Coherent Corp.

Greetings and welcome to the Coherent First Quarter Fiscal Year 2026 Earnings Call. It is now my pleasure to introduce your host, Mr. Paul Silverstein, Senior Vice President of Investor Relations for Coherent. Please go ahead.

Thank you, Operator, and good afternoon, everyone. With me today are Jim Anderson, Coherent CEO, and Sherry Luther, Coherent CFO. During today's call, we will provide a financial and business review of the first quarter of fiscal 2026 and the business outlook for the second quarter of fiscal 2026. 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 today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements or predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs, and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call includes and constitutes the company's official guidance for the second quarter of fiscal 2026. If at any time after this call we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call. Additionally, we will refer to both GAAP and non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, We've provided reconciliations of these non-GAAP financial measures to GAAP financial measures in 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.

Thank you, Paul, and thank you, everyone, for joining today's call. Coherent is the world's leading innovator and provider of photonic technology and solutions. Photonics is critical to growing applications in AI data center networks, communications, and a wide range of industrial applications. We're well positioned for long-term growth across all these applications, and especially in AI data centers, where we're experiencing unprecedented demand for our optical networking products. In particular, we expect continued strong sequential revenue growth throughout this fiscal year, given the record level of orders we are receiving from our customers and the continued expansion of our production capacity. In addition, we continue to streamline our portfolio and ensure that our investments are focused on the areas of greatest long-term growth and profitability for the company in order to drive sustained shareholder value creation. Turning to our Q1 operating results, revenue increased by 6% sequentially and 19% year-over-year on a pro forma basis, which excludes revenue from our recently divested aerospace and defense business a sale that enhanced our portfolio focus and accelerated deleveraging. Non-GAAP gross margin expanded by 70 basis points sequentially and 200 basis points year-over-year. The combination of revenue growth and gross margin expansion drove non-GAAP EPS growth of 16% sequentially and 73% year-over-year. I'll now provide some highlights from our two operating segments. We'll begin with our data center and communication segment, which is our largest and fastest growing business. Q1 revenue grew by 7% sequentially and by 26% year-over-year, driven by growth in both our data center and communications markets. In our data center business, Q1 revenue grew 4% sequentially and 23% year-over-year. Our data center growth in Q1 was constrained by the supply of indium phosphide lasers. However, we expect data center growth to accelerate to approximately 10% sequential growth in the current quarter, followed by strong sequential growth through the balance of this fiscal year, given very strong demand and improving supply. I'd like to provide some additional color on both the demand and supply picture within our data center business. First, we are experiencing an exceptionally strong level of demand. In our fiscal Q1, we received record bookings that represent a step function increase in already strong customer demand. We're seeing strong demand for both our 800 gig and 1.6T transceivers with broad adoption of our 800 gig transceivers and accelerated adoption of our 1.6T transceivers. A significant portion of the sequential growth we expect in the current quarter is driven by 1.6T adoption. As a reminder, earlier this year at OFC, we were the only company to demonstrate three different types of 1.6T transceivers based on three different types of laser sources, silicon photonics, EML, and VIXL. Our 1.6T transceivers based on silicon photonics and EMLs are ramping first, and we expect our 1.6T transceivers based on our 200 gig VIXLs to ramp next calendar year. We see strong demand for 1.6T transceivers across multiple customers and expect both 800 gig and 1.6T to grow significantly in calendar 2026. Our deep portfolio of optical networking technology combined with our vertical integration and diversified supply chain are key competitive advantages with our customers and uniquely positioned coherent within the industry. On the supply side, given the strong demand growth we are seeing, We are continuing to expand our production capacity for transceiver modules and the key optical components used in those modules. For example, one of the key constraints across the industry is indium phosphide laser capacity. Over the course of Q1, we saw improving EML supply, and we expect both internal and external EML supply to improve significantly in the current quarter and throughout the balance of this fiscal year. In particular, we continue to expand our internal Indium Phosphide production capacity. We are aggressively ramping six inch capacity because a six inch wafer compared to a three inch wafer will produce more than four times as many chips at less than half the cost. This will provide increasing benefit to our gross margin as we continue to ramp production. Our six inch Indium Phosphide line in Sherman, Texas, which is the world's first six inch Indium Phosphide production line, began production last quarter and continues to ramp well. I am very pleased to share that our initial six-inch indium phosphide production yields are actually higher than our current three-inch indium phosphide yields. This is an outstanding accomplishment by our production team and also a testament to the tremendous experience that we've gained over the past five years producing almost two billion Vixil devices on our six-inch gallium arsenide technology. Given the healthy yields we are seeing with 6-inch production, we began production of 6-inch indium phosphide at a second site in Jarfalla, Sweden. Ramping at two sites in parallel will significantly accelerate our production capacity ramp. Additionally, we are in production on three different types of key transceiver components on 6-inch indium phosphide, EMLs, CW lasers, and photodiodes. With a ramp of 6-inch production at two sites in parallel, We expect to roughly double our total internal production capacity of indium phosphide over the next year. We also expect to continue to supplement our internal indium phosphide capacity with sourcing from external suppliers. We expect our external supply of EMLs to increase sequentially this quarter and next calendar year through continued partnership with our key external suppliers. In addition to critical laser production capacity, we are also expanding transceiver module assembly capacity. While we continue to expand production at our existing site in Ipoh, Malaysia, we will now be expanding production capacity in parallel at a new transceiver production facility that we recently opened in Penang, Malaysia. In addition, we will be adding transceiver production capacity at our existing site in Vietnam, which already produces transceiver components. This additional production capacity allows us to continue to rapidly ramp module capacity to support the demand growth in front of us. I'd like to pivot to some technology developments that we expect to further benefit our data center business over the long term. We continue to make progress on LPO, LRO, CPO, and MPO related products and technologies with strong engagements across a wide range of customers. For example, we've shipped both LPO and LRO 800 gig and 1.6T transceivers to customers. Also in September, we announced that we have commenced sampling of our 400 milliwatt CW lasers designed for CPO and silicon photonics applications. We expect to address a broad range of CPO form factors for both scale out and scale up data center applications with this new product. We also continue to see significant customer engagement around our 200 gig VIXL based solutions for NPO applications. Multiple customer engagements on integrated optics applications reinforce our view that the incremental market opportunity for optical solutions in the scale up portion of the AI data center networks will be very compelling. And we believe Coherent is well positioned to address these applications using both CW and VIXL based solutions. We continue to expect to see initial CPO deployments in calendar 2026 with growth continuing in the following years while pluggable form factor continues to grow in the scale out portion of the network. Another area of new growth is our optical circuit switch platform, which continues to progress well with expanding customer engagement. We believe this product line adds over 2 billion of addressable market opportunity over the coming years. Both the breadth of customers and the range of applications are wider than our initial expectations. The underlying technology in our OCS system is a non-mechanical field-proven liquid crystal technology, which has been successfully deployed for many years in demanding telecom applications and has a significant competitive advantage over other solutions. To date, we've shipped systems to seven customers and expect that number to continue to expand this quarter. Shipments have included both 64 by 64 and 320 by 320 system sizes. Both revenue and backlog for OCS grew sequentially in our fiscal Q1, and we expect it to grow again in the current quarter. Our current backlog includes both 64 by 64 and 320 by 320 systems, with the majority of the backlog weighted toward the larger system size. Given the strong customer demand and backlog, we are aggressively ramping production for both small and large capacity systems, and we expect revenue to ramp throughout calendar 2026. Given the multiple growth vectors across pluggable transceivers, CPO, and OCS, we are very excited about the opportunities ahead of our data center business. Turning to our communications market, in Q1 revenue grew 11% sequentially and 55% year-over-year. Growth was driven by products for data center interconnect, but we also saw strong growth in traditional telecom applications. We expect our communications business to grow sequentially again in the current quarter and throughout the balance of this fiscal year. In hyperscale DCI, we continue to see strong growth in customer demand for our ZR, ZR+, DCI-focused products. Our product lineup, which includes 100 gig, 400 gig, and 800 gig ZR, ZR+, coherent transceivers, is growing quickly, and we expect these products to continue to ramp throughout the course of this fiscal year. We also continue to see steady recovery in our telecom business. In addition to market recovery, we've introduced multiple new industry leading telecom platforms for which we are seeing significant customer interest and expect strong future revenue contribution, such as our new award-winning multi-rail technology platform. This platform is a breakthrough solution that amplifies multiple fiber pairs while operating within the physical and electrical constraints of existing infrastructure. Customer engagement on this new platform is very strong, and we see this as one of many growth factors for our communications business in both the near and long term. Turning now to our industrial segment, revenue grew 2% quarter over quarter and 4% year over year on a pro forma basis, excluding revenue from the recently divested aerospace and defense business. While we maintain a cautious outlook on near-term demand, given the macroeconomic backdrop and ongoing tariff and regulatory uncertainty. We were pleased to see growth in our first fiscal quarter, and we expect the industrial business to be stable to slightly up sequentially in our current quarter on a pro forma basis. Within our industrial segment, there are several key growth areas. For example, we expect ongoing strong demand into state capital equipment driven by OLED screen adoption expanding to larger format devices like tablets and laptops. We also expect growth over the long term in our semi-cap equipment market, given the industry wide expansion in semiconductor production. Another promising growth opportunity that I'd like to highlight is our advanced materials for thermal management and cooling. Traditionally, these materials are used in a wide range of applications in our industrial markets. However, the rapid expansion of AI data centers has created a significant growth opportunity. We see potential widespread adoption of these materials to address the thermal and power challenges posed by ever larger AI data centers. For example, our proprietary Thermodyte material moves heat twice as effectively as copper, which is a tremendous advantage in data center cooling applications. We're engaged with multiple hyperscaler customers on this new emerging application of our materials technology. Lastly, I'd like to give an update on our portfolio optimization initiative. As a reminder, we are focused on streamlining our portfolio and concentrating our investments in the areas of greatest long-term growth and profitability. We are shifting investment from non-core areas and relining our footprint to drive better asset composition and utilization efficiency across the organization. We completed the sale of our aerospace and defense business at the beginning of September. The proceeds of the sale were used to pay down debt and the sale is immediately accretive to both gross margin and EPS. In addition, we recently announced the sale of our product division based in Munich, Germany that makes tools for materials processing and is part of our industrial segment. We made the decision to sell this product division because it was not aligned to our long-term strategic focus areas and it did not support our long-term financial goals. This transaction is expected to close in our fiscal Q3. The proceeds of this transaction will be used to reduce debt and the sale is expected to be immediately accretive to both gross margin and DPS. In addition to streamlining the product portfolio, we are also continuing to streamline our physical footprint. Since the beginning of our last fiscal year, roughly five quarters ago, we have sold or exited 23 sites and we plan to continue to streamline our footprint and exit additional underutilized or unnecessary sites over the coming quarters. While I'm pleased with the progress we've made streamlining our portfolio, we still have more work to do. I view portfolio optimization as an evergreen process and we will continue to reevaluate our asset portfolio to streamline and focus on the areas of greatest profit growth and ensure we are optimizing our return on invested capital. In summary, we delivered strong revenue and EPS growth in Q1 and are on track for strong sequential growth over the coming quarters. driven by exceptionally strong demand in our data center and communication segment, along with continued expansion in our production capacity. I want to thank the coherent team for all their hard work and dedication. I'll now turn the call over to our CFO, Sherry Luther.