Coherent Corp. ((COHR)) has held its Q2 earnings call. Read on for the main highlights of the call.
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New trading tool for COHR bullsCoherent Corp.’s latest earnings call struck an upbeat tone, as management highlighted record revenue, surging data center and communications demand, and a powerful bookings pipeline that stretches into 2028. While executives acknowledged supply tightness, rising input costs, and elevated capital spending, they stressed that capacity expansions and margin initiatives are already translating into higher profitability.
Record Revenue Sets New Baseline
Coherent posted record Q2 revenue of $1.69 billion, rising 7% sequentially and 17% year over year, with even faster growth when excluding the divested aerospace and defense business. Management guided Q3 revenue to a range of $1.7 billion to $1.84 billion, suggesting the company expects momentum to continue despite macro pockets of weakness.
Data Center and Communications Power Growth
Data center and communications now contribute more than 70% of total revenue, underscoring the company’s pivot toward AI and cloud infrastructure. In Q2, revenue from this segment climbed 11% sequentially and 34% year over year, with data center alone up 14% sequentially and 36% annually, fueled by 800G and 1.6T optical transceivers.
Bookings Provide Multi-Year Visibility
The company’s data center bookings drove a book-to-bill ratio above 4x, reflecting demand far outpacing current shipments. Coherent reported that many customer orders now extend into calendar 2027, with multi-year forecasts into 2028, giving investors unusually strong visibility into future revenue streams.
Margins and Earnings Trend Higher
Non-GAAP gross margin improved to 39.0% in Q2, up both sequentially and year over year, as mix and efficiency gains flowed to the bottom line. Non-GAAP EPS rose to $1.29, an increase of 11% quarter over quarter and 35% year over year, while operating margin ticked up to 19.9%, highlighting operating leverage despite higher spending.
Six-Inch Indium Phosphide Ramp as Margin Engine
Coherent is rapidly ramping six-inch indium phosphide wafers and is already at roughly 80% of its goal to double capacity by year-end. These larger wafers yield more than four times as many chips as three-inch wafers at less than half the cost, and with better yields, positioning the transition as a major driver of future gross margin expansion.
CPO and OCS Win Early in AI Cycle
The company secured a sizable co-packaged optics order from a leading AI data center customer, with initial revenue expected later this year and a more meaningful contribution in the next fiscal year. Its optical circuit switch business is also gaining traction, with a growing backlog, more than 10 active customer engagements, and shipments across multiple system sizes supporting a sustained revenue ramp.
Communications Recovery and Design Wins
Communications revenue advanced 9% sequentially and 44% year over year, reflecting strengthening demand in data center interconnect and telecom. Management also highlighted a notable multi-year design win with a leading DCI original equipment maker for an uncooled three-pin micropump, reinforcing the company’s positioning in high-performance communications components.
Balance Sheet Strength and Portfolio Streamlining
Leverage continues to improve, with the debt ratio down to 1.7x from 2.3x a year earlier, giving the company more flexibility to fund growth. Coherent also completed the sale of a lower-margin Munich product division and exited multiple sites, moves that are expected to be immediately accretive to gross margin and EPS while simplifying the operating footprint.
Heavy Investment to Match Demand
Capital expenditures climbed to $154 million in Q2 from $104 million in the prior quarter, reflecting aggressive investment to capture AI-driven demand. The company is expanding assembly and test capacity in Malaysia and Vietnam and adding indium phosphide manufacturing in Texas and Sweden, and it expects capex to rise further as these projects progress.
Industry-Wide Indium Phosphide Tightness
Management warned that indium phosphide supply will likely remain tight across the industry through at least next year, keeping the market structurally constrained. Coherent plans to maintain an accelerated capacity ramp to stay ahead of demand, but acknowledged this strategy entails ongoing capital intensity and execution risk.
Higher External Input Costs Pressure Margins
The company is facing higher prices for externally sourced components, including certain electro-absorption modulated lasers and other critical parts. While leaders expect the internal six-inch wafer ramp to offset much of this over time, they cautioned that near-term margin performance remains exposed to these elevated input costs.
Industrial Segment Lags Broader Business
Industrial revenue grew only 4% sequentially and was flat year over year on a pro forma basis, highlighting a slower recovery compared with data center and communications. Management described the industrial rebound as early and partial, with expectations that improvement later in the year will be led primarily by semiconductor capital equipment customers.
Operating Spend and Capex Remain Elevated
Non-GAAP operating expenses increased to $321 million from $304 million as Coherent invests in research, engineering, and go-to-market capabilities. Executives reiterated that they expect better leverage and SG&A efficiencies over time, but in the near term operating expenses and capital intensity will stay high to support ambitious capacity and technology roadmaps.
Margins Still Short of Long-Term Target
Despite recent improvement, the current 39% gross margin remains below the company’s long-term goal of more than 42%. Management emphasized ongoing efforts in yield enhancement, cost reduction, and pricing discipline, noting that gross margin has already improved by roughly 470 basis points since fiscal 2024 but still has room to climb.
Guidance and Outlook Emphasize Sustained Growth
For Q3, Coherent guided revenue to $1.70 billion to $1.84 billion, non-GAAP gross margin to 38.5% to 40.5%, and EPS to $1.28 to $1.48, with operating expenses of $320 million to $340 million and a tax rate in the high teens. Management expects continued strong sequential revenue growth in coming quarters, especially in data center, faster EPS growth than revenue over the longer term, and progress toward its gross margin target above 42%.
Coherent’s earnings call painted a picture of a company riding powerful AI and cloud trends while actively tackling supply constraints and cost pressures. With record revenue, robust bookings stretching years ahead, and strategic investments in capacity and margin drivers, management presented a constructive outlook that, if executed well, could support ongoing growth and profitability gains for shareholders.