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DATE
Wednesday, Nov. 4, 2026
CALL PARTICIPANTS
- Senior Vice President of Investor Relations - Paul Jonas Silverstein
- Chief Executive Officer - James Robert Anderson
- Chief Financial Officer - Sherri R. Luther
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TAKEAWAYS
- Revenue -- $2.37 billion, representing 56% pro forma growth year over year driven by the ongoing build-out of artificial intelligence data centers.
- Non-GAAP EPS -- $2.09, reflecting an 80% increase year over year due to expanding gross margins and substantial operating leverage.
- Data Center & Communications Revenue -- $1.95 billion, increasing 79% year over year and now accounting for 82% of total company revenue.
- Scale-Across DCI Revenue -- $200 million, representing a nearly fourfold increase year over year as AI workloads drive demand for connectivity between data centers.
- PhotonLink Revenue Guidance -- Over $100 million expected in the March quarter, with a target to exceed $250 million per quarter before the end of calendar 2027.
- Long-Term LTA -- $20 billion over five years, signed with a major AI customer for PhotonLink technology with revenue beginning to ramp in early calendar 2028.
- Non-GAAP Gross Margin -- 40.6%, representing a 184-basis-point improvement year over year driven by pricing optimization and improved manufacturing yields.
- Indium Phosphide Capacity -- Doubled year over year in the first quarter, with plans to more than double again by the end of calendar 2027 to support transceiver demand.
- Industrial Segment Revenue -- $418.6 million, remaining flat year over year on a pro forma basis despite a recent uptick in semiconductor capital equipment bookings.
- Capital Expenditures -- $776 million, increasing from $556 million in the prior quarter to support targeted capacity expansion in data center and communications.
- Q2 Revenue Guidance -- $2.55 billion to $2.75 billion, based on continued strength in 1.6T and 800G transceiver demand.
- Q2 Non-GAAP EPS Guidance -- $2.28 to $2.48, assuming a non-GAAP tax rate of 18% to 20% for the second quarter.
- Long-Term Revenue Target -- Management expects to achieve the first $3 billion revenue quarter by the end of fiscal 2027 and the first $4 billion quarter in fiscal 2028.
- Content Opportunity -- Approximately $15,000 per chip for 100 Tbps bandwidth systems when utilizing the full PhotonLink portfolio.
- Cash Balance -- $2.34 billion at quarter end, maintaining a debt leverage ratio of 1.1x while funding accelerated capital deployment.
- Non-GAAP Operating Margin -- 23.2%, increasing from 19.5% year over year as operating expenses as a percentage of revenue declined to 17.4%.
- OCS Market Opportunity -- Estimated at $4 billion by 2030, supported by nonmechanical liquid crystal technology and production expansion at two sites.
- Internal Component Sourcing -- Management anticipates shifting more indium phosphide supply from external to internal sources to improve cost structures on the 6-inch platform.
- Scale-Across Run Rate -- Nearly $1 billion annualized, with management projecting revenue to double from the first quarter level by the end of calendar 2027.
SUMMARY
Coherent Corp. (NYSE:COHR) reported record first-quarter results characterized by accelerating revenue growth in the data center and communications segment and structural margin expansion through vertical integration. Management reported that the company is transitioning from a materials and components provider to a comprehensive photonics platform, supporting the industry-wide shift from copper to optical connectivity in AI data centers. The company stated that it has secured exceptional order visibility through calendar 2027, bolstered by new multiyear long-term agreements and a significant ramp in the newly launched PhotonLink integrated optics platform. Financial performance for the period was driven by high-speed transceiver demand and a quadrupling of scale-across data center interconnect revenue, leading management to raise the company's long-term non-GAAP gross margin target to over 45%.
- Management reported that the company is at the center of an expansion in optical networking. CEO Anderson stated, "Coherent is a photonics platform company bringing together technologies across the optical signal chain for materials and components through subsystems and complete solutions."
- The company secured a significant $20 billion long-term agreement for PhotonLink technology, which management believes differentiates the company through its end-to-end manufacturing of lasers, fiber assemblies, and optical components.
- Management indicated that current 1.6T transceiver ramps and ongoing 800G growth provide visibility into fiscal 2028, with no signs of demand attenuation across its hyperscale customer base.
- CEO Anderson noted that the company is well positioned as an independent optical supplier in the wake of industry consolidation, stating, "It positions us really well to be that independent optical supplier that can support without any competitive conflict."
- The expansion of 6-inch indium phosphide production in Sweden, Texas, and Zurich is expected to drive significant cost advantages as the company increases the mix of internally sourced components.
INDUSTRY GLOSSARY
- Indium Phosphide (InP): A semiconductor material used to produce high-performance lasers and photodiodes for optical communications.
- PhotonLink: An integrated optics platform that combines various photonic technologies to address the transition from copper to optical connectivity.
- Scale-across: Networking architecture that connects multiple distributed data centers to handle massive AI workloads.
- CPO (Co-Packaged Optics): An architecture where optical components and electronic switches are integrated into a single package to reduce power and increase bandwidth.
- NPO (Near-Packaged Optics): An architecture placing optical modules on the same board as the switch chip to improve signal integrity over traditional pluggables.
- EML (Electro-absorption Modulated Laser): A high-speed laser integrated with a modulator, used for data transmission over fiber optic networks.
- VCSEL (Vertical-Cavity Surface-Emitting Laser): A semiconductor laser that emits light vertically from its top surface, commonly used for short-range data communication.
- DCI (Data Center Interconnect): Technology used to connect two or more data centers together over short, medium, or long distances.
- OCS (Optical Circuit Switch): A type of network switch that routes data using light signals rather than converting them to electrical form.
- OSFP (Octal Small Form-factor Pluggable): A high-density transceiver form factor designed to support 400G and 800G data rates.
Full Conference Call Transcript
Operator: Greetings, and welcome to the Coherent Corp. First Quarter Fiscal Year 27 Earnings Webcast. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1, on your telephone keypad. To withdraw your question, please press star, then 2. Please note this event is being recorded. It is now my pleasure to introduce your host. Mr. Paul Silverstein. Senior vice president of investor relations for Coherent. Please go ahead.
Paul Jonas Silverstein: Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Coherent's CEO and Sherri R. Luther, Coherent's CFO. During today's call, we will provide a financial and business review of the first quarter of fiscal 2020 7 and the business outlook for the second quarter of fiscal 2020 7. Our earnings press release can be found in the Investor Relations section of our company website at coherent.com. 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.
For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release and most recent Forms 10-K and 10-Q the reports that we may file in Form 8-Ks with the Securities and Exchange Commission. All our statements are made as of today, 11/04/2026, 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. Can find a reconciliation of these non GAAP financial measures to GAAP financial measures our earnings release and investor presentation that can be found on the Investor Relations section of our website at coherent.com.
Let me now turn the call over to our CEO, Jim Anderson.
James Robert Anderson: Thank you, Paul, and thank you, everyone, for joining today's call. Q1 marked a strong start to fiscal 2020 7. Revenue increased 16% sequentially and 56% year over year on a pro forma basis. Non GAAP EPS increased 80% year over year reflecting continued gross margin expansion and operating leverage. Strong customer demand and our rapid capacity expansion are supporting this growth, with near term bookings and newly signed LTAs providing multiyear visibility. We remain on track to achieve our first $3 billion revenue quarter by the end of fiscal 2020 We expect the full year pro forma revenue growth rate to exceed 60%. More than double our fiscal 2020 6 pro forma growth rate.
We also have a clear line of sight to our first $4 billion revenue quarter in fiscal 2020 8. Coherent is a photonics platform company bringing together technologies across the optical signal chain for materials and components through subsystems and complete solutions. This positions us to support customers across data center and communications. We are 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.
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. In addition, PhotonLink, 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. Accelerating revenue growth, continued gross margin expansion, and operating leverage position us to grow profitability faster than revenue. We expect fiscal 2020 to be an exceptional year for Coherent.
Moving to our data center and communications segment, revenue increased 21% sequentially, and 79% year over year, marking a fourth consecutive quarter of accelerating growth on both the sequential and year over year basis. The segment now accounts for 82% of Coherent's total revenue. Near term demand remains strong and our visibility into long term demand continues to improve. Order coverage through calendar 2027 is exceptional. And customer orders increasingly extend into calendar 2028. We signed multiple new LTAs in Q1, and customer LTAs typically extend through the end of the decade. We continue to see no signs of attenuation in demand.
Within the segment, data center revenue increased 17% sequentially and 85% year over year marking our fourth consecutive quarter of double digit sequential growth. We expect another quarter of strong sequential and year over year growth in the current quarter. In data center transceivers, we are ramping 1.6T products with multiple customers while continuing to grow 800G revenue. We expect strong transceiver revenue growth in Q2 driven by both 1.6T and 800G. We expect 1.6T revenue to continue ramping rapidly over the coming quarters. While 800G revenue continues to grow through calendar 2027. At ECOC in September, we demonstrated our progress beyond 1.6T with a 3.2T OSFP pluggable transceiver built with our 400G differential EMLs and photodiodes.
We expect pluggable transceivers to remain the dominant form factor for scale out networks over the coming years. Coherent is helping shape the industry ecosystem for emerging formats, demonstrating XPO at OFC and also supporting the new USFP form factor. Turning to OCS, customer engagement is broadening across scale-across, scale out, and scale up networks, spanning our 23 by 23 platform and denser configurations. We are expanding production at 2 sites to meet demand. As capacity ramps, we expect OCS to become an increasingly meaningful contributor to revenue growth and margin expansion.
At ECOC in September, we launched Photon Link, our new platform for integrated optics. it is designed to address the transition from copper to optical connectivity in AI data centers, creating a significant opportunity for Coherent. We estimate that CPO, NPO, and chip to chip optical interconnects represent approximately $30 billion of market opportunity by 2030. 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.
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. It includes lasers, laser modules, complex fiber assemblies, and other optical components and supports indium phosphide based CW lasers and VCSEL based technologies. We believe this breadth and depth differentiates us For an XPU or switch chip with 100 Tbps to bandwidth, we estimate our content opportunity can reach approximately $15 thousand per chip. Customer engagement is validating the opportunity. In Q1, we signed another significant photon link LTA with a major AI company. The total revenue value of this new LTA is $20 billion over 5 years.
With revenue beginning to ramp in early calendar 2028. This is in addition to our previously announced LTA with NVIDIA. Beyond these 2 anchor customers, we have more than 10 additional CPO engagements, more than 10 NPO engagements, and more than 5 chip to chip engagements. We expect Photon Link revenue to ramp quickly over the coming quarters. We expect revenue to exceed $100 million in our March quarter and to exceed $250 million 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 400mW CW laser, our fiber assembly solutions, and other products. Photon Link is initially being deployed in CPO scale-out application.
We expect to begin shipping PhotonLink product for CPO and NPO scale up applications in the second half of calendar 2027. Over time, we expect PhotonLink to become a multibillion dollar product line for Coherent. 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 6 inch indium phosphide expansion is progressing well. We doubled our internal indium phosphide output capacity year over year in Q1, 1 quarter ahead of our original plan. Q1 was our highest production quarter ever for EMLs, including both 100G and 200G devices.
The ramp contributed meaningfully to data center growth and we expect it to remain an important driver of revenue and gross margin. 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. We remain on track to more than double our internal indium phosphide output capacity again by the end of calendar 2027. We have secured the substrates and other critical inputs needed to support this ramp given the strength of customer demand, we are planning additional capacity expansion beyond 2027.
Our 6 inch lines in Texas and Sweden are producing EMLs CW lasers, and high speed photodiodes. With yields that continue to exceed those of our 3-inch lines. Production includes our 400 milliwatt CW laser for CPO, which is covered by our Nvidia partnership. It is expected to begin generating revenue this quarter. We also remain on track to begin 6 inch indium phosphide production in Zurich in the first half of calendar 2027. Further extending what we believe is a meaningful manufacturing advantage. Moving to communications. Revenue increased 34% sequentially and 84% year over year. 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. Over the past year, we have expanded our data center interconnect portfolio to help customers connect data centers with greater capacity and efficiency. Building on our leadership in pump lasers and our broad component portfolio, we have 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. 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 1 of our fastest growing businesses. 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 2027. Turning to industrial, Q1 revenue was flat sequentially and year over year on a pro forma basis. 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.
In semiconductor equipment, our lasers, precision, and engineered materials serve front end applications and we have seen a strong uptick in bookings. In AI infrastructure, our CO2 lasers and zinc selenide optics are used to drill advanced circuit boards for AI servers. Demand is also growing for our pulsed 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. For AI data centers, our thermodyte material can enable higher performance and token generation. We are shipping prototypes to several strategic customers this quarter and we expect revenue to begin ramping in the second half of calendar 2027.
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 in build momentum over the coming quarters. 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. Established businesses continue to grow rapidly while new growth areas are quickly ramping. 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 2020 7 and beyond.
I want to thank our team for their outstanding work this quarter. I will now turn the call over to Sherri.
Sherri R. Luther: Thank you, Jim. I am 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 road map to support robust AI data center and communications demand. 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. This performance was driven by the continued AI build out across our data center and communications businesses. 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.
This continuous expansion reflects durable pricing optimization and structural cost improvements, particularly within our data center and communications segment. 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. 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. Our gross margin profile is also benefiting from the transition to 6 inch indium phosphide as we continue to scale our production capacity.
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 of 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, full operational leverage of our 6 inch indium phosphide capacity and other cost improvements. 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.
First quarter non GAAP operating expense was $412 million compared to $377 million in Q4 and $304 million in the year ago quarter. 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. This improvement reflects enhanced operational discipline and underscores the powerful operating leverage inherent in our business. From an R&D perspective, we are a strategically directing our capital toward high conviction, long term growth drivers which Jim outlined in his remarks. This disciplined approach ensures our investments are concentrated where they generate the highest financial returns and drive sustainable revenue growth.
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. The sequential and year over year increases were driven by strong revenue growth expanding gross margin, and structural expense discipline. 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. Earnings growth continued to exceed revenue growth demonstrating gross margin expansion and operational leverage accelerating our bottom line profitability. 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. Our debt leverage ratio at the end of Q1 was 1.1x as we continue to maintain a highly resilient and flexible balance sheet. Consistent with our capital allocation priorities, we strategically invested in opportunities that will drive long term growth and profitability. 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.
These investments directly support the future growth of our data center and communications businesses with excellent financial returns. Our conviction to deploy this capital at an accelerated rate is backed by exceptional customer visibility, a robust pipeline of committed purchase orders, and additional multiyear supply agreements. Furthermore, this capacity offers significant fungibility as our infrastructure can be efficiently repurposed to support multiple product lines. Given the strong visibility and record backlog, we expect capital expenditures to increase sequentially again in the second quarter. 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.
I will now turn to our guidance for the second quarter of fiscal 2020 7. We expect revenue to be between $2.55 billion and $2.75 billion. We expect non GAAP gross margin to be between 40% to 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% to 20% on a non-GAAP basis. We expect non GAAP diluted EPS to be between $2.28 and $2.48. In summary, fiscal 2020 7 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 and A session.
Operator: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing any keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Samik Chatterjee with JPMorgan. Please go ahead.
Joseph Cardoso: Hi. Good afternoon, and thank you for the questions here. Really appreciate some of the disclosures that you provided this quarter and wanted to first start with PhotonLink 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 agreement that you have highlighted? Then I have a follow-up. Thank you.
James Robert Anderson: Yes. Thanks, Samik. So first of all, yes, 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 the revenue outlook that I mentioned in the prepared remarks. We are just really pleased with the progress there and just as a reminder, Photon Link is. We kind of consider it a 1 stop shop for integrated optics. it is basically our platform. For allowing customers to basically have a platform that allows for the optical link from end to end. it is the complete optical signal chain and all the technology along the optical technology along 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 5 chip to chip engagements. So the customer engagement is very extensive, and they continue to grow. You mentioned or asked about the LTA. Really pleased about that. Major AI customer and that LTA is, as I said, $20 billion over a year period, and the revenue for that would start at the beginning of calendar 2028. But the PhotonLink revenue ramp is starting ahead of that. We will 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 2025, we 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, if we look further out, we are we are expecting this over time to become a multibillion dollar product line The initial shipments of PhotonLink are all around CPO in the scale out network. But when we start to ship into CPO and MPO 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 MPO applications in the scale up domain towards the end of calendar 2027. So, yeah, we are excited about the progress and expect this to become a major product line for us. No. Thank you for that, Jim.
Joseph Cardoso: 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?
James Robert Anderson: Yes. Thanks again. This has been a really great growth area for us over the past year. In fact, it is surprised us a little bit how quickly this has grown. So overall. So DCI and scale across that falls within our 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 is going on there is seeing these large AI workloads that are spanning multiple data centers so that is driving the need for much greater bandwidth and connectivity between data centers. And so that is what is driving. that is the underlying market dynamic that is driving the growth. And then you asked about customers and products. So customers would be either equipment makers. So we are 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 is a mixture of both types of both types of customers.
And then the products, it is interesting, we sell this part of the market, we sell products at multiple levels of the value chain. So we sell components, like, for instance, pump lasers that go into a wide range of different equipment. 1 level up in the value chain, we sell subsystems and modules. So ZR plus modules, line cards, amplifiers, ROADMs, etcetera. And then 1 level up from that, in some cases, we sell complete solutions to our customers as well. So we are selling across multiple levels of the value chain. And so I think that is 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, it was $200 million. So we are basically at about a $1 billion annualized revenue run rate now. And that is a. 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 2027. And so that growth that we have seen to date, that is 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 is 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. Thank you, Jim. Appreciate all the color. Thanks, Samik.
Operator: The next question comes from Simon Leopold with Raymond James. Please go ahead.
Simon Leopold: Thanks for taking the question. First, Jim, I want to thank you for the increased transparency on Slide 7. I know this is something I have been probably annoying you about. So thank you. The slide did not mention OCS. I know you talked about a product group in your prepared remarks, but could you update us on your progress and expectation for this product group? And then I have got a follow-up, please.
James Robert Anderson: Yeah, sure. Thanks, Simon. Thanks for the feedback as always. We are always looking to improve, so appreciate the feedback. But yeah, on OCS, I did mention in the prepared remarks, OCS falls within our data center 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 have got really extensive customer engagement. We have 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 is across in terms of products, that is across both 23 by 23 systems, which are shipping as well as denser configurations.
I think the denser configurations will be used more in the scale up applications. We are ramping production at 2 different sites in parallel, and that is really to meet the demand that we are seeing We have a very differentiated technology. Liquid crystal. it is nonmechanical technology. It has better power efficiency and better reliability than MEMS-based solution. So we feel really well positioned. We are 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 that. Thanks.
Simon Leopold: And as a follow-up, I have a hard question, 1 that I imagine you anticipate getting. Is, what does the proposed consolidation of Lumentum and Marvell mean to you? Thank you.
James Robert Anderson: Yeah, thanks, Simon. No, I do not think that is a hard question at all. I think happy to answer that. I will give a few thoughts on this. I think number 1 is it definitely demonstrates that optics and photonics is becoming an absolutely critical part of data center architecture. 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 is 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 within Coherent. there is 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 do not think there is any other company that is got a better portfolio of technology. So I think it definitely highlights strategic importance of our technology platform. And then, look, I think from a customer perspective, I think that.
I think for a lot of our customers, our customers, I think it is 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 can 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, but we think we are really well positioned for both the standpoint, manufacturing standpoint, and strategically, and I think we are on a really great growth trajectory.
And I think you can see some of that already in the PhotonLink technology and the PhotonLink revenue ramp. Thank you.
Operator: The next question comes from Tom O'Malley with Barclays. Please go ahead.
Thomas O'Malley: Hey, guys. Thanks for taking my question. Thanks for the additional color. So I guess the first part of the question for you, Jim, is why now in terms of giving the longer term forecast? it is been something that you have kind of held off on doing for a while. You have 3 billion and then 4 billion next year. And then the second part of the question is, is that all backed with supply? How are you able to get visibility that far out? Is that 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.
James Robert Anderson: 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 is really backed by the. Just extraordinary level of visibility that we have on the business. When I look at the backlog, the bookings, so both near-term visibility and long term visibility, If I look at the. Just the backlog that we have, I mean, calendar 2027, is basically booked out, and the customers are booking out calendar 2028 now. So from a near terms booking demand perspective, we have great visibility. We signed a number of new LTAs over the past quarter.
I mentioned 1 of the big LTAs as part of the Photon Link. Prepared remarks, but the LTAs also give us really good visibility because they because they include very high quality forecast, long term forecast. So I think that is. Given that really good visibility, that is certainly giving us confidence. And then also, great that you mentioned supply. We have done a number of things within our supply base to make sure that we have got the right supply in place to support that as well. So yeah, I would say that is. That those views that we gave, whether it is the 3 billion this year and the $4 billion quarter year is underpinned by.
Underpinned by supply agreements. Also, remember that you know, we are we are highly vertically integrated, so a lot of that is under by our own internal supply that we are ramping Right? 1 of the constraints we look back over the past year and a half, 1 of the constraints has been indium phosphide. And I am just really pleased with how the team has executed very, very well on the indium phosphide production ramp. We have doubled production capacity a quarter earlier than what we thought we would, and that gives me the confidence that they are gonna achieve. The team's gonna achieve our plan to more than double capacity again by the end of calendar 2027.
So you put all that together and yeah, we are feeling really good about the outlook and the visibility for the business.
Thomas O'Malley: Super helpful. And then just as my follow-up for that LTA obviously, $20 billion, a pretty robust number over that 5 years. Could you just give us any color just around that customer, perhaps. And if you cannot talk about the customer around some of the solutions that, obviously, it is PhotonLink, so it spans a large number of your products. But any more specificity would be really helpful just given the size of that customer.
James Robert Anderson: Yeah. Sure. Sure. Definitely a leading AI data center customer name that you would definitely recognize. Right? And so we are really proud of that partnership, excited about it. that is all that LTA for $20 billion is all around photon link technology. I would call it. I would say it is anchored by our laser, our 400mW CW laser. that is kind of the anchor of that LTA. But there is. it is more than. We are selling more than just that laser. So we are selling more, you know, call it a higher level solution than that. So more than just that laser.
So we are really pleased by that as I mentioned, the revenue, we expect the revenue to start to flow from that in early 28 and to ramp 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. Thanks a lot, Jim.
Operator: The next question comes from George Notter with Wolfe Research. Please go ahead.
George Notter: Hi, guys. Thanks a lot. I guess I just wanted to ask a question about the 45% gross margin outlook before the end of 2028. So I guess I am curious, like what does that assume about your transceiver business? I am 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 ramp and wind up at 45% gross margins. what is the view there? Thanks.
James Robert Anderson: Yes. Thanks, George. I will start and then see if Sherri has any color to add. But yeah, we have not assumed that we are kind of artificially gating the transceiver business. So there is no assumption on that. We are assuming that the transceiver business grows at what we think is a 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. PhotonLink, number of new products in data center interconnect, OCS ramping over time as well, and 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 cost activities that we are driving. But certainly, a big 1 of it is we expect additional leverage in terms of gross margin from our indium phosphide ramp. I think there is. 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 think there is a good component of the margin expansion that is kind of underpinned by the indium phosphide expansion. as well.
George Notter: Is it possible to get the company to higher margins than 45% over time? I mean, I guess I am maybe looking at Lumentum as an example. Those guys, have had quite a bit of margin expansion. Obviously, the fastest growing parts of that business are many of the areas where you are kind of looking for growth going forward. Is 45% just a stop in a bigger picture or bigger number? What do you think?
James Robert Anderson: I do not think there is 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 2028, I think, is the way she said it. Right? So, yeah, we certainly do not view, you just like our old target of 42% where we said over 42%, we never viewed that as a 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 do not see any structural reason why the company to continue to drive gross margins beyond that.
Sherri R. Luther: Yeah. Yeah, and I would just add that the target that we put out about 18 months ago at our Investor Day of over 42% That was a 3- to 4-year. 3 to 4 year target that we put out. But we pulled that in, right, in only 18 months. Now raising our target to over 45%. So as we get close to that target, you know, we will certainly reevaluate, you know, and look at, you know, what makes sense beyond that, but it is just it is just a step along the way.
James Robert Anderson: Yeah. And, George, maybe the other thing I would add is we are certainly super focused on gross margin expansion. But the other thing that we are very focused on is operating leverage. Right? And I think we are quite pleased to see that we are 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. Thank you.
Operator: The next question comes from Gian Marco Conti with Deutsche Bank. Please go ahead.
Gian Marco Conti: Yes, great. Thank you for taking my questions. Congrats on the quarter. Maybe starting with PhotonLink. I wanted to touch on the scale in/scale-up opportunity with MicroVixel. You mentioned you had 5 engagements, I believe, chip to chip. I am curious if you could talk in a little bit more detail here whether there is anything you can quantify in terms of revenue to come online next year, anything around MicroVixels. Thank you.
James Robert Anderson: Yeah. So thanks for asking about microvixels. So, certainly, I look across the photon link engagements, there is, I would say, many VCSEL. MicroVCSEL. We call it multicore VCSEL because the multicore VCSEL attaches to our multicore fiber that we that we produce. And so but multiple of those engagements involve our VCSEL technology. I mean, maybe just as a reminder of the company's sort of depth in VCSEL technology, Number 1 is we have shipped over 700 million VCSELs into data center applications over the past year. So we have enormous manufacturing expertise in VCSELs. Also, at the ECOC conference, when we launched PhotonLink, we talked about our technology in VCSELs, MicroVixels, pixel arrays, etcetera.
You know, we showed that we. 1 of the things that we showed was that we had industry leading energy efficiency around. We showed a 1 pJ per bit capability, which I think is very industry leading capability. And so VCSEL is definitely a core technology something that the company has a long history in, and we have multiple engagements. I think you will 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 is a little further out in time.
I think Photon Link and scale in applications is more in the 2029 to 2030 time frame, but we will definitely see, I think, VCSEL's deployed in NPO applications well before that.
Gian Marco Conti: If I could just ask a follow-up. it is going to be a tough question. Sorry to put you on the spot. But, I have 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?
James Robert Anderson: Yeah. So I do not see that those competitors in terms of ultra-high power, if you are talking about, like, the 400mW CW laser, not seeing competition from really. We really only have 1 competitor there as far as we can see. Right? So really not seeing any other, competitors out there. With high power CW laser capability. Got it. Thank you. Yep.
Paul Jonas Silverstein: Operator, before we go to the next analyst if we could ask all the other analysts to limit themselves to 1 question with a goal of trying to accommodate everybody on the call. Alright? Thank you.
Operator: The next question comes from Dan Xu with Bernstein. Please go ahead.
Dan Xu: Hey. Thanks for the question. You mentioned that scale-up optics should start towards the end of calendar 2027. Anything you can share about whether the deployments are NPO or CPO, and also about how whether sort of this is primarily going to be on VCSELs, or will this start with IMP based lasers?
James Robert Anderson: Yeah. Thanks, Dan. So I think what we will see. We will definitely see CPO in scale up. We certainly believe that. I think we will I think we will see NPO scale up soon after that as well. If not, by the end of calendar 27, I think we will certainly see deployment in the early part of 2028. 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 that. Did you ask. What was the second part of your question, Dan? On VCSEL? How much of it is VCSEL versus InP? Yeah.
I think the initial deployment is indium phosphide, the high power CW lasers. that is for CPO in both initially scale out and then in scale up. And then I think VCSELs will happen in that in that NPO, kind of early 20. call it 28 time frame. Got it. Thank you.
Operator: The next question comes from Ryan Kuntz with Needham. Please go ahead.
Jeff Hopson: This is Ryan Koontz on for Jeff. Thank you for the question. You noted ramping the indium phosphide supply for your own laser supply, and, that would be able to lead to the margin expansion from weaning off external sources. I was just curious if there is 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 to the margin expansion? Thank you.
James Robert Anderson: Yeah. Thanks, Ryan. We have not broken out the split, but I can tell you the split has not changed much in a year. We are using about the same mix of internal versus external now as we were a year ago. So although we have doubled our internal Indium phosphide supply, our. The primary usage of our internal 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 is basically tracked the growth of our indium phosphide capacity, although 1, basically, quarter later.
Because when in the quarter we produce the lasers, the next quarter is when we ship the And so, essentially, our transceiver business has grown at the same rate as our internal indium phosphide, which means that our mix of internal versus external really has not changed much over the past year. Now as we 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, start to shift more of the mix from external towards internal. Now we will always think. We always believe we will have some portion of our supply from external for our for our transceiver business.
But we believe over the coming quarters, we will start to shift more towards internal. And that is really because it is a tremendous cost advantage for us to use our internally produced lasers, especially the ones that are made on the 6 inch platform. And in my prepared remarks when I said, you know, the majority of the benefit from 6 inch indium phosphide is ahead of us, that is actually what. Really what I am referring to is that benefit of changing the mix towards internal is largely ahead of us, and that is a much bigger cost structure cost structure improvement. Got it. Thank you very much.
Operator: The next question comes from Vivek with Citi. Please go ahead.
Vivek Sylla: Congrats on the very impressive results. Jim, I wanted to maybe double click on the $15 thousand of content per I think, 100T chip. You mentioned earlier, and 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, if you. Of that 15 thousand you expect to capture in the near term versus longer term and how it may change kind of beyond 2027?
James Robert Anderson: Yeah. Thanks, Vivek. The, Yeah, the $15 thousand basically represents if you if you take an example of a chip that needed 100 terabit of IO, And if we were using our full our full photon link portfolio, which would include not just the lasers, but all the other components, isolators, Thermoelectric Coolers, laser modules, our full fiber assembly kit, all the connectors, etcetera. So everything that we do if you use all the content per chip would be, we estimated, about $15 thousand per chip. Now it will 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 will really depend on the particular engagement. But that $15 thousand is sort of the opportunity that is out there for us. I think we will see over the over the next year or 2 as PhotonLink ramps. I think we will see customers that leverage the vast majority of that and I think we will also see customers that leverage a subset of that. So I think we will definitely. We will see a mix of that. And we are happy to support our customers whether they want the entire solution or they wanna a portion of it.
We will work with them on whatever works best for them. But regardless of the amount of content they take, for us, 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 is all greenfield growth for us because that is us and the industry converting. Copper links to optical links over time. So we see it as greenfield revenue growth. Got it. that is very helpful.
Vivek Sylla: Thank you.
Operator: The next question comes from Samik Chatterjee with JPMorgan. Please go ahead.
Cody Acree: Hey, guys. Thanks for taking my question. Sherri, maybe for you, if we can go back to the gross margin discussion, can you maybe help to stratify the contribution part of that. Can you talk about the. In the emphosphide 6 inch ramp yields increasing utilization rates, maybe even your mixed 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 is inherently just a more price sensitive market?
Sherri R. Luther: Yes. 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%. What I think your question is. It is. that is right. Yeah. Okay. So if I were to rank order, I think that the largest contributors are gonna be our new product ramps and that full operational leverage of our 6 inch indium phosphide capacity and then pricing optimization. Followed by cost reduction. that is kind of how I would rank order it. And the timing of some of those things kicking in, right, will vary.
But certainly, product ramps, I mean, those are gross margin accretive, and new products that Jim referred to earlier in his 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 is gonna drive significant opportunity in our gross margin. And then custom. Pricing optimization rather, I mean, that is an area where I think we will continue to have benefit there. You know, fully in our data center communication segment, certainly in our industrial, too. But definitely in data center communications, there is 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 is how I would rank order them.
Operator: The next question comes from Karl Ackerman with BNP Paribas. Please go ahead.
Karl Ackerman: 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 data centers here in The United States. In light of this, how does the team align its laser production capacity plans with your major customers? And has the team considered customer prepayments for additional laser production capacity? Thank you.
James Robert Anderson: Yeah. Thanks, Karl. The answer to the last part of the question is yes, definitely. Maybe I will start with the end of the question. So we have signed a number of LTAs over the past quarters. The 1 that is public is the 1 with NVIDIA that we signed back in March, but we have signed a number of other LTAs. The LTAs follow. All follow a general pattern. And 1 part of the LTA is typically some sort of upfront payment from the customer. Either. It could be either prepayment or NRE. there is different forms of payment, but there is some sort of upfront payment from the customer.
And what we do that for is for 2 reasons. Number 1 is it makes sure that the customers have skin in the game. But number 2 is we use that upfront payment to help fund the CapEx to build the capacity for that customer. Right? We think it is important that if we are gonna go build the capacity that the customers either fund that or help cofund that. And so far, we have had customers be very willing to do that. And I think that is worked really well for us. And so I would say almost every LTA that we have signed has 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 1 thing that. To keep in mind with indium phosphide capacity is remember that it is not it is not just being driven by data center demand. there is 2 things driving optics in general, optics demand. Right? Number 1 is data center growth. But number 2 is, in the case of integrated optics, it is the conversion of the copper links to optical over time.
And that is a technology trend that, in my view, is independent of the market demand that is a technology trend that will happen regardless of the data center demand because that is that is 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 is we have to switch to optics over time. And so that is an independent technology trend. That certainly that is certainly part of what is driving the indium phosphide capacity demand over the long term.
Operator: The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.
Meta Marshall: Great. Thanks. Maybe just a question on sub availability. I think there had been some concern in the market around availability of 6 inch versus 3 inch. I know you noted in the prepared remarks that you had gotten to capacity, but maybe if you could just speak about kind of a 6 inch versus 3 inch substrate availability and how that is impacting expansion plans? Thanks.
James Robert Anderson: Yeah. Thanks, Meta. So we have over on 6 inch in particular, but 3 inch as well. We do continue to buy 3 inch wafers. We do still have 3 inch production. But all of our expansion is mostly on 6 inch moving forward. And we have over 5 different suppliers of substrates. We have 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 have secured the necessary substrates for that capacity expansion. Then we have certainly.
You know, we have plans in place to further expand capacity beyond 2027, and we are 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 have made sure that we have the substrate capacity for the expansion.
Operator: The next question comes from Sean O'Laughlin with TD Cowen. Please go ahead.
Sean O'Loughlin: Great. Thanks for squeezing me in. I will make it quick. Jim, can you just talk about how, fungible your, capital installment. Capital installed base is across indium phosphide versus gallium arsenide if we. You know, maybe we end up in a world that is more VCSEL or multicore VCSEL heavy than it is ultra high power CW. Thanks for getting the question.
James Robert Anderson: Thanks. Sure. I would say there. there is some fungibility, but not it is 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 1 of the stats that we shared at the PhotonLink launch is that today, we have capacity to produce over a billion over a billion pixel arrays annually. 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 VCSEL technology, I do not think we would. there is probably anybody else in the industry that is better positioned to source or to supply that demand than Coherent is. And so we feel really well positioned on gallium arsenide pixel technology and or capacity And then on indium phosphide, obviously, we are ramping that very, very quickly. And so I think on both run a good path.
Operator: Our last question today comes from Samik Chatterjee with JPMorgan. Please go ahead.
Ananda Baruah: Hey. Thanks. Really appreciate it. And, yeah, congrats on the on the progress here. And I guess, Jim, let me let me just ask you a capacity question, supply capacity supply question from the other direction. Yeah. there is 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 2028, Now you are also talking about you know, sort of contract agreements, going sort of well into that time frame. So would love to get your opinion on sort of how you view the potential for an oversupply situation at an industry level? Going through 2028. Thanks.
James Robert Anderson: Yeah. I think through 2027 and into 2028, I do not 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 gonna create for lasers. As well as there is quite a bit of indium phosphide that is also used in some of the DCI applications too. So when I look across all of that, I do not see a risk through calendar 2028. 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 do not we do not even produce enough today for. To meet all the demand of our own products. For us, I do not think that is a primary concern for us. If you know, I think if we were if there were more supply externally that may affect us if we were supplying indium phosphide lasers externally, but we are 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 I. Yeah.
I guess the short answer to your question is we do not see any big oversupply situation into 28.
Operator: This concludes our question and answer session. I would like to turn the conference back over for any closing remarks.
James Robert Anderson: Thanks, operator, and thanks, everybody, for joining us on 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. Just wanna say thanks 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.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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