Coherent Corp.

Greetings, and welcome to the Coherent second 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 Jimmy Anderson, Coherent CEO, and Sherry Luther, Coherent CFO. During today's call, we will provide a financial and business review of the second quarter fiscal 2026 earnings and the business outlook for the third 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, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish and 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 from 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 the projections or forward-looking statements. This call includes and constitutes the company's official guidance for the third quarter 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'll 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 provided reconciliation 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 attending today's call. As the world's leading innovator and provider of photonic technology and solutions, Coherent is at the center of an extraordinary expansion of optical networking infrastructure that's enabling tremendous growth in data traffic in the scale across, scale out, and scale up networks of AI data centers. As a result of the AI build out, we saw strong revenue and profit growth in our December quarter. We also experienced another step function increase in our bookings, which we expect to increase again in our current quarter. Given the extraordinary strength and visibility of demand from our customers, combined with our continued rapid expansion and production capacity, we expect a period of sustained strong revenue growth over the coming quarters. In particular, we expect continued strong sequential revenue growth in both our March and June quarters, and we expect our fiscal 27 revenue growth rate to exceed our fiscal 26 growth rate. The key growth drivers that we see over the coming quarters are growth in both 800 gig and 1.6T transceivers, growth from the ramps of new products such as OCS and CPO solutions, and ongoing exceptionally strong demand in our products for DCI and scale across. In addition, we are now seeing demand signals that indicate a pickup in the growth of our industrial business over the course of this calendar year, led by strong orders from our semi-cap equipment customers. Overall, we're excited about the growth outlook over the coming quarters. We're also focused on driving meaningful operating leverage and expect to continue to deliver EPS growth that is significantly faster than our expected revenue growth rate. With that overview, let me provide some additional details on our recent quarter and what we expect moving forward. Turning to our Q2 operating results, revenue increased by 9% sequentially and 22% year-over-year on a pro forma basis, which excludes revenue from our recently divested aerospace and defense business. Non-GAAP gross margin expanded by 24 basis points sequentially and 77 basis points year-over-year. The combination of revenue growth and gross margin expansion drove non-GAAP EPS growth of 11% sequentially and 35% year-over-year. I'll now provide some highlights from our two operating segments. In our data center and communications segment, which now accounts for over 70% of our revenue, we saw an acceleration of our sequential growth rate, with Q2 revenue growing by 11% sequentially and by 34% year-over-year, driven by strong growth in both the data center and communications markets. In our data center business, we drove a substantial acceleration in our sequential growth rate, with Q2 revenue growing 14% sequentially and 36% year-over-year. The acceleration of sequential growth in Q2 was driven by very strong execution from our production teams. Given the exceptional demand and our rapidly expanding capacity, we expect double-digit sequential growth in data center again in both our March and June quarters. Given that this is our largest and fastest growing business, I'd like to provide some additional details on both the demand and supply picture within our data center business. Q2 data center revenue growth was driven by growth in both 800 gig and 1.6G transceivers. In Q2, we experienced another step function increase in our data center bookings with a book-to-bill ratio that exceeded 4X as customer demand continues to increase and customers place orders further out in time, which provides us with strong visibility for the coming quarters. The strength of our product portfolio, combined with our vertical integration and our expanding U.S. manufacturing footprint, provide a clear competitive advantage with our customers. We expect revenue growth in the current quarter to be driven by a combination of growth in both 1.60 and 800 gig transceivers, as well as growth in our OCS systems. We see strong demand for our 1.6T transceivers across multiple customers and continue to expect both 800 gig and 1.6T to grow significantly in calendar 26. We expect 1.6T to ramp significantly over the coming quarters with the early phase of the ramp driven by our EML and silicon photonics-based transceivers, followed by our 200 gig Vixel-based 1.6T transceivers ramping in the second half of this calendar year. On the supply side, to address the extraordinary growth of demand, we are investing in the rapid expansion of our production capacity. For example, we significantly increased our indium phosphide production capacity in Q2, and we are executing on track to our plan to double our internal indium phosphide production capacity by the fourth quarter of this calendar year. As a reminder, our indium phosphide capacity expansion is driven by our ramp of six-inch wafer production, A 6-inch wafer compared to a 3-inch wafer will produce more than four times as many chips at less than half the cost. Our production team is doing an outstanding job ramping our 6-inch indium phosphide production, and I'd like to take the opportunity to thank our team for executing ahead of our plan in Q2. We are ramping production in parallel at two sites, Sherman, Texas, and Jarfalla, Sweden. We are in production with three different types of key transceiver components on 6-inch indium phosphide. EMLs, CW lasers, and photodiodes. Our 6-inch yields continue to exceed the yields of our 3-inch production lines. In addition, we have multiple 6-inch indium phosphide substrate suppliers, and we have secured committed substrate supply that supports our expected doubling of capacity by our December quarter. In short, we are very pleased with our ramp of the world's first 6-inch indium phosphide production lines, and expect this production ramp to support significant revenue growth and margin expansion of our transceiver products over the coming quarters. We also expect to continue to supplement our internal indium phosphide capacity with continued sourcing from external suppliers. For example, EML supply from our external suppliers increased sequentially in Q2, and we expect it to increase again in the current quarter and during this calendar year through continued long-term partnership with our key external suppliers. We also continue to invest in the expansion of our transceiver module assembly capacity. We are expanding our production capacity in Malaysia, Vietnam, and other locations. Overall, I'm very pleased with the continued expansion of our production capacity to meet the rapid growth in our demand. I'm equally excited regarding our progress on other key data center products and technologies. Specifically, I want to provide updates on our CPO and OCS products which we expect to be significant contributors to our long-term growth and profitability. Transceiver technology platforms continue to evolve and we are well positioned as we continue to make progress on LPO, LRO, CPO, and MPO-related products and technologies with a growing number of engagements across a wide range of customers. In particular, we recently secured an exceptionally large purchase order from a market-leading AI data center customer for a CPO solution that includes our new high-power CW laser that began sampling last year. Beyond the outstanding performance of this solution, a key factor in the customer's decision to partner with Coherent was the fact that our high-power CW laser is produced on our six-inch indium phosphide line in our Sherman, Texas facility. We expect this significant design win to generate initial revenue toward the end of this calendar year with a more significant revenue contribution next calendar year and beyond. We also have engagements across multiple other customers for both indium phosphide and 200-gig Vixel-based solutions for CPO and NPO applications. In Q2, we also saw strong progress for our optical circuit switch platform based on our differentiated non-mechanical liquid crystal technology. OCS backlog grew sequentially in Q2, and we now have over 10 customer engagements, Shipments and backlog include both 64 by 64 and 320 by 320 system sizes, with most of the backlog weighted toward the larger system size. We expect OCS revenue to grow sequentially in the current quarter and the coming quarters as we ramp production capacity as fast as possible to meet the rapidly growing demand and the over $2 billion of expected addressable market opportunity for this platform over the coming years. In our communications market, Q2 revenue grew 9% sequentially and 44% year-over-year. Growth continues to be driven by our products for data center interconnect and scale across, as well as strong growth in traditional telecom applications. We expect our communications business to grow sequentially in the current quarter, as well as our June quarter. The strength we are seeing in communications is broad-based in terms of both products and customers. We continue to see extremely strong demand for our products addressing the data center interconnect market opportunity. These include our ZR and ZR Plus coherent transceiver products, as well as lasers and other components that we sell to system OEMs. For example, we recently secured a significant multi-year design win with a leading DCI OEM, which utilizes coherent industry-first uncooled three-pin micropump solution. We're also seeing strong demand in our traditional telecom business driven by ongoing market recovery and new product introductions, such as our new award-winning multi-rail technology platform. We are also experiencing very strong demand across our broader communications product portfolio, including pumps, amplifiers, line cards, and systems. Turning to our industrial segment, 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 in Q2 was driven by our industrial lasers and engineered materials product lines. We expect the industrial segment to be roughly flat sequentially in the current quarter on a pro forma basis. However, looking ahead, we expect improving demand. For example, we saw a significant increase in orders in Q2 from our semi-cap customers, which we expect to translate into sequential growth for our industrial business in our June quarter and the remainder of this calendar year. At the recent Photonics West conference, we highlighted a number of compelling long-term growth areas for our industrial product lines, including data center XPU cooling solutions based on our 300-millimeter silicon carbide and thermodite technology, thermoelectric generators for improving data center energy efficiency through waste heat recovery, Examer laser annealing systems for Gen 8 OLED fabs, high-power lasers for direct fusion energy generation, and Examer lasers for for processing superconducting tape used in magnetic fusion applications. This wide range of differentiated solutions positions our industrial business for significant long-term growth. Finally, I'd like to provide an update on our portfolio optimization initiative. Last week we completed the sale of our product division based in Munich, Germany that makes tools for materials processing. The sale of this product division is expected to be immediately accretive to both gross margin and EPS. As a result of this sale and other operational streamlining initiatives, we exited 10 sites over the past quarter, which brings the total number of sites that we've either sold or exited to 33 over the past roughly six quarters since we began this initiative. We plan to continue to streamline our footprint and exit additional underutilized and unnecessary sites over the coming quarters. In summary, we've delivered strong revenue and EPS growth in Q2 and expect both fiscal 26 and fiscal 27 to be strong growth years for Coherent, given our exceptional demand from our customers and the rapid expansion of our production capacity. I'd like to thank my Coherent teammates for their strong execution and the incredible innovation that they are driving every day for our customers. I'll now turn the call over to our CFO, Sherry Luther.