Coherent's Q2 2025 to Q1 2026: Contradictions Emerge on Indium Phosphide Capacity, OCS Market, and Telecom Outlook

Date of Call: None provided

Financials Results

• Revenue: $1.58B, up 3% sequentially and 17% YOY (pro forma excluding $33M A&D: +6% seq, +19% YOY)
• EPS: $1.16 non-GAAP diluted, up 16% sequentially and 73% YOY (prior quarter $1.00, year-ago $0.67)
• Gross Margin: 38.7% non-GAAP, up 70 bps sequentially and up 200 bps YOY
• Operating Margin: 19.5% non-GAAP, up 150 bps sequentially (18.0% prior quarter) and up 340 bps YOY (16.1% year-ago)

Guidance:

• Revenue for Q2 expected to be $1.56B to $1.70B.
• Non-GAAP gross margin expected to be 38% to 40%.
• Non-GAAP operating expenses expected to be $300M to $320M.
• Non-GAAP tax rate expected to be 18% to 20%.
• Non-GAAP EPS expected to be $1.10 to $1.30.

Business Commentary:

• Strong Revenue and Earnings Growth:
• Coherent reported a pro forma revenue of $1.58 billion for Q1, up 6% sequentially and 19% year-over-year.

• The growth was driven by strong demand in data center and AI applications, leading to a 16% increase in non-GAAP EPS.

• Data Center Segment Performance:

• Coherent's data center and communications segment revenue grew by 7% sequentially and 26% year-over-year.

• The increase was primarily due to growth in both data center and communications markets, despite supply constraints, particularly in indium phosphide lasers.

• Indium Phosphide Capacity Expansion:

• Coherent is investing in expanding indium phosphide production capacity, with a target to double output over the next year.

• The expansion is aimed at addressing strong customer demand and improving supply constraints, particularly for EML lasers used in data center applications.

• Optical Circuit Switch (OCS) Demand:

• Coherent shipped OCS systems to seven customers, with both revenue and backlog growing sequentially.

• The increased adoption is driven by the technology's non-mechanical, field-proven liquid crystal platform, which is gaining wider customer interest and application areas.

• Debt Reduction and Financial Stability:

• Coherent reduced its debt leverage to 1.7 times after a $400 million debt paydown, underscore by the divestiture of its aerospace and defense business.
• These financial actions strengthen Coherent's balance sheet and position the company for strategic investments in long-term growth.

  Sentiment Analysis:

  Overall Tone: Positive

  • Management reported record Q1 revenue of $1.58B (pro forma +19% YOY), non-GAAP gross margin 38.7% (↑70bps seq, ↑200bps YoY), and non-GAAP EPS $1.16 (↑73% YoY). They described "record bookings," "exceptionally strong demand" in AI data centers and communications, aggressive 6-inch indium phosphide capacity ramp, and $400M debt paydown reducing leverage to 1.7x.

Q&A:

• Question from Samik Chatterjee (JPMorgan Chase): How broad-based is the demand and what are the drivers across your communications portfolio?
  Response: Demand is very broad-based across data center and communications with record bookings and multi-quarter visibility; strong 800G orders and accelerating 1.6T adoption, plus robust DCI and traditional telecom demand.

• Question from Samik Chatterjee (JPMorgan Chase): What are the milestones and roadmap for indium phosphide capacity (doubling over 12 months)?
  Response: 6‑inch IP began production in Sherman with initial yields above 3‑inch; ramping a second 6‑inch site in Järfälla to ~2x internal IP capacity in ~12 months and planning further expansion beyond that.

• Question from Samik Chatterjee (JPMorgan Chase): How much was data center growth capacity-constrained and what would growth be with more supply?
  Response: Q1 was constrained by indium phosphide/EML supply; that unmet backlog rolled into Q2 and both internal and external IP supply are expected to improve sequentially, easing constraints over coming quarters.

• Question from Simon Leopold (Raymond James): How should we think about OCS revenue trajectory (e.g., compare to a peer targeting $100M/quarter)?
  Response: OCS uses differentiated liquid‑crystal, non‑mechanical tech; shipped to seven customers with growing backlog and revenue; meaningful revenue contribution expected in calendar 2026, weighted to H2.

• Question from Simon Leopold (Raymond James): Clarify reports that IP lines only made photodiodes, not lasers—what's actually being produced?
  Response: 6‑inch IP lines are producing EMLs, CW lasers, and photodiodes across Sherman and Järfälla—ramping all three device types for internal transceiver demand.

• Question from George Norton (Wolf Research): How much more site consolidation and manufacturing expansion remains?
  Response: Running parallel programs: have exited/sold 23 sites with more consolidation planned, while expanding transceiver/module and IP capacity in Malaysia (Ipoh, Penang) and Vietnam to meet demand.

• Question from Blaine Curtis (Jefferies): Is data center growth still constrained beyond EMLs; what else is constrained?
  Response: Primary constraint was indium phosphide/EMLs; no major other bottlenecks cited, and supply (internal and external) is improving sequentially to reduce constraints.

• Question from Tom O’Malley (Barclays): What drove the September quarter and what are the quarter‑to‑quarter expectations for data, comms, and industrial into December?
  Response: Q1: data center +4% seq, communications +11% seq; guidance for current quarter: data center ~+10% seq, communications up low single digits, industrial flat to slightly up.

• Question from Papa Sila (Citigroup): For the December quarter, what portion of 1.6T growth comes from silicon photonics, EML, or VCSEL, and timeline changes into 2026?
  Response: Early 1.6T ramp driven by silicon‑photonics (CW) and EML; VCSEL‑based 1.6T expected to begin production and contribute revenue mid‑to‑late calendar 2026; multiple customers ramping in parallel.

• Question from Michael Mani (Bank of America): Confidence in expanding share in 1.6T vs 800G and breadth of customer ramps?
  Response: Confident—well‑positioned with product lineup across SP, EML, and VCSEL; multiple customers are accelerating 1.6T ramps, providing broad customer breadth.

• Question from Meta Marshall (Morgan Stanley): Any FX headwinds to gross margin this quarter and how are you thinking about ZR capacity ramp?
  Response: No material FX headwind this quarter; strong ZR/ZR+ demand across 100/400/800G and ramping both modules and components (pump lasers notably strong) to meet DCI demand.

• Question from Reuben Roy (Telsey): For OCS, are initial wins redundancy/spine only or are customers exploring broader applications?
  Response: Initial deployments focused on redundancy/spine use cases, but customers are exploring broader applications (scale‑up networks and DCI), suggesting a larger TAM over time.

• Question from Carl Ackerman (BNP Paribas Asset Management): What about transceiver component bookings and order visibility?
  Response: Record component bookings as well; customers are placing orders more than a year out and some provide forecasts into 2028, giving multi‑year visibility.