Coherent Corp. 2026 Q4 Earnings Call

Please go ahead. 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.