Photonics leader Coherent (COHR.US) delivered a stellar performance for its fiscal fourth quarter of 2026, with both revenue and profit exceeding Wall Street forecasts. The company also provided a robust outlook for the first quarter of fiscal 2027, signaling that demand for AI-driven optical interconnects remains far from its peak. For the quarter ending June 30, 2026, Coherent reported revenue of $2.05 billion, a 34% year-over-year increase, surpassing the expected $1.98 billion by about 3.5%. Adjusted earnings per share hit $1.74, up 74% year-over-year and beating analyst estimates of $1.62 by over 7%. The adjusted gross margin reached 40.2%, improving 215 basis points year-over-year, while the adjusted operating margin expanded 381 basis points to 21.8%. On a GAAP basis, EPS was $1.19, a significant turnaround from a loss of $0.83 in the same period last year.

Capacity expansion remains the primary bottleneck for revenue growth, with gross margin improvement still in its early stages. The Data Center and Communications segment has become the dominant force, generating $1.62 billion in Q4 revenue, a 59% increase, accounting for 79% of total revenue. CEO Jim Anderson highlighted that indium phosphide production capacity is the main growth constraint. The company is on track to double its internal indium phosphide output capacity year-over-year by the end of this quarter, a quarter ahead of schedule, and plans to more than double it again by the end of calendar 2027. In Q4, indium phosphide laser production grew 80% year-over-year, directly supporting sustained growth in 800G transceivers and a faster-than-expected ramp-up of 1.6T products. Regarding gross margin, CFO Sherri Luther emphasized that the margin improvement strategy is still in its infancy. The full benefits of the 6-inch indium phosphide product ramp-up are yet to come, and the ramp-ups of new products like 1.6T, OCS systems, CPO, multi-track systems, and thermal management solutions have not yet fully materialized. A 6-inch wafer yields four times the output of a 3-inch wafer at half the cost, and as capacity expands, the cost structure will continue to improve. Additionally, the company has reduced SG&A expenses as a percentage of revenue from 10.5% to 9.2% through a regional shared services structure, with operating expenses as a percentage of revenue now below the 18% target model.

Demand for CPO and NPO is rising, not declining, and several new growth platforms are poised for volume production. Addressing recent market concerns about potential CPO delays, Anderson clearly stated, "We are not seeing any delays in CPO demand. Quite the opposite, demand is increasing and customer requests are being pulled in." Over the past 3 to 6 months, customer engagement on CPO and NPO has "significantly increased," with nearly all major strategic customers having active projects. CPO revenue is expected to begin contributing in the December quarter, with revenue for vertical scaling applications starting in the second half of 2027. In September, the company will launch a new integrated photonics platform, PhotonLink, covering the entire signal chain from light generation to electrical signal conversion. For optical circuit switching, the company has doubled its addressable market estimate from $2 billion to over $4 billion, and may still be conservative, with applications extending from horizontal to vertical scaling. Multi-track system samples have been delivered to customers, with revenue expected to begin in the first half of 2027. Order visibility is strong, with the fiscal 2027 year essentially fully booked. Customer orders now extend into calendar 2028, and long-term agreements stretch to the end of the decade. The CEO has set a target: achieving quarterly revenue of over $3 billion by the end of fiscal 2027, a figure well above current market consensus, based on accelerated capacity expansion and the concentrated ramp-up of new product platforms.

Key areas for initial focus

The company is making excellent progress on its 6-inch indium phosphide ramp-up, which is a key driver for both revenue and gross margin. In the June quarter, the production of indium phosphide lasers increased by 80% year-over-year, directly supporting the growth of 800G and 1.6T transceivers. The company expects its data center revenue growth for the current quarter to exceed 80% year-over-year, supported by the increased laser output. Yields on the 6-inch platform are already better than those on the 3-inch platform for all three device types (CW, EML, and photodetectors). Production of ultra-high peak power CW lasers for CPO applications has also begun, with associated revenue expected in the December quarter.

Why CPO and NPO demand is robust

Contrary to market chatter about delays, Coherent sees increasing demand for CPO, with customer requests being pulled in. Engagement with customers on both CPO and NPO has intensified significantly over the past 3 to 6 months. The company offers a broad portfolio of integrated optical solutions, including lasers, external laser modules, optical components, and silicon photonics PICs. The content opportunity in both NPO and CPO is very comparable for the company. The upcoming PhotonLink platform, a complete integrated optics solution, is expected to be well-received by customers seeking a more comprehensive solution. Revenue from CPO is expected to start in the December quarter, with revenue from vertical scaling applications beginning in the second half of 2027.

Production capacity as the primary constraint

The company's main growth constraint is indium phosphide production capacity. Assembly and test capacity for transceivers are currently not limiting. The focus is on ramping up 6-inch production to alleviate this bottleneck. The company is also investing in additional capacity beyond 2027, given the robust customer demand. The shift to 6-inch production is a key driver for cost reduction and margin expansion.

Optical circuit switching: a significant opportunity

OCS demand is expanding beyond initial horizontal scaling applications to include vertical scaling. The company has revised its addressable market estimate to over $4 billion, which may be conservative. Revenue from OCS grew in the June quarter, and the company expects significant growth in fiscal 2027 as it expands production capacity. The technology is seen as a growing contributor to both revenue and margin expansion.

New product platforms on the horizon

Multi-track systems, a key opportunity in the communications business, have samples delivered to customers with initial revenue expected in the first half of fiscal 2027. The addressable market is estimated at over $20 billion by calendar 2030. In the industrial sector, the company sees long-term opportunities in data center XPU cooling with its proprietary Thermadite material, with revenue expected in the second half of calendar 2027. Other long-term opportunities include fusion energy, quantum technology, and micro LED display capital equipment.

Financial outlook and guidance

For the first quarter of fiscal 2027, Coherent expects revenue between $2.2 billion and $2.4 billion. The non-GAAP gross margin is projected to be between 39.5% and 41.5%. Total non-GAAP operating expenses are expected to be between $400 million and $420 million. The non-GAAP tax rate is expected to be between 18% and 20%. Non-GAAP earnings per share are forecast to be between $1.85 and $2.05. The company enters fiscal 2027 with record backlog, strong visibility into customer demand, and a significantly improved financial position. The focus remains on expanding capacity, improving profitability, and allocating capital to support long-term growth and shareholder value.