COHERENT 2025 Q4
Earnings Overview & AI Insights

Earnings Performance

Summary of Financial Performance: Coherent reported strong Q2 fiscal 2026 results, driven primarily by AI data center and communications demand. Revenue reached a record $1.69 billion, up 7% sequentially and 17% year over year; on a pro forma basis excluding the divested aerospace and defense business, revenue grew 9% sequentially and 22% year over year. Non-GAAP gross margin was 39.0%, improving 24 basis points sequentially and 77 basis points year over year, supported by lower input costs, better cycle times, yield gains, and pricing optimization. Non-GAAP operating margin rose to 19.9% from 19.5% in the prior quarter, while non-GAAP EPS increased to $1.29 from $1.16 sequentially and $0.95 a year ago. Data Center & Communications, now over 70% of total revenue, grew 11% sequentially and 34% year over year, with data center alone up 14% sequentially and 36% year over year. Industrial revenue rose 4% sequentially and was flat year over year on a pro forma basis. Capex increased to $154 million as the company expands capacity, while debt leverage improved to 1.7x from 2.3x a year earlier.

Company Outlook & Strategy: Management expressed high confidence in sustained strong growth over the coming quarters, citing exceptional customer demand, strong backlog, and expanding production capacity. For Q3 fiscal 2026, Coherent guided revenue to $1.7 billion-$1.84 billion, non-GAAP gross margin to 38.5%-40.5%, and non-GAAP EPS to $1.28-$1.48. Executives expect strong sequential revenue growth in both the March and June quarters and said fiscal 2027 revenue growth should exceed fiscal 2026 growth. Key growth drivers include 800G and 1.6T transceivers, OCS, CPO solutions, and continued strength in DCI and scale-across applications. The company is also targeting operating leverage, expecting EPS growth to outpace revenue growth. Portfolio optimization remains a strategic focus, with the Munich product division sale expected to be immediately accretive to gross margin and EPS, alongside continued site consolidation and footprint streamlining.

Key Industry Trends: The dominant industry theme is rapid AI data center infrastructure build-out, which is driving major demand for optical networking, transceivers, and interconnect solutions across scale-up, scale-out, and scale-across architectures. Management highlighted especially strong demand for 800G and 1.6T products and increasing adoption of next-generation technologies such as OCS and CPO. In communications, demand is being supported by both data center interconnect growth and a recovery in traditional telecom. In industrial markets, management sees improving conditions led by semi-cap equipment demand. Longer term, Coherent pointed to opportunities tied to data center cooling, energy efficiency, OLED manufacturing, and fusion energy applications.

Operational Highlights: Operational execution was a major positive. Coherent reported a step-function increase in bookings in data center, with book-to-bill above 4x, and said most calendar 2026 demand is booked with calendar 2027 filling quickly. The company is rapidly expanding indium phosphide capacity and remains on track to double internal production by the fourth quarter of calendar 2026, helped by six-inch wafer production in Sherman, Texas and Yarfala, Sweden. Management emphasized that six-inch wafers deliver more than four times as many chips at less than half the cost versus three-inch wafers, with yields already exceeding older lines. Production capacity is also being expanded in Malaysia, Vietnam, and other module assembly locations. Coherent also announced a large CPO design win with a leading AI data center customer, with initial revenue expected late this calendar year and more meaningful contribution next year. OCS backlog increased sequentially, with over 10 customer engagements and growing demand across both 64x64 and 320x320 systems. Operational streamlining also continued, with 10 sites exited in the quarter and 33 sites sold or exited over roughly six quarters.

Challenges & Risks: The main challenge remains scaling supply quickly enough to meet extraordinary demand. Management is investing heavily in production expansion, including rising capex through the remainder of the fiscal year. While demand visibility is unusually strong, execution risk remains around converting wafer starts into shipments, as production lead times can run about six months from wafer start to transceiver shipment. Industrial performance remains less robust than data center, with near-term revenue expected to be roughly flat sequentially before improvement later in the year. The company also continues to depend on both internal expansion and external suppliers to satisfy demand. Broader risks include normal forward-looking uncertainties, market conditions, and execution on capacity, product ramps, and site consolidation.

Key Analyst Questions & Responses: In Q&A, analysts focused heavily on demand visibility and capacity expansion. Management described current visibility as the best ever, citing bookings extending through most of calendar 2026 and rapidly filling into 2027, plus long-term customer forecasts extending into 2028 and increasing use of long-term supply agreements that include demand commitments and sometimes customer capex support. On indium phosphide capacity, management said the company is already at about 80% of its target doubling capacity goal in terms of wafer starts, ahead of schedule, and more than quadrupled wafer starts from the September to December quarter. They reiterated that the ramp supports both revenue growth and future margin expansion due to superior economics of six-inch production. Overall Q&A reinforced management’s bullish tone on both demand durability and Coherent’s ability to expand capacity to support that growth.