Coherent Corp. ((COHR)) has held its Q3 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 celebrated record revenue, widening margins and a swelling order backlog that now stretches into 2028. Executives acknowledged pockets of industrial weakness and higher spending to support rapid scaling, but framed these as necessary investments in a growth story increasingly fueled by datacenter and cloud demand.
Record Revenue and Accelerating Growth
Coherent posted record third-quarter revenue of $1.8 billion, up 7% sequentially and 21% year over year on a reported basis, with pro forma growth even stronger at 9% and 27%, respectively. Management guided fourth-quarter revenue between $1.91 billion and $2.05 billion and said fiscal 2027 growth is expected to outpace fiscal 2026, underscoring confidence in demand.
Datacenter and Communications Lead the Charge
Datacenter and Communications now account for roughly 75% of company revenue, with datacenter sales up 13% sequentially and 37% year over year. The broader Datacenter and Communications segment grew more than 40% versus last year, making it the primary engine behind Coherent’s accelerating top-line performance.
Margin Expansion and Earnings Momentum
Non-GAAP gross margin improved to 39.6%, expanding 57 basis points sequentially and 105 basis points year over year as scale and mix shifted toward higher-value products. Non-GAAP operating margin reached 20.3% and earnings per share rose to $1.41, up 9% sequentially and 55% from a year ago, with management reaffirming a path to gross margins above 42% over time.
Record Backlog and Long-Term Visibility
The order book hit a record level, with commitments stretching into calendar 2028 and multiple long-term agreements running through the end of the decade. This deep backlog gives Coherent unusual multi-year visibility into demand, supporting its decision to invest heavily in capacity and new product introductions.
6-Inch Indium Phosphide Ramp and Capacity Build-Out
Coherent reported strong progress in its 6-inch indium phosphide ramp, noting that yields for key devices now exceed those on legacy 3-inch wafers and that the first transceivers using 6-inch components have already shipped. The company expects to double internal indium phosphide capacity by year-end, reaching that milestone one quarter earlier than planned, and to more than double capacity again by the end of 2027.
NVIDIA Partnership and Strengthened Balance Sheet
A strategic partnership with NVIDIA includes a $2 billion equity investment and a multiyear supply agreement for co-packaged optics, cementing Coherent’s role in next-generation datacenter architectures. The NVIDIA funding helped lift cash to $3.0 billion while driving the debt leverage ratio down to 0.5 times, from 1.7 times last quarter and 2.1 times a year ago.
Ramping High-Value Product Lines
Coherent sees a growing pipeline of high-value product opportunities, including an Optical Connectivity Systems market now estimated above $4 billion as production bottlenecks ease across two plants. The company pegs the co-packaged optics opportunity above $15 billion with initial scale-out revenue expected in the second half of this calendar year, and is also targeting multi-rail and thermal solutions that should begin contributing revenue between 2027 and beyond.
CapEx Surge and Elevated R&D Spend
Capital spending jumped to $290 million in the quarter, nearly doubling from a year ago as Coherent accelerates internal capacity expansion to meet demand. Non-GAAP operating expenses climbed to $348 million with R&D rising to 9.9% of revenue, reflecting an intentional push into transceivers, co-packaged optics and systems that will pressure near-term operating leverage.
Industrial Segment Softness
While the core datacenter business is booming, Coherent’s industrial segment saw modest revenue declines both sequentially and year over year amid ongoing weakness in parts of the broader industrial market. Management downplayed the near-term impact, noting that industrial currently plays a smaller role in growth and that newer thermal products tied to this segment are not expected to ramp until the second half of 2027.
Lag Between Capacity Build and Revenue
Executives cautioned that there is a multi-month lag between indium phosphide device production and final transceiver shipments, which means recent capacity additions are not yet fully showing up in revenue. This timing gap limits immediate upside to growth and margins, even as the company ramps 6-inch wafers and prepares a third production site in Zurich for broader scale.
Higher Operating Expenses and R&D Intensity
Non-GAAP operating expenses rose from $321 million last quarter and $297 million a year ago, as Coherent ramps hiring and development around its next-generation platforms. Management acknowledged that rising R&D intensity will dampen operating leverage in the short term but argued these investments are critical to capturing large long-term opportunities in datacenter optics and systems.
Supply Constraints and Component Cost Pressures
Indium phosphide remains a constrained material across the industry even as Coherent races to expand internal capacity, creating a competitive advantage but also execution risk. Some external component suppliers have raised prices for items such as lasers, and while pricing in the market remains healthy, the company must offset or pass along these cost pressures to protect margins.
Revenue Impact from Divestiture
The sale of a Munich product division at the end of January removed a business that previously generated about $25 million of quarterly revenue, with only $8 million recognized in the third quarter. While the divestiture modestly lowers the near-term revenue base, management emphasized that it improves overall corporate margins and streamlines the portfolio toward higher-return opportunities.
Early-Stage Ramp and Qualification Risks
Coherent highlighted that its 6-inch wafers and new platforms such as co-packaged optics, multi-rail power and Optical Connectivity Systems are still in early production stages. Although yields and initial results are encouraging, customer qualifications, pilot-to-volume transitions and the ramp of a third site introduce execution and timing risk if any delays materialize.
Guidance and Outlook
For the fourth quarter of fiscal 2026, Coherent guided revenue to $1.91 billion to $2.05 billion, non-GAAP gross margin of 39% to 41%, non-GAAP operating expenses of $360 million to $380 million and non-GAAP EPS of $1.52 to $1.72. Management expects capital expenditures to rise further as indium phosphide capacity doubles by year-end and more than doubles again by 2027, supporting a forecast that fiscal 2027 growth will surpass fiscal 2026.
Coherent’s earnings call painted the picture of a company firmly tethered to the datacenter and AI boom, with record revenue, expanding margins and a fortified balance sheet. Investors must weigh near-term risks from higher spending, industrial softness and execution on new ramps, but the long-term narrative remains one of accelerating growth supported by deep backlog and strategic partnerships.