Coherent Corp. (COHR) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary indicates strong financial metrics with optimistic guidance, particularly in data center growth and demand for transceivers. The Q&A section highlights positive developments like higher margins from new products and strategic expansions. Although management was vague on some specifics, the overall outlook is promising with expected revenue growth and partnerships like Apple. These factors suggest a positive stock price movement over the next two weeks.
Key Financial Performance
Revenue Revenue increased by 9% sequentially and 22% year-over-year on a pro forma basis, excluding revenue from the recently divested aerospace and defense business. This growth was driven by strong demand in AI Datacenter & Communications.
Non-GAAP Gross Margin Non-GAAP gross margin expanded by 24 basis points sequentially and 77 basis points year-over-year. Improvements were driven by reductions in product input costs, efficiency gains from improved cycle times in the manufacturing process, yield improvements, and pricing optimization.
Non-GAAP EPS Non-GAAP EPS grew 11% sequentially and 35% year-over-year. This was driven by the combination of revenue growth and gross margin expansion.
Datacenter & Communications Segment Revenue Revenue grew by 11% sequentially and 34% year-over-year, driven by strong growth in both the Datacenter & Communications markets.
Data Center Business Revenue Revenue grew 14% sequentially and 36% year-over-year, driven by growth in both 800 gig and 1.6T transceivers and strong execution from production teams.
Communications Market Revenue Revenue grew 9% sequentially and 44% year-over-year, driven by strong demand for products addressing data center interconnect market opportunities and traditional telecom applications.
Industrial Segment Revenue Revenue grew 4% sequentially and was flat year-over-year on a pro forma basis, excluding revenue from the recently divested aerospace and defense business. Sequential growth was driven by industrial lasers and engineered materials product lines.
Non-GAAP Operating Margin Non-GAAP operating margin was 19.9%, up from 19.5% in the prior quarter and 18.5% in the year-ago quarter, driven by gross margin expansion and operating expense efficiencies.
Capital Expenditures Capital expenditures were $154 million, up from $104 million in the prior quarter and $106 million in the year-ago quarter, driven by investments to expand production capacity to meet exceptional customer demand in Datacenter & Communications.
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Operating Highlights
800 gig and 1.6T transceivers: Strong growth in demand, with significant revenue expected in calendar '26. 1.6T transceivers ramping significantly over the coming quarters.
OCS and CPO solutions: New products ramping up, with significant design wins and revenue expected towards the end of this calendar year.
6-inch indium phosphide production: World's first production ramped up, supporting significant revenue growth and margin expansion.
AI Datacenter & Communications: Exceptional demand driving strong revenue growth, with double-digit sequential growth expected in March and June quarters.
Industrial business: Demand signals indicate growth over the calendar year, led by semi-cap equipment customers.
Production capacity expansion: Significant investments in Malaysia, Vietnam, and other locations to meet demand.
Portfolio optimization: Sale of Munich product division and closure of 10 sites, improving gross margin and EPS.
ERP consolidation: Most of the company expected to be on a single ERP platform by the end of fiscal year, driving efficiencies.
Debt leverage reduction: Maintained debt leverage ratio below 2x, with proceeds from divestitures used to reduce interest expenses.
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Risk or Challenges
Regulatory Risks: The company acknowledges the presence of risk factors in its SEC filings, which could cause actual results to differ materially from projections. However, no specific regulatory challenges were detailed in the transcript.
Supply Chain Risks: The company is heavily reliant on the expansion of its production capacity, including indium phosphide production and transceiver module assembly. Any disruptions in the supply chain, including delays from external suppliers or issues with substrate supply, could impact operations.
Economic Uncertainties: The company is investing heavily in production capacity and capital expenditures to meet demand. Economic downturns or reduced customer spending could adversely affect these investments and the company's financial performance.
Operational Risks: The company is undergoing significant operational changes, including the sale of divisions and the consolidation of ERP systems. These transitions could pose risks related to execution, integration, and potential disruptions.
Competitive Pressures: The company operates in a highly competitive market, particularly in data center and communications segments. Failure to maintain technological leadership or meet customer demand could impact market share and profitability.
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Guidance & Outlook
Revenue Growth: Coherent expects sustained strong revenue growth over the coming quarters, with sequential revenue growth anticipated in both the March and June quarters. Fiscal 2027 revenue growth rate is expected to exceed fiscal 2026 growth rate.
Key Growth Drivers: Growth in 800 gig and 1.6T transceivers, new product ramps such as OCS and CPO solutions, and strong demand for DCI and scale across products are expected to drive growth.
Industrial Business Outlook: Demand signals indicate a pickup in growth over the calendar year, led by strong orders from semi-cap equipment customers.
EPS Growth: Coherent expects EPS growth to outpace revenue growth rate significantly over the coming quarters.
Data Center Business: Double-digit sequential growth is expected in the March and June quarters, driven by 800 gig and 1.6T transceivers and OCS systems. 1.6T transceivers are expected to ramp significantly over the coming quarters.
Production Capacity Expansion: Coherent is doubling its internal indium phosphide production capacity by Q4 of the calendar year, with significant investments in production facilities in Texas and Sweden. This expansion is expected to support revenue growth and margin expansion.
CPO and OCS Products: Initial revenue from a significant CPO design win is expected towards the end of the calendar year, with more substantial contributions in the next calendar year. OCS revenue is expected to grow sequentially in the current and coming quarters.
Communications Market: Sequential growth is expected in the March and June quarters, driven by demand for DCI, ZR/ZR+ transceivers, and traditional telecom applications.
Industrial Segment: Sequential growth is expected in the June quarter and the remainder of the calendar year, driven by increased orders from semi-cap customers.
Capital Expenditures: Capital expenditures are expected to increase sequentially over the remainder of the fiscal year to support production capacity expansion.
Q3 Fiscal 2026 Guidance: Revenue is expected to be between $1.7 billion and $1.84 billion. Non-GAAP gross margin is expected to be between 38.5% and 40.5%. EPS is expected to be between $1.28 and $1.48.
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Shareholder Return Plan
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Key Q&A
Q:How would you characterize the visibility in terms of demand and the capacity ramp for indium phosphide?
A:The visibility in terms of demand is extraordinary, with bookings extending into calendar '27 and detailed long-term forecasts from customers going out to calendar '28. The indium phosphide capacity ramp is progressing well, with wafer starts at 80% of the target to double capacity by the end of the year, ahead of schedule. The transition from wafer starts to product shipment takes about six months.
Q:Can you quantify the magnitude of the backlog from the 10 customers for OCS and its revenue impact?
A:Demand for OCS is strong, with backlog growing in the December quarter. Revenue is expected to ramp throughout this calendar year and into next year, contributing to revenue growth in both periods. Specific revenue milestones will be provided later in the year.
Q:What are the milestones and competitive landscape for the 1.6 terabit product?
A:Both 800 gig and 1.6T products are expected to grow this year, with 1.6T growing faster but from a smaller base. The 1.6T ramp has accelerated, driven by demand from multiple customers. Initial ramp is based on EML and silicon photonics, with VCSEL-based transceivers expected to ramp in the second half of the year. The competitive landscape is favorable, with strong demand and visibility.
Q:What is the scale-up opportunity for co-packaged optics (CPO)?
A:The scale-up opportunity for CPO is significant, with active customer engagements and design wins. The transition from electrical to optical networks in scale-up is expected to drive tremendous growth. Coherent plans to supply components and higher-level solutions like external laser sources and CPO module assemblies. The opportunity is not years away but expected sooner based on customer plans.
Q:How does the content opportunity for CPO compare to 800 gig and 1.6 terabit modules?
A:CPO is viewed as additive, with pluggable transceivers remaining dominant through the decade. CPO's growth is expected to be driven by scale-up, which will be orders of magnitude larger than scale-out. This represents incremental TAM for the optical industry and Coherent.
Q:What are the margin implications of the 1.6 terabit mix and the 6-inch indium phosphide ramp?
A:The 1.6T gross margins are expected to be higher than 800 gig due to higher ASPs and the early stage of the data rate lifecycle. The 6-inch indium phosphide ramp is also a gross margin driver, as it significantly reduces costs compared to 3-inch wafers.
Q:What are the components of the backlog and the supply-demand balance for indium phosphide?
A:The backlog is primarily driven by 800 gig and 1.6T transceiver bookings, with contributions from CPO and OCS. The supply-demand balance for indium phosphide is expected to remain tight through this year and next, with sustained imbalance likely due to strong customer demand.
Q:How are you managing input costs and pricing optimization?
A:Input costs for externally sourced components like EMLs are rising, but this is offset by the internal indium phosphide ramp, which is a gross margin benefit. Pricing optimization has contributed to gross margin improvement, and the company continues to see opportunities for further optimization.
Q:What is the progress and long-term outlook for the 6-inch indium phosphide ramp?
A:The 6-inch indium phosphide ramp is progressing well, with wafer starts at 80% of the target to double capacity by year-end. Over time, 6-inch capacity will become the majority, offering over 4x the product at less than half the cost compared to 3-inch wafers. The ramp is expected to continue aggressively in the coming years.
Q:What is the mix of internally versus externally sourced indium phosphide transceivers?
A:The majority of indium phosphide lasers are internally sourced, and this proportion is expected to grow as 6-inch production ramps. External sources will continue to be utilized for supply chain resiliency.
Q:What are the applications and market size for OCS?
A:OCS applications have broadened from scale-out to include DCI and scale-up networks. The market size, initially estimated at $2 billion by the end of the decade, is now expected to be well above that due to growing customer engagements and applications.
Q:What is the capacity situation for transceiver assembly and test?
A:Capacity for transceiver assembly and test is being expanded with a new facility in Malaysia and plans to build transceivers in Vietnam. Capacity for DCI and telecom products is also being ramped up to meet strong demand.
Q:What are the investments in R&D and SG&A to drive growth?
A:R&D investments are focused on Datacenter & Communications, with a 16% year-over-year increase. SG&A is being optimized to achieve a target of 8% of revenue, while R&D is targeted at 10% of revenue. The company is balancing growth investments with operational efficiency.
Q:What is the outlook for the broader industrial business, excluding semi cap?
A:A broad-based industrial recovery is not yet evident, but there is a strong pickup in semi cap orders, which are expected to drive sequential revenue growth in the second half of the calendar year.
Q:What is the timing and content opportunity for multi-rail density upgrades in long-haul fiber?
A:The multi-rail product ramp is expected to start in the second half of the year, with strong design wins and orders. It provides significant upgrades for network operators and is expected to contribute to revenue growth.
Q:What is the status of the 3D sensing market and the Apple partnership?
A:The 3D sensing market is supported by a significant new agreement with Apple, with revenue expected to kick in during the second half of the calendar year. The partnership leverages 6-inch gallium arsenide VCSEL technology manufactured in Sherman, Texas.
Q:What are the gross margin drivers and the path to the 42% target?
A:Gross margin drivers include cost reductions, yield improvements, pricing optimization, and higher volumes. The 6-inch indium phosphide ramp and mix improvements are also contributing. The company is targeting over 42% gross margin in the long term.
Q:What is the mix of EML versus silicon photonics for 1.6 terabit transceivers?
A:The mix depends on customer applications, with both EML and silicon photonics being ramped. There is no significant financial difference for Coherent between the two.
Q:Review of Unclear Management Responses
A:Management avoided providing specific revenue milestones for OCS, stating that they would share more details later in the year. Additionally, they did not provide detailed sizing for the scale-up opportunity in CPO, describing it as 'tremendous' but difficult to quantify. Similarly, they did not specify the exact gross margin leverage from the 6-inch indium phosphide ramp, only providing general benefits.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI
CEO
CPO MPO
CW Laser
Coherent
Datacenter Communications
OCS
Sherman Texas
acceleration rate
aerospace defense
application
basis aerospace
communication
demand expansion
design win
energy
engagement
expansion production
expansion transceiver
forma basis
fusion
gig
inch indium
inch wafer
indium phosphide
laser
phosphide production
power CW
production capacity
quarter
ramp
scale
segment
solution demand
strength
supplier
system
transceivers
COHR Transcript
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Coherent Corp. (COHR) Q2 2026 Earnings Call Transcript
Positive2-4
The earnings call summary indicates strong financial metrics with optimistic guidance, particularly in data center growth and demand for transceivers. The Q&A section highlights positive developments like higher margins from new products and strategic expansions. Although management was vague on some specifics, the overall outlook is promising with expected revenue growth and partnerships like Apple. These factors suggest a positive stock price movement over the next two weeks.
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