Coherent is not nearly as flashy as Lumentum when it comes to revenue growth or even data center growth, yet the company is sitting in a prime position moving through 2026 as the industry navigates extremely tight indium phosphide (InP) capacity coupled with elevated demand for InP-based EML lasers. This is because Coherent is preparing to double indium-phosphide capacity via a multi-faceted expansion plan with multiple facilities ramping output in unison, while shifting to a larger wafer size that can deliver 4X output per wafer at half the cost.
This dynamic is expected to help drive a reacceleration in Coherent’s data center segment to 10% QoQ growth next quarter, a notable uplift from 4% this quarter, along with margin expansion driving solid adjusted EPS leverage. Management also stated they expect “strong sequential growth through the balance of this fiscal year given very strong demand and improving supply.”
On the product side, Coherent sees strong demand for both its 800G and 1.6T transceivers, with 1.6T expected to drive a significant portion of the guided sequential growth. This first wave of 1.6T growth is expected to be split between both EML-based and CW laser-based silicon photonics transceivers, with Coherent able to benefit from both as it can quickly shift capacity for whichever customers prefer.
For Coherent’s AI-related revenue exposure, Datacenter and Communications account for ~69% of total revenue. This also includes some contribution from telecom so is not an exact figure yet provides a rough idea as to Coherent’s AI exposure.
InP Capacity to Double, Data Center to Accelerate to 10% QoQ in Q2
Coherent has many products that participate in the AI-driven datacom transceiver and optical interconnects market. Primarily, the growth story centers around supplying pluggable optical transceivers (400G, 800G, 1.6T) including EML lasers, VSCEL lasers and CW lasers, and emerging co-packaged optics technologies for next-generation switches and interconnects. Right now, the primary focus centers on EML supply and indium phosphide capacity, given Coherent, Lumentum and others have pointed out how imbalanced supply is relative to exceptionally strong demand.
Electro-absorption modulated lasers (EMLs) have quickly become attractive for AI servers as these components help enable 100G and 200G per lane transmissions, thus enabling 800G and 1.6T data rates for optical transceivers. EMLs also leverage indium phosphide (InP) over silicon as InP reduces power consumption, although it is more expensive at the component level as four EMLs are needed compared to two lower-cost CW lasers for silicon photonics modules.
Coherent’s data center segment growth was “constrained by the supply of indium phosphide lasers” and specifically EMLs in Q1, with Coherent reporting just 4% QoQ and 23% YoY growth in the segment. This was a slight uptick from 3% QoQ in Q4, where management cautioned that “sequential growth rates can fluctuate quarter-to-quarter based on lumpiness of demand from our customers or supply or capacity related things.”
Notably, Coherent is guiding for the data center segment to grow ~10% QoQ in fiscal Q2, “followed by strong sequential growth through the balance of this fiscal year given very strong demand and improving supply.” Q2’s sequential growth guide also includes some unmet backlog that rolled over from Q1 due to InP constraints.
6-inch InP Wafers to Produce 4X more than 3-inch InP Wafers
Expectations for significant sequential improvements in internal and external supply through 2026 are the primary factors driving this strong QoQ growth outlook over the next few quarters, helping Coherent potentially absorb higher levels of EML demand. Much of the improvement in internal supply is tied to the company’s InP capacity expansion plans and shift to 6-inch wafers (the world’s first 6-inch fabs), aiming to double InP capacity again after recently tripling it:
“We are aggressively ramping 6-inch capacity because a 6-inch wafer compared to a 3-inch wafer will produce more than 4x as many chips at less than half the cost. This will provide increasing benefit to our gross margin as we continue to ramp production.”
Q2 is also the first full quarter of production on the 6-inch wafer, after production initially started mid-quarter in Q1.
While the ability to produce 4x more chips at less than half the cost is certainly impressive in itself, 6-inch wafer yields are more important: “Our initial 6-inch indium phosphide production yields are actually higher than our current 3-inch indium phosphide yields.”
The major takeaway here is not only that 6-inch wafer yields are better than 3-inch, but that these are the initial yields versus the ‘very mature’ 3-inch lines, suggesting that there is room for further improvement as production continues to ramp over the next four quarters and as 6-inch matures. As such, Coherent will likely be exceeding linear capacity growth over the next few quarters as 6-inch ramps and then matures. The cost advantages from 6-inch are also expected to drive more meaningful gross margin benefits in calendar 2026 and in each sequential quarter, though current margin tailwinds are minimal.
Management also offered a bit more of a long-term picture on capacity in response to a question about milestones to track this doubling of InP capacity over the next 12 months. CEO Jim Anderson explained that some of Coherent’s largest customers are now showing forecasts through 2028, and “given that demand signal that we're seeing, not just for next calendar year, but now for '27 and '28, our plan is to continue to ramp indium phosphide capacity beyond the next 12 months as well. And certainly, we'll share more thoughts on the rate and pace of that ramp over the next 12 months.”
Coherent Expanding InP Capacity, Targeting 2X Growth in One Year
As mentioned briefly above, Coherent is aiming to double its InP capacity in roughly one year in order to meet higher levels of demand. This capacity growth is coming from a simultaneous capacity ramp in both Texas and Sweden, supported by strong initial yields:
“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 … With the ramp of 6-inch production at 2 sites in parallel, we expect to roughly double our total internal production capacity of indium phosphide over the next year.” Importantly, this ramp covers the three key transceiver components, EMLs, CW lasers and photodiodes. Management said they will share progress updates on the ramp as they occur, but added that “beyond the next 12 months, we expect to continue to expand capacity,” hinting that capacity could more than double by calendar 2027.
Not only is Coherent’s InP capacity doubling, but external capacity is expected increase sequentially as well: “We expect our external supply of EMLs to increase sequentially this quarter and next calendar year through continued partnership with our key external suppliers.”
This quick capacity expansion is critical in helping close the supply-demand imbalance, which theoretically will translate into an ability to capture more revenue and drive faster growth the smaller the gap becomes.
More on 1.6T Transceivers and the EML vs CW Ramp Question
As we have discussed previously, 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 co-packaged optics technologies for next-generation switches and interconnects. 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.
Coherent’s ability to now get 4X more chips per wafer while supplementing this with external supply can directly drive 800G/1.6T transceiver output much higher over the course of the fiscal year, as InP capacity is fully consumed internally for transceivers. More importantly, Coherent is early compared to some of its competitors – management pointed out that at OFC earlier this year, they were the “only company to demonstrate 3 different types of 1.6T transceivers based on 3 different types of laser sources; silicon photonics, EML and VCSEL.”
Additionally, Coherent is already ramping its first EML and silicon photonics-based 1.6T transceivers, noting that a “significant portion of the sequential growth we expect in the current quarter is driven by 1.6T adoption.” This compares to Lumentum, who stated that they “have expectation to be shipping 1.6T transceivers sometime middle-ish of next year, and those will be at the early part of the customer ramp as well.” This gives Coherent a few quarters to ramp output and secure market share before Lumentum brings its products to market.
Management provided ample discussion around 800G and 1.6T demand, summarized below:
- 800G demand remains very strong with strong orders, and significant YoY growth is expected in calendar 2026.
- 1.6T adoption is accelerating, with Coherent engaged with multiple customers with multiple ramping in parallel, with strong orders. Management also expects significant 1.6T growth in calendar 2026.
As mentioned above, the first wave of growth for 1.6T transceivers will be a mix of both silicon photonics (which uses CW lasers) and EML-based, with 200G VSCEL-based 1.6T transceivers ramping much later in 2026. Similar to Lumentum, Coherent expects to be well positioned for whichever way this mix shifts and expects to benefit regardless of whether customers prefer CW laser-based or EML-based transceivers:
“From our perspective, there's no significant profitability trade-off between those two. Really, what drives our production mix of EML versus CW is purely the demand from our customers, right? So if it's more silicon photonics-based transceivers, then we'll allocate more capacity to CW lasers. If it's more EML, we'll allocate it to EML. And I think in general, we can make those choices certainly 6 months ahead of time. We can even make those choices even 4 months ahead of time. So I would say somewhere to the kind of 4 to 6 months ahead of time, we have to do the capacity planning between EML and CW.”
Although management has not outright confirmed this, it’s likely that the strength of demand means there will be more than enough content for Coherent (and Lumentum) to participate.
Bookings Support Strong Ramp
The strong demand and ramp signals for 1.6T transceivers are further supported by Coherent’s bookings, and while an exact bookings figure was not disclosed, commentary suggests bookings have moved substantially higher.
Management explained that they “received direct bookings that represent a step function increase in already strong customer demand,” with record bookings for transceivers (primarily driven by 800G and 1.6T), as well as for DCI and telecom products. InP capacity growth allows more of this backlog to be converted to revenue over the coming quarters, which could translate to Datacenter revenue growth remaining stronger for longer.
Management also explained that this includes both typical bookings for near-term supply, as well as orders more than a year in advance, as customers are already looking to lock in supply for 2027 due to strong demand forecasts they are seeing. Some of Coherent’s large customers are providing strong forecast visibility into 2028, giving management the confidence in ramping capacity to meet multi-year demand growth.
Initial Co-packaged Deployments on Deck for 2026
In Q1, Coherent began sampling its 400mW CW lasers for co-packaged optics (CPO) and silicon photonics applications, with the lasers expected to address “a broad range of CPO form factors for both scale-out and scale-up data center applications with this new product.”
Co-packaged optics (CPO) are not contributing to revenue now yet could materialize into a strong opportunity for Coherent as Nvidia begins to roll out its Spectrum-X photonics networking switches in 2026.
Coherent expects initial CPO deployments in calendar 2026, though volume production and availability of the 400mW CW lasers is expected to start in Q3, meaning the ramp may be more geared towards 2027. Additionally, surging InP capacity growth with improved yields at 6-inch wafers also suggests that Coherent could be rather quick to ramp CPO when the time comes, as supply allocation allows. Outside of this, discussion on CPO was rather limited.
Other Product Opportunities
Coherent also has a handful of other upcoming product opportunities outside of EMLs, 1.6T transceivers and CPO:
- Optical Circuit Switching (OCS) – Coherent maintains that they have a more advanced approach/advantage to OCS through liquid crystal technology versus the more mechanical MEMS technology that competitors offer, with OCS adding a >$2 billion addressable market over the next few years. Coherent said its revenue and backlog for OCS grew sequentially in Q1 and is expected to grow again in Q2, with the company shipping systems to seven customers.
- Linear Receive Optics (LRO) and Linear Pluggable Optics (LPO): Coherent says LPO has potential to offer lower power consumption, lower cost and lower latency versus traditional retimed optics, while LRO are optimized for low power consumption in distances up to 500 meters, such as for network switch interconnects. Coherent says it has shipped both LPO and LRO 800G and 1.6T transceivers to customers.
- Thermodyne – Coherent believes its experience in advanced materials for thermal management could help address thermal issues and cooling needs of future AI data centers as GPU racks get more powerful. Coherent said that its Thermodyne material “moves heat twice as effectively as copper which is a tremendous advantage in data center cooling applications,” and while it is engaged with hyperscalers on the tech, it’s too early in its emergence to project how this will pan out.
- Data Center Interconnect (DCI) – Although recognized as part of telecom (under Communications), demand is driven by AI, as the long-distance data transmissions can range up to hundreds of kilometers, crucial for current data center buildouts. Coherent has seen five sequential quarters of growth for DCI along with strong orders in Q1.
Streamlining Portfolio, Paying Down Debt
Coherent has made steps recently to streamline its portfolio, notably with the $400 million sale of its Aerospace and Defense unit in early September. The sale was immediately accretive to gross margin and EPS, per management, with proceeds going to pay down debt.
In Q1, Coherent also announced the sale of its materials processing product division based in Germany, which has averaged revenue of ~$25 million (1.6% of revenue) in recent quarters with gross margins well below corporate average. Coherent also expects to use proceeds to pay down debt, and once again the transaction is expected to be immediately accretive to gross margins and EPS upon closing, slated for fiscal Q3.
Relating to its physical manufacturing footprint, Coherent has sold or exited 23 different sites and plans to “continue to streamline our footprint and exit additional underutilized or unnecessary sites over the coming quarters.” This will consolidate operations to its key plants and likely also create small margin tailwinds.
As a result, Coherent has made substantial progress on its debt leverage ratio, paying down $400 million in debt in Q1. On that note, Coherent’s debt has declined approximately $1 billion over the last two years, from $4.29 billion in Q1 FY24 to $3.31 billion this quarter – a nearly 23% reduction.
Coherent’s debt leverage ratio has now improved to 1.7x, down from 2x in the prior quarter and 2.4x a year ago. This is notably now below the company’s <2x target, implying that as further sales are recorded and used to pay down debt (such as the materials processing unit), debt leverage ratio will continue to improve. This is key to Coherent’s turnaround story as the company can better withstand potential cyclical whipsaws with a less-stressed balance sheet.
Financials
Revenue Growth to Inflect in Late FY26
Coherent delivered 17.3% YoY and 3.4% QoQ revenue growth in fiscal Q1 to $1.58 billion, beating estimates by nearly 3%. On a pro-forma basis excluding the $33 million in Q1 revenue from the now-divested Aerospace & Defense unit, revenue growth was 19% YoY and 6% QoQ.
For Q2, Coherent guided for revenue between $1.56 billion to $1.70 billion, which on the headline figure would be decelerating to 13.6% YoY and 3.2% QoQ at midpoint, before reaccelerating to 15.9% by Q4.
However, our internal pro-forma estimate shows a better trajectory for revenue through fiscal 2026 – pro-forma growth may decelerate slightly to the 17.4% YoY and ~5.7% QoQ in Q2, before reaccelerating to nearly 21% by Q4, the highest growth rate in the past five quarters.
For fiscal 2026 ending in June 2026, Coherent is expected to report 14.8% headline growth to $6.67 billion in revenue, though pro-forma growth would be higher at ~18.6% YoY based on our internal calculations. Fiscal 2027 is currently expected to see a slight deceleration to 14.1% growth to $7.61 billion.
AI Revenue
Coherent’s Datacenter and Communications revenue rose 26.2% YoY and 7% QoQ to $1.09 billion, accounting for ~69% of revenue. Growth has decelerated rather steadily since Q1 FY2025’s 68% YoY print.
- Datacenter revenue rose 4% QoQ and 23% YoY. As mentioned previously, Datacenter growth was constrained by InP laser supply, with management expecting QoQ growth to accelerate to 10% in Q2 and remain strong through the end of the fiscal year
- Communications revenue, which includes telecom and data center interconnect (DCI) rose 11% QoQ and 55% YoY, driven primarily by DCI products. Management said they witnessed strong growth in demand for ZR/ZR+ DCI products, with 100G, 400G and 800G products expected to continue ramping through fiscal 2026.
Adjusted Gross Margin Shows Improvement Towards 42% Goal
Coherent made solid progress on the margin front and expects gross margins to strengthen towards 42% with the ramp of its 6-inch InP wafers and higher margin 1.6T transceivers, and continued cost cutting measures. While it may take multiple quarters to progress solidly above 40% for gross margin, margin improvement down the line is expected to drive strong EPS leverage through 2026 with adjusted EPS growth expected to outpace revenue growth by 2X to 3X.
GAAP gross margin was 36.6%, expanding 2.5 points YoY and 0.9 points sequentially. Adjusted gross margin came in at 38.7%, above the midpoint of guidance for 37.5-39.5%, expanding two points YoY and 0.6 points sequentially. Management said the gross margin expansion was driven by “cost reductions and product input costs as well as yield improvements,” while pricing optimization was also a meaningful contributor.
GAAP operating margin was 16.4%, up nearly 11 points YoY and 16 points QoQ, though this was impacted by a $115 million gain from the Aerospace divestment. Adjusted operating margin was 19.5%, up 3.4 points YoY and 1.5 points QoQ.
GAAP net margin was 14.3%, up 12.4 points YoY and more than 21 points QoQ; adjusted net margin was 14%, up 3.8 points YoY and 1.4 points QoQ.
Adjusted EPS Up 73% YoY and 16% QoQ
Fueled by margin improvements, Coherent reported a solid adjusted earnings beat in Q1, with adjusted EPS rising 73% YoY and 16% QoQ to $1.16, beating estimates by 11.3%.
For Q2, Coherent guided for adjusted EPS between $1.10 to $1.30, decelerating sharply to 26.3% YoY at the $1.20 midpoint, and only showing a small sequential improvement. As noted above, while it may take a few quarters for gross margins to progress solidly above 40%, steady margin improvement down the line (3-4 points YoY and ~1.5 points QoQ for adjusted operating margin and net margin) is expected to drive solid EPS leverage through 2026.
For example, adjusted EPS growth is expected to reaccelerate to the low-40% range in both Q3 and Q4, and moving through the first half of fiscal 2027 (Dec 2026 quarter) adjusted EPS growth is expected to range between 28% to 32%, or 2X to 3X estimated revenue growth of 13% to 17% over the next five quarters.
Coherent has not provided a guide for the full year, but current consensus estimates point to fiscal 2026 adjusted EPS of $5.05, up 43% YoY. Fiscal 2027 is currently expected to see growth decelerate to 25.5% to $6.34.
GAAP earnings have been lumpy as Coherent reorganizes its business and sells off assets – Q1 saw GAAP EPS of $1.18, impacted by the Aerospace sale, though Q4 recorded a GAAP loss of ($0.83) impacted by impairment charges on assets held for sale. GAAP EPS is expected to remain positive in fiscal 2026 at $0.69 in Q2, $0.81 in Q3 and $0.92 in Q4 for annual GAAP EPS of $3.62, up from $(0.52) last year.
Operating Cash Flow Shrinks, Free Cash Flow Negative in Q1
Coherent’s balance sheet is beginning to improve, with the company using proceeds from the divestment to pay down debt, though debt to cash remains upside down. Cash flows were also thin with OCF margin down nearly 10 points YoY, and FCF widened deeper into negative territory due to capex for the upcoming capacity expansion.
- Operating cash flow was $46 million in Q1, down from $130.3 million in Q4 and the first time falling below $100 million in the past seven quarters. OCF margin was 2.9%, down from 11.4% a year ago and 8.5% in the prior quarter.
- Free cash flow was ($57.9 million), widening from ($1 million) in Q4 and a stark contrast to $61 million in the year ago quarter, driven by capex of $103.9 million. FCF margin was (3.7%), widening from (0.1%) in the prior quarter and down from 4.5% a year ago.
- Cash and equivalent totaled $852.8 million, while debt was $3.31 billion, down from $3.69 billion in the prior quarter. Additionally, Coherent refinanced its debt at the end of Q1, reducing interest rate by 60bp, cutting down its quarterly interest expenses, which were ~$58.7 million in Q1.
Valuation
Coherent’s valuation is quite elevated on the topline, with the company trading at a peak 4X forward sales multiple, double its historical 5-year average of 2X. This is also a ~33% premium to the peak 3X multiple that Coherent found resistance at in late 2024 and early 2025.
On the bottom line, however, Coherent trades at a more reasonable 33x forward PE based on its adjusted EPS estimate of $5.05. While this does represent a ~30% premium to its 5-year average of 25.7x, it is around the midpoint of its recent range of 24.5x to 45x.
Conclusion
Coherent is positioning itself to capitalize on the growing imbalance of EML supply and demand, with the company aiming to double its InP capacity over the next year with a shift to 6-inch wafers which can deliver 4X more output per wafer at half the cost. Coherent will likely be exceeding linear capacity growth over the next few quarters as 6-inch ramps and then matures, further supporting the QoQ reacceleration management projects.
Although the company’s Datacenter segment growth was soft in fiscal Q1 with growth of just 4% QoQ, Coherent expects to drive a reacceleration to 10% QoQ in Q2, driven by this supply growth and strength in 1.6T transceiver, followed by strong sequential growth thereafter. The ultimate pace of this sequential growth over the next few quarters will be important to track given the converging supply growth tailwinds and increasing demand for 800G and 1.6T products ahead of CPO and other contributions later in 2026.
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 Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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