Coherent Q1 2027 Earnings Call Transcript

Coherent (NYSE:COHR) reported first-quarter financial results on Wednesday. The transcript from the company’s first-quarter earnings call has been provided below.

This transcript is brought to you by Benzinga APIs. For real-time access to our entire catalog, please visit https://www.benzinga.com/apis/ for a consultation.

View the webcast at https://viavid.webcasts.com/starthere.jsp?ei=1778100&amp%3Btp_key=f7c6ff35982

Summary

Coherent reported a 16% sequential and 56% year-over-year revenue increase for Q1 2027, with non-GAAP EPS growth of 80% year over year.

The company forecasts achieving $3 billion in revenue by the end of fiscal 2027 and $4 billion in fiscal 2028, driven by strong demand in data centers and communications.

PhotonLink, a new integrated optics platform, is expected to exceed $100 million in revenue by March 2027, with a $20 billion LTA signed with a major AI company.

Indium phosphide capacity expansion is progressing ahead of schedule, with plans to more than double output by the end of 2027.

Coherent’s gross margin target has been raised to over 45% by the end of 2028, supported by pricing optimization, new product ramps, and cost improvements.

Full Transcript

OPERATOR

Greetings and welcome to the Coherent first quarter fiscal year 2027 earnings webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded.

It is now my pleasure to introduce your host, Mr. Paul Silverstein, Senior Vice President of Investor Relations for Coherent. Please go ahead.

Paul Silverstein (Senior Vice President of Investor Relations)

Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Coherent CEO, and Sherri Luther, Coherent CFO. During today’s call we will provide a financial and business review of the first quarter fiscal 2027 and the business outlook for the second quarter of fiscal 2027. Our earnings press release can be found in the Investor Relations section of our company website at coherent.com. I would like to remind everyone that during our conference call we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. These are subject to a number of significant risks and uncertainties, and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today’s earnings release, our most recent Forms 10-K and 10-Q, and the report that we may file in Form 8-K with the Securities and Exchange Commission.

All our statements are made as of today, November 4, 2026, based on information currently available to us. Except as required by law, we assume no obligation to update any such statements. During this call we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release and investor presentation that can be found on the Investor Relations section of our website at coherent.com. Let me now turn the call over to our CEO, Jim Anderson.

Jim Anderson (Chief Executive Officer)

Thank you, Paul, and thank you everyone for joining today’s call. Q1 marked a strong start to fiscal 2027. Revenue increased 16% sequentially and 56% year over year on a pro forma basis. Non-GAAP EPS increased 80% year over year, reflecting continued gross margin expansion and operating leverage. Strong customer demand and our rapid capacity expansion are supporting this growth. With near-term bookings and newly signed LTAs providing multi-year visibility, we remain on track to achieve our first $3 billion revenue quarter.

By the end of fiscal 27, we expect the full-year pro forma revenue growth rate to exceed 60%, more than double our fiscal 26 pro forma growth rate. We also have a clear line of sight to our first $4 billion revenue quarter in fiscal 28. Coherent is a photonics platform company bringing together technologies across the optical signal chain from materials and components through subsystems and complete solutions. Our breadth positions us to support customers across data center and communications networks. We’re at the center of an extraordinary expansion in optical networking infrastructure driven by rapid AI growth, the transition from copper to optical connectivity, and rising demand for bandwidth and energy efficiency across increasingly large and complex data center architectures.

Our established businesses continue to grow rapidly, with data center revenue up 85% year over year in Q1. At the same time, new growth areas are ramping as well as, for example, scale across. Data center interconnect revenue is growing rapidly, with Q1 revenue roughly quadrupling year over year and reaching a nearly $1 billion annualized revenue run rate. In addition, PhotonLink, our newly announced integrated optics platform, is also beginning to ramp, and we expect PhotonLink revenue to exceed $100 million in our March quarter.

Accelerating revenue growth, continued gross margin expansion, and operating leverage position us to grow profitability faster than revenue. We expect fiscal 27 to be an exceptional year for Coherent. Moving to our Data Center and Communications segment. Revenue increased 21% sequentially and 79% year over year, marking a fourth consecutive quarter of accelerating growth on both a sequential and year-over-year basis. The segment now accounts for 82% of Coherent’s total revenue. Near-term demand remains strong and our visibility into long-term demand continues to improve. Order coverage through calendar 27 is exceptional and customer orders increasingly extend into calendar 28.

We signed multiple new LTAs in Q1 and customer LTAs typically extend through the end of the decade. We continue to see no signs of attenuation in demand within the segment. Data center revenue increased 17% sequentially and 85% year over year, marking our fourth consecutive quarter of double-digit sequential growth. We expect another quarter of strong sequential and year-over-year growth in the current quarter. In data center transceivers, we’re ramping 1.6T products with multiple customers while continuing to grow 800G revenue. We expect strong transceiver revenue growth in Q2 driven by both 1.6T and 800G. We expect 1.6T revenue to continue ramping rapidly over the coming quarters while 800G revenue continues to grow through calendar 27. At ECOC in September, we demonstrated our progress beyond 1.6T with a 3.2T OSFP pluggable transceiver built with our 400-gig differential EMLs and photodiodes.

We expect pluggable transceivers to remain the dominant form factor for scale-out networks over the coming years. Coherent is helping shape the industry ecosystem for emerging formats, demonstrating XPO at OFC and also supporting the new OSFP form factor. Turning to OCS, customer engagement is broadening across scale across scale-out and scale-up networks spanning our 320×320 platform and denser configurations. We’re expanding production at two sites to meet demand as capacity ramps. We expect OCS to become an increasingly meaningful contributor to revenue growth and margin expansion.

At ECOC in September we launched PhotonLink, our new platform for integrated optics. It’s designed to address the transition from copper to optical connectivity in AI data centers, creating a significant opportunity for Coherent. We estimate that CPO, NPO, and chip-to-chip optical interconnects represent approximately $30 billion of market opportunity by 2030, bringing our total market opportunity for Data Center and Communications to about $90 billion in 2030.

PhotonLink brings together Coherent’s photonic technologies and manufacturing capabilities in an end-to-end platform that spans the optical signal chain from generating and shaping light through transmission and detection to converting signal to electrical form. The platform is designed for a wide range of architectures and applications including CPO and NPO, scale-out and scale-up networks, and scale-in chip-to-chip links. It includes lasers, laser modules, complex fiber assemblies, and other optical components and supports indium phosphide-based CW lasers and VCSEL-based technologies.

We believe this breadth and depth differentiates us. For an XPU or switch chip with 100 terabits per second of bandwidth, we estimate our content opportunity can reach approximately $15,000 per chip. Customer engagement is validating the opportunity. In Q1 we signed another significant PhotonLink LTA with a major AI company. The total revenue value of this new LTA is approximately $20 billion over five years, with revenue beginning to ramp in early calendar 28. This is in addition to our previously announced LTA with Nvidia. Beyond these two anchor customers, we have more than 10 additional CPO engagements, more than 10 NPO engagements, and more than five chip-to-chip engagements.

We expect PhotonLink revenue to ramp quickly over the coming quarters. We expect revenue to exceed $100 million in our March quarter and to exceed $250 million per quarter before the end of calendar 27. Expected shipments in the current quarter include a range of CPO products including our ultra-high-power 400 milliwatt CW laser, our fiber assembly solutions, and other products. PhotonLink is initially being deployed in CPO scale-out applications.

We expect to begin shipping PhotonLink products for CPO and NPO scale-up applications in the second half of calendar. Over time we expect PhotonLink to become a multi-billion-dollar product line for Coherent. Expanding our indium phosphide capacity is a key enabler of growth in both indium phosphide pluggable transceivers and indium phosphide-enabled PhotonLink solutions. Our 6-inch indium phosphide expansion is progressing well. We doubled our internal indium phosphide output capacity year over year in Q1, one quarter ahead of our original plan. Q1 was our highest production quarter ever for EMLs, including both 100G and 200G devices. The ramp contributed meaningfully to data center growth and we expect it to remain an important driver of revenue and gross margin.

Most of the gross margin benefit of our indium phosphide expansion is still ahead of us as the expansion will enable us to increase our mix of internally sourced indium phosphide components which have a tremendous cost advantage. We remain on track to more than double our internal indium phosphide output capacity again by the end of calendar 27. We’ve secured the substrates and other critical inputs needed to support this ramp and, given the strength of customer demand, are planning additional capacity expansion beyond 2027.

Our 6-inch lines in Texas and Sweden are producing EMLs, CW lasers, and high-speed photodiodes with yields that continue to exceed those of our 3-inch lines. Production includes our 400 milliwatt CW laser for CPO, which is covered by our Nvidia partnership and is expected to begin generating revenue this quarter. We also remain on track to begin 6-inch indium phosphide production in Zurich in the first half of calendar 27, further extending what we believe is a meaningful manufacturing advantage.

Moving to Communications, revenue increased 34% sequentially and 84% year over year, and we expect another quarter of strong sequential and year-over-year growth in the current quarter. Traditional telecom continued to grow but the primary growth driver was scale across, which has quickly become the largest source of revenue within Communications. Over the past year we’ve expanded our data center interconnect portfolio to help customers connect data centers with greater capacity and efficiency.

Building on our leadership in pump lasers and our broad component portfolio, we’ve introduced higher-level products including modules, line cards, subsystems, and our new MultiRail solution. These offerings are seeing strong customer demand and help customers make better use of existing fiber while scaling high-capacity links between distributed AI data centers. In Q1 scale across revenue exceeded $200 million, up 53% sequentially and nearly fourfold year over year.

That puts the business at a nearly $1 billion annualized revenue run rate, making it one of our fastest-growing businesses. With MultiRail beginning to ramp in our March quarter, we expect quarterly scale across revenue to roughly double from the Q1 level by the end of calendar 27. Turning to Industrial, Q1 revenue was flat sequentially and year over year on a pro forma basis. Bookings were strong, led by semiconductor capital equipment customers, and we expect growth to resume in the current quarter. Near-term growth is being driven by semiconductor capital equipment, AI infrastructure, and fusion energy. In semiconductor equipment, our lasers, precision optics, and engineered materials serve front-end applications and we’ve seen a strong uptick in bookings.

In AI infrastructure, our CO2 lasers and zinc selenide optics are used to drill advanced circuit boards for AI servers. Demand is also growing for our pulsed laser deposition systems used to produce high-temperature superconductor tape for magnetic fusion. Over the longer term, we see significant opportunities in data center XPU cooling and quantum technologies. For AI data centers, our Thermadite material can enable higher XPU performance and token generation.

We’re shipping prototypes to several strategic customers this quarter and we expect revenue to begin ramping in the second half of calendar 27. In quantum, we supply lasers and materials to leading quantum technology developers and are engaged in next-generation programs. Given the multiple growth areas, we expect our Industrial segment to return to growth and build momentum over the coming quarters. In summary, Q1 demonstrated the strength of our growth momentum and the breadth of our opportunity. Demand remains strong, customer commitments continue to deepen our visibility, and we are expanding capacity ahead of plan. Established businesses continue to grow rapidly while new growth areas are ramping up quickly. Our focus is on execution, expanding capacity, delivering for our customers, and improving profitability as we grow. We believe this combination positions Coherent for sustained growth in fiscal 27 and beyond.

I want to thank our team for their outstanding work this quarter. I’ll now turn the call over to Sherry.

Sherri Luther (Chief Financial Officer and Treasurer)

Thank you, Jim. I’m extremely pleased with the outstanding Q1 financial results. Our performance in the first quarter represents a powerful continuation of our growth trajectory characterized by accelerating top line momentum, durable Structural gross margin expansion and significant operating leverage. The compounding impact of these operational drivers fuels non-GAAP EPS growth to significantly outpace revenue growth. We achieved this strong performance while preserving balance sheet flexibility and strategically directing capital toward targeted capacity expansions and making investments in our product roadmap to support robust AI data center and communications demand. Let me now provide a summary of our results.

First quarter revenue was a record $2.37 billion, representing a sequential acceleration of 16% and a substantial 50% increase year over year. This performance was driven by the continued AI infrastructure buildout across our data center and communications businesses. On a pro forma basis, excluding the financial impact of the aerospace and defense business and the Munich, Germany product division, both of which were divested in 2026, revenue increased 16% sequentially and 56% year over year.

Our non-GAAP gross margin for the first quarter was 40.6%, representing a 37 basis point increase sequentially and a 184 basis point improvement as compared to the year-ago quarter. This continuous expansion reflects durable pricing optimization and structural cost improvements, particularly within our data center and communications segment. The improvements in gross margin both sequentially and year over year were driven primarily by pricing optimization, lower product input costs, and improved manufacturing yields.

We have made significant progress with our pricing optimization strategy to ensure that we price our highly differentiated products for the value they provide to our customers. Our gross margin profile is also benefiting from the transition to 6-inch indium phosphide as we continue to scale our production capacity. Given the progress that we have made over the past couple of years and our current trajectory, it is clear that we need to raise our gross margin target. We now expect to achieve our first quarter with gross margin above 45% before the end of calendar 2028. We believe the drivers of this gross margin expansion are continued pricing optimization, ramp of new growth platforms, full operational leverage of our 6-inch indium phosphide capacity, and other cost improvements.

I also want to note that the new over-45% target is 300 basis points higher than the long-term target we provided to the investment community only 18 months ago. First quarter non-GAAP operating expense was $412 million compared to $377 million in Q4 and $304 million in the year-ago quarter. Non-GAAP operating expenses as a percentage of revenue decreased meaningfully to 17.4%, down from 18.4% in the prior quarter and 19.2% in the year-ago quarter. This improvement reflects enhanced operational discipline and underscores the powerful operating leverage inherent in our business. From an R&D perspective, we are strategically directing our capital toward high-conviction long-term growth drivers which Jim outlined in his remarks.

This disciplined approach ensures our investments are concentrated where they generate the highest financial returns and drive sustainable revenue growth. Our first quarter non-GAAP operating margin increased to 23.2% from 21.8% in the prior quarter and 19.5% in the year-ago quarter. The sequential and year-over-year increases were driven by strong revenue growth, expanding gross margin, and structural expense discipline. First quarter non-GAAP earnings per diluted share was $2.09, up 20% from the prior quarter and up 80% from the year-ago quarter. Earnings growth continued to exceed revenue growth, demonstrating gross margin expansion and operational leverage accelerating our bottom line profitability.

Turning to the balance sheet, we closed the quarter with a healthy cash balance of $2.34 billion compared to $2.59 billion at the end of the prior quarter and $1.55 billion at the end of the year-ago quarter. Our debt leverage ratio at the end of Q1 was 1.1 times. As we continue to maintain a highly resilient and flexible balance sheet consistent with our capital allocation priorities, we strategically invested in opportunities that will drive long-term growth and profitability.

Capital expenditures for the first quarter increased sequentially to $776 million, up from $556 million in the prior quarter and $104 million in the year-ago quarter. These investments directly support the future growth of our data center and communications businesses with excellent financial returns. Our conviction to deploy this capital at an accelerated rate is backed by exceptional customer visibility, a robust pipeline of committed purchase orders, and additional multi-year supply agreements.

Furthermore, this capacity offers significant fungibility as our infrastructure can be efficiently repurposed to support multiple product lines. Given the strong visibility and record backlog, we expect capital expenditures to increase sequentially again in the second quarter. With our strong balance sheet and profitability trajectory, we possess the scale and flexibility to continue investing capital toward high-ROI growth initiatives while supporting customer demand.

I will now turn to our guidance. For the second quarter of fiscal 2027, we expect revenue to be between $2.55 billion and $2.75 billion. We expect non-GAAP gross margin to be between 40% and 42%. We expect total operating expenses of between $430 million and $450 million. On a non-GAAP basis, we expect the tax rate for the quarter to be between 18% and 20%. On a non-GAAP basis, we expect non-GAAP diluted EPS to be between $2.28 and $2.48. In summary, fiscal 2027 is off to a powerful start. With strong financial momentum backed by deep demand visibility, our focus remains on rapidly ramping capacity to meet demand, expanding our gross margin, capitalizing on the immense operating leverage in our model, and executing a disciplined capital allocation strategy focused on maximizing returns that drive long-term shareholder value. That concludes my formal comments. Operator, please open the line for the Q&A session.

OPERATOR

We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing any keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time we will pause momentarily to assemble our roster. The first question today comes from Joseph Cardoso with J.P. Morgan.

Please go ahead.

Joseph Cardoso (Analyst)

Hi, good afternoon and thank you for the questions here. Really appreciate some of the disclosures that you provided this quarter and wanted to first start with PhotonLink and the initial visibility you provided there. Was hoping you could provide more color with respect to the ramp itself, especially just given the backdrop of the $20 billion agreement that you’ve highlighted. And then I have a follow-up. Thank you.

Jim Anderson (Chief Executive Officer)

Yeah, thanks, Joe. So first of all, yeah, we’re certainly really pleased with the momentum that we have around PhotonLink and kind of whether you measure by customer engagement or LTAs, as you mentioned, or just the revenue outlook that I mentioned in the prepared remarks, we’re just really pleased with the progress there. And just as a reminder, PhotonLink is, we kind of consider it a one-stop shop for integrated optics. It’s basically our platform for allowing customers to basically have a platform that allows for the optical link from end to end.

It’s the complete optical signal chain and all the technology along the optical path, and really excited about the progress. As I mentioned in the prepared remarks, over 20 customer engagements on CPO, over 10 on MPO, and then over five chip-to-chip engagements. So the customer engagement is very extensive, and they continue to grow. You mentioned or asked about the LTA. Really pleased about that majority AI customer, and that LTA is, as I said, $20 billion over a five-year period, and the revenue for that would start at the beginning of calendar ’28, but the PhotonLink revenue ramp is starting ahead of that.

We’ll ship a little bit of a small amount of PhotonLink revenue this quarter, but we expect to ship over $100 million in our March quarter, and then before the end of calendar ’25 expect to ship over $250 million a quarter. So really pleased with all of that progress. I guess the other thing that I would add is if we look further out, we’re expecting this, over time, to become a multibillion-dollar product line. The initial shipments of PhotonLink are all around CPO and the scale-out network. But when we start to ship into CPO and MPO into scale-up networks, I think that drives another huge leg of demand for this technology. I think that will be the much bigger adoption that we see, and we expect to start to ship revenue into CPO and MPO applications in the scale-up domain towards the end of calendar ’27.

So yeah, we’re excited about the product progress and expect this to become a major product line for us.

Joseph Cardoso (Analyst)

Thank you for that, Jim. And maybe in a similar vein, wanted to touch on the scale across DCI opportunity. Particularly curious how we should think about the customers and products that are underpinning the revenue outlook to double by the end of the next calendar year.

Jim Anderson (Chief Executive Officer)

Yeah, thanks again. This has been a really great growth area for us over the past year. In fact, it’s surprised us a little bit how quickly this has grown. So overall DCI and scale across, that falls within our communications part of our business, which is essentially everything outside of all communications outside of the data center. And if we look at that segment, overall communications grew 84% year over year. But while telecom grew, the vast majority of that growth was driven by DCI.

And so what’s going on there is you’re seeing these large AI workloads that are spanning multiple data centers. And so that’s driving the need for much greater bandwidth and connectivity, optical connectivity between data centers. And so that’s the underlying market dynamic that’s driving the growth. And then you asked about customers and products. So customers would be either equipment makers. We’re certainly selling into multiple different equipment makers whose equipment goes into scale-across applications, but also selling directly to hyperscalers as well. And so it’s a mixture of both types of customers. And then the products. It’s interesting, we sell in this part of the market, we sell products at multiple levels of the value chain. So we sell in components, like for instance pump lasers, that go into a wide range of different equipment.

One level up in the value chain, we sell subsystems and modules—so ZR, ZR plus modules, line cards, amplifiers, ROADMs, et cetera. And then one level up from that, in some cases, sell complete solutions to our customers as well. So we’re selling across multiple levels of the value chain. And so I think that’s helped us really maximize the growth here as well. And as I mentioned in the prepared remarks, if we look at our Q1 revenue, it was over $200 million. So we’re basically at about a billion-dollar annualized revenue run rate now, and that Q1 growth had quadrupled year over year, and we expect that if you take that Q1 baseline, we expect the revenue to double again before the end of calendar. And so that growth that we’ve seen to date, that’s ahead of multi rail. So we expect multi rail revenue—which is, multi rail is a great solution, some great technology that we have there—we expect that revenue to start to ramp in our March quarter.

And so it’s been a really good area of growth, and we expect this to continue to be a very good area of growth over the coming quarters as well.

Joseph Cardoso (Analyst)

Thank you, Jim. Appreciate all the color.

Jim Anderson (Chief Executive Officer)

Thanks, Joe.

OPERATOR

The next question comes from Simon Leopold with Raymond James. Please go ahead.

Simon Leopold (Analyst)

Thanks for taking a question. First, Jim, I want to thank you for the increased transparency on slide 7. I know this is something I’ve been probably annoying you about, so thank you. The slide did not mention OCS. I know you talked about product group in your prepared remarks, but could you update us on your progress and expectation for this product group? And then I’ve got a follow-up, please.

Jim Anderson (Chief Executive Officer)

Yeah, sure. Thanks, Simon, and thanks for the feedback, as always. We’re always looking to improve, so appreciate the feedback. But yeah, on OCS, I did mention in the prepared remarks, OCS falls within our data center, our data center part of our business. And just to reiterate, data center was up 85% year over year in our Q1. OCS continues to make good progress. We’ve got really extensive customer engagement. We’ve seen that customer engagement continue to expand across more applications, so not just scale-out applications but scale-across and scale-up applications as well.

And that’s across, in terms of product sets, both 320 by 320 systems which are shipping as well as denser configurations. I think the denser configurations will be used more in the scale-up applications. We’re ramping production at two different sites in parallel, and that’s really to meet the demand that we’re seeing. We have a very differentiated technology. It’s liquid crystal, it’s non-mechanical technology, has better power efficiency and better reliability than MEMS-based solutions. So we feel really well positioned. We’re ramping production, and I think it will be an increasingly larger contributor to our revenue growth in the quarters to come.

And maybe the last thing to add is market opportunity for OCS is at least $4 billion by 2030. It could be larger than that.

Simon Leopold (Analyst)

Thanks. And as a follow-up, I have a hard question, one that I imagine you anticipate getting: what does the proposed consolidation of Lumentum and Marvell mean to you?

Jim Anderson (Chief Executive Officer)

Thank you. Yeah, thanks, Simon. No, I don’t think that’s a hard question at all. Happy to answer that. I’d give a few thoughts on this. I think number one is it definitely demonstrates that optics and photonics is becoming an absolutely critical part of data center architecture. As we look forward, as we convert the entire scale-up network and then even the scale-in chip-to-chip communication links over time, all of that getting converted from copper to optical photonic technology is absolutely critical to making that happen, to driving the innovation in data center architecture.

So I think it’s a proof point around just the criticality of optics and photonics. And then I think for Coherent, I think it just highlights the tremendous strategic value of the portfolio that is within Coherent. There’s no other company, I believe, on the planet that has a broader and deeper set of photonic and optical technology. If you look at the entire optical signal chain, from the generation of the light to the transmission through our fiber optic cable that we make to detection on the other side, I don’t think there’s any other company that’s got a better portfolio of technology.

So I think it definitely highlights the strategic importance of our technology platform. And then, look, I think from a customer perspective, for a lot of our customers, I think it’s really important that they have an independent photonic optical supplier and partner. And so I think it positions us really well to be that independent optical supplier that, without any competitive conflict, can support multiple different customers and support both hyperscaler customers, can support semiconductor customers. And so I think it positions us really well to be that partner of choice in terms of operations for the industry.

So, look, we think we’re really well positioned from both a technology standpoint, manufacturing standpoint, and strategically. And I think we’re on a really great growth trajectory. And I think you can see some of that already in PhotonLink technology and the PhotonLink revenue ramp.

OPERATOR

Thank you. The next question comes from Tom O’Malley with Barclays. Please go ahead.

Tom O’Malley (Analyst)

Hey guys, thanks for taking my question. Thanks for the additional color as well. I guess the first part of the question for you, Jim, is, you know, why now in terms of giving the longer-term forecast? It’s been something that you’ve kind of held off on doing for a while. You gave $3 billion and then $4 billion next year. And then the second part of the question is, is that all backed with supply? How are you able to get visibility that far out? Is that already in the books today?

Or perhaps you could give us, like, what percentage of that is backed with supply today, or if you need to add in to get you to those numbers.

Jim Anderson (Chief Executive Officer)

Yeah, thanks, Tom. I think it is a little bit different. We are providing a little bit longer-term visibility than we really would. I think it’s really backed by the just extraordinary level of visibility that we have on the business. When I look at the backlog, the bookings—so both near-term visibility and long-term visibility—look at just the backlog that we have. I mean, calendar ’27 is basically booked out, and the customers are booking out calendar ’28 now.

So from a near-term booking demand perspective, we have great visibility. You know, we’ve signed a number of new LTAs over the past quarter. I mentioned one of the big LTAs as part of the PhotonLink prepared remarks. But the LTAs also give us really good visibility because they include very high-quality long-term forecasts. So I think that’s given that really good visibility. That’s certainly giving us confidence. And then also, great that you mentioned supply. You know, we’ve done a number of things within our supply base to make sure that we’ve got the right supply in place to support that as well. So yeah, I would say that those views that we gave, whether it’s the $3 billion this year and the $4 billion next year, is underpinned by supply agreements. Also, remember that we’re highly vertically integrated, so a lot of that’s underpinned by our own internal supply that we’re ramping.

Right. One of the constraints, if we look back over the past year, year and a half, has been indium phosphide. And I’m just really pleased—pleased with how the team has executed very, very well—on the indium phosphide production ramp. We’ve doubled production capacity a quarter earlier than what we thought we would, and that gives me the confidence that the team’s going to achieve our plan to more than double capacity again by the end of calendar ’27.

So you put all that together, and we’re feeling really good about the outlook and the visibility for the business.

Tom O’Malley (Analyst)

Super helpful. And then just as my follow-up for that LTA, obviously $20 billion, a pretty robust number over that five years. Could you just give us any color just around that customer, perhaps? And then if you can’t talk about the customer, around some of the solutions—that obviously it’s PhotonLink, so it spans a large number of your products. But any more specificity would be really helpful just given the size of that customer.

Jim Anderson (Chief Executive Officer)

Yeah, sure. So, definitely a leading AI data center customer—name you would definitely recognize. Right. And so we’re really proud of that partnership, excited about it. That LTA for $20 billion is all around PhotonLink technology, I would call it. I would say it’s anchored by our laser, our 400 milliwatt CW laser. That’s kind of the anchor of that LTA. But we’re selling more than just that laser—so we’re selling more, you know, call it a higher-level solution than that.

So more than just that laser. So we’re really, really pleased by that. As I mentioned, we expect the revenue to start to flow from that in early 2028 and to ramp over the course of the quarters and years after that. And I think, given the engagement that we have on PhotonLink across many different customers, many different solutions, we certainly expect to sign more long-term agreements and partnerships with PhotonLink over the coming quarters as well.

Tom O’Malley (Analyst)

Thanks a lot, Jim.

OPERATOR

The next question comes from George Nader with Wolfe Research. Please go ahead.

George Nader (Analyst)

Hi guys, thanks a lot. I guess I just wanted to ask a question about the 45% gross margin outlook before the end of ’28. So I guess I’m curious, what does that assume about your transceiver business? I’m just wondering if to hit that you need to gate your transceiver supply or transceiver ramp, or is this just a case where everything can ramp in unison, naturally would ramp, and you wind up at 45% gross margins? What’s the view there? Thanks.

Jim Anderson (Chief Executive Officer)

Yeah, thanks, George. I’ll start and then see if Sherri has any color to add. But yeah, we haven’t assumed that we’re kind of artificially gating the transceiver business. So there’s no assumption on that. We’re assuming that the transceiver business grows at what we think is a reasonable growth rate to expect from the transceiver business. But on top of that we do have new products that are ramping—on top of that PhotonLink, a number of new products in data center interconnect, OCS ramping over time as well.

And so you put all those products ramping over time, and those products are accretive to the company’s margin. I think the new product ramp helps as well. And then, in addition to that, the other thing that I would add more on the cost side is a number of different cost activities that we’re driving, but certainly a big one is we expect additional leverage in terms of gross margin from our indium phosphide ramp. I think, as I mentioned briefly in the prepared remarks, most of the benefit from indium phosphide expansion is still ahead of us. And so I think there’s a good component of the margin expansion that’s kind of underpinned by the indium phosphide expansion as well.

George Nader (Analyst)

Is it possible to get the company to higher margins than 45% over time? I mean, I guess I’m maybe looking at Lumentum as an example. Those guys obviously have had quite a bit of margin expansion. Obviously the fastest-growing parts of that business are many of the areas where you’re kind of looking for growth going forward. Is 45% just a stop in a bigger picture or bigger number?

Jim Anderson (Chief Executive Officer)

I don’t think there’s any structural barrier to us driving gross margin above 45%. In fact, I think Sherri, in her remarks, said over 45% before the end of calendar ’28, I think is the way she said it. Right. So, yeah, we certainly don’t view—just like our old target of 42%, where we said over 42—we never viewed that as a stopping point. We viewed that as a stop along the way. And I would say 45% is, yeah, a stop along the way. And I don’t see any structural reason why the company couldn’t continue to drive gross margins beyond that.

Sherri Luther (Chief Financial Officer and Treasurer)

Yeah, I would just add that the target that we put out about 18 months ago at our investor day of over 42%, that was a three- to four-year target that we put out, but we pulled that in—right—in only 18 months, now raising our target to over 45%. So as we get close to that target, we’ll certainly reevaluate and look at what makes sense beyond that. But it’s just a stop along the way.

Jim Anderson (Chief Executive Officer)

Yeah, and George, maybe the other thing I’d add is we’re certainly super focused on gross margin expansion, but the other thing that we’re very focused on is operating leverage. Right. And I think we’re quite pleased to see that we’re gaining operating leverage in terms of OPEX as a percentage of sales, and we expect that to continue as well. So I think you should expect continued operating leverage as well.

OPERATOR

Thank you. The next question comes from Gianmarco Conti with Deutsche Bank. Please go ahead.

Jim Anderson (Chief Executive Officer)

Yeah, so thanks for asking about micro VCSEL. So certainly when I look across the PhotonLink engagements there is, I would say, many VCSEL. Micro VCSEL, we call it multicore VCSEL because the multicore VCSEL attaches to our multicore fiber that we produce. But multiple of those engagements involve our VCSEL technology. I mean, maybe just as a reminder of the company’s sort of depth in VCSEL technology, number one is we’ve shipped over 700 million VCSEL into data center applications over the past year. So we have enormous manufacturing expertise in VCSELs. Also at the ECOC conference when we launched PhotonLink, we talked about our technology in VCSELs, micro VCSELs, VCSEL arrays, et cetera. We showed that one of the things that we showed was that we had industry-leading energy efficiency around VCSEL.

We showed a 1 picojoule per bit capability which I think is a very industry-leading capability. And so VCSEL is definitely a core technology, something that the company has a long history in and we have multiple engagements. I think you’ll see that deployed in NPO applications in relatively short amount of time. I think you also asked about scale-in chip-to-chip. I think that’s a little further out in time. I think PhotonLink and scale-in applications is more in the 2029–2030. But we’ll definitely see, I think, VCSELs deployed in NPO applications well before that.

Yeah, so I don’t see those competitors in terms of ultra high power. If you’re talking about, like, the 400 milliwatt CW laser, we’re not seeing competition really. We really only have one competitor there, as far as we can see. Right. So we’re really not seeing any other competitors there with high-power CW capability.

OPERATOR

Before we go to the next analyst, if we could ask all the other analysts to limit themselves to one question with a goal of trying to accommodate everybody on the call. All right, thank you. The next question comes from Dan Hsu with Bernstein. Please go ahead.

Dan Hsu (Analyst)

Hey, thanks for the question. You mentioned that scale-up optics should start towards the end of calendar 2027. Anything you can share about whether the initial deployments are NPO or CPO, and also about how much—whether this is primarily going to be on VCSEL, or will this start with InP lasers?

Jim Anderson (Chief Executive Officer)

Yes. Thanks, Dan. So I think what we’ll see—we’ll definitely see CPO in scale-up. We certainly believe that. I think we’ll see NPO scale-up soon after that as well, if not by the end of calendar ’27. I think we’ll certainly see deployment in the early part of ’28. So I think in scale-up both CPO and NPO within either that late ’27 or early ’28 timeframe in the scale-up applications. And then I think—did you ask what was the second part of your question, Dan?

Dan Hsu (Analyst)

How much of it is VCSEL versus InP?

Jim Anderson (Chief Executive Officer)

Yeah, I think the initial deployment is indium phosphide, the high-power CW lasers. That’s for CPO in both initially scale-out and then in scale-up. And then I think those will happen in that NPO kind of early ’28 timeframe.

Dan Hsu (Analyst)

Got it. Thank you.

OPERATOR

The next question comes from Ryan Kuntz with Needham. Please go ahead.

Jeff Opsinon (Analyst)

This is Jeff Opsinon for Ryan. Thank you for the question. You noted ramping the indium phosphide supply for your own laser supply and that being able to lead to margin expansion from weaning off external sources. I’m just curious if there’s any color on what the split is currently internal versus external and kind of the timeline of that over time as it relates to the margin expansion.

OPERATOR

Thank you.

Jim Anderson (Chief Executive Officer)

Yeah, thanks, Jeff. We haven’t broken out the split, but I can tell you the split hasn’t changed much in a year. We’re using about the same mix of internal versus external now as we were a year ago. So although we’ve doubled our internal indium phosphide supply, the primary usage of our internal indium phosphide parts is in our data center transceivers. And if you look at the growth rate of our data center business—data center transceivers—it’s basically tracked the growth of our indium phosphide capacity, although basically one quarter later, because in the quarter we produce the lasers, the next quarter is when we ship the transceivers.

And so essentially our transceivers business has grown at the same rate as our internal indium phosphide, which means that our mix of internal versus external really hasn’t changed much over the past year. Now, as we continue to expand indium phosphide—now looking forward more than doubling it by the end of ’27—we do believe over the coming quarters we’ll start to shift more of the mix from external towards internal. Now we always believe we’ll have some portion of our supply from external for our transceiver business, but we believe over the coming quarters we’ll start to shift more towards internal.

And that’s really because it’s a tremendous cost advantage for us to use our internally produced lasers, especially the ones that are made on the 6-inch platform. And in my prepared remarks when I said the majority of the benefit from 6-inch indium phosphide is ahead of us, that’s actually really what I’m referring to—that benefit of changing the mix towards internal is largely ahead of us, and that’s a much bigger cost-structure improvement.

Jeff Opsinon (Analyst)

Got it. Thank you very much.

OPERATOR

The next question comes from Papacilia with Citi. Please go ahead.

Papacilia (Analyst at Citi)

Thank you. Thank you for taking my question, and congrats on the very impressive results. Jim, I wanted to maybe double-click on the $15,000 of content per, I think, 100 terabit you mentioned earlier at ECOC. So assuming that is probably the full-stack opportunity, which might be a longer-term figure, but I thought it would be helpful to also have a sense, even qualitatively, on what percentage of that 15,000 you expect to capture in the near term versus longer term, and how it may change kind of beyond ’27.

Jim Anderson (Chief Executive Officer)

Yeah, thanks, Papa. The 15,000 basically represents if you take an example of a chip that needed 100 terabit of I/O, and if you were using our full PhotonLink portfolio, which would include not just the lasers but all the other components—isolators, thermoelectric coolers, laser modules, our full fiber assembly kit, all the connectors, et cetera—so everything that we do, if you used all that, the content per chip would be, we estimated, about $15,000 per chip.

Now it’ll depend on the customer and their particular application how much of that content they utilize, whether they utilize a portion of that, all of it. That will really depend on the particular engagement. But that 15,000 is sort of the opportunity that’s out there for us. I think we’ll see over the next year or two as PhotonLink ramps, I think we’ll see customers that leverage the vast majority of that, and I think we’ll also see customers that leverage a subset of that. So I think we’ll see a mix of that, and we’re happy to support our customers—whether they want the entire solution or they want a portion of it, we’ll work with them on whatever works best for them. But regardless of the amount of content they take from us, we see this as all greenfield growth because, especially because, most of PhotonLink adoption over time will be driven by scale-up.

And again, that’s all greenfield growth for us because that’s us and the industry converting copper links to optical links over time. So we see it as greenfield revenue growth.

Papacilia (Analyst at Citi)

Got it. That’s very helpful, thank you.

OPERATOR

The next question comes from Cody Accrete with StoneX Financial. Please go ahead.

Cody Accrete (Analyst)

Hey guys, thanks for taking my question. Sherri, maybe for you, if we can go back to the gross margin discussion, can you maybe help to stratify the contribution part of that? You talk about the indium phosphide 6-inch ramp, yields, increasing utilization rates, maybe even your mix thoughts. And just if you can also factor into that the competitive dynamics on your module and your transceiver piece of more global Chinese competition and what’s inherently just a more price-sensitive market.

Sherri Luther (Chief Financial Officer and Treasurer)

Yeah, sure, Cody. I think you cut out a little bit, but I think you were asking for more color on what the drivers are to gross margin expansion over 45%—that’s what I think your question is. It is, yeah. Okay, so if I were to rank order, I think that the largest contributors are going to be our new product ramps and that full operational leverage of our 6-inch indium phosphide capacity, and then pricing optimization, followed by cost reductions. That’s kind of how I would rank order it. And the timing of some of those things kicking in will vary, but certainly new programs—I mean, those are gross margin accretive—and new products that Jim referred to earlier in his prepared remarks, those are gross margin accretive.

And so that will benefit our gross margin. As we continue to shift our supply from external to internal, as Jim talked about a little bit ago, that’s going to drive significant opportunity in our gross margin. And then pricing optimization, rather—I mean, that is an area where I think we will continue to have benefit there, you know, fully in our Data Center Communications segment, certainly in our Industrial too, but definitely in Data Center Communications there’s opportunity for that.

We saw that to be a large contributor during the current quarter as well as in prior quarters. And so that will continue to be a benefit as well to drive to over 45%. And, you know, cost reductions—that will always continue to be something that we focus on. But that’s how I would rank order them.

OPERATOR

The next question comes from Carl Ackerman with BNP Paribas. Please go ahead.

Carl Ackerman (Analyst)

Thank you. Jim, you spoke about how customers are beginning to book out to calendar 2028. That gives you confidence in your growth forecast. At the same time, there is investor concern about the financing and permitting of data centers here in the United States. In light of this, how does the team align its laser production capacity plans with their major customers? And has the team considered customer prepayments for additional laser production capacity?

Jim Anderson (Chief Executive Officer)

Thank you. Yeah, thanks, Carl. The answer to the last part of the question is yes, definitely. Maybe I’ll start with the end of the question. So we’ve signed a number of LTAs over the past quarters. The one public LTA is the one with Nvidia that we signed back in March, but we’ve signed a number of other LTAs. The LTAs follow a general pattern, and one part of the LTA is typically some sort of upfront payment from the customer. It could be either prepayment or NRE.

There are different forms of payment, but there’s some sort of upfront payment from the customer. And what we do that for is for two reasons. Number one is it makes sure that the customers have skin in the game. But number two is we use that upfront payment to help fund the capex to build the capacity for that customer. Right. We think it’s important that if we’re going to go build the capacity, that the customers either fund that or help co-fund that.

And so far we’ve had customers be very willing to do that. And I think that’s worked really well for us. And so I would say almost every LTA that we’ve signed has that general pattern. And so that certainly gives us better confidence and helps offset the risk in terms of our own capital deployment. But I guess on the first part of your question, we certainly work very, very closely with our customers on planning out the demand. I think one thing to keep in mind with indium phosphide capacity is remember that it’s not just being driven by data center demand. There are two things driving optics demand, right. Number one is data center growth. But number two is, in the case of integrated optics, it’s the conversion of the copper links to optical over time.

That is a technology trend that in my view is independent of the market demand. That’s a technology trend that will happen regardless of the data center demand because that’s necessitated by the ability to achieve the bandwidth and the link speeds that we need to achieve in the scale-up domain or chip to chip — we have to switch to optics over time. And so that’s an independent technology trend, and that’s certainly part of what’s driving the indium phosphide capacity demand over the long term.

OPERATOR

The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Meta Marshall (Analyst)

Great, thanks. Maybe just a question on substrate availability. I think there had been some concern in the market around availability of 6 inch versus 3 inch. I know you noted in the prepared remarks that you had gotten capacity, but maybe if you could just speak about kind of a 6 inch versus 3 inch substrate availability and how that’s impacting expansion plans. Thanks.

Jim Anderson (Chief Executive Officer)

Yeah, thanks, Meta. So we have over on 6 inch in particular, but 3 inch as well. We do continue to buy 3 inch wafers. We do still have 3 inch production, but all of our expansion is mostly on 6 inch moving forward. And we have over five different suppliers of substrates. We’ve signed long-term agreements with a number of those suppliers. And when I look at, you know, our next step of more than doubling the capacity by the end of calendar 27, we believe we’ve secured the necessary substrates for that capacity expansion.

And then we’ve certainly, you know, we have plans in place to further expand capacity beyond 27, and we’re certainly working with or already have in place substrate capacity for that as well. So I think the summary is we have multiple different suppliers and we’ve made sure that we have the substrate capacity for the expansion.

OPERATOR

The next question comes from Sean O’Loughlin with TD Cowen. Please go ahead.

Sean O’Loughlin (Analyst)

Great. Thanks for squeezing me in. I’ll make it quick. Jim, can you just talk about how fungible your capital installed base is across indium phosphide versus gallium arsenide? If we, you know, maybe we end up in a world that is more VCSEL or multi-core VCSEL heavy than it is ultra high power, CW. Thanks for getting the question. Thanks.

Jim Anderson (Chief Executive Officer)

Sure. I would say there’s some fungibility, but it’s not like you can easily switch a line from indium phosphide to gallium arsenide or vice versa. But I will note that we have a tremendous amount of gallium arsenide capacity. One of the stats that we shared at the PhotonLink launch is that today we have capacity to produce over a billion VCSEL arrays. So we have a tremendous capacity that we could deploy. And so to the extent that we saw broad-based adoption and rapid ramp of VCSEL technology, I don’t think there’s probably anybody else in the industry that’s better positioned to source or to supply that demand than Coherent is.

And so we feel really well positioned on gallium arsenide VCSEL technology and/or capacity, and then on indium phosphide obviously we’re ramping that very, very quickly, and so I think on both we’re on a good path.

OPERATOR

Our last question today comes from Ananda Brua with Loop Capital. Please go ahead.

Ananda Brua (Analyst)

Hey, thanks guys, really appreciate it. And yeah, congrats on the progress here. And I guess, Jim, let me just ask you a capacity question — capacity supply question from the other direction. There’s also been a conversation just in the financial community about, at an industry level, you know, excess, you know, I and T EML capacity at some point in calendar 28. You’re also talking now, you’re also talking about, you know, sort of contract agreements going sort of well into that time frame.

So we’d love to get your opinion on sort of how you view the potential for an oversupply situation at an industry level going through 28. Thanks.

Jim Anderson (Chief Executive Officer)

Yeah, I think through 27 and into 28, I don’t see that as a risk given not just the demand that pluggable transceivers is creating but also the demand that integrated optics is going to create for lasers, as well as there’s quite a bit of indium phosphide that’s also used in some of the DCI applications too. So when I look across all of that, I don’t see an oversupply risk through calendar 28. I also think for us, because most of our indium phosphide gets used in our—well, I guess today all of it—today all of our indium phosphide gets used in our own products, and we don’t even produce enough today to meet all the demand of our own products, for us that’s not a primary concern. I think if there were more supply externally, that may affect us if we were supplying indium phosphide lasers external, but we’re not. And I think our plan is over time to start to use more indium phosphide, more of our internal indium phosphide production, to increase the mix towards internal over time.

I guess the short answer to your question is we don’t see any big oversupply situation in 28.

OPERATOR

This concludes our question and answer session. I would like to turn the conference back over for any closing remarks.

Jim Anderson (Chief Executive Officer)

Thanks, operator, and thanks everybody for joining us on the call today. So we certainly enter the remainder of the year with great momentum, exceptional customer demand, and, as we were just talking about, rapidly expanding capacity. Just want to say thanks especially to all of our employees, our customers, our partners, and of course our shareholders for the continued support, and we look forward to updating you again next quarter. Thank you.

OPERATOR

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.