Coherent Q4 2026 Earnings Call Transcript

Quartr
Provided by Quartr
August 12, 2026

Key Takeaways

  • Positive Sentiment: Record fiscal 2026 results: Revenue reached $7.12 billion, up 23% year over year, while non-GAAP EPS rose 59% to $5.61. Q4 revenue increased 34% year over year to a record $2.05 billion, supported by AI data-center and communications demand.
  • Positive Sentiment: Management expects significant growth acceleration in fiscal 2027, including a quarterly revenue run rate above $3 billion by the end of the year. Q1 guidance calls for revenue of $2.2 billion–$2.4 billion and non-GAAP EPS of $1.85–$2.05.
  • Positive Sentiment: Demand visibility remains unusually strong, with record bookings, orders extending through calendar 2028, and long-term agreements reaching through the end of the decade. Growth is expected across 800G and rapidly ramping 1.6T transceivers, optical circuit switching, CPO/NPO, and multi-rail systems.
  • Positive Sentiment: Gross margin and operating leverage continued to improve, with Q4 non-GAAP gross margin at 40.2% and operating margin at 21.8%. Management remains confident in reaching a gross margin above 42%, aided by six-inch indium phosphide production, pricing optimization, cost reductions, and new product ramps.
  • Negative Sentiment: Capacity expansion is requiring substantial investment: Q4 capital expenditures rose to $556 million and are expected to increase sequentially again in Q1, while indium phosphide capacity remains the company’s primary constraint. The industrial segment was roughly flat in fiscal 2026 and Q4, with broader industrial markets still weak.
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Earnings Conference Call
Coherent Q4 2026
00:00 / 00:00

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Coherent fourth quarter and fiscal year 2026 earnings call. It is now my pleasure to introduce your host, Mr. Paul Silverstein, Senior Vice President of Investor Relations for Coherent. Please go ahead.

Speaker 1

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 fourth quarter of fiscal 2026 and the business outlook for the first 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.

Speaker 1

For a discussion of factors that could affect our future financial results in business, please refer to the disclosure in today's earnings release, our most recent Forms 10-K and 10-Q, and the reports that we may file on Form 8-K with the Securities and Exchange Commission. All our statements are made as of today, August 12, 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.

Speaker 2

Thank you, Paul, and thank you everyone for joining today's call. Fiscal 2026 was an outstanding year for Coherent. On a pro forma basis, revenue increased 28% to a record $7 billion. Our revenue growth, combined with gross margin expansion and continued operating leverage, drove non-GAAP EPS growth of approximately 59%, more than twice the rate of revenue growth. We also finished the year with significant momentum. In Q4, our pro forma revenue growth rate accelerated significantly with revenue increasing 14% sequentially and 42% year-over-year, while non-GAAP EPS increased 74% year-over-year. Our accelerated growth rate reflects the exceptional demand environment and our continued rapid expansion of production capacity. While we're very pleased with our fiscal 2026 performance, we are even more excited about the year ahead. We expect our growth to accelerate significantly in fiscal 2027.

Speaker 2

Having achieved our first $2 billion revenue quarter, we now expect to achieve our first quarter with over $3 billion of revenue by the end of fiscal 2027. Coherent is a global leader in photonic technology. Our broad photonic technology platform is foundational to the performance and scalability of AI data centers. AI runs on compute, but it scales on optical connectivity. Coherent is at the center of an extraordinary expansion in optical networking infrastructure driven by the rapid growth of AI, the transition from copper to optical connectivity, and the increasing need for bandwidth and energy efficiency across increasingly large and complex data center architectures. Our confidence in fiscal 2027 is based on three factors. First, customer demand continues to grow, as demonstrated by another quarter of record bookings.

Speaker 2

Second, our supply of critical components is increasing, including the planned doubling of our internal indium phosphide output year-over-year by the end of the current quarter. Third, multiple new revenue streams are expected to ramp over the coming quarters, including optical circuit switching, co-packaged optics, multi-rail systems, and advanced materials for data center thermal and power management. Along with strong revenue growth, we expect continued gross margin expansion and operating leverage, enabling us to grow EPS significantly faster than revenue. We expect fiscal 2027 to be another outstanding year for Coherent. Our data center and communication segment continues to be the primary driver of our growth and accounted for 79% of total company revenue in fiscal Q4. Segment revenue increased 40% for full year fiscal 2026. In Q4, our segment revenue growth rate accelerated significantly with revenue increasing 19% sequentially and 59% year-over-year.

Speaker 2

Demand continues to strengthen, driving another quarter of record bookings and extending our visibility further into the future. Our order coverage through calendar 2027 is exceptional. Customer orders now extend into calendar 2028. Customer LTAs extend through the end of the decade. We continue to see no signs of attenuation in customer demand. Our broad photonic technology portfolio, manufacturing scale, and significant U.S. production footprint are increasingly differentiating Coherent with customers and translating into deeper, longer-term partnerships and revenue opportunities. In our data center business, revenue increased 41% for full year fiscal 2026. In Q4, our data center revenue growth rate accelerated significantly with revenue increasing 24% sequentially, 66% year-over-year. This marked our third consecutive quarter of double-digit sequential growth, and we expect strong sequential growth again in the current quarter. Demand in our data center business remains exceptionally strong and broad-based across multiple customers and product categories.

Speaker 2

Within transceivers, we expect growth to be driven by both 800G and 1.6T. We expect 800G revenue to continue growing year-over-year in calendar 2026, while 1.6T transceivers ramp rapidly through the balance of calendar 2026 and into calendar 2027 as adoption broadens across customers. Beyond transceivers, OCS revenue increased sequentially in Q4. We expect continued growth over the coming quarters as we expand production capacity. We also expect CPO to begin contributing to revenue growth in fiscal Q2, consistent with our planned production ramp. Our six-inch indium phosphide capacity expansion is a key driver of revenue growth and margin expansion. We remain on track to double our internal indium phosphide output capacity year-over-year by the end of the current quarter, one quarter ahead of our original plan.

Speaker 2

This ramp contributed meaningfully to our data center revenue growth in Q4, and we expect it to remain an important growth driver in Q1. Looking further ahead, we remain on track to more than double our internal indium phosphide output capacity again by the end of calendar 2027. We have secured the substrates and other critical inputs required to support this ramp. Given the strength of customer demand, we are planning additional capacity beyond 2027. Our capacity expansion is being driven by the transition to 6-inch indium phosphide production. Our 6-inch lines in Texas and Sweden are producing EMLs, CW lasers, and photodiodes with yields that continue to exceed our 3-inch lines. We remain on track to begin 6-inch production in Zurich during the first half of calendar 2027, further extending what we believe is a meaningful manufacturing advantage.

Speaker 2

Our Texas facility has also begun ramping our ultra-high-power CW laser for CPO solutions, including those covered by our Nvidia partnership, with revenue expected to begin ramping in fiscal Q2. Turning to OCS, revenue increased in Q4 as we continue to ramp production. Given strong customer demand across our 320 by 320 platform and other system sizes, we expect OCS revenue to grow significantly through fiscal 2027. We continue to estimate that OCS represents more than $4 billion of addressable market opportunity across data center interconnect, scale-out, and scale-out networks. As we expand production across two manufacturing locations, we expect OCS to become an increasingly meaningful contributor to revenue growth and margin expansion. CPO, NPO, and other forms of integrated optics represent a tremendous growth opportunity for Coherent.

Speaker 2

These technologies enable the transition from copper to optical connectivity represent more than $15 billion of incremental addressable market opportunity over the coming years. At the ECOC industry event in September, we plan to unveil Coherent PhotonLink, our new platform for integrated optics. PhotonLink spans the complete optical signal chain from light generation and beam shaping through transmission, detection, and conversion back to an electric signal for the XPU or switch chip. The platform supports CPO, NPO, and other forms of optical integration. PhotonLink leverages the breadth of Coherent's photonic technology portfolio and manufacturing capabilities to enable next-generation data center architectures that use optical links to achieve new levels of bandwidth, performance, and energy efficiency. We have deep engagements with multiple customers across both CPO and NPO applications, which we believe offer comparable content opportunities for Coherent. We expect initial revenue from PhotonLink-related products to begin in our December quarter.

Speaker 2

We will share additional details about PhotonLink at our launch event on September 21st. Turning to our communications business, customer demand remained exceptionally strong in Q4. Communications revenue increased approximately 54% for full year fiscal 2026. Q4 revenue increased 11% sequentially, 56% year-over-year, driven by continued strength across data center interconnect, scale-across, and traditional telecom applications. We expect another quarter of strong sequential growth in Q1. Demand remains broad-based across our portfolio, with particular strength in DCI solutions, including ZR and ZR+ transceivers, as well as pump lasers and complex high-end optical subsystems. Multi-Rail is an important new growth opportunity in our communications business, addressing scale-across AI networking as workloads increasingly span multiple data centers and require greater bandwidth between locations. We estimate a more than $2 billion addressable market by calendar 2030, continue to expect initial revenue to ramp in the first half of calendar 2027.

Speaker 2

Preparation for the expected revenue ramp, we recently delivered samples to multiple customers. We believe Coherent is well positioned with a broad technology portfolio, differentiated density and power efficiency, strong customer engagement. We expect Multi-Rail to become a meaningful contributor to revenue growth and margin expansion over time. Turning to our industrial segment, revenue was roughly flat on a pro forma basis in both fiscal 2026 and Q4. In Q4, semiconductor capital equipment and display capital equipment both grew sequentially and year-over-year, offset by continued weakness across broader industrial markets. We expect growth to resume over the coming quarters, led by semiconductor capital equipment, where bookings continue to strengthen. Over the longer term, we see meaningful growth opportunities across several emerging applications.

Speaker 2

One example is data center XPU cooling, where our proprietary Thermadite material can improve thermal performance and enable higher XPU performance, which can translate into greater AI token generation per XPU. We are engaged with multiple strategic customers and have delivered samples of our Thermadite cooling solutions. We expect revenue to begin ramping in the second half of calendar 2027, representing a meaningful expansion of our long-term market opportunity. We also see longer-term opportunities in fusion energy, quantum technologies, and microLED display capital equipment. Overall, we believe industrial is positioned to return to growth and become an increasingly important source of revenue diversification over time. In summary, we enter fiscal 2027 with exceptional customer demand, record visibility, expanding production capacity, and multiple new growth platforms beginning to ramp.

Speaker 2

We believe Coherent is uniquely positioned to capitalize on the multi-year expansion of AI data center infrastructure, supported by the breadth of our photonic technology portfolio, our manufacturing scale, and our significant U.S. production footprint. I want to thank the entire Coherent team for their outstanding execution and innovation throughout fiscal 2026. I'll now turn the call over to Sherri.

Speaker 3

Thank you, Jim. Fiscal 2026 was an exceptional year for Coherent. We delivered record revenue of $7.12 billion, expanded gross margin by over 150 basis points, increased operating margin by nearly 300 basis points, and grew non-GAAP earnings per share by 59%, significantly faster than revenue growth. We also strengthened our balance sheet, reducing debt leverage to 0.7 times from two times at the end of FY 2025, while continuing to invest in capacity as well as our product roadmap to support the growing AI data center and communications demand. Let me now provide a summary of our results. Fourth quarter revenue was a record $2.05 billion, up 13% sequentially and 34% year-over-year, driven by growth in AI data center and communications demand.

Speaker 3

On a pro forma basis, revenue increased 14% sequentially and 42% year-over-year, excluding revenue from the aerospace and defense business and the Munich, Germany product division, which were sold in Q1 and Q3, respectively. Full year 2026 revenue was $7.12 billion, up 23% from 2025 and up 28% on a pro forma basis. AI data center and communication strength was the key driver of our full year 2026 revenue growth. Fiscal 2026 was the first year in Coherent's history to exceed $7 billion in revenue. Our Q4 non-GAAP gross margin was 40.2%, a 66 basis point improvement compared to the prior quarter, and a 215 basis point improvement compared to the year ago quarter. Our full year 2026 non-GAAP gross margin was 39.4%, up 152 basis points from 2025.

Speaker 3

Gross margin performance continued to improve both sequentially and year-over-year as a result of the initiatives we have been executing throughout fiscal 2026. We saw benefits from our gross margin expansion strategy primarily within the data center and communication segment. These improvements were driven by lower product input costs, improved manufacturing yields and efficiencies, including continued progress on our six-inch indium phosphide platform, as well as benefits from our pricing optimization efforts. We expect gross margin to continue to improve over the coming quarters as pricing optimization and cost structure improvements, such as increasing capacity from our six-inch indium phosphide platform, continue to take effect. Fourth quarter non-GAAP operating expense was $377 million, compared to $348 million in the prior quarter and $307 million in the year ago quarter.

Speaker 3

Non-GAAP operating expense as a percentage of revenue decreased to 18.4% in Q4 from 19.3% in Q3 and 20.1% in the year ago quarter, as we continue to focus on driving better leverage and operating efficiencies. Full year 2026 non-GAAP operating expense increased to $1.35 billion from $1.17 billion in FY 2025, primarily driven by increased investments in our product portfolio. As a percent of revenue, operating expenses decreased to 19% in 2026 from 20.1% in 2025. R&D expense as a percentage of revenue increased to 10.2% in Q4 from 9.9% in the prior quarter and 9.8% in the year ago quarter. For the full year, R&D expense as a percentage of revenue increased to 9.7% compared to 9.5% in FY 2025. The sequential and year-over-year increases were driven primarily by investments within the data center and communication segment product portfolio.

Speaker 3

R&D investments remain focused in 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 address customer demand while generating attractive returns and supporting future growth. SG&A expense declined to 8.2% of revenue in Q4 compared to 9.4% in the prior quarter and 10.3% in the year ago quarter. For the full year, SG&A expense decreased to 9.2% of revenue from 10.5% in FY 2025, reflecting continued progress in driving efficiencies and generating greater operating leverage. During fiscal 2026, we made significant progress simplifying our operating model and driving greater operational efficiency. The expansion of our regional shared services structure has reduced costs, improved process consistency, and improved leverage across our global operations. The benefits realized during the year exceeded our original expectations, and we expect these benefits to continue to increase throughout fiscal year 2027.

Speaker 3

Our fourth quarter non-GAAP operating margin increased to 21.8% compared to 20.3% in the prior quarter and 18% in the year-ago quarter. Our full year 2026 non-GAAP operating margin increased to 20.5% from 17.8% in FY 2025. The increases for both Q4 and FY 2026 were driven by strong revenue growth, continued gross margin expansion, and improved operating leverage. Fourth quarter non-GAAP earnings per diluted share was $1.74, up 23% from the third quarter and up 74% from the year-ago quarter. FY 2026 non-GAAP earnings per share was $5.61, up 59% from FY 2025. Earnings growth continued to outpace revenue growth in both the quarter and the full year, driven by strong revenue performance, gross margin expansion, and improved operating leverage. Our FY 2026 year-end cash balance of $2.59 billion compares to $3.05 billion at the end of the prior quarter and $1.63 billion at the end of FY 2025.

Speaker 3

Consistent with our capital allocation priorities, we continued investing in opportunities that we believe will drive long-term growth and profitability. These investments were primarily focused on expanding data center and communications capacity and advancing our product development roadmaps. During FY 2026, we made $513 million in debt payments, exiting the year with a debt leverage ratio of 0.7 times, compared to two times at the end of FY 2025. Our capital expenditures increased $556 million, up from $290 million last quarter and $131 million in the year-ago period. This acceleration directly supports future growth across our data center and communications business. These strategic investments are expected to yield excellent financial returns. For example, the investments we are making in the data center business have a roughly 18-month payback period.

Speaker 3

Our conviction in these high-return investments is backed by excellent visibility from our customers, with a robust pipeline of strong purchase orders and long-term agreements. This CapEx is primarily directed towards advanced tooling and state-of-the-art manufacturing equipment that accelerates our volume manufacturing capabilities and optimizes production yields. Furthermore, as a vertically integrated manufacturer, this capacity offers significant fungibility as our infrastructure can be dynamically repurposed to support multiple product lines. Given the exceptional demand profile and clear ROI visibility, we expect capital expenditures to increase sequentially again in Q1. These results reflect strong customer demand, disciplined operational execution, continued progress on our gross margin expansion initiatives, and investments in the products and technologies that we believe will drive future growth. I will now turn to our guidance for the first quarter of fiscal 2027. We expect revenue to be between $2.2 billion and $2.4 billion.

Speaker 3

We expect non-GAAP gross margin to be between 39.5% and 41.5%. We expect total operating expenses of between $400 million and $420 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 EPS of between $1.85 and $2.05 on a non-GAAP basis. We are entering fiscal 2027 with strong momentum, supported by record backlog, excellent visibility into customer demand, and a significantly stronger financial position. We remain focused on expanding capacity, improving profitability, and allocating capital in a disciplined manner as we support future growth and drive long-term shareholder value. That concludes my formal comments. Operator, please open the call for Q&A.

Operator

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Joe Cardoso with JPMorgan. Please proceed with your question.

Speaker 4

Hi, good afternoon, and thanks for the questions. Maybe for my first, it sounds like you continue to make good progress on the 6-inch ramp and even hinting at further expansion beyond 2027. Can you provide us an update on the ramp and specifically how we should be thinking about how it translates into revenue and gross margins? Then I have a follow-up. Thank you.

Speaker 3

Yeah, thanks, Joe, for the question. Yeah, I would say I am quite pleased with the progress on our 6-inch indium phosphide ramp. I think the team is doing just an outstanding job of ramping that production. As I mentioned in the prepared remarks, we are on track to double the output capacity of indium phosphide production this quarter. That is one quarter earlier than our original plan. By the end of next calendar year, we expect to more than double it again. So we are on a pretty fast pace of expansion and executing well to that, and actually a little ahead of our plan. So really pleased with that. Maybe a helpful data point, just to kind of measure our progress along the way is if I look at our June quarter.

Speaker 2

I look at, well, how many indium phosphide lasers did we produce in our June quarter on a year-over-year basis? We produced about 80% more indium phosphide lasers in our June quarter than we did the prior year. So 80% year-over-year growth. Those are the lasers that go specifically into our 800G transceivers and our 1.6T transceivers. That sort of 80% growth year-over-year, I see that as a really good measure of progress towards continuing to expand our indium phosphide capacity. I think you asked, how does that relate to revenue? That 80% growth in lasers in the June quarter, those basically go into transceiver shipments in the current quarter. So we would expect our data center growth, for instance, this quarter on a year-over-year basis to exceed 80%. We have certainly got the lasers this quarter to make that happen.

Speaker 2

That is kind of how you can think about how it impacts the data center transceiver revenue growth. Just a couple other comments on the progress. One of the things I continue to be pleased by is our yields. Our yields continue to be better than our 3-inch production, so yields of 6-inch better than 3-inch, and that is across all three devices that we have in production. That is CW, EML, and photodiodes. All three showing better yields in 3-inch. Another milestone that I mentioned in prepared remarks, we are starting production and ramping production of our ultra-high power CW lasers that go into CPO applications. We will see revenue from those, we expect in our December quarter. It is our Texas and Sweden plants that are ramping right now.

Speaker 2

We are ramping in two locations, 6-inch, and we will bring a third 6-inch location online, we expect in the first half of calendar 2027. I would say the progress, quite pleased with it, so thanks. Then it sounded like, Joe, you had a follow-up question?

Speaker 4

Yes. Very useful color there. Thanks, Jim. The second one is, and maybe you started touching on this, but the CPO revenue starting in the December quarter. Just curious, can you shed any light or additional color around the opportunity both near and long term? Just particularly given the recent noise surrounding it from the market perspective around concerns around delays and maybe the forward pulling of NPO. Just curious in terms of if there is any other color you can share there, just given kind of all the noise surrounding it. Thank you.

Speaker 2

Yeah, sure. Thanks, Joe. First of all, we have seen absolutely no push-out of CPO demand. In fact, it has been the opposite. We have seen demand increase and request from customers' demand getting pulled in. We have only seen the opposite. That is on CPO specifically. The other thing that we have seen, especially over the last three to six months, is a significant ramp-up in the engagement with customers on not just CPO, but now NPO. I would say we have multiple very important engagements across many customers around either CPO or NPO. The intensity has really gone up over the last three to six months. We are really pleased to see that.

Speaker 2

As a reminder, when we talk about integrated optics, whether it is CPO or NPO or any other form of it, we have a very wide portfolio that we can bring to our customers. It is not just one ingredient, but a really wide range of products. Of course, it is the laser. We have very strong laser capabilities. But the laser, the external laser module, the optical components that go into that external laser module, like isolators. We manufacture polarization-maintaining fiber. This is the type of fiber that you would use to connect the laser module to the device or the device back to the front panel. We can do the full assembly of the entire fiber-attached kit. We do the SiPho PICs, et cetera. So we are able to bring to our customers a full range of integrated optics capability.

Speaker 2

We see NPO or CPO, to us, it is just a different form factor. The amount of content that we would have in an NPO application versus a CPO is very comparable, very similar. So we are driving whatever the customer prefers in terms of their type of application, CPO or NPO. We are there to support them. The other thing that we are going to be launching in September that I mentioned is a new technology platform called Coherent PhotonLink. What we were seeing with customers around CPO and NPO is customers not wanting to just buy a point individual ingredient like a laser or an isolator, but really wanting help bringing the full solution. So what Coherent PhotonLink is it is our complete integrated platform for basically being the one-stop shop for integrated optics platform.

Speaker 2

It spans all the way from light generation to beam shaping and transmission to detection and conversion back to the electrical signal. So we will talk more about it at our product launch event in September. But we think that is, based on the initial customer reaction, great solution for customers that want more of a complete solution. So we are pretty excited about that as well.

Speaker 4

Thank you. Appreciate all the details.

Operator

Our next question is from Simon Leopold with Raymond James. Please proceed with your question.

Speaker 5

Great. Thank you very much for taking the question. The first thing I wanted to ask you about, I know that it is not a done deal, but there has been press coverage on potential import restrictions for optical transceivers. I think I have two parts to this question. The first aspect is what does it mean to Coherent specifically? Part of this job, I think it applies to the Jobs Act, creating U.S. jobs. Could you, in practice, move transceiver manufacturing? Would you or could you move that to the U.S.? I have a follow-up. Thank you.

Speaker 2

Yeah. Thanks, Simon. That report is speculative at this point. Certainly, we would benefit from something like that. As the largest U.S. supplier of transceivers, something like that would certainly be beneficial. Although, we always want to compete for our customers' business based on our technology and based on our manufacturing. We think we have the broadest, deepest photonic technology in the industry and the most extensive manufacturing footprint. One of the things that we are really proud about on our manufacturing is, of course, we are a global manufacturer with locations all over the world, which gives us resiliency. Of course, we are also vertically integrated. We build a number of the very important components ourselves. Simon, as you mentioned, we have an outstanding footprint in the U.S.

Speaker 2

We have over 20 production facilities in the U.S., that I think is really a strategic advantage for us. Just one example is that Sherman, Texas facility. We are making very critical components in Sherman, Texas for not just transceivers, but for CPO and MPO applications. There are other facilities throughout the U.S. where we make other critical components like fiber optic cable, like growing the garnet that goes in the isolators for transceivers. To the extent that we need to, we are already investing in U.S. manufacturing, but to the extent we need to increase that U.S. manufacturing, we would certainly be open to doing that. We were founded over 50 years ago as a U.S. manufacturing company. We have a great footprint, we could certainly build off of that.

Speaker 5

Thanks. Then just the follow-up is, I think you gave us a target for 4Q 2027, June 2027 of revenue exceeding $3 billion. I think that's well above current consensus. I'd like to get a better sense then of what you're thinking about your gross margin. I know in the past you've talked about a target of 42.5%. I'm wondering if you could update us, given sort of the shifts in growth and the mix, how you're thinking about the gross margin trajectory. Thank you.

Speaker 2

Yeah. I'll pass that one off to Sherri to comment on gross margin. The quick version is that we've made, I think, great progress over the past quarters, and we're certainly super focused on continuing to make progress moving forward. But Sherri, do you want to add color to that?

Speaker 3

Sure, Jim. Thanks, Simon. So first of all, I'd like to say I'm extremely pleased with the progress we've made in improving gross margin. We increased gross margin 66 basis points sequentially and 250 basis points year-over-year. In fact, in eight out of the past nine quarters, we have increased our gross margin. So that's not just a trend. That's showing that we are actively driving gross margin improvement. The accumulation of improvement that we've driven in those eight quarters is over 660 basis points of improvement. So clearly an area that we're actively driving and focused on. Now the target that we gave at our Investor Day, Simon, it was greater than 42%. At the midpoint of our Q1 guide, which is at 40.5%, certainly we're still early. We have a little bit of ways to go.

Speaker 3

I do view that we are early in our strategy for growth margin expansion. But we are extremely focused on getting to greater than 42%. Let me tell you why I'm confident. The bulk of the 6-inch indium phosphide product ramp is still ahead of us. That's still to come. New product ramps for 1.6T OCS systems, CPO, multi-rail systems, thermal management solutions, all of those new products, those ramps are all still to come. They're all ahead of us. And of course, we will continue to drive cost reductions, pricing optimization improvements. The bulk of those improvements driven to date are in these areas, and we have clear plans to drive what I view as a very significant opportunity ahead. So once we get to our target of greater than 42%, we will no doubt raise the target.

Speaker 5

Thank you.

Speaker 2

Thanks, Simon.

Speaker 3

Thanks, Simon.

Operator

Our next question is from George Nader with Wolfe Research. Please proceed with your question.

Speaker 6

Hi, guys. Thanks very much. I guess I was just curious about where you are in terms of your transceiver mix right now. Obviously there's an initiative to in-source as much of those laser Datacom chips as you can. I'm just curious, how much of your mix is now in-sourced in terms of the laser Datacom chip? Also, I know there was a plan to kind of exceed your own internal needs and supply EMLs externally. I'm just curious what the roadmap looks like for selling EMLs commercially in the market. Thanks.

Speaker 2

Yeah. Thanks, George. I think on the last point, given the demand that we see in our data center business with transceivers, I don't see any time in the near future where we would be selling indium phosphide lasers externally. Our data center Transceiver demand is absorbing every bit of capacity that we have and then some. I don't see any near-term ability to do that. Maybe further out. Today we use a mix of internally produced and externally sourced. I still believe that over the long term, we'll have some portion of our Datacom transceivers that'll be supported by external sources. I think there's a number of strategic reasons why that's good for the transceiver business.

Speaker 2

But certainly, I think as we expand our internal production, which is growing very quickly, I talked about the 80% year-over-year growth that we saw in laser production in our June quarter, and that'll grow from here, given the ramp in indium phosphide. I would expect over time for a greater percentage of our transceivers to be serviced with internal indium phosphide.

Speaker 6

Great. Thank you. As a quick follow-on, I'm curious about where you are on VCSELs. Seems like there's a lot of new enthusiasm around VCSELs in scale-up applications. Obviously, you guys are working on a 200G VCSEL. I'm just curious about where that is and how you see that opportunity for Coherent. Thanks.

Speaker 2

Yeah, I think that's a great tool in our chest. In our tool chest is the 200G VCSEL. We continue to make good progress on that. I do think that that 200G VCSEL will see adoption in integrated optics applications, in MPO type of applications. So we're actively working with customers on VCSEL related MPO or integrated optics applications. So that's certainly an important tool and yeah, we think that'll be deployed.

Speaker 6

Thank you.

Operator

Our next question is from Ryan Koontz with Needham & Company. Please proceed with your question.

Speaker 7

Great. Thanks. I want to ask about your capacity constraints here. I wonder if you could look at your input capacity constraints as well as your own internal production capacity constraints, and how should investors think about those and where you're investing now, but where are your sharpest pain points now to grow the business over the next 12 months?

Speaker 2

Yeah. Thanks, Ryan. I would say that indium phosphide capacity continues to be our primary constraint. That's why we're so focused on ramping that 6-inch production. We're not constrained, for instance, if you look at transceivers, we're not constrained in the assembly and test capacity right now. We have that capacity available. We're really just constrained by the ramp of the indium phosphide production. As we continue to ramp that indium phosphide output, we expect that to continue to help drive revenue growth for our transceivers. It's really as simple as that. That's the primary constraint.

Speaker 7

Helpful. Thank you. Maybe as you think about the telecom side of the world and multi-rail and pump lasers and all that's involved there, how do you think about that monetization opportunity in terms of various parts or systems you might sell into that market?

Speaker 2

Yeah. Thanks, Ryan. In that market, we actually sell at multiple different levels. We do sell components into that market. We sell what I would call subsystems. These would be amplifiers, line cards, and in some cases, we'll sell full systems. We sell at multiple levels, and I would say the growth there is incredibly strong. In communications, this kind of scale-across DCI falls within our communications business. We saw in our June quarter a 56% year-over-year growth in that segment. I think that segment, moving forward, we're going to continue to see faster growth, just as we've seen in the sort of data center applications. That's across just multiple different products, whether it's our ZR+ transceivers, whether it's some of the components like the pump lasers or the products that go into the pump lasers.

Speaker 2

As I mentioned in the prepared remarks, soon we'll start to see revenue from multi-rail systems. Our technology for multi-rail systems is in the hands of customers now. We've sampled that, and we expect revenue to start to flow from multi-rail in the first half of calendar 2027. Yeah, there's just a wide range of products there, and I would say the demand just continues to go up for anything DCI or scale-across related.

Speaker 7

Super. Thanks, Jim.

Operator

Our next question is from Blayne Curtis with Jefferies. Please proceed with your question.

Speaker 8

Hey, good afternoon, guys. I had two questions. First, maybe can you just talk about the OCS demand? You mentioned the $4 billion TAM. I think you're starting to ship in smaller volumes. Can you just talk about where you're seeing the demand, how broad that is? I think there's expanding applications as well, intra-rack and such. Can you just comment on that?

Speaker 2

Yeah, definitely, Blayne. We're certainly seeing an expanding range of applications. Originally when we started working on OCS, we were thinking about it mostly in the context of scale-out. But now, clearly, we think we'll see adoption in scale-across, and then a clear path to scale-up as well. We have active customer engagements in scale-up applications. That's really what led us to double the size of our market outlook at OFC earlier this year. We doubled it from 2 to over 4 billion. We may have even been conservative on that $4 billion number in terms of the addressable market over time. I think that was for a 2030 timeframe. Yeah, we've only seen the applications widen and the demand look stronger than what we had thought six or 12 months ago. It looks very good.

Speaker 2

And then in terms of our progress, pleased with our progress. The demand is clearly there, so we're really just focused on ramping manufacturing capacity as fast as we can. We saw revenue grow in our June quarter, and as I look forward over the coming quarters, we expect to continue to expand production capacity and then drive faster revenue growth as well. We believe it becomes a very meaningful product line over time for us.

Speaker 8

Thanks. Then I want to go back to MPO. If you could just talk about, is there a way to think about how many projects you're working on? Then I just want to drill down on, there's a lot of questions on, you said the content would be similar to CPO, but then I think there's some talk about integrated, then you answered a question talking about VCSEL. So can you just walk through that content? Where are you seeing the demand? Is it even on the projects you're working on now and it might change in the future? Can you just walk through that?

Speaker 2

Sure. What I would say is almost every customer that we work with, certainly the large strategic customers, we have either a CPO or an MPO or in some cases, a CPO and MPO project ongoing. That is really that sort of intensity and engagement around CPO and/or MPO has really gone up over the last three to six months. So I would say those engagements are very active. Just as a reminder, as I said earlier, we're not just bringing one ingredient like a laser to the solution. We're bringing a full platform solution of the laser, the interconnect, the different optical components, et cetera. So I would say engagements across all the major customers. Then on the second part of your question on the dollars of content, we see comparable levels of content for both CPO and MPO.

Speaker 2

To us, it's just a different attach point, whether it's connecting directly near the piece of silicon or whether it's on the motherboard, CPO or MPO. The level of content that we would see, we view as very similar. Maybe that's because we're providing a pretty broad range of solutions in both of those types of applications, but we see the level of content similar. I would say all of this, I would point out, is incremental addressable market for us, but also for the optics industry in general. Most of these projects are focused on scale-up applications where we're going to be converting more of those copper electrical lines to optical over the coming years. So it's great addressable market expansion for us, and we expect it to be a major growth area for us.

Speaker 8

Thanks, Jim.

Operator

Our next question is from Karl Ackerman with BNP Paribas. Please proceed with your question.

Speaker 9

Yes. Thank you. I have two, if I may. First question, Jim, you spoke about quarterly revenue exceeding $3 billion by the end of fiscal 2027, which is quite robust. Could you unpack that a bit and describe how much of that is an uplift from perhaps 1.6T transceivers? You talked about OCS demand, you talked about multi-rail, and perhaps how much of this is coming from any backlog or pricing as well. If you could just kind of bucketize those, would be very helpful. I have a follow-up.

Speaker 2

Yeah. Thanks, Karl. First of all, the primary driver there is data center and communications. We expect some improvement in industrial, but it's really the bulk of that is driven by data center and communications, given that that's 80% of our revenue. Within that, I would say certainly transceivers is a big driver of that. We've got 800G is still growing very robustly on a year-over-year basis, and 1.6T is ramping incredibly fast. In fact, we've seen the 1.6T ramp only pull in, be stronger, demand increase. That ramp is even faster than what we thought, say, three months ago. 800G 1.6T transceiver is certainly a key part of that. Beyond that, OCS ramping through the course of this fiscal year. CPO now starting to really kick in in our December quarter and ramping in the following quarters.

Speaker 2

We talked about multi-rail as well. There are pricing improvements that we are driving, either kind of normal pricing improvements or pricing improvements that are part of our LTAs, long-term agreements with our customers that are kicking in as well. It is really a number of factors. Across data center and communications, I am trying to think if there is any product line we are not supply constrained on. The demand is robust across almost every single product across data center and comms, and it is really just a matter of we can sell as fast as we can ramp production. We have had just an extreme focus on ramping production as quickly as possible.

Speaker 9

Thank you. You also spoke about how customer orders extend into 2028 and LTAs to the end of the decade. When you discuss LTAs extending into 2028, is that volume committed in 2028 at a higher volume commitment than 2027? Perhaps you could provide some guardrails with respect to the volume commitments that you are seeing today and how that has improved over the last 90 days. Thank you.

Speaker 2

Thanks, Karl. First of all, when I am talking about the near term, we are talking about purchase orders or backlog. In terms of backlog and bookings, if we take our June quarter, we saw, I would call it just an extraordinary level of bookings, record bookings, again in our June quarter. Our backlog now extends out, fiscal 2027 is basically completely booked out. We are booked really through the end of calendar 2027. What we are seeing now is customers now booking into calendar 2028. Those are purchase orders for specific products, et cetera. That is really good because that is very high-quality near-term demand visibility.

Speaker 2

At the same time, in parallel, a lot of customers putting in place long-term agreements with us, where long-term agreements for supply over a multi-year period, many of those periods extending out through the end of the decade. Generally those agreements have increasing supply each year, because what we are doing is we are expanding capacity to bring on, or to support their demand requirements moving forward. So expanding capacity, expanding demand from them, and then they have pricing-related commitments, and then they also have sort of minimum demand guarantees from our customers, or sometimes you refer to those as take-or-pay agreements. Those LTAs are also really helpful. Those give us great visibility just beyond 2028.

Speaker 2

Those give us really good visibility into the key products we need to be building and the capacity we need to be expanding through the rest of the decade.

Operator

Our next question is from Meta Marshall with Morgan Stanley. Please proceed with your question.

Speaker 10

Great. Thanks so much. Maybe a question. Sherri, I know you alluded to 6-inch yields being a big portion of the gross margin increase, but just as we think about into the next year, how much of that improvement is really the yield improvements versus maybe some of the product mix or pricing? Then second question, Jim, a question for you. I know it was asked about the potential restrictions being put into place, but just have you seen a change in customer urgency to get product? I know you're sold out, but just in terms of a change in customer communication over the past couple of weeks. Thanks.

Speaker 3

Thanks, Meta, for your question. So in terms of 6-inch yield, what I was mentioning, it's 6-inch cost structure. Because if you remember, we've talked about the fact that 6-inch wafers are, we get four times the amount of output from that wafer versus 3-inch, right? Four times, but it's at half the cost. So it's that cost structure that's beneficial to us. And when I talk about what's ahead of us that will help drive gross margin improvement, it's really that ramp of 6-inch indium phosphide products that will be beneficial to us because of the cost structure of 6-inch. And I think, Jim, you-

Speaker 2

Yeah, I'll just reiterate what I said earlier, that when we look at yields for 6-inch, the yields for 6-inch are actually higher than our 3-inch production. Again, the benefit of the 6-inch is the cost structure benefit. Then on the second part of your question around sort of customer reaction to the recent Reuters article, I would say, yeah, there's a number of customers that have reached out to us and have engaged in a discussion around manufacturing and exploring different options around that. So yeah, I would say that has spurred some new customer demand and supply discussions, and so those discussions are ongoing.

Speaker 10

Great. Thank you.

Operator

Our next question is from Vivek Arya from Bank of America. Please proceed with your question.

Speaker 11

Thanks for taking my questions. For the first one, Jim, CPO for scale-up, what is the timeline for Coherent? Is it second half of 2027? Is it 2028? Then how broad is it, and what's the pushback from customers who don't want to adopt it early?

Speaker 2

Thanks, Vivek. I think we've said this in the past, we continue to expect revenue from CPO for scale-up applications to start to flow in the second half of calendar 2027. That's been a consistent view for quite a while for us. The CPO that we're ramping right now will first go into scale-out applications, and then that'll continue to grow, and then scale-up will kick in the second half of 2027. I would say in the scale-up domain, with customers, if we're not having a CPO discussion, they're at least considering or engaged with us in NPO. I think almost every customer that we have, certainly the big strategic customers, are engaged with us in a discussion of CPO or NPO.

Speaker 2

There's just a differing views by our customers, depending on their architecture, whether they would prefer an NPO sort of form factor to start with or CPO. Some customers that we're engaged with on NPO, I expect to eventually transfer to CPO further down the line, and some are choosing to go directly to CPO. It really depends on the particular customer and comes down to their specific architecture.

Speaker 11

Got it. Thank you. For my follow-up, maybe one more on gross margins. This is probably more nitpicking, but in the first half of the year, we saw incremental gross margins that were more in the, I think, mid-40s or better. I think what you guided to for September is sort of in the low 40s. I'm just curious if there's anything specific for September and just broadly, how should we think about incremental gross margin fall through for fiscal 2027, given that you've kind of given us the bookends for the year? Thank you.

Speaker 3

Yeah. When you think about, Vivek, you think about gross margin improvement going forward, it's really driving the initiatives that I talked about, right? Continued cost reductions, pricing optimization. We'll continue to focus on that. The timing of those benefits, it's going to differ because it just depends on the initiatives and when they kick in. As we ramp throughout the rest of this year, as Jim mentioned, that $3 billion revenue number, by the end of FY 2027, and he talked about the revenue opportunities there. He mentioned new products, right? He mentioned 1.6T OCS, CPO, all these things kicking in, which are going to be beneficial to our gross margin. That will help drive improvements in gross margin as we move ahead.

Speaker 3

But when you talk about flow-through on gross margin and what you can think about, the other thing that I would like to make sure that I call your attention to is that if you look at our operating expenses in the Q1 guide that we provided, at the midpoint of that guide, we are already below our target model, rather. So we gave a target model for OpEx, just last year, in fact, of 18% for OpEx. The midpoint of our Q1 guide, we are already below that. We are going to continue to drive operating efficiency. We have made tremendous progress on the SG&A front, but there is more operating leverage that we will get out of R&D as well. So when you think about total flow-through, keep that in mind as well.

Speaker 3

I just want to point that out because I expect that there is significant opportunity to drive even greater operating leverage for the reasons that I just stated.

Speaker 11

Okay. Thank you.

Operator

Our next question is from Mike Genovese with Rosenblatt Securities. Please proceed with your question.

Speaker 12

Great. Thanks. Jim, it is really good to see the expectation for CPO laser revenues in the fiscal second quarter, because that would imply that you are either qualified or have line of sight to qualification and would kind of go against some of the fuzz, I think that is not coming from Wall Street, but more coming from Substack saying you guys are having trouble with that laser. Just any more color on the confidence that you will be ready for the customer to actually recognize revenue in that quarter and just progress that has been made recently. Thanks.

Speaker 2

Yeah. I am really pleased with the progress. I think the team has done a great job. I actually think our design on that particular laser is outstanding and has some significant technical advantages and production advantages. Yeah, we have already started production wafers for those shipments in our December quarter, and that customer continues to tell us to please ship more as fast as possible. Yeah, I think we feel really good about that. Just as a reminder, it is not just lasers, right? We supply lasers, external laser modules, the different optical connectors, the fiber optic cable, the fiber attach unit. There is a lot of content that we supply beyond just the laser. But certainly, laser is a key ingredient.

Speaker 12

Great. Sounds good. Last question. You have mentioned already repeatedly about the LTAs, which gives you revenue visibility. My question is, does that also give you pricing visibility? Specifically, how far into the future do you think that prices of lasers will keep rising when you sort of weigh your LTAs and the amount of capacity that has been added and the potential for increasing competition may be coming from China. But your confidence sort of how far out you think before we have to worry about laser prices not going up anymore.

Speaker 2

Yeah. It is a good question, Michael. When we do LTAs, they almost always have not just a volume commitment, but agreed-upon pricing as well. The pricing is set for, I think, all or almost all of our LTAs out through the length of the LTA. Some of those are three years. Many of those go out through the rest of the decade. That gives us great visibility on not just the volume that we need to go drive, but the pricing that we can expect as well. So it is good visibility from both those aspects.

Speaker 12

Thanks for taking the questions. Appreciate it.

Speaker 2

Thank you.

Operator

This concludes our Q&A session. I would like to turn the floor back over to Jim Anderson for closing comments.

Speaker 2

Yeah. Thanks, operator, and thanks again for joining us on the call today. We are certainly entering our fiscal 2027 with great momentum, exceptional customer demand, and really an accelerating growth prospect given the capacity and the ramp in new growth platforms ahead of us. I think with our photonic technology and manufacturing scale, I think the company is just really well-positioned moving forward. I just want to say thanks again to our employees for their great work in fiscal 2026 and to all of our customers, partners, and shareholders for the support. Thank you, and we will look forward to updating you again in another quarter.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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