Coherent has all of the right products to potentially become a sizable player in AI networking. Primarily, Coherent’s growth story centers around supplying Nvidia with pluggable optical transceivers (400G, 800G, 1.6T) including EML lasers, VSCEL lasers and CW lasers, and emerging CPO technologies for next-generation switches and interconnects.
Transceiver speed has been growing with the highest data rates ranging from 100G to 200G to 400G. AI servers are driving a market for 800G data rates, which are shipping in production now, and 1.6T rates, which are initially shipping yet expected to grow in volume come 2026.
Coherent’s transceivers work with both Ethernet or InfiniBand, as well as proprietary protocols such as Nvidia’s NVLink and Nvidia’s interconnect chips NVSwitch. The company has stated that their 100ZR pluggable transceivers can upgrade old 10GBps Ethernet links with 100 GBps at the optical network edge, representing a 10X upgrade.
Coherent designs and manufactures the components, such as lasers, detectors and passive optics. Manufacturing the components (as opposed to buying them) is a strength as the company has supply chain resiliency by controlling the end-to-end process, and the manufacturing takes place primarily in the United States with some in Europe.
What COHR must navigate is that other companies also offer optical interconnects, and thus, competition is heightened in the datacom transceivers, silicon photonics, and CW/EML/VSCEL laser space. For example, Chinese companies such as InnoLight and Eoptolink compete with Coherent, larger companies like Broadcom, and then smaller companies with agile engineering like Lumentum also directly compete. In fact, Lumentum’s report was stronger than Coherent’s report this quarter in a a few key areas which likely drove COHR’s weak price action.
In terms of fundamentals, Coherent was weak in terms of the company guiding for lower sequential growth in its datacom segment than the prior two quarters. The company’s margins are also coming under pressure, which is the most important line item for a hardware company in terms of investor appetite.
With that said, I don’t think Coherent is out of the game by any means. There are some important things in the pipeline – all discussed for you below.
Quick note on Coherent Divesting the Aerospace and Defense Business:
This quarter, Coherent divested its underperforming segment Aerospace and Defense; selling the unit for $400 million. This will help the company streamline its operations and provide more cash to help pay down elevated debt. The sale will result in Coherent exiting from 10 sites and reducing employee count by 550 employees, and thus, will be accretive to EPS.
According to analyst notes, the expected headwind to revenue will be $170 million, thus growth will appear lower in the forward growth estimates provided below although the company will be growing organically at a higher rate.
Revenue Growth Decelerating to Single-Digits
Coherent reported a slight 1.1% beat to revenue estimates, reporting Q4 revenue of $1.53 billion, up 16.4% YoY. Revenue growth has decelerated more than 10 points since the start of the fiscal year.
For Q1, Coherent offered guidance for $1.46 to $1.60 billion in revenue, or $1.53 billion at the midpoint, excluding ~$0.02 billion in revenue related to its Aerospace & Defense unit that it expects to occur after the sale is closed.
This compares to consensus estimates for $1.55 billion. On a YoY basis, this points to YoY growth of 13.3% at midpoint, with growth expected to decelerate to the mid single-digit levels in both Q2 and Q3.
For fiscal 2025, Coherent reported 23.4% YoY growth in revenue to $5.81 billion, driven by a 51% increase in data center and communications revenue, offset by a (2%) decline in industrial and other revenue. This is discussed further in detail below.
For fiscal 2026, Coherent is expected to report just 8.4% revenue growth to $6.3 billion, down from 10.0% growth to $6.37 billion at the end of July; however, the decline in growth estimates looks to stem from the Aero & Defense unit divestment. BofA had estimated the sale would create a ~$170 million headwind (implying ~$6.2 billion), yet estimates are only ~$70 million lower, suggesting other segments are offsetting some of the impact.
May 2025 Investor’s Day:
A few months back, Coherent provided updated growth targets for revenue and earnings. It’s notable that Coherent is guiding for lower top line growth in the coming years yet helps to illustrate the primary growth will be on the bottom line.
- Revenue growth of 23% in FY25 versus target model of 10% to 15%
- Yet, operating margin expansion expected of 6.2+ points to 24% operating margin
Source: Coherent Investor DayCoherent Investor Day
Key Segments: Networking Growth Decelerates to 39%
Networking remains the primary driver of Coherent’s growth, with the company announcing that it commenced revenue shipments of its first 1.6T transceiver products and its first differentiated liquid-crystal optical circuit switch (OCS) platform.
Networking revenue rose 39% YoY and 5% QoQ to $945.2 million in Q4, with its share of revenue growing by two points sequentially to 62%. For the full year, Networking revenue rose 49% YoY to $3.42 billion, accounting for 59% of revenue.
Growth has decelerated steadily throughout the fiscal year, from 61% in Q1 to 45% growth in Q3 and now 39% in Q4. However, the primary concern is that the segment was showing a rather sharp deceleration on a QoQ basis, to the lowest sequential growth since early FY24. Coherent reported just 5% QoQ growth in networking in Q4, versus 10% in Q3.
Lasers revenue declined (2%) YoY and (4%) QoQ to $348 million, the segment’s first YoY decline in five quarters. Lasers accounted for 23% of revenue in Q4, down from 24% in Q3. For the full year, Lasers revenue grew just 3% to $1.44 billion.
Materials revenue declined (15%) YoY and was flat QoQ at $236.2 million, its sharpest decline since Q1. Of the three segments, Materials was the only to see revenue decline in FY25, down more than (6%) YoY to $953.8 million.
End Markets: Data Center Reporting Low 3% QoQ Growth
Turning to end markets, Coherent has now reorganized its reporting into just two end markets: Data center and Communications, and Industrial (which includes its previously reported Instrumentation and Electronics end markets).
The main concern is that Data center growth has slowed dramatically on a QoQ basis, from 11% last quarter to 3% in Q4, despite signs of accelerating AI systems demand (capex spend increasing from Big Tech, Blackwell shipping, Blackwell Ultra seeing initial shipments, etc)
Data center and Communications revenue rose 39% YoY and 5% QoQ in Q4 to $942 million. For the full-year, revenue increased 51% to $3.44 billion.
Within this, Data center revenue increased 38% YoY but just 3% QoQ. For FY25, Data center revenue rose 61% YoY. Similar to Networking, the major concern here is that Data center growth has slowed dramatically on a QoQ basis, from 11% last quarter to 3% in Q4, despite those signs of accelerating AI systems demand.
Management did state that “sequential growth rates can fluctuate quarter-to-quarter based on lumpiness of demand from our customers or supply or capacity related things,” but they offered little to soothe fears of rising competitive pressure within Nvidia’s supply chain. Aside from saying the see strong demand ahead, management dodged the question about when Data center’s QoQ growth would accelerate.
In a brief update on the Data center product roadmap, Coherent said it expects 1.6T transceiver volume to ramp throughout calendar 2025 with more meaningful contribution in calendar 2026, while demand continued to grow in Q4 for <1.6T data rates.
For Communications, Coherent said Q4 saw accelerated growth, up 11% QoQ and 42% YoY. For the year, Communications revenue grew 23%. Management stated that the 100G ZR product family is ramping rapidly, and they expected increasing revenue contribution through FY26 from 100G, 400G and 800G ZR/ZR+ transceivers.
Industrial revenue declined (8%) YoY and (2%) QoQ to $587 million, while revenue for the full-year declined (2%) YoY to $2.37 billion. Coherent said that above-market growth in industrial lasers and services was offset by a decline in silicon carbide, consistent with softer end market demand from autos. Management said that silicon carbide has stabilized and is not expected to be a headwind in FY26.
Margins Expand YoY in FY25
Despite gross margin expanding in Q4, GAAP operating margin shrunk, pressuring GAAP EPS; however, adjusted operating margin met management’s guidance for the quarter. For the full-year, Coherent delivered expansion for gross and operating margins.
- Q4 GAAP gross margin was 35.7%, up 2.8 points YoY and half a point QoQ. Adjusted gross margin was 38.1%, slightly above the midpoint of guidance for 37-39%, up 2.3 points YoY but down 0.4 points QoQ.
- Q4 GAAP operating margin was 0.4%, down 4.4 points YoY and QoQ; as a result of the pending divestment, Coherent recorded $85 million in asset impairment charges, impacting the margin. Adjusted operating margin was 18%, up 2.6 points YoY but down 0.6 points QoQ.
- Q4 GAAP net margin was (6.3%), down 2.6 points YoY and down 7.3 points QoQ. Adjusted net margin was 12.6%, up more than 4 points YoY and nearly 1 point QoQ.
For Q1 FY26, management offered guidance for adjusted gross margin and adjusted operating expenses:
- Adjusted gross margin was guided between 37.5% to 39.5%, up 1.8 points YoY and 0.4 points QoQ at midpoint.
- Adjusted operating expenses were guided between $290-310 million, implying adjusted operating margin at 18.9%, up 2.8 points YoY and 0.9 points QoQ.
For FY25:
- GAAP gross margin expanded 4.3 points YoY to 35.2%, while adjusted operating margin expanded 3.6 points YoY to 37.9%.
- GAAP operating margin increased 3 points YoY to 5.0%, while adjusted operating margin increased 4.7 points YoY to 17.8%.
- GAAP net margin expanded 4.1 points YoY to 0.8%, while adjusted net margin expanded 3.8 points to 11.9%.
EPS Beat in Q4, Guidance In-Line Q1
Coherent reported an 8.7% adjusted EPS beat in Q4, though offered guidance for Q1 in line with consensus estimates.
Q4 adjusted EPS was $1.00, ahead of estimates for $0.92 and representing YoY growth of nearly 64%. For Q1, Coherent guided for $0.93 to $1.13 in adjusted EPS, in line with the $1.03 estimate at midpoint and representing a deceleration to ~39% YoY growth. The deceleration is stemming from minimal expansion in adjusted margins in recent quarters combined with the top-line deceleration.
For FY25, Coherent reported 192% YoY growth to $3.53 in adjusted EPS. FY26 is estimated to see growth moderate to 30% YoY to $4.59, while management noted that the Aero & Defense divestment is expected to be accretive to EPS.
Cash and Balance Sheet
Cash flows moderated and cash flow margins shrunk to the lowest levels in the past six quarters. Coherent also noted that proceeds from the divestment will be used to pay down debt.
- Operating cash flow was $130.3 million in Q4, down approximately (20%) YoY and QoQ. OCF margin was 8.5%, down nearly 4 points YoY and the first single-digit margin in the last five quarters.
- For FY25, operating cash flow rose 16% YoY to $633.6 million, for a 10.9% margin, down 0.7 points YoY due to the softer Q4.
- Free cash flow was ($1 million) in Q4, for a (0.1%) margin, down nearly 5 points YoY. It also was the first quarter with negative FCF since Q2 FY24.
- For FY25, free cash flow was $192.8 million, down (3%) YoY. FCF margin was 3.3%, down nearly 1 point YoY.
- Cash and equivalents were $909.2 million, while debt was $3.69 billion.
- Inventories rose 3.6% QoQ to $1.44 billion.
Earnings Call Q&A:
800G and 1.6T Shipping, yet Data Center reporting declining QoQ growth
As discussed in our previous writeup on Coherent, the company supplies EML Lasers, VSCEL Lasers and CW Lasers for silicon photonics. While 100G per lane for 400G and 800G optical transceivers is what is supporting the growth now, it’s expected that 200G per lane and even 400G per lane for 1.6T optical transceivers is what will drive growth in the coming quarters.
Management offered the following update in terms of 800G ramping now and 1.6T ramping i the coming quarters:
“Okay. On the first part of the discussion, the way — I think the way to think about it is if you start with the 800-gig ramp, the 800-gig is obviously growing this calendar year versus prior. We expect 800-gig to grow again next calendar year, and that's ramping very quickly. And then on top of that, 1.6T, we believe, starts to ramp on top of that 800-gig ramp. We saw initial revenue in the prior quarter. We expect that revenue to grow over the coming quarters.”
In the May investor’s day, the company provided the following timeline for the ramp of the new data rates, showing Coherent has a healthy pipeline over the next few years.
However, despite these updates – the market is nervous that Coherent is not able to compete given data center sequential growth is declining QoQ. There was a pointed question on the call on the unusual QoQ decline Coherent is expecting (lumpiness). Although the answer from the CEO does not directly address the timing issues, the concern is significant enough to quote the exchange in full:
Vivek Arya, BofA:
So the first one, Jim, I realized this is a little bit more short-term oriented. But when I look at your data center and communications segment, sequential growth rate has gone from 9% in March to 5% in June, and I think your September implied is probably at or somewhat below this number, even though you're starting to ramp 1.6T and OCS. So what is the right way to interpret, right, this kind of somewhat slowdown because when I look at the deployment of AI clusters, they seem to be accelerating in the back half and one of your closest peers guided to double-digit sequential growth. So how would you address that pushback and do you think the sequential growth rates can start to reaccelerate at some point?
James Robert Anderson, CEO
Yes. Thanks, Vivek. On a quarter-to-quarter basis, the sequential growth rates can fluctuate quarter-to-quarter based on lumpiness of demand from our customers or supply or capacity related things, so. But I think if you look over the full year of fiscal '25, I'm quite pleased with our growth in data center for full year. We saw over 60% growth and even faster growth in the higher speed data rates. And we believe over that fiscal '25, we gained share over that fiscal '25. We feel good about fiscal '25 results. And as I said, looking forward into the current fiscal year, again, we see very strong demand ahead of us, and a number of different growth vectors, 800-gig, 1.6T. We talked about OCS as well — as well as seeing very strong demand in our DCI segment. So we feel good about the growth ahead of us. And certainly, making sure that we've got all the capacity in place to meet that — those demand signals.
InP Capacity Tripled plus 6-inch production line offers additional capacity
EMLs were traditionally used by telecom customers, yet became attractive for AI servers due to meeting the 200G per second speeds necessary for 1.6T optical modules to support AI models. These are called single mode optics, made of Indium Phosphide, which has been used instead of silicon for long-haul networking due to being a superior choice for optical functions, such as enabling the laser, modulator, photodetector and amplifier.
InP is more expensive at the component level as four EMLs are needed compared to two lower-cost CW lasers for silicon photonics modules, yet this difference at the component level can be made up for in data centers as InP reduces power consumption.
Setting aside the data center segment lumpiness, one reason Coherent may not be down for the count (time will tell) is they have recently tripled their InP capacity and are rolling-out a 6-inch InP production line for yet another significant increase in capacity.
According to Coherent, this will be the world’s first 6-inch wafers for InP. Inevitably, there were questions on the call about how quickly Coherent could produce more EML and CW lasers plus Co-Packaged Optics (CPOs) with this new production line:
“This is a big benefit to us in 2 ways, both capacity, obviously, on a larger wafer size we get a significant increase in capacity. But also, we expect a significant cost structure advantage. And so as we fully ramp that capacity both the ability to just drive higher volume, but lower cost structure is a big advantage for that. So we're really excited about that and looking forward to that ramp.”
Apple Partnership on VSCEL Lasers:
Apple and Coherent have partnered in the past, yet there was a new partnership announced recently for VSCEL lasers to be used in iPhones and iPads. Per the opening remarks:
“As mentioned in a recent Apple announcement regarding their American manufacturing program, we've entered into a new multiyear agreement with Apple for a new generation of VCSEL products that support Apple's iPhone and iPad products. We expect revenue from this expanded partnership with Apple to begin in the second half of calendar '26.”
Analysts are penciling in 2027 as the year where Coherent could see a more meaningful boost in revenue although despite this takeaway, management did repeat impact would be seen H2 CY2026:
“Yes, we feel really good about that expansion. I would describe it as an expansion of the partnership. It's a new generation of VCSELs that go into Apple iPad and iPhones and we do see that as an increase in revenue that will start to have impact to our revenue in the second half of next calendar year, so second half of '26”
Additional Key Points:
There are many moving pieces with Coherent and the following are also notable points from the earnings call:
- Optical circuit switching will increase their TAM by $2 billion. OCS was covered in the past here. Coherent has a more advanced approach to OCS through liquid crystal technology versus the more mechanical MEMS technology that competitors offer.
- Communications revenue is particularly resilient with 11% QoQ growth (outpacing DC when you separate the two). Driving this QoQ growth is DCIs (data center interconnects). Although recognized outside of the data center segment as part of telecom, the demand is driven by AI as the long-distance data transmissions were traditionally used for telecom purposes, yet and can range up to hundreds of kilometers and are now seeing demand for data center buildouts.
- USA footprint: Coherent has 20 U.S. manufacturing locations in 13 states, an advantage should trade wars heat up.
Conclusion:
Coherent is in all the right place, but they are certainly not alone. The market and BofA analyst are correct to question why Coherent’s data center growth is declining QoQ especially given their competitor Lumentum had a solid earnings report. Lumentum saw 16% QoQ growth in Cloud & Networking in its Q4 and guided for ~10% QoQ in Q1.
Ultimately, we had trimmed Coherent quite a bit prior to the report simply because we felt Credo and Astera Lab deserved higher allocations. After the report, I feel the same – which is that Coherent has some work to do to not only secure a spot in our portfolio but to compete with the strong AI networking stocks we already own.
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Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.
Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund do not own shares in COHR at the time of writing and may own stocks pictured in the charts.
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