Coherent (COHR) Q1 FY27 Earnings Call Transcript

Operator00:00

Greetings and welcome to the Coherent Corp first quarter fiscal year 2027 earnings webcast. All participants will be in a listen only mode.

Operator00:16

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.

Operator00:32

To withdraw your question please press star then two. two. Please note this event is being recorded. It is now my pleasure to introduce your host Mister Paul Silverstein Senior Vice President of Investor Relations for Coherent.

Operator00:35

Please go ahead.

Paul Silverstein00:59

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.

Paul Silverstein01:14

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.

Paul Silverstein01:44

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 reports that we may file in form 8-K with the Securities and Exchange Commission all our statements are made as of today November 4th 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.

Paul Silverstein01:55

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.

Paul Silverstein01:58

Let me now turn the call over to our CEO, Jim Anderson.

Prepared remarks

Jim Anderson02:12

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.

Jim Anderson02:19

Non-GAAP EPS increased 80% year over year reflecting continued gross margin expansion and operating leverage.

Jim Anderson02:30

Strong customer demand and our rapid capacity expansion are supporting this growth with near term bookings and newly signed LTAs LTAs providing multi-year visibility.

Jim Anderson03:32

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.

Jim Anderson03:47

At the same time new growth areas are ramping as well, 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.

Jim Anderson03:59

In addition photonics our newly announced integrated optics platform is also beginning to ramp and we expect photon link revenue to exceed $100 million in our March quarter.

Jim Anderson04:11

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.

Jim Anderson04:25

Moving to our data center and communication 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.

Jim Anderson04:29

The segment now accounts for 82% of Coherent's total revenue.

Jim Anderson04:50

Near term demand remains strong and our visibility into long term demand continues to improve. Order Order coverage through calendar 27 is exceptional and customer orders increasingly extend into calendar 28. We signed multiple new LTAs LTAs in Q1 and customer LTAs typically extend through the end of the decade.

Jim Anderson04:53

We continue to see no signs of attenuation in demand.

Jim Anderson05:04

Within the segment data center revenue increased 17% sequentially and 85% year over year marking our fourth consecutive quarter of double digit sequential growth.

Jim Anderson05:05

Growth.

Jim Anderson05:18

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 800 gig revenue.

Jim Anderson05:24

We expect strong transceiver revenue growth in Q2 driven by both 1.6T and 800 gig.

Jim Anderson05:52

We expect 1.6T revenue to continue ramping rapidly over the coming quarters while 800 gig 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.

Jim Anderson06:03

Coherent is helping shape the industry ecosystem for emerging formats demonstrating XPO at OFC and also supporting the new USFP form factor.

Jim Anderson06:15

Turning to OCS customer engagement is broadening across scale out and scale up networks spanning our 320 by 320 platform and denser configurations.

Jim Anderson06:26

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.

Jim Anderson06:32

At ECOC in September we launched Photon Link our new platform for integrated optics.

Jim Anderson06:41

It's designed to address the transition from copper to optical connectivity in AI data centers creating a significant opportunity for Coherent.

Jim Anderson06:51

We estimate that CPO NPO and chip to chip optical interconnects represent approximately $30 billion of market opportunity by 2030.

Jim Anderson07:13

Bringing our total market opportunity for data center and communications to about 90 billion in 2030. Photon Link 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 the signal to electrical form.

Jim Anderson07:24

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.

Jim Anderson07:37

It includes lasers laser modules complex fiber assemblies and other optical components and supports indium phosphide based CW lasers and Vixel based technologies.

Jim Anderson07:50

We believe this breadth and depth differentiates us. For an XPU or switch chip with 100 terabits per second to bandwidth we estimate our content opportunity can reach approximately $15,000 per chip.

Jim Anderson07:54

Customer engagement is validating the opportunity.

Jim Anderson08:24

In Q1 we signed another significant Photon Link 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.

Jim Anderson09:10

We expect Photon Link revenue to ramp quickly over the coming quarters We expect revenue to exceed 100 million dollars in our March quarter and to exceed 250 million dollars 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 Photon Link is initially being deployed in CPO scale out applications we expect to begin shipping Photon Link products for CPO and NPO scale up applications in the second half of calendar 27. Over time we expect Photon Link to become a multi billion dollar product line for Coherent.

Jim Anderson09:39

Expanding our indium phosphide capacity is a key enabler of growth in both indium phosphide pluggable transceivers and indium phosphide enabled photon link solutions our six 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 100 gig and 200 gig devices.

Jim Anderson09:47

The The ramp contributed meaningfully to data center growth and we expect it to remain an important driver of revenue and gross margin.

Jim Anderson10:01

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.

Jim Anderson10:19

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.

Jim Anderson10:53

Our six inch lines in Texas and Sweden are producing EMLs CW lasers and high speed photodiodes with yields that that continue to exceed those of our three 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 six inch indium phosphide production in Zurich in the first half of calendar 27 further extending what we believe is a meaningful manufacturing advantage.

Jim Anderson11:00

Moving to communications revenue increased 34% sequentially and 84% year over year.

Jim Anderson11:15

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.

Jim Anderson11:23

Over the past year we've expanded our data center interconnect portfolio to help customers connect data centers with greater capacity and efficiency.

Jim Anderson11:47

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 multi rail 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.

Jim Anderson12:05

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.

Jim Anderson12:22

With multi rail 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.

Jim Anderson12:35

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.

Jim Anderson12:45

In semiconductor equipment our lasers precision optics and engineered materials serve front end applications and we've seen a strong uptick in bookings.

Jim Anderson12:54

In AI infrastructure our CO2 lasers and zinc selenide optics are used to drill advanced circuit boards for AI servers.

Jim Anderson13:09

Demand is also growing for our pulse 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.

Jim Anderson13:24

For AI data centers our thermodyte 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.

Jim Anderson13:40

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.

Jim Anderson13:54

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.

Jim Anderson13:59

Established businesses continue to grow rapidly while new growth areas are ramping quickly.

Jim Anderson14:20

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 Sherri

Sherri Luther15:01

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.

Sherri Luther15:17

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.

Sherri Luther15:25

This performance was driven by the continued AI infrastructure build out across our data center and communications businesses.

Sherri Luther15:53

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.

Sherri Luther16:04

This continuous expansion reflects durable pricing optimization and structural cost improvements particularly within our data center and communications segment.

Sherri Luther16:15

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.

Sherri Luther16:25

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.

Sherri Luther16:34

Our gross margin profile is also benefiting from the transition to six inch indium phosphide as we continue to scale our production capacity.

Sherri Luther16:59

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,

Sherri Luther17:06

Platforms, full operational leverage of our six inch indium phosphide capacity and other cost improvements.

Sherri Luther17:19

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.

Sherri Luther17:30

First quarter non-GAAP operating expense was 412 million compared to 377 million in Q4 and 304 million in the year ago quarter.

Sherri Luther17:45

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.

Sherri Luther17:53

This improvement reflects enhanced operational discipline and underscores the powerful operating leverage inherent in our business.

Sherri Luther18:04

From an R&D perspective, we are strategically directing our capital toward high conviction long term growth drivers which Jim outlined in his remarks.

Sherri Luther18:12

This disciplined approach ensures our investments are concentrated where they generate the highest financial returns and drive sustainable revenue growth.

Sherri Luther18:24

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.

Sherri Luther18:33

The sequential and year over year increases were driven by strong revenue growth expanding gross margin and structural expense discipline.

Sherri Luther18:44

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.

Sherri Luther18:53

Earnings Earnings growth continued to exceed revenue growth demonstrating gross margin expansion and operational leverage accelerating our bottom line profitability.

Sherri Luther19:09

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.

Sherri Luther19:18

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.

Sherri Luther19:27

Consistent with our capital allocation priorities we strategically invested in opportunities that will drive long term growth and profitability.

Sherri Luther19:39

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.

Sherri Luther19:47

These investments directly support the future growth of our data center and communications businesses with excellent financial returns.

Sherri Luther20:10

Our conviction to deploy this capital at an accelerated rate is 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.

Sherri Luther20:18

Given the strong visibility and record backlog we expect capital expenditures to increase sequentially again in the second quarter.

Sherri Luther20:31

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.

Sherri Luther21:43

I will now turn to our guidance for the second quarter of fiscal 2027. We expect revenue to be between 2.55 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

Questions and answers

Operator21:57

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.

Operator22:09

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.

Operator22:19

The first question today comes from Joseph Cardoso with JPMorgan. Please go ahead

Joseph Cardoso22:42

Hi, good afternoon and thank you for the questions here. You know really appreciate some of the disclosures that that you provided this quarter and wanted to first start with Photon Link 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 $20 billion agreement that you've highlighted and then I have a follow up Thank you.

Jim Anderson25:13

Yeah thanks Joe so so first of all yeah we're certainly really pleased with the momentum that we have around Photon Link and kind of whether you measure by customer engagement or LTAs as you mentioned or just you know the revenue outlook that I mentioned in the prepared remarks we're just really pleased with the progress there and just as a reminder you know Photon Link 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 technology along that that path and really excited about the progress as I mentioned in the prepared remarks over 20 customer engagements on CPO over 10 on or sorry over 10 on CPO over 10 on NPO and then over five chip to chip engagements so the customer engagement's very extensive and they continue to grow you mentioned or asked about the LTA really pleased about that major AI customer and that LTA LTA is as I said 20 billion dollars over a five year period and the revenue for that would start at the beginning of calendar 28 but the Photon Link revenue ramp is starting ahead of that we'll ship a little bit of a small amount of Photon Link 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 and I guess the other thing that I would add is you know if we look further out we're expecting this over time to become a multi billion dollar product line the initial shipments of Photon Link are all around CPO CPO in the scale out network but when we start to ship into CPO and NPO 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 that we expect to start to ship revenue into CPO and NPO applications in the scale up domain towards the end of calendar 27 so yeah we're excited about the progress and expect this to become a major product line for us

Joseph Cardoso25:28

No 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 Anderson28:14

Yeah thanks again this is 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 so DCI and scale across that 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 most of that 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 what's driving 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 so we're certainly selling into multiple different equipment makers that 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 rotums etc 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 the if we look at our Q1 revenue was over 200 million so we're basically at about a billion dollar annualized revenue run rate now and that's that Q1 growth had quadrupled year over year and we expect that if you take that Q1 baseline we expect that the revenue to double again before the end of calendar 27 and so that that growth that we've seen to date that's ahead of multi rail so we expect multi rail revenue which is a multi rail is a great solution some great technology that we have there we expect that to start 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 Cardoso28:18

Thank you, Jim. Appreciate all the color.

Jim Anderson28:21

Thanks, Joel. Joel.

Operator28:26

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

Simon Leopold28:52

Thanks for taking a question. Uh first Jim I want to thank you for the increased transparency on slide seven I know this is something I've been probably annoying you about um so thank you uh the slide did not mention OCS I know you talked about the 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 Anderson30:25

Yeah sure thanks Simon thanks for the feedback as always we're always looking to improve so appreciate the feedback but yeah and OCS I did mention in the prepared remarks OCS falls within our data center part of our business and just reiterating data center was up 85% year over year in our Q1 OCS continue to make good progress we've got really extensive customer engagement we saw 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 products it's across 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 very 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 we see the market opportunity for OCS as at least 4 billion by 2030 it could be larger than

Simon Leopold30:38

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

Jim Anderson31:00

Yeah, thanks, Simon. No, I don't think that's a hard question at all. I think happy to answer that. I 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.

Jim Anderson33:00

You know, 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 it highlights the tremendous strategic value of the portfolio that is 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 I think that I think a lot of for a lot of customers 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's going to support 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 optics 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 the Photon Link technology and the Photon Link revenue ramp.

Simon Leopold33:06

Thank you.

Operator33:12

The next question comes from Tom O'Malley with Barclays. Please go ahead.

Thomas O'Malley33:42

Hey, guys. Thanks for taking my question. Uh 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 three billion and then four billion next year and then the second part of the question is is that all backed with supply um 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 any to get you to those numbers.

Jim Anderson33:58

Yeah, thanks, Tom. I think it is a little bit different. We are providing a little bit longer term visibility than we normally would. I think it's really backed by the just extraordinary level of visibility that we have on the business.

Jim Anderson35:53

And when I look at the backlog the bookings both so both near term visibility and long term visibility if I look at the 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 terms 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 Photon Link prepared remarks but the LTAs also give us really good visibility because they include very high quality forecast long term forecast so I think that's given that 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 that's that those views that we gave whether it's the three billion this year and the four billion dollar quarter next year is underpinned by supply agreements also remember that you know we're highly vertically integrated so a lot of that's underpinned by our own internal supply that we're ramping right you know one of the constraints if we look back over the past year and a half one of the constraints has been indium phosphide and I'm just really 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 they're going to achieve 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 yeah we're feeling really good about the outlook and the visibility for the business.

Thomas O'Malley36:15

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 Photon Link, Link. 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 Anderson37:27

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's all that LTA for 20 billion is all around Photon Link 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 there's it's more than 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 the revenue 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 so really pleased with that and I think given the engagement that we have on Photon Link across many different customers many different solutions we certainly expect to sign more long term agreements and partnerships with Photon Link over the coming quarters as well

Thomas O'Malley37:31

Thanks a lot Jim.

Operator37:38

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

George Notter37:47

Hi guys, thanks a lot. Um I guess I just wanted to ask a question about the 45% gross margin

George Notter38:08

You know outlook before the end of 28 so I guess I'm curious like 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 and naturally would ramp and you wind up in 45% gross margins what's the view there thanks

Jim Anderson39:29

Yeah, thanks, George. I 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 you know 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 you know Photon Link 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 number of different cost activities that we're driving but certainly a big one of it is we expect additional leverage in terms of gross margin from our indium phosphide ramp I think there's as I mentioned briefly in the prepared remarks I think 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 well.

George Notter39:54

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 is 45% just a stop in a bigger picture or a bigger number what do you think?

Jim Anderson40:32

I don't think there's any structural barrier to us driving gross margin above 40% in fact I think Sherri in her remarks I think she said over 45% before the end of calendar 28 I think is the way she said it right so I I 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 stop along the way and I would say 45% is yeah stop along the way and I don't see any structural reason why the company couldn't continue to drive gross margins beyond that

Jim Anderson40:59

Yeah I would just add that you know the target that we put out about 18 months ago at our investor day of over 42% that was a three to 40 year 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 so you know as we get close to that target you know we'll certainly reevaluate you know and look at you know what makes sense beyond that but it's just a stop along the way.

Jim Anderson41:24

Yeah and George maybe the other thing I'd add is you know we're certainly you know super focused on gross margin expansion but the other thing that we're very 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 know you should expect continued operating leverage as well.

George Notter41:26

Thank you.

Operator41:35

The next question comes from Gian Marco Conti with Deutsche Bank. Please go ahead.

Unidentified speaker42:01

Yeah, great. Thank you for taking my questions. Um congrats on the quarter um maybe starting with Photon Link I wanted to touch on the scale in slash scale up opportunity with micro Vixel. You mentioned you had five engagements I believe chip to chip I'm curious if you could talk a little bit more detail here whether there is anything you can quantify in terms of revenue to come online next year anything around micro Vixel thank you.

Jim Anderson42:27

Yeah, so thanks for asking about micro Vixel. So certainly when I look across the Photon Link engagements there is I would say many Vixel micro Vixel we call it multi core Vixel pixel because it the multi core Vixel attaches to our multi core fiber that we produce and so but multiple of those engagements involve our Vixel technology.

Jim Anderson43:54

I mean maybe just as a reminder of the company's sort of depth in Vixel technology number one is we've shipped over 700 million Vixels into data center applications over the past year so we have enormous manufacturing expertise in Vixels also at the ECOC conference when we launched Photon Link we talked about our technology in Vixels micro Vixels Vixel arrays etc you know we showed that we one of the things that we showed was that we had industry leading energy efficiency around Vixels of we showed a one one picojoule per bit capability which I think is very industry leading capability and so Vixels 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 relatively in scale up MPO 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 Photon Link and scale in applications is more in the 2029 to 2030 but we'll definitely see I think Vixels deployed in NPO applications well before that

Unidentified speaker44:16

If I could just ask a follow up it's going to be a tough question sorry to put you on the spot but I've been receiving a lot of questions from investors around Chinese laser suppliers I was wondering if you could provide any kind of thoughts on basically more supply coming in online and whether you see them competing for ultra high powered lasers for CWs.

Jim Anderson44:44

Yeah so I don't see that that those competitors in terms of ultra high power if you're talking about like the 400 milliwatt CW laser we're not seeing competition from really we really only have one competitor there as far as we can see right so really not seeing any other competitors out there with high power CW laser capability

Unidentified speaker44:48

Thank you.

Jim Anderson44:49

Yep.

Paul Silverstein45:01

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. Alright thank you

Operator45:07

The next question comes from Dan Shue with Bernstein. Please go ahead.

Unidentified speaker45:23

Hey thanks for the question um you mentioned that scale up optics should start towards the end of calendar 2027 um anything you can share about whether the initial deployments are NPO or CPO and also about how much whether sort of this is primarily going to be on Vixels or will this start with IMP based lasers?

Jim Anderson45:59

Yeah 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 think in scale up both CPO and NPO within either that late 27 or early 28 time frame in the scale up applications and then I think did you ask what was the second part of your question Dan?

Unidentified speaker46:04

How much of it is Vixel versus IMP

Jim Anderson46:23

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 Vixels will happen in that NPO kind of early 28 time frame

Unidentified speaker46:26

Got it. Thank you.

Operator46:33

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

Unidentified speaker46:52

This is Jeff Hobson on for Ryan. Thank you for the question. You noted ramping the indium phosphide supply for your own laser supply and you know that be able to lead to you know the margin expansion from weaning off external sources.

Unidentified speaker47:08

I'm just curious if there's any color on what the split is currently versus internal versus external and kind of how or the timeline of that over time as it relates to the margin expansion. Thank you.

Jim Anderson49:07

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 our 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 one basically one quarter later because when in the quarter we produce the lasers the next quarter is when we ship the transceivers and so essentially our transceivers have been 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'll always think 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 six inch platform and in my prepared remarks when I said you know the majority of the benefit from six inch indium phosphide is ahead of us that's actually what really what I'm referring to is that benefit of changing the mix towards internal is is largely ahead of us and that's a much bigger cost structure improvement.

Unidentified speaker49:11

Thank you very much.

Operator49:19

The next question comes from Papa Sylla with Citi. Please go ahead.

Papa Sylla49:56

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, think, 100 you mentioned earlier and 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 I guess of that 15,000 you expect to capture in the near term versus longer term and how it may change kind of beyond 27. 27.

Jim Anderson50:24

Yeah, thanks, Papa. The yeah, the 15,000 basically represents, if you take an example of a chip that needed 100 terabit of IO and if we were using our full photon link portfolio, which would include not just the lasers, but all the other components, isolators, thermal electric coolers, laser modules, modules, full our full fiber assembly kit, all the connectors, etc.

Jim Anderson51:44

So everything that we do if you use 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'll 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 photon link 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 definitely 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 for us this we see this as all greenfield growth because especially because most of Photon Link 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.

Papa Sylla51:48

Got it. That's very helpful. Thank you.

Operator51:56

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

Unidentified speaker52:07

Hey guys, thanks for taking my question. Cherry, maybe for you, going back to the gross margin discussion, can you maybe help to stratify the contribution?

Unidentified speaker52:37

Part of that can you talk about the indium phosphide six 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 you know more global Chinese competition and what's inherently just a more price sensitive market.

Sherri Luther52:48

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.

Unidentified speaker52:49

It is.

Sherri Luther53:59

And a little bit yeah, okay. So, so if I 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 six 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 right will vary but certainly new product ramps I mean those are gross margin accretive the new products that Jim referred to earlier in its 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 cost pricing optimization rather I mean that is an area where I think we will continue to have benefit there you know it fully in our data center communication 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.

Operator54:08

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

Karl Ackerman54:24

Yes, 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.

Karl Ackerman54:34

In light of this, how does the team align its laser production capacity plans with your major customers and has a team considered customer prepayments for additional laser production capacity?

Karl Ackerman54:36

Thank you.

Jim Anderson57:13

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 that's is the one with NVIDIA that we signed back in March but we've signed a number of other LTAs the LTAs follow all follow a general pattern and one part of the LTA is typically some sort of upfront payment from the customer either it could be either a prepayment or NRE there's 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 very 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 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 that to keep in mind with indium phosphide capacity is is remember that it's not just being driven by data center demand there's two things driving optics in general 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 and that that is a technology trend that in my view is independent of the market demand that's a technology trend that will happen and 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 as 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.

Operator57:20

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

Meta Marshall57:47

Great, thanks. Maybe just a question on substrate availability. I think there had been some concern in the market around availability of six inch versus three 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 six inch versus three inch substrate availability and how that's impacting expansion plans. Thanks.

Jim Anderson58:05

Yeah, thanks, Meta. So we have over on six inch in particular, but three inch as well, we do continue to buy three inch wafers. We do still have three inch production but all of our expansion is mostly on six inch moving forward.

Jim Anderson58:49

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 you know the summary is we have multiple different suppliers and we've made sure that we have the substrate capacity for the expansion

Operator58:57

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

Sean O'Loughlin59:20

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 VIXL or multi-core VIXL heavy than it is ultra high power CW thanks for getting the question thanks

Jim Anderson1:00:26

Sure. I would say there there's some fungibility but not 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 photon link launch is that today we have capacity to produce over a billion Vixel arrays annually so we have a tremendous amount of capacity that we could deploy and so to the extent that we saw a broad based adoption and rapid ramp of Vixel technology I don't think we'd 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 Vixel 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.

Operator1:00:36

Our last question today comes from Ananda Barua with Wolfe Capital. Please go ahead.

Unidentified speaker1:01:26

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, supply capacity supply question from the other direction. Yeah, there's also been a conversation just in the financial community about at an industry level, you know, excess, you know, INP EML capacity at some point in calendar 28. you're also talk now you're also talking about you know sort of contract agreements uh going sort of well into that time frame so would love to get your opinion uh on sort of how you view the potential for an oversupply situation at an industry level going through 28 thanks

Jim Anderson1:02:57

Yeah, I think through 27 and into 28 I don't see that as a risk given that 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 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 for to meet all the demand of our own products for us I don't that's not a primary concern for us if you know I think if we were if there were more supply externally that that may affect us if we were supplying indium phosphide lasers externally but we're not and you know I think our plan is to over time to start to use more indium phosphide more of our internal indium phosphide production in our to change to increase the mix towards internal over time so so I yeah I guess the short answer to your question is we don't see any big oversupply situation into 28.

Operator1:03:07

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

Paul Silverstein1:03:22

Thanks. 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.

Paul Silverstein1:03:22

Just speaker_D|>

Paul Silverstein1:03:33

Just want to say thanks to 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.

Operator1:03:38

The conference is now concluded. Thank you for attending today's presentation.

Operator1:03:40

You may now disconnect.