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Investing.com -- S&P Global Ratings revised its outlook on Coherent (NYSE:COHR) Corp. to stable from negative, while affirming the company’s ’BB-’ issuer credit rating.
The ratings agency cited strong end-customer demand for Coherent’s datacom transceivers, which has offset weakness in the telecom and industrial segments. This demand has helped the company increase revenue by more than 20% year-over-year as of the third quarter of fiscal year 2025, which ended in June.
Coherent has also focused on debt reduction, paying down more than $200 million over the past three fiscal quarters. The combination of strong growth, debt reduction, and expanded EBITDA margins due to improved operational efficiency is expected to reduce the company’s leverage to the high-4x area in fiscal year 2025.
S&P forecasts Coherent will increase its top-line revenue by 5% to 8% year-over-year in fiscal year 2026, with continued EBITDA margin expansion as the company focuses on operational efficiency. These factors are expected to further reduce leverage to the low-4x area in fiscal year 2026.
The ratings agency noted that approximately 2x of Coherent’s adjusted leverage is related to the $2.15 billion Bain Capital preferred equity investment, which S&P treats as debt because Bain can put the instrument to the company in 2031.
Coherent’s datacom transceivers are important components in AI servers, helping interconnect switches, GPU servers, and storage infrastructure. Despite competition from companies like Ciena (NYSE:CIEN) and Lumentum, S&P expects Coherent to benefit from continued investment in AI solutions by hyperscalers.
The company has taken steps to mitigate potential tariff impacts by moving most of its U.S. transceiver manufacturing from China to Malaysia. Additional profitability improvements are expected from shutting down a portion of its silicon carbide business that wasn’t generating revenue, increasing prices on some datacom solutions, reducing headcount, and tightening operating expenses.
S&P expects Coherent to generate more than $200 million of free operating cash flow in fiscal year 2025, increasing to over $400 million in fiscal year 2026, which could be used for further debt reduction.
The stable outlook reflects S&P’s expectation that Coherent will maintain leverage below 5x and generate positive free operating cash flow despite macroeconomic challenges and potential tariff headwinds.
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