Fiscal first-quarter 2027 earnings call, November 4, 2026

A $20 billion PhotonLink agreement reframes the growth outlook

The most consequential disclosure from Coherent's fiscal first-quarter call was a second large long-term agreement for PhotonLink, the company's integrated optics platform launched at ECOC in September. Coherent signed the agreement with what CEO Jim Anderson described as "a leading AI datacenter customer, a name you will definitely recognize." Total revenue value is about $20 billion over 5 years, with revenue starting in early calendar 2028. It comes on top of the NVIDIA agreement announced in March. Anderson said the contract is "anchored by our 400-milliwatt CW laser," but that Coherent is "selling more than just that laser," meaning a higher-level solution built from the broader PhotonLink portfolio.

Management paired the agreement with a near-term ramp. PhotonLink revenue is expected to exceed $100 million in the March quarter, with only a small amount shipping in the current quarter, and to exceed $250 million per quarter before the end of calendar 2027. Initial shipments are for co-packaged optics (CPO) in scale-out networks. Shipments for CPO and near-package optics (NPO) in scale-up networks are expected to begin in the second half of calendar 2027. Anderson called scale-up "the much bigger adoption" and said PhotonLink should become a multibillion-dollar product line. Beyond the two anchor customers, Coherent cited more than 10 additional CPO engagements, more than 10 NPO engagements and more than 5 chip-to-chip engagements, and said it expects to sign further agreements in coming quarters.

Coherent also sized the content opportunity. For an xPU or switch chip with 100 terabits per second of bandwidth, it estimates content of about $15,000 per chip if a customer adopts the full portfolio of lasers, isolators, thermoelectric coolers, laser modules, fiber assemblies and connectors. Anderson acknowledged that customers will take varying subsets and said the company will support either approach. He characterized the revenue as "all greenfield growth," since scale-up adoption reflects the conversion of copper links to optical. Coherent now sizes CPO, NPO and chip-to-chip optical interconnects at about $30 billion by 2030, which lifts its total addressable market for Datacenter & Communications to about $90 billion.

The sequencing is worth noting. The $20 billion contract produces no revenue until calendar 2028, so the near-term ramp comes from other customers and products. Anderson said initial scale-up deployments will use indium phosphide high-power CW lasers, with VCSELs entering through NPO in early 2028. He placed chip-to-chip scale-in applications in the 2029 to 2030 window, so that part of the opportunity is still distant.

Gross margin target raised 300 basis points, pulled forward

CFO Sherri Luther raised the long-term gross margin target to above 45%, to be reached in a quarter before the end of calendar 2028. The prior target of above 42%, set at the Investor Day about 18 months ago, was a 3-to-4-year goal. The new target is 300 basis points above the old one. Non-GAAP gross margin was 40.6% in the quarter, up 37 basis points sequentially and 184 basis points year over year.

Luther ranked the drivers. New product ramps come first, followed by full operational leverage of the 6-inch indium phosphide capacity, then pricing optimization, then cost reductions. Anderson said the target does not assume Coherent holds back transceiver growth, and he saw "no structural barrier" to going higher. He called 45% "a stop along the way."

The indium phosphide mix shift is the least obvious driver. Anderson said the split between internal and external supply "hasn't changed much in a year," because transceiver growth has tracked internal capacity growth with a one-quarter lag. The cost benefit from using more internally produced 6-inch lasers is therefore still ahead. Coherent will keep some external sourcing for transceivers, but expects to shift the mix toward internal over the coming quarters. Near-term margins will not move in a straight line. Second-quarter guidance of 40% to 42% brackets the first-quarter result, which implies little sequential gain at the midpoint.

Results and guidance

First-quarter revenue was a record $2.37 billion, up 16% sequentially and 50% year over year, or 56% on a pro forma basis excluding the divested Aerospace and Defense business and the Munich product division. Non-GAAP EPS was $2.09, up 80% year over year. Non-GAAP operating margin rose to 23.2% from 21.8% in the prior quarter, as operating expenses fell to 17.4% of revenue from 18.4%.

Second-quarter guidance calls for revenue of $2.55 billion to $2.75 billion, non-GAAP gross margin of 40% to 42%, operating expenses of $430 million to $450 million, and non-GAAP EPS of $2.28 to $2.48. Management reiterated its first $3 billion revenue quarter by the end of fiscal 2027 and added a first $4 billion quarter in fiscal 2028. It expects fiscal 2027 pro forma revenue growth above 60%, more than double the fiscal 2026 rate.

Capital intensity is rising sharply. Capital expenditures reached $776 million in the quarter, up from $556 million in the prior quarter and $104 million a year ago, and will increase again in the second quarter. Cash fell to $2.34 billion from $2.59 billion, though leverage remains a modest 1.1x. Luther argued the capacity is fungible across product lines. Investors should still weigh the free cash flow drag against the margin and growth targets.

Customer-funded capacity and demand visibility

Asked about data center financing and permitting risk, Anderson explained how the agreements are structured. Nearly all long-term agreements include an upfront payment, either a prepayment or non-recurring engineering funding. He said this serves two purposes: "it makes sure that the customers have skin in the game," and the payment helps fund the capacity built for that customer. "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," he said. This partly offsets Coherent's balance sheet risk on the rising capex.

Order coverage is the other support. Anderson said calendar 2027 is "basically booked out" and customers are now ordering for calendar 2028. Management said the $3 billion and $4 billion quarterly targets are underpinned by supply agreements and by internal indium phosphide capacity. Datacenter & Communications revenue rose 21% sequentially and 79% year over year, its fourth straight quarter of accelerating growth, and is now 82% of total revenue. Datacenter revenue alone grew 85% year over year.

Indium phosphide capacity and the oversupply debate

Coherent doubled internal indium phosphide output capacity year over year in the quarter, one quarter ahead of plan, and plans to more than double it again by the end of calendar 2027. It has secured substrates for that ramp from more than 5 suppliers under long-term agreements and is planning further expansion beyond 2027. Management said 6-inch yields exceed those of the 3-inch lines, and that 6-inch production in Zurich should start in the first half of calendar 2027. The 400-milliwatt CW laser for CPO, covered by the NVIDIA partnership, should begin generating revenue this quarter.

On the market concern about industry oversupply of indium phosphide EMLs in 2028, Anderson said he sees no such risk through 2028, citing demand from pluggables, integrated optics and data center interconnect. He added that Coherent uses all its internal output in its own products and does not produce enough to meet its own demand. That insulates it from the merchant-market dynamics, though the company is also not a seller in a tight external market. On Chinese laser suppliers, he said Coherent sees essentially one competitor in ultra-high-power CW lasers.

Scale-across, transceivers and OCS

Scale-across data center interconnect has become the largest source of revenue in Communications. First-quarter revenue exceeded $200 million, up 53% sequentially and nearly fourfold year over year, for a run rate near $1 billion. Anderson said the growth "surprised us a little bit." Coherent sells at several levels of the value chain, from pump lasers to ZR/ZR+ modules, line cards, amplifiers and ROADMs to complete solutions, and to both equipment makers and hyperscalers. Its new multi-rail solution begins ramping in the March quarter, and management expects quarterly scale-across revenue to roughly double from the first-quarter level by the end of calendar 2027. Communications revenue grew 34% sequentially and 84% year over year.

In transceivers, Coherent is ramping 1.6T with multiple customers while 800G continues to grow through calendar 2027. It demonstrated a 3.2T OSFP pluggable at ECOC and expects pluggables to stay dominant in scale-out networks. In optical circuit switching, Anderson described the liquid crystal, non-mechanical technology as having better power efficiency and reliability than MEMS-based approaches. Coherent is expanding production at 2 sites and sizes the OCS opportunity at "at least $4 billion by 2030." Asked about Lumentum and Marvell's proposed consolidation, Anderson said it shows how critical photonics has become, and he pitched Coherent as an independent optical supplier without competitive conflict with its customers.

VCSEL positioning and the Industrial segment

Anderson said Coherent shipped more than 700 million VCSELs into datacenter applications over the past year, has capacity for more than 1 billion VCSEL arrays annually, and has demonstrated 1 picojoule per bit energy efficiency. Gallium arsenide and indium phosphide lines are not easily interchangeable, but he argued that the VCSEL capacity leaves Coherent well placed if multi-core VCSEL adoption outpaces ultra-high-power CW lasers.

Industrial was the weak spot. Revenue was flat sequentially and year over year on a pro forma basis. Management said bookings were strong, led by semiconductor capital equipment, and expects growth to resume this quarter, with AI circuit board drilling and fusion energy also contributing. Thermadite xPU cooling material is going to several strategic customers as prototypes this quarter, with revenue expected to ramp in the second half of calendar 2027.