orders, excellent visibility into customer needs, and a significantly stronger financial position. We remain focused on expanding production capacity, improving profitability, and allocating capital in a disciplined manner to support future growth and drive long-term shareholder value.

This concludes my formal remarks. Host, please open the conference call for a question and answer session.

Q&A session

presenter

[Operator Instructions] Our first question came from J.P. Morgan's Joe Cardoso.

Joseph Cardoso J.P. Morgan Research Division

Perhaps my first question, sounds like you guys are continuing to make good progress on the 6-inch climb, and even suggest further expansion after 2027. Can you give me an update on the climbing situation? Specifically, how should we consider how it translates into revenue and gross profit margin? Then I have a follow-up question.

James Anderson CEO, President, and Staff Director

Yes. Thanks Joe for the question. Yes, I'd say I'm quite satisfied with the progress of our 6-inch indium phosphide climb. I think the team did a great job in hill climbing production. As I mentioned in my prepared statement, we are planning to double our indium phosphide production capacity this quarter, which is a quarter ahead of our original plan. Then by the end of the next calendar year, we expect to more than double again. So we're in a pretty fast pace of expansion, executed very well, and actually a little ahead of our plans.

So I'm very happy with that. Perhaps a useful data point to measure our progress would be if I looked at our June quarter to see how many indium phosphide lasers we produced year over year. We produced about 80% more indium phosphide lasers in the June quarter compared to the same period last year. So the year-on-year increase was 80%. These are lasers specifically designed for our 800G transceivers and 1.6T transceivers. So this 80% year-on-year increase, I think, is a good measure of progress in continuing to expand our indium phosphide production capacity.

Then I think you asked about the relationship between this and income. Lasers grew 80% in the June quarter, and we use these — these essentially entered the current quarter's transceiver shipments. So we expect our data center to grow, for example, over 80% year over year this quarter. We definitely have lasers this quarter to achieve this. So that's how you can consider how it affects data center transceiver revenue growth.

A few more comments on progress. What I am satisfied with is that our production is also quite good. Our yield is better than our 3 inch product. So the yield of 6 inches is better than 3 inches. This applies to all three devices we mass-produce — CW, EML, and photo-detectors. So all three showed better yield than 3 inches. Another milestone I mentioned in my prepared statement is that we have now begun production and climbed the slope to produce ultra-high peak power CW lasers for CPO applications. We expect to see these revenues in the December quarter. Currently, factories in Texas and Sweden are climbing slopes. So we're doing 6-inch climbs at two locations, and we expect to launch a third 6-inch site in the first half of the 2027 calendar year. So yeah, I'd say I'm pretty happy with the progress. Thank you. Then it sounds, Joe, you have a follow-up question.

Joseph Cardoso J.P. Morgan Research Division

Yes, second—very useful info there. The second one is — maybe you're starting to touch on this, but CPO revenue starts in the December quarter. Just curious if you could provide some insight or more information on immediate and long-term opportunities. Especially considering the recent noise surrounding it in the market, concerns about delays, and the early pull of NPOs. Just curious if you could share any other info there, considering all this noise surrounding it.

James Anderson CEO, President, and Staff Director

Yes, of course. Thanks Joe. Yes. First, we haven't seen any delays in CPO requirements. In fact, quite the opposite. We are seeing an increase in demand, and customer demand requests are being brought forward. So we've only seen the opposite. Then that's the CPO specific aspect. Then another thing we've seen, particularly over the past 3 to 6 months, is a significant increase in CPO partnerships with customers, and now NPOs are also included. So I'd like to say that many of our clients have several very important collaborations involving CPO or NPO. So — yes, the intensity has really increased over the past 3 to 6 months. So we're very happy to see that.

As a reminder, when we talk about integrated optics, whether it's CPO or NPO or any other form, we have a very broad product portfolio to bring to our customers — not just a single ingredient, but a very broad product range. Of course, it includes lasers. We have very strong laser capabilities. However, lasers, external laser modules, optical components that enter the external laser module, such as isolators. We manufacture polarization-maintaining optical fibers. This is the kind of fiber you'll use to connect the laser module to the device or from the device to the front panel. We can do the complete assembly of the entire optical fiber attachment kit, we do SiPho PIC, etc. So we are able to bring a full range of integrated optical capabilities to our customers.

We see that NPO or CPO is just a different form factor for us. The amount of content we have in our NPO app is very comparable and very similar compared to CPO. So we just — we drive whatever options our customers prefer in their application type (CPO or NPO). We're there to support them. Then the other thing I mentioned we're launching in September is a new platform—a technology platform called PhotonLink. What we see with our customers on the CPO and NPO side is that customers don't want to just buy point-like components, such as lasers or isolators, but really want to help provide a complete solution.

So PhotonLink is our complete integration platform, which is basically a one-stop platform for integrating optics. Therefore, it covers the entire process from light generation to beam shaping and transmission, to detection and conversion of return signals. We'll be discussing it more at the September product launch event, but we think it's a great solution for customers who want a more complete solution based on initial customer reactions. So we're really excited about it, too.

presenter

Our next question comes from Raymond James's Simon Leopold.

Simon Leopold Raymond James Associates Research Division

Very good. The first thing I want to ask is that I know this hasn't been finalized yet, but there are media reports about possible import restrictions for optical transceivers. I think my question has two parts. The first aspect is, what exactly does this mean for Coherent? Part of it I think it applies to the Jobs Act to create jobs in the US. So can you move transceiver manufacturing to the US in practice? Will you or can you move that to the US? Then I have a follow-up question.

James Anderson CEO, President, and Staff Director

Yes. Thanks Simon. So that report is presently speculative. But of course we would benefit from something like this. As the largest transceiver supplier in the US, something like this would of course be beneficial. Although, we always want to compete for our customers' businesses based on our technology and our manufacturing. We believe we have the broadest and deepest optoelectronics technology in the industry and the broadest manufacturing footprint. One thing we're proud of about our manufacturing is, of course, we're a global manufacturer with production sites all over the world, which gives us resilience, and of course, we're also vertically integrated.

We manufacture many of the most important components ourselves. But Simon, as you mentioned, we have an excellent footprint in America. We have over 20 manufacturing facilities in the US. I think this is really a strategic advantage for us. One example is the Sherman plant in Texas. We manufacture critical components in Sherman, Texas, not only for transceivers, but also for CPO and NPO applications. We also have other facilities in the US where we manufacture other critical components, such as optical cables, such as garnet grown for transceiver isolators. So we need it — we're already investing in American manufacturing, but to the extent that we need to increase American manufacturing, we're definitely happy to do that. We started over 50 years ago as an American manufacturing company. So we have a good footprint, and of course we can continue to build on this.

Simon Leopold Raymond James Associates Research Division

Then the follow-up question is, I think you've given us a goal of over $3 billion in revenue for the fourth quarter of 2027 (June 2027). I think this is far higher than the current consensus. I'd like to better understand your views on gross margins. I know you've talked about the 42.5% target in the past. I was wondering if you could update your thoughts on the gross margin trajectory in light of the growth and changes in the mix?

James Anderson CEO, President, and Staff Director

Yes. I'll leave this to Sherri to review gross profit margins. But the short version is, we've made a lot of progress over the past few quarters, and of course, we'll do our best to keep moving forward. But Sherri, would you like to add something?

Sherri Luther CFO and Treasurer

Of course, of course, Jim. Thanks Simon. First, I'd like to say I'm very satisfied with the progress we've made in improving our gross margin. We increased our gross margin by 66 basis points month-on-month and 250 basis points year-over-year. In fact, we've increased our gross profit margin in 8 of the last 9 quarters. So this isn't just a trend. This shows that we are actively promoting improvements in gross margins. The improvements we have driven in those eight quarters have accumulated over 660 basis points. So clearly, this is an area we are actively promoting and focusing on.

Now our target for Investor Day, Simon, is greater than 42%. At the midpoint of our first quarter guidance, 40.5%, that's of course — we're still early. We still have a little way to go. I do think we are in the early stages of our gross margin expansion strategy. But we're very focused on reaching over 42%.

Let me tell you why I'm confident. The majority of the 6-inch indium phosphide product climbing the slope is still ahead of us. That hasn't arrived yet. New product climbs, such as the 1.6T OCS system, CPO, multi-track systems, thermal management solutions, all of these new products are yet to come. They're all ahead of us. Of course, we will continue to drive cost reduction and pricing optimization improvements. Most of the improvements we have driven so far are in these areas, and we have clear plans to drive what I think is a very important future opportunity. Once we reach our goal greater than 42%, we will definitely raise the target.

presenter

Our next question comes from George Notter of Wolfe Research.

George Notter Wolfe Research, LLC

I think I'm just curious about your current situation with transceiver combinations. Obviously, there is an initiative to internally procure data communication laser chips whenever possible. I'm just curious what percentage of your data communication laser chips are now purchased in-house. Then I knew there was a plan to exceed my own internal needs and supply EML externally. I'm just curious what the roadmap for commercial sale of EML in the marketplace looks like.

James Anderson CEO, President, and Staff Director

Yes. Thanks George. I'd like to say about the last point, given the demand we're seeing in the data center transceiver business, I don't think we'll be selling indium phosphide lasers abroad any time in the near future. Our data center transceiver requirements have absorbed all of our production capacity, or not enough. So I don't think I'll be able to do that anytime soon. Maybe a little further away. But today, we use a mix of in-house production and external procurement. I still believe that in the long run, part of our data communication transceivers will be supported by external sources. I think this is a good strategic reason for the transceiver business.

But I think this is growing very fast as we expand in-house production. I mentioned that we saw an 80% year-on-year increase in laser production in the June quarter, which will continue to grow from here considering the steep slope of indium phosphide. I expect over time a greater proportion of our transceivers will be serviced by internal indium phosphide.

George Notter Wolfe Research, LLC

Very good. Then as a quick follow-up. I'm curious about how you guys are on the VCSEL side. There seems to be a lot of new enthusiasm around VCSEL in vertically expanding applications. Obviously you're developing a 200G VCSEL. I'm just curious how that is going and what do you guys think of this opportunity for Coherent?

James Anderson CEO, President, and Staff Director

Yes. I think this is a great tool in our toolbox, right? 200G VCSEL in our toolbox. We continue to make good progress in this regard. I do think 200G VCSELs will be used in integrated optical applications such as NPO type applications. Therefore, we are actively cooperating with customers on VCSEL-related NPO or integrated optical applications. So of course, this is an important tool. Yes, we think that will be deployed.

presenter

Our next question comes from Needham & Company's Ryan Koontz.

Ryan Koontz Needham & Company, LLC Research Division

I'd like to ask about your capacity limits. I was wondering if you could take a look at your input capacity limits and your own internal production capacity limits. How should investors consider this? And where are you investing now, but what are the most acute pain points of growing your business over the next 12 months?

James Anderson CEO, President, and Staff Director

Yes. Thanks Ryan. I wouldn't say indium phosphide production capacity is still a major constraint we face. That's why we're so focused on climbing the slope of 6-inch production — for example, if we look at transceivers, we're now unrestricted in terms of assembly and testing capacity. We have available production capacity. We are really limited only by climbing the slope of indium phosphide production. So as we continue to climb indium phosphide production, we expect that will continue to help drive revenue growth in our transceiver business. So it's that simple. That's the main limitation.

Ryan Koontz Needham & Company, LLC Research Division

Helpful. Maybe when you consider the telecommunications sector and multi-rail and pump lasers, etc., how do you see the monetization opportunities in the various components or systems you might enter this market?

James Anderson CEO, President, and Staff Director

Yes. Thanks Ryan. In that market, we actually sell on many different levels. So we do sell components to this market. We sell what I call subsystems. So these would be amplifiers, line cards, and in some cases, we would sell complete systems. So we sell on multiple levels. I'd say the growth there is very strong. In the field of communications, this horizontal expansion of DCI is part of our communications business. We saw 56% year-over-year growth in this sector in the June quarter. I think the division is moving forward, and as we've seen in data center applications, we expect growth to continue to accelerate in the future.

This involves many different products, whether it's our ZR, ZR+ transceivers, or components such as pump lasers or products that go into pump lasers. Then as I mentioned in my prepared statement, soon we'll start to see revenue from the multi-track system. So our multi-track system technology is now in the hands of our customers. We've already sampled, and we expect revenue to start flowing in from multiple tracks in the first half of the 2027 calendar year. So yes, there's a wide range of products out there. I'd say the demand for any DCI or horizontal scaling related continues to grow.

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Our next question comes from Jefferies' Blayne Curtis.

Blayne Curtis Jefferies LLC Research Division

I have two questions. First, maybe you can talk about OCS requirements. I meant you mentioned the $4 billion TAM. I think you're starting to ship in small quantities. Can you talk about where you see the demand and how broad? I think there are also extended applications, such as in-rack, etc. Can you please comment on it?

James Anderson CEO, President, and Staff Director

Yes, of course, Blayne. Our range of applications is indeed constantly expanding. So initially, when we started looking at OCS, we mainly considered it in the context of horizontal scaling. But now it's clear we think we'll see adoption in horizontal scaling, and there's a clear path to vertical scaling. That's why we have active customer partnerships in vertically expanding applications. This is what really led us to double our market size outlook at OFC earlier this year. So we doubled from [$2 billion] to over $4 billion. And as far as the long-term addressable market is concerned, we're probably even conservative about that $4 billion figure. I think that's for the 2030 time frame.

So yeah, we're only seeing apps expanding, and demand seems stronger than we thought 6 or 12 months ago. So it looks really good. Then about our progress, yeah, I'm happy with our progress. The demand is clearly there. So our real focus is to increase production capacity as soon as possible. We saw revenue growth in the June quarter. As I look ahead to the next few quarters, we expect to continue to expand production capacity and then drive faster revenue growth. So we believe this will become a very important product line for us over time.

Blayne Curtis Jefferies LLC Research Division

Then I wanted to go back to NPO. Can you talk about whether there's a way to think about the number of projects you're working on? Then I wanted to dive deeper, and there were lots of questions about — you said the content would be different from CPO, but then I thought there was some discussion about integration, then you answered a question about VCSEL. So can you go through that content? Where do you see demand? Is there uniformity in the projects you are currently working on, and is that likely to change in the future? Can you walk it over?

James Anderson CEO, President, and Staff Director

Of course. What I want to say is that almost every client we work with, a large strategic customer, we have a CPO or NPO project in progress, and in some cases, both CPO and NPO projects. So — over the past 3 to 6 months, this intensity and engagement around the Chief Product Officer (CPO) and/or non-profit organization (NPO) has indeed increased significantly. So I'd like to say these collaborations are very active. As a reminder, as I said before, we're not just bringing an ingredient such as a laser to the solution. We bring a complete platform solution, lasers, interconnects, different optical components, etc. So I'd like to say that all major customers cooperate.

Then on to the second part of your question, about the amount of content, yes, we saw that CPO and NPO content levels are comparable. For us, it's just a different connection point, whether it's directly connected to the silicon chip or to the motherboard, CPO, or NPO, we've seen

At the level of content, we think it's very similar. Perhaps this is because we offer a fairly wide range of solutions in both types of applications. But we see a similar level of content. I want to say all of this, and I want to point out that it's an incremental addressable market for us, and for the optical industry in general. I mean, most of these projects focus on expanding applications vertically, and we'll be converting more of those copper wires to optics over the next few years. So this is a great addressable market expansion for us, and we expect this to be our main area of growth.

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Our next question comes from BNP Paribas's Karl Ackerman.

Karl Ackerman BNP Paribas Research Division

Two questions, if you can. First question, Jim, you talked about revenue of over $3 billion at the end of fiscal year 2027, which is pretty strong. Can you expand a bit and describe how much of this improvement is likely to come from the 1.6T transceiver? You mentioned OCS requirements. You talked about multitrack. Maybe a lot of that comes from backorders or pricing? It would be really helpful if you could sort it out a bit. I have a follow-up question.

James Anderson CEO, President, and Staff Director

Yes. Thanks Karl. First, that's all—the main drivers there are data centers and communications. We expect some improvements in the industry, but most of them are driven by data centers and communications, considering that accounts for 80% of our revenue. And in that, I'd like to say, of course, transceivers are an important factor driving this trend. We have 800G still growing very strongly year over year. Then the 1.6T was climbing the hill incredibly fast. In fact, we saw that the 1.6T climb was only advanced, and demand increased even more. So that climb was even faster than we thought 3 months ago.

So 800G, 1.6T transceivers are the main factors. But in addition to that, OCS has climbed in the course of this fiscal year, and the CPO is now actually starting to launch in the December quarter and climbing in subsequent quarters. We talked about multi-track. Then yes, there are the pricing improvements we are promoting, either normal pricing improvements, or some pricing improvements in long-term agreements with customers that are also taking effect. So there really are a lot of factors. When it comes to data centers and communications, I -- trying to think if there are any product lines we don't have supply restrictions. Demand is strong in almost every product in data centers and communications. This is actually a question of increasing sales speed and production capacity as fast as possible. So our top priority at the time was to increase production capacity as fast as possible.

Karl Ackerman BNP Paribas Research Division

Then you also talked about extending customer orders until 2028 and long-term agreements until the end of this decade. When you discuss long-term agreements extending to 2028, is that a higher amount of commitment in 2028 than in 2027? Maybe you can provide some guidance on the volume promises you're seeing today and how this has improved over the past 90 days.

James Anderson CEO, President, and Staff Director

Yes. Thanks Karl. First, when I talk about the recent past, we're talking about purchase orders or backlogs. So as far as the backlog of orders and bookings is concerned, if we take the June quarter, we saw — I would call it an extraordinary level of bookings, with another record number of bookings in the June quarter. So our backlog of orders now extends to — almost fully booked for the 2027 fiscal year. We actually booked until the end of the 2027 calendar year. What we're seeing now — customers are now looking at the 2028 calendar year, right, these are purchase orders for specific products, etc. So that's really good because it's a very high quality visibility of immediate demand.

Then, at the same time, in parallel, many customers entered into long-term agreements with us. These long-term agreements were supplied over a period of many years, many of which extended until the end of this decade. Yes, usually these agreements increase supply every year, because we are expanding production capacity to introduce or support their future demand requirements, so we expand production capacity and expand demand for them. Then they have pricing related promises. Then they also have some kind of minimum requirement guarantee, which from our customers you sometimes call a no-holds-bargain agreement. So these long-term agreements are also very helpful. These gave us great visibility, not just beyond 2028; they gave us a very clear understanding of the key products we need to develop over the next ten years and the production capacity we need to expand.

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Our next question comes from Morgan Stanley's Meta Marshall.

Meta Marshall Morgan Stanley Research Division

Very good. Maybe a problem. Sherri, I know you mentioned that 6 inch yield is an important part of gross margin growth. But as we consider next year, how many of the improvements are really yield improvements and product mix or pricing? And then the second question, Jim, asks you a question. I know someone has asked about restrictions that might be implemented. But have you seen a change in the urgency for customers to acquire products? I know you guys are mostly sold out. But in terms of changes in customer communications over the past few weeks.

Sherri Luther CFO and Treasurer

Thank you Meta for the question. Regarding the 6-inch yield, I'm referring to the 6-inch cost structure. Because if you remember, we talked about 6-inch wafers -- we came from that wafer that produced 4 times that of 3 inches, right, 4 times the cost, but only half the cost. So it's a cost structure that works for us. When I talk about the factors in front of us that will help drive the improvement in gross margin, it's really a climb for 6-inch indium phosphide products, which will benefit us due to the 6-inch cost structure. I think Jim...

James Anderson CEO, President, and Staff Director

Yes. I just wanted to reiterate what I said before, when we look at the 6 inch yield, the 6 inch yield is actually higher than our 3 inch production. So again, 6 inches more is a benefit of the cost structure — the benefit of the cost structure. Then on to the second part of your question, about customer reactions to recent Reuters articles. I'd say, yes, we've seen it — lots of customers have contacted us and discussed manufacturing and exploring different options. So yeah, I'd say that really stimulated some new customer demand and supply discussions. So these discussions are ongoing.

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Our next question comes from Bank of America's Vivek Arya.

Vivek Arya Bank of America Securities Research Division

First question, Jim, CPO for vertical expansion, what is Coherent's timeline? Is it the second half of 2027? Is it 2028? Then how broad is it? And what are the objections from customers who don't want early adoption?

James Anderson CEO, President, and Staff Director

Thanks Vivek. Yes, we — as I think we've said in the past, we expect revenue from CPO's for large-scale apps to begin pouring in in the second half of 2027. Yes, this has been an agreement for us for quite some time. So our CPO, which is currently climbing, will first enter horizontal scaling applications, then that will continue to grow, then vertical expansion will begin in the second half of 2027.

Then the customer, I would say in the field of vertical expansion, with the customer, if we don't have CPO discussions, they are at least considering or participating in an NPO with us. So I think almost every customer we have, and of course, an important strategic customer, has participated in CPO or NPO discussions with us. Depending on their architecture, our customers have different opinions depending on whether they are more inclined to start with an NPO form factor or a CPO. Some of our clients involved in NPOs, I expect to eventually switch to CPO in the future, and some choose to go directly to CPO. It really depends on the specific customer and comes down to their specific architecture.

Vivek Arya Bank of America Securities Research Division

Understood. Then I'll follow up and maybe ask another question about gross margin. Yes — this may be more far-fetched, but in the first half of this year, we saw more incremental gross margin; I think, 40% mid-range or better. I think your guidance for September is around 40% lower. I'm just curious what's so special about September? And, given that you've given us a full year range, how should we consider incremental gross margin transmission for FY2027?

Sherri Luther CFO and Treasurer

Yes. So when you think about it, Vivek, you think about future gross margin improvements, this really drives all the initiatives I mentioned, right, continuous cost reduction and pricing optimization. We'll continue to focus on it. The timing of these benefits will vary, as it depends on the initiatives and when they launch. As we climbed the hill for the rest of the year, reaching the $3 billion revenue figure by the end of fiscal year 2027, as Jim mentioned, you talked about revenue opportunities there. He mentioned a new product, right? You mentioned 1.6T OCS, CPO, all of which are launching, which will benefit our gross margin. So that will help increase gross profit margins as we continue to move forward.

But when you talk about gross margin transmission and things you can consider, another thing I want to make sure to catch your attention is that if you look at our operating expenses, we're already below our operations — our target model — by the midpoint of the first-quarter guidance we provided. So we just came up with a target model of 18% operating expenses last year. At the midpoint of our first quarter guidance, we were already below that. We will continue to improve operational efficiency. We have made tremendous progress in sales and management expenses, but there is also some operating leverage we will gain from R&D. So when you consider total conduction, keep that in mind, and I just wanted to point out that because I expect this to be an excellent opportunity to achieve greater operational leverage for the reasons I just described.

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Our next question comes from Michael Genovese of Rosenblatt Securities.

Michael Genovese Rosenblatt Securities Inc. Research Division

Jim, it's really good to see the CPO laser revenue expectations for the second fiscal quarter, because that would mean you're either qualified or have qualified prospects, and would go against some vague claims. I don't think that's from Wall Street, but more from Substack saying you have a problem with that laser. So just a little more about your confidence in being ready for customers to actually confirm revenue in that quarter, and recent progress.

James Anderson CEO, President, and Staff Director

Yes. I'm really happy with getting in. I think the team did a great job. I actually think our design on that particular laser is excellent, with some significant technical advantages and production capacity advantages. Yes, we have already started producing wafers for the December quarter, and that customer continues to tell us, please ship as soon as possible. So yeah, I think we feel really good about that. But as a reminder, it's not just lasers, right? We supply lasers, external laser modules, different optical connectors, optical cables, and fiber attachment units. We supply a lot of content, not just lasers. But lasers are a key component.

Michael Genovese Rosenblatt Securities Inc. Research Division

Very good. Sounds great. One last question. You've mentioned long-term agreements many times, which give you revenue visibility. My question is, does that also give you pricing visibility. Specifically, how long do you think laser prices will continue to rise as you plan your long-term agreement and increased production capacity and the potential for increased competition from China? But with your confidence, how long until we don't have to worry about laser prices stopping rising.

James Anderson CEO, President, and Staff Director

Yes. That's a great question, Michael. When we make long-term agreements, they almost always have not only sales promises, but also price agreements. So pricing is set for the entire term of the long-term agreement, and I think this is true for all or almost all of our long-term agreements. Some of them are 3 years, and many extend until the end of this decade. So this gives us great visibility, not only the amount we need to drive, but also the pricing we can expect. So there's good visibility from both aspects.

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This concludes our question and answer session. I'd like to finish by handing over the microphone to Jim Anderson.

James Anderson CEO, President and Staff Director

Yes. Thank you to the host, and thank you all again for joining our conference call today. Therefore, we are entering the 2027 fiscal year with strong development momentum, and customer demand is strong. Given our current production capacity and the rapid development of new growth platforms in the future, growth prospects will undoubtedly accelerate. I think with our optoelectronic technology and manufacturing scale, I think the company's future development situation is very good. So I just want to thank our employees once again for their amazing work in FY2026, and all of our customers, partners, and shareholders for their support. Thanks and we look forward to updating you again next quarter.

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That concludes today's conference call. You can now hang up the line. Thank you for participating.