Earnings call transcript: Coherent Inc Q3 2025 beats EPS expectations, stock rises

Coherent Inc. reported robust financial results for Q3 2025, with earnings per share (EPS) of $0.91, surpassing the forecasted $0.855. This marks a significant year-over-year growth, with EPS increasing 2.4 times compared to the previous year. The strong performance was reflected in the stock market, as Coherent’s shares rose 0.78% in aftermarket trading, closing at $70.16. According to InvestingPro data, the company’s current price suggests it is trading slightly above its Fair Value, with analysts setting price targets ranging from $47 to $125.

Key Takeaways

• Coherent’s Q3 revenue reached a record $1.5 billion, up 24% year-over-year.
• The company successfully reduced its debt by $136 million, enhancing financial stability.
• Coherent introduced innovative products, including 1.6T transceivers, signaling future growth potential.

Company Performance

Coherent Inc. demonstrated substantial growth in Q3 2025, with a 24% increase in revenue compared to the same period last year. The company’s strategic focus on high-ROI projects and innovative product development has positioned it well in the competitive photonics market. InvestingPro analysis shows the company maintains strong financial health with a current ratio of 2.67, indicating robust liquidity. Despite macroeconomic challenges affecting industrial markets, Coherent’s diversified portfolio and strong demand in the AI data center and telecom sectors have driven its performance, contributing to a notable revenue growth of 14.61% over the last twelve months.

Financial Highlights

• Revenue: $1.5 billion, up 24% year-over-year
• Earnings per share: $0.91, up 2.4 times year-over-year
• Non-GAAP gross margin: 38.5%, up 30 basis points sequentially

Earnings vs. Forecast

Coherent exceeded EPS expectations with a reported $0.91 against a forecast of $0.855, a 6.43% beat. This strong performance continues the company’s trend of outperforming market expectations, driven by strategic initiatives and product innovations.

Market Reaction

Following the earnings announcement, Coherent’s stock rose by 0.78% in aftermarket trading, reflecting investor confidence in the company’s growth trajectory. The stock remains below its 52-week high of $113.60, suggesting room for further appreciation as market conditions improve. With a beta of 1.91, investors should note the stock’s higher volatility compared to the market. InvestingPro subscribers have access to 12 additional exclusive ProTips and comprehensive analysis tools to better understand Coherent’s market positioning and growth potential.

Outlook & Guidance

Looking ahead, Coherent provided Q4 revenue guidance between $1,425 million and $1,575 million, with a non-GAAP gross margin expected to range from 37% to 39%. The company anticipates revenue from its 1.6T transceivers to commence within the current calendar year, highlighting ongoing innovation and market expansion. InvestingPro data indicates analysts expect the company to be profitable this year, with an EPS forecast of $3.56 for FY2025, supporting the positive outlook.

Executive Commentary

CEO Jim Anderson emphasized the company’s commitment to growth, stating, "We continue to expect fiscal twenty twenty-five to be a strong growth year for the company." He also highlighted Coherent’s focus on gaining market share, not just matching market growth.

Risks and Challenges

• The discontinuation of the silicon carbide business may impact short-term revenues.
• Restructuring costs of $74 million could affect profitability.
• Macroeconomic uncertainty poses risks to industrial market demand.

Q&A

During the earnings call, analysts inquired about the strong demand for 800G transceivers and potential inventory issues. Coherent confirmed robust demand with no significant inventory concerns, reinforcing confidence in its market positioning.

Full transcript - Coherent Inc (COHR) Q3 2025:

Conference Operator: Greetings, and welcome to the Coherent Fiscal Year twenty twenty five Third Quarter Earnings Webcast. At this time, all participants are in listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Silverstein, Senior Vice President of Investor Relations for Coherent.

Please go ahead.

Paul Silverstein, Senior Vice President of Investor Relations, Coherent: Thank you, operator, and good afternoon, everyone. With me today are Jimmy Anderson, Coherent’s CEO and Sherry Luther, Coherent’s CFO. During today’s call, we will provide a financial and business review of the third quarter of fiscal twenty twenty five and the business outlook for the fourth quarter of fiscal twenty twenty five. 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 are 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 eight 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 fourth quarter of fiscal twenty twenty five. 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 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 coherence.com. Let me now turn the call over to our CEO, Jim Anderson.

Jim Anderson, CEO, Coherent: Thank you, Paul, and thank you, everyone, for joining today’s call. I’d like to start by thanking my Coherent teammates for another quarter of strong execution and the continued focus on accelerating our pace of innovation as we introduced a number of outstanding new products over the past quarter that will help drive long term growth for the company. Our fiscal third quarter revenue increased by approximately 4% sequentially and 24% year over year to a record $1,500,000,000 This was primarily driven by ongoing strong AI data center related revenue growth and a third quarter of growth in our telecom revenue. We also continued to make solid progress towards achieving our gross margin target of operating above 40% on a non GAAP basis. In fiscal Q3, our non GAAP gross margin improved on both a sequential and year over year basis to 38.5%.

Our revenue growth and gross margin expansion drove a 2.4x increase year over year in our non GAAP EPS. While I’m pleased with the progress to date, we have much more work and opportunity ahead of us. I’d now like to share some updates on our products and markets. Starting with our data center and communications end market, Q3 revenue increased by 9% sequentially and by 46% year over year with growth in both our AI data center and telecom end markets. In the data center market, we achieved record Q3 revenue, which grew 11% sequentially and 54% year over year due to ongoing strong AI data center demand.

We have the broadest and deepest portfolio of photonic technologies required for high speed optical data transmission. Our customers value both the breadth and depth of our technology portfolio, as well as our supply chain flexibility and resiliency, especially in the current environment. At the Optical Fiber Communications Conference in March, we introduced many new optical networking products and technologies. For example, six of our products received awards reflecting innovations at the component, module, and system level. At OFC, we showcased three different 1.6 D transceiver designs based on three different types of lasers, designed based on our EML technology, a design based on our new 200 gig per lane VCSEL technology, and a third design based on our silicon photonics technology.

The three different 1.16 demonstrations illustrate the wide breadth of technology options that we bring customers as we partner with them over multiple generations of data rate and architectural transitions. We continue to expect 1.6T to begin ramping during this calendar year. We are making good progress with our lead customers and we continue to execute well through the typical stages of engineering milestones and customer qualifications. We are also pleased to see continued expansion of our 1.6 customer engagements. While we approach the 1.6 ramp, our engineering team is also focused on the development of our portfolio of 3.2T transceiver products and technologies, which will support a range of optical data transmission form factors.

For example, at OFC, we reached a key technical milestone for the industry when we demonstrated our 400 gig per lane differential EML, which is the foundation of 3.2T transceivers and paves the path for future industry adoption of 3.2T transceivers. We also expect to see adoption of our 400 gig EMLs in 1.6T transceivers, where they can provide meaningful benefit to our customers. We also showcased a wide range of co packaged optical solutions over the past quarter. We announced our collaboration with NVIDIA on co packaged optics and networking switches for AI infrastructure. And at OFC, we showcased a comprehensive portfolio of optical networking components for CPO applications in both scale out and scale up domain.

Indium phosphide is the key technology behind our internally produced EML and CW lasers, with the latter being used in our silicon photonics and CPO solutions. We have had in house indium phosphide capability for over twenty years. Indium phosphide based EML transceivers already account for the majority of our data center transceiver revenue, and a majority of our EML based transceivers utilize our internally manufactured lasers. To meet rising demand for optical networking solutions that use either EML or CW lasers, we continue to expand our indium phosphide capacity. In Q3, we once again expanded our capacity both sequentially and year over year, with year over year capacity growing by over 3x.

We remain on track to introduce our six inches indium phosphide platform, which will provide significant advantages in terms of both lower cost and higher volume production. We expect to begin ramping six inches volume production next quarter. We also continue to make good progress with our new data center optical circuit switch, or OCS platform, which drives The underlying technology in our OCS switch is based on field proven digital liquid crystal technology that has been deployed for many years in demanding telecom applications. Our technology has tremendous benefits versus the mechanical MEMS based solutions offered by others, and our customer engagement and enthusiasm around our OCS platform continues to grow. As I noted last quarter, we’ve already received our first customer order for this key new differentiated platform, and we continue to expect initial OCS revenue in calendar twenty twenty five.

In telecom, our Q3 revenue increased 2% sequentially and 21% year over year. Q3 was the third consecutive quarter of sequential growth. Revenue growth in Q3 was driven primarily by data center interconnect, along with further improvement in traditional transport market. We saw continued growth in the ramp of our new products, including our 100 gig, 400 gig and 800 gig ZRZR Plus coherent transceivers and expect these products to continue to ramp over the coming quarters. We also continue to expand our product portfolio and announce new products at OFC to address increasing demand for high efficient and scalable metro, regional and DCI applications.

We expect this to continue to be a key growth area for us over the long term. In our remaining markets, which are primarily industrial related applications, aggregate revenue was relatively stable with a decrease of 2% sequentially and an increase of 1% year over year. In Q3, we saw a healthy year over year growth in the semi cap equipment and display capital equipment end markets that was offset by soft demand in broad based industrial end markets such as precision manufacturing. Growth in our semi cap equipment revenue was driven by increased demand for advanced packaging tools where our lasers, optics and advanced materials are being increasingly adopted. In our display capital equipment market, year over year growth was driven by ongoing demand for our differentiated excimer laser annealing systems, which support both Gen six OLED fab expansions and new Gen eight fabs as OLED screen adoption continues to grow.

We expect the total surface area of OLED screen production to double over the coming years as OLED screens are adopted across a broader range of devices. In support to the OLED expansion, we continue to ramp shipments of our laser systems for new Gen eight OLED fabs. Shifting now to our investment strategy, I’d like to provide an update on our strategic portfolio optimization. We continue to drive a series of actions stemming from the portfolio assessment that we completed last year with several parallel initiatives in motion. One area of focus to optimize our portfolio is to exit or divest non core product lines.

For example, during the March, we shut down development of silicon carbide devices and modules and eliminated the related headcount and operational expenses. We have refocused our silicon carbide business on substrate and epi production, where we have differentiated technology and healthy customer demand. We also discontinued several other unprofitable product lines. Another area of focus is to continue to streamline our asset base and divest underutilized assets. For example, we recently announced our intent to sell our underutilized production facility in Champaign, Illinois.

We are also pursuing several other asset optimization actions. As we reduce investment in non core product lines and streamline our asset base, we continue to concentrate and grow investment in our core growth and profit engines to accelerate shareholder value creation for the long term. We will provide additional details and examples regarding our strategic portfolio realignment at our upcoming Investor Day. Regarding the current tariff policy environment, the impact of tariffs to our business in the current quarter is not expected to be significant. One of our strengths, which is valued by our customers, is supply chain resiliency and flexibility.

We have a global manufacturing footprint that spans roughly 60 different locations across 14 countries, with roughly half of our manufacturing sites located in The U. S. Our geographically diverse supply chain, combined with the internal production, many of our most critical technology in feeds, provides adaptability and optionality that benefits our customers. To the extent there are changes in the landscape, we will adapt as necessary to support our customers. In summary, I’m pleased with the additional progress we made in our fiscal third quarter and especially proud of the large number of new products and technologies that we introduced.

With a high level of uncertainty in the current macroeconomic environment, we’re taking a more cautious near term view of our end market demand. However, we continue to expect fiscal twenty twenty five to be a strong growth year for the company, and we believe we are well positioned for continued long term growth. I look forward to sharing more details about our long term plans for the company at our upcoming Investor Day. I’ll now turn the call over to our CFO, Sherry Luther.

Sherry Luther, CFO, Coherent: Thank you, Jim. In the third quarter, we drove continued sequential improvement in our financial results with strong revenue growth and gross margin expansion driving strong profitability. In addition, we strengthened the balance sheet by paying down $136,000,000 in debt. Third quarter revenue was a record $1,500,000,000 an increase of approximately 4% sequentially and 24% year over year. From a segment perspective, networking revenue increased 10% sequentially and 45% year over year, driven by strong AI data center demand.

Lasers segment revenue decreased 3% sequentially and increased 4% year over year. The year over year growth was driven primarily by demand for our excimer annealing lasers in our display capital equipment business, as well as higher demand in semi cap equipment. Materials segment revenue decreased 3% sequentially and decreased 1% year over year. Both the sequential and year over year declines were due to softness in the consumer electronics end market. Our third quarter non GAAP gross margin was 38.5%, an increase of 30 basis points compared to the prior quarter and an increase of four ninety basis points compared to the year ago quarter.

The sequential and year over year improvements in non GAAP gross margin were driven by higher revenue volume as well as benefits from our gross margin expansion strategy where we saw improvements in both pricing optimization as well as cost reductions, offset somewhat by unfavorable mix. Cost reductions included lower manufacturing costs as well as yield improvements. Third quarter non GAAP operating expenses were $297,000,000 compared to $283,000,000 in the prior quarter and $254,000,000 in the year ago quarter. The R and D increases were primarily driven by increased investments in our product portfolio. The SG and A increases include debt repricing fees incurred in Q3 to reduce the interest rate on our term loan B by 50 basis points.

As a result of our strategic portfolio optimization, the company incurred restructuring cost of $74,000,000 on a GAAP basis in Q3 related to a number of restructuring actions, including the elimination of certain nonstrategic product lines, site closures and consolidations, workforce reductions, contract terminations, and other associated cost reductions, as well as initiatives to drive greater efficiency and lower costs. From an R and D perspective, we continue to focus on investing our R and D in those projects with the highest ROI, while driving efficiency and greater leverage in SG and A. Our third quarter non GAAP operating margin was 18.6% compared to 18.5% in the prior quarter and 12.6% in the year ago quarter. Third quarter non GAAP tax rate was 25% compared to 17.4% in the prior quarter due to the restructuring charges that I mentioned, which were primarily in higher tax rate jurisdictions. Third quarter non GAAP earnings per diluted share was $0.91 compared to $0.95 in the prior quarter and $0.38 in the year ago quarter.

We paid down $136,000,000 in debt during the quarter using cash from operations. This brings our fiscal year to date total debt payments to $386,000,000 reducing our debt leverage to 2.1 times as defined in the credit agreement. I will now turn to our guidance for the fourth quarter of fiscal twenty twenty five. We expect revenue to be between $1,425,000,000 and $1,575,000,000 We expect non GAAP gross margin to be between 3739%. We expect total operating expenses of between $290,000,000 and $310,000,000 on a non GAAP basis.

We expect the tax rate for the quarter to be between 2124% on a non GAAP basis. We expect EPS of between $0.81 and $1.01 on a non GAAP basis. Our guidance comprehends the impact of tariffs based on the current policy environment. The current impact is not expected to be significant. In summary, I am very pleased with the progress we have made in Q3.

We will continue to focus on improving profitability through gross margin expansion as well as operational efficiency. It’s important that we make investments for the long term growth of the company while driving operating leverage and efficiency. Cash and capital allocation will continue to be key focused areas to further strengthen and deleverage our balance sheet. As a reminder, we will host an Investor Day in New York on May 28 at the New York Stock Exchange. At that event, we will outline our overall strategy, including our end market growth opportunities, product and technology roadmap, and long term financial model.

That concludes my formal comments. Operator, please open the call for Q and A.

Conference Operator: Thank you. We will now be conducting a question and answer session. The first question we have comes from Samik Chatterjee of JPMorgan. Congrats

Samik Chatterjee, Analyst, JPMorgan: on the robust results. Maybe, Jim, if I can start you off on the in your prepared remarks, you had mentioned the pace of innovation, and we’re seeing that across the industry and from Coherent as well. You had a bunch of announcement product announcements at OFC. Can you just help us think about the significance and the impact as well as somewhat in relation to timing of when investors should expect those to become more material in terms of revenue and impact the P and L? And then I have a follow-up.

Thank you.

Jim Anderson, CEO, Coherent: Yes. Thanks, Samik. Yes, I appreciate that. I’m always happy to talk about products, so thanks for asking. You know, so we did have quite an outstanding month in March in terms of new product announcements and technology demonstrations, most of that happening at OFC and I think it really showcased the great innovation that happens every day within Coherent.

But I could go on and on about the product announcements, but maybe I’ll just highlight two or three is one of the ones I was most proud about of what the team accomplished was we showed three different versions of a 1.6 T transceiver. So obviously for the industry, the next for the data center, the next big transition in terms of data rate is 1.6 T. And we showed three different versions, one that was based on our 200 gig EML technology, one that was based on our 200 gig pixel, and then another one based on our silicon photonics. And I thought that was a great way to showcase the breadth and the depth of technology that Coherent brings to our partners when we partner on a multi generational basis. And then my other one that I really liked was we demonstrated 400 gig differential EML.

And the reason that one’s important is because that’s really foundation laser technology for 3.2T transceivers. So we’re, you know, we’re deep into development of our portfolio of 3.2T transceivers and demonstrating that key laser capability of 400 gig EML is really important milestone. So really proud of the innovation the team had demonstrated there. So we’re really pleased with the progress on that. And then you asked about kind of timing of impact.

All of what I just mentioned, we view as significant to the company. And then timing of impact would be on 1.6 we continue to view the 1.6 ramp as we’ve said in past quarters. We expect 1.6 revenue to start in this current calendar year. And we’re making good progress through kind of the normal, what I would call the normal engineering milestones and qualification milestones with the customers across multiple customers. So continuing to see that beginning as a ramp in this calendar year and then obviously continuing into the following calendar year.

Samik Chatterjee, Analyst, JPMorgan: Got it. Thanks for those insights. And maybe for my follow-up, clearly, there’s a lot of concern both with investors as well as the broader industry in relation to the macro as well as tariffs right now. And you outlined that you’re not really seeing tariff as a headwind. But still, maybe if you can flesh out the strength of your U.

S. Manufacturing footprint, how that gives you some level of flexibility with your overall manufacturing plans? And at the same time, how are you incorporating any second order demand impact in your guidance for the fourth quarter in relation to any demand hiccups to expect because of the macro where we stand today? Thank you.

Jim Anderson, CEO, Coherent: Got it. Thanks. On the first part of your question on the kind of flexibility of our manufacturing footprint, as we mentioned in the prepared remarks, when we look at the current tariff policy environment, we don’t expect any significant impact to our financials this quarter. And with respect to the manufacturing footprint, I think the company has really done a great job over the past years of building a very resilient and adaptable supply chain. And just a couple data points around that, I mentioned in the prepared remarks, if you look at the global footprint of the company, we have over 60 different production facilities worldwide, and those are across 14 different countries.

And so from geographic diversification perspective, we have really great geo diversity in our production footprint. Now those 60 plus production sites, actually roughly half are within The US, so we’re very proud of our strong US manufacturing presence, and we view that as a key capability. But the other the second point I would make in terms of supply chain resiliency is around vertical integration. And this applies to not just our data center business, but also to our industrial business, for instance, our laser business, is if you look at a lot of the very key technology in feeds for whether it’s data center transceiver or an industrial laser, we make ourselves, manufacture ourselves a lot of the very key components that go into transceivers or laser systems or other products. And so that’s an important part of our supply chain resiliency and flexibility.

So to the extent that there are changes in the landscape, the tariff landscape, and to the extent we need to adapt manufacturing, move manufacturing to different for the benefit of our customers. We certainly feel like we’ve got a very good resilient, adaptable supply chain to leverage for that. And then I think the second part of your question was on demand impact. With respect to tariffs, I would say the one place where we’re taking a more cautious view on the end market demand, I would say, is more in the industrial part of our business. The current tariff environment, I think, is creating just a higher level of uncertainty across the environment.

And so we’re taking a bit of a more cautious near term view on our industrial business. But other than that, I’d say on the other part of our business, data center and communications business, we see that as continuing to grow and be strong.

Samik Chatterjee, Analyst, JPMorgan: Got it. Thank you. Very helpful. Thanks.

Conference Operator: Thank you. The next question we have comes from Simon Leopold of Raymond James. Please go ahead.

Simon Leopold, Analyst, Raymond James: Thanks for taking the question. I wanted to first ask you about what you’re seeing in the trends for the 800 gig, which I guess is more of a foundational element today of your data center business. We’ve been getting a lot of questions or hearing about debate about excess inventory. So if you could help level set us of where are we and where are we going in that category of equipment. And then I’ve got a quick follow-up, which I’ll ask after this one.

Jim Anderson, CEO, Coherent: Okay. Thanks, Simon. So on 800 gig, I would say first, if I look at 800 gig shipments last quarter, I would say the demand was strong and as expected. I mean, if you look at as I mentioned in the prepared remarks, our data center business, so these are primarily datacom transceivers, that grew 11% sequentially and grew about 54% year over year. So we continue to see strong demand in 800 gig, but also, I would say, hundred gig and below, we also saw strong demand.

So good strong demand. And then if I I think with respect to inventory, I think you’re asking about customer inventory. Yes. Clearly, we don’t have perfect visibility into our end customer inventory. But I will say that from our experience and from our interactions with customers, when as we’re shipping them, for instance, transceivers, they are using those or deploying those very quickly after we ship them.

So we’re not seeing any obvious pockets of inventory, because we’re seeing customers deploy those transceivers very quickly after shipment.

Simon Leopold, Analyst, Raymond James: Thanks, that’s helpful. And then my other question is regarding the mix of technologies in the data center. I think it’s great in terms of the new products. You’ve talked about having offerings in VCSELs, in silicon photonics, and with EMLs. I want to get a better understanding of how does that mix line up with your revenue.

And and the reason I’m asking is I feel like there’s a perception that you’re overly dependent on VCSELs for for revenue. And so you’ve got all the tools in the tool chest and it’s just trying to understand what’s the mix and how does that evolve over time? Thank you.

Jim Anderson, CEO, Coherent: Yeah, Thanks, Simon. So the yeah. Definitely, if there is a perception that we’re over indexed on VCSELs, that’s certainly not the case. As I as I mentioned in the prepared remarks, if we look at our transceiver revenue, actually over over half the revenue is is based on EML. So over half of our transceiver revenue comes from EML based transceivers.

And then if I look at that portion of EML transceivers, actually the majority of that EML transceivers actually ship with our own internally designed and manufactured EML. Now we do utilize external EML sources as well, but as I said, over half of our EML transceivers are from our own EML factories. So hopefully that addresses a little bit of the mix. You know, VCSEL is still, we view, an important part of our tool chest. But as I said, majority of transceivers are EML based now.

Although I also say that, you know, a growing portion of the transceiver is now silicon photonics too. So we do have silicon photonics transceivers. And as I mentioned earlier, in terms of 1.6 d transceivers, we have all three solutions. Right? We were intending to offer our customers 1.6 d transceivers based on EML, VCSEL, and silicon photonics, so we can deploy the best technology for whatever particular application the customers are trying to address.

Simon Leopold, Analyst, Raymond James: Thank you.

Conference Operator: Thank you. The next question we have comes from Blayne Curtis of Jefferies. Please go ahead.

Ezra Reener, Analyst, Jefferies: Ezra Reener on for Blayne. Thanks for taking my question.

Simon Leopold, Analyst, Raymond James: Two, I guess.

Ezra Reener, Analyst, Jefferies: The first one, kind of following up on the last question in 800 gs and some of the technological changes there as you move to EML. Can you talk a little bit about the traction of your own EML and what that means in terms of your supply demand and capacity growth there? And how it looks when you move from 400 gs to 800 gs? And then second question would be, can you talk a little bit about your guidance from a segment basis?

Jim Anderson, CEO, Coherent: Yes. And the first part of your question on 800 gs, I would say the traction is on our own EML is quite good considering, you know, as I mentioned, the majority of our total transceiver revenue ships on our own EMLs, right? And look, I think, you know, our strategy of using both external and internally produced EMLs is a good way to provide us greater supply chain resiliency again to our customers. We’re able to offer a very resilient adaptable supply chain because we’re using we’re able to shift and adapt our own internal capacity as externally supplied EML capacity. So we view that as a key tool of our supply chain resiliency, but certainly internally produced EMLs is an important part of our I’ll also mention that, and just reiterate that, remember we’ve shared that our indium phosphide capacity has tripled on a year over year basis, and our intention is to continue to expand our indium phosphide capacity.

Our six inches indium phosphide line will go into will start production next quarter. And that six inches line moving from three inches to six inches provides significant increase in capacity, but it also provides a significant step function improvement in cost structure as well. So we see that as a big benefit. And one of the reasons we’re ramping indium phosphide capacity beyond just the immediate need for transceivers is also for CW lasers for, for instance, CPO applications. So indium phosphide capacity is used for both EML as well as CW lasers, and so we’re ramping that capacity in preparation for that as well.

And so we see it again, we see indium phosphide as a key capability in the company, something we’ve had in house for over twenty years and something we expect to continue to invest in. On the second part of your question around guidance, yes, if you look at the midpoint of the guidance that Sherry provided on revenue, roughly flat at the midpoint sequentially. But within that, what I would say is we’re expecting data center and communications to be sequentially up in the current quarter and then our industrial related end markets to be sequentially down. And with the industrial related markets, as I mentioned earlier, I think just given the kind of more uncertainty in the environment, we’re taking a bit of more of a cautious view on the end market outlook around industrial. But in data center and communications, we expect to continue to see growth.

Ezra Reener, Analyst, Jefferies: Awesome. Appreciate it.

Conference Operator: Thank you. The next question we have comes from Thomas O’Malley of Barclays. Please go ahead.

Thomas O’Malley, Analyst, Barclays: Hey, thanks for taking my question. Tactically, first off, on the silicon carbide business, you’re exiting there. There’s obviously some costs associated with those people, but there’s also some revenue associated with that business unit as well. In your June guidance, what are you assuming from a revenue perspective from silicon carbide? And maybe walk through what numbers would have been if you would have included it?

That would be helpful just to compare.

Jim Anderson, CEO, Coherent: Yes. On the devices and modules portion of our silicon carbide business that we discontinued, that was largely pre revenue. So there is no revenue that comes out of the forecast because those were largely pre revenue. So our revenue today is on the substrates and epi, and that’s the place that we continue to invest. And so what we did is we shut down investment for devices and modules, and we’re just focusing on substrate and epi.

And that’s really where we think that we have a significant differentiation in the manufacturing capability and the technology behind that. That’s where we have a long history. And that’s also where we have strong customer relationships and we see improving demand. In terms of the size of that silicon carbide revenue, we don’t break that out, but it’s a I would say it’s a a small percentage of our overall revenue, certainly in the probably low single digits.

Thomas O’Malley, Analyst, Barclays: Helpful. And then just something I noticed, obviously, going into the June, you’re getting a bit of revenue uplift, obviously, a little flattish, but gross margins are pressured a bit. Should we be thinking about mix differential that gets you to lower gross margins? Or are there any other factors that we should be weighing as to why you’re seeing the sequential step down?

Sherry Luther, CFO, Coherent: Yeah, Thomas, I’ll take that question. So, you know, first of all, the gross margin guide, it is a range, but you know, it’s within that range at the midpoint, know, to your question about what could impact it that could cause it to be a little bit less downward from sequentially, and mix would be the biggest driver there, frankly, because mix can always be a headwind, know, within our market segments can be a headwind. But the other thing I will take the opportunity to point out is that the sequential improvement that we did see in Q3, very pleased with that, 30 basis points sequentially and four ninety basis points year over year. The great thing about what we’ve been doing is our gross margin optimization strategy is where we’ve been focused on product cost reductions as well as pricing optimization. And what I can tell you for Q3 is that we’ve seen that frankly we saw benefits across all of our market segments within the company in the product cost reductions, saw in all market segments we saw examples of that, saw yield improvement, we saw overall cost reduction, so I was really pleased with that.

And then from a pricing optimization perspective, we did see benefits in our lasers business, in our datacom business, examples of where we were executing on pricing improvements there. So I’m really pleased with the progress that the team has made so far. We are definitely in the early stages, we’re continuing to focus on that, but those levers for pricing optimization and cost reduction, they really help when we do have mix headwinds. And so the other thing I would mention is that the timing of these initiatives can kick in some near term, some longer term, and the rate and pace can differ. That’s just a few other little specifics that I can share with you in terms of that gross margin optimization strategy.

But we are focused on the target of over 40%, and I look forward to giving more color on that at our Investor Day in May.

Conference Operator: Thank you. The next question we have comes from Vivek Arya of Bank of America. Please go ahead.

Michael Mani, Analyst, Bank of America: Hi. This is Michael Mani on for Vivek Aria. Thanks so much for taking our questions. Just first on the 1.6 t ramp. At this stage, your visibility, do you have any insight into what your relative share could be for the upcoming ramp maybe relative to 800 gig?

And then further on that, could you give us a sense of what the Powdervailing adoption is across your customer base? Is it just starting with a few customers and kind of like 800 gig, maybe later in the ramp, there’ll be a longer tail of customers that then eventually catch up? Just how should we think about that progression? Thank you.

Jim Anderson, CEO, Coherent: Yeah, thanks, Michael. On the first part of the question, it’s probably too early for us to talk about share of 1.6 T ramp. But as we said, we still continue to expect revenue to start this calendar year and then ramp through the course of the following year and beyond. And then what one of the things that we’re seeing in the industry, has changed versus say, a number of years ago is, we’re seeing these faster adoption cycles of new data rates. And so we’re seeing overlapping cycles.

And so we expect 800 gig to continue to ramp as the 1.6 adoption starts. So we still expect 800 gig demand to remain strong, I would say, into next year as well with 1.6 kind of ramping on top of that. And we’ll actually give a picture of what we expect the industry adoption rate of 1.6 to be at our Investor Day at the May. We’ll map out what we think is kind of the 800 gig to 1.6 transition. And we would view our revenue profile will kind of match the industry adoption rate.

On the second part of your question in terms of pattern of customer adoption, yeah, I think what you the way you described it is accurate is we would see probably a smaller number of early adopters of 1.6 and that expanding out over time. That’s what we saw in 800 gig as a, you know, small number of initial adopters of 800 gig. And although that that did expand pretty rapidly over the course of about And so we would expect the same to happen on 1.6.

Michael Mani, Analyst, Bank of America: Great. Thank you. And then just one on gross margins. So just to confirm, I know you said no significant impact from tariffs, but is there any cost headwind contemplated in your gross margin guide for the next quarter? And then from here through the end of the year, could you give us a sense of where most of the expansion opportunity could come from, from whether it’s cost reductions, yield, product mix, further pricing optimization, just among those big buckets, what would be the biggest contributors for the next for maybe like the medium term?

And then just finally on the pricing optimizations, so I know you said you’ve already begun to do that. How early are we in that process? You know, how much of I guess, you know, how much of a benefit will that be over the next couple of quarters? And, you know, what are some areas where you can you still see great opportunity to maybe optimize price? Thank you.

Sherry Luther, CFO, Coherent: Sure. Thank you for the question. A number of questions there, so I got to make sure I cover them all. But in terms of the I think the first one had to do with sort of cost impact and tariffs and gross margin. I think that was what your sort of your first question was.

And what I can tell you is that, in addition to what I’ve already said, the gross margin guide is based upon the best information that we have for Q4. It incorporates all the best information that we have, the current environment related to tariffs, which as we said, Jim had said, both of us have said in our prepared remarks, is not significant. And we’re going to continue focusing our gross margin expansion strategy for pricing optimization and cost reductions, sort of the unfavorable component that could occur is mix, and that I responded to in the earlier question. So all of those earlier comments apply to your question. Then in terms of the rest of the year, where are the opportunities for improvements in gross margin, how can we get it up?

We don’t guide beyond the current quarter, but we are focused on the product cost reductions and the pricing optimization. The way to think about that, and of course we’ll give more color at Investor Day, but the way to think about that is when we think of product cost reductions, that’s the entire company, right? We’re looking everywhere in the company, every segment, no stone unturned, product costs, manufacturing costs, fixed costs, all elements of cost as well as yield improvements. And so every part of the company, every part of each business is really participating in that and really driving toward those improvements. When you think about pricing optimization, that is primarily in the industrial and other part of our business.

It doesn’t mean Datacom won’t have benefits there, in fact we did have benefits from pricing in Q3 from Datacom, but most of that benefit, if you think about where most of the opportunity is coming from in the company for pricing, be in the industrial and other part of our business. Because for Datacom, we’re focused on growing revenue growth, market share, all of that, and so that’s kind of the way you can think about it in terms of where in the company we would be generating these benefits that are part of this optimization strategy. And then in terms of the relative magnitude of each of these elements, that I’ll give you more color on at our Investor Day where I think we’ve got some good information that we’ll share with you that’ll help give you that better perspective at that time. Hopefully, covered them all. I don’t know if I missed any part of your question.

Michael Mani, Analyst, Bank of America: No, that was super helpful. Thank you.

Conference Operator: Thank you. The next question we have comes from Papa Sela of Citigroup. Please go ahead.

Papa Sela, Analyst, Citigroup: Thank you for taking my question and congrats on the strong results. I guess for my first question, Jim, I was wondering if you can just provide more color on the telecom sub segment. I guess if last quarter the sentiment was for traditional telco cautiously positive, has the sentiment improved incrementally since then despite maybe more macro uncertainty? And in terms of mix, how should we think about the mix between traditional telco versus DCI at this point?

Jim Anderson, CEO, Coherent: Thanks, Bob. Yeah, I think we’re in the traditional telecom, we’re still in that cautiously positive mode that I mentioned last quarter. Yeah, we’re still seeing incremental improvement on a kind of quarter by quarter basis. So we’re certainly happy to see that. Now, where we’re seeing bigger growth is, of course, in DCI, kind of the second part of your question.

That’s still a smaller portion of our telecom revenue, but no doubt, you know, the bigger growth driver in that segment. When we look at, you know, our telecom revenue grew over 20% year over year. Some of that was improving in traditional telecom, but the majority of that growth was driven by DCI. And we expect that DCI component to continue to grow over the coming quarters.

Papa Sela, Analyst, Citigroup: Got it. No. That’s that’s helpful. And my my follow-up is is kind of on margin and kind of alongside prior questions. And here, obviously, you have been quite successful in your efforts to improve margin through kind of manufacturing reducing manufacturing costs, improving yield and price increases.

I guess for this quarter in particular, what would you maybe attribute primarily your margin outperformance between those three? And maybe the second part of this question is how far along in terms of the yield improvement efforts, how far along are you? Is there still a lot of room there? Or are you getting really close to your internal targets?

Sherry Luther, CFO, Coherent: Yeah, sure, Pappa. So I think you’re quite it cut out a little bit, but I think your question was is most of the where did most of the benefit in Q3 come from in terms of pricing and cost? I think that’s what you’re asking. And so really, you know, cost reductions tend to be a little bit higher in terms of the contributor versus pricing, but again that can fluctuate on a quarterly basis and that’s not necessarily always the rule, that’s generally what we saw for Q3, cost reductions a little bit higher than the pricing improvement. And then in terms of where we are on the yield improvement, I mean, you can imagine for a manufacturing company there’s manufacturing a number of different products, there’s lots of opportunity for yield improvements all throughout the manufacturing processes many of our businesses, and so it’s not the situation that you sort of make a yield improvement and you’re done.

It’s always ongoing, there’s always opportunity for improving yield, and also as new products come out there are additional opportunities that present themselves to create yield improvement. That is going to be an ongoing part of strategy.

Papa Sela, Analyst, Citigroup: Got it. Thank you.

Conference Operator: Thank you. The next question we have comes from Chris Rowland of Susquehanna. Please go ahead.

Paul Silverstein, Senior Vice President of Investor Relations, Coherent0: Hey, guys. Thanks for the question. So perhaps first a follow-up on your manufacturing footprint, specifically for transceivers. I guess, I think you’re in China and Malaysia with that manufacturing. Do you have the capacity to serve American customers via Malaysia?

Or how is China involved that? And then perhaps if you could give us some color as to what percent of your business might actually end up in America. So, yeah, can you fully serve America out of Malaysia and what percent goes to The US? Thank you.

Jim Anderson, CEO, Coherent: Yeah, on the first part of the question, the answer is yes. In fact, today, if you look at our U. S.-based, for instance, customers like hyperscaler customers, both transceivers come from Malaysia. So, today we’re supporting our U. S.

Customers almost entirely from Malaysia. And then on the second part of the question, I think you were asking about like total revenue by geography, how much is North America based?

Paul Silverstein, Senior Vice President of Investor Relations, Coherent0: Don’t have For transceivers, yeah.

Jim Anderson, CEO, Coherent: Oh, for transceivers. Boy, I don’t have Chris, I don’t have that in front of me, but it certainly is a very significant percentage. Right? But I don’t have that right in front of me.

Paul Silverstein, Senior Vice President of Investor Relations, Coherent0: Yeah. No. That that that’s fine. I think you answered it. And then secondly, you know, the comments and the additional focus on EMLs this quarter, seems like this is a increased emphasis for the company.

So I guess, at what point in time do you think you could fill all your EML needs internally or do we have to wait for that six inch fab to come online? And conversely, Lamentum last night talked about doing more in CW. Do you see that as becoming increasingly crowded space? Thank you.

Jim Anderson, CEO, Coherent: Yes, Sean, on EML, I think today our strategy is actually to use a mix of both external and internal produced EMLs for our transceivers. I would expect to continue to use a mix. We have a number of external EML vendors that are great partners and have been very reliable suppliers. And we view it as a nice way to have just even more supply chain resiliency. So as I shared, the majority of our EML based transceivers ship with our own internally produced EMLs, but I would, you know, expect to continue to utilize external suppliers as well.

On CW lasers, you know, maybe for us, maybe just to maybe clarify that on CW lasers, we have produced CW lasers for our telecom products for many years. So remember, we’ve had indium phosphide capability for over twenty years, so we’ve been doing CW lasers for a long time for telecom. And, you know, moving forward with the adoption of, you know, silicon photonics in some transceiver applications and potentially in CPO applications as well. We believe there’s certainly opportunity for, you know, increased usage of CW lasers in data centers. And so part of the capacity ramp that we’re doing is in support of, you know, making sure that we have the right capacity in place to support our customers with respect to CW laser needs over the long term as well.

And and definitely that, you know, that six inch line actually will be introducing six inch capacity at two sites, two separate physical sites. So and that six inch capacity is, yeah, definitely a key enabler of our capacity expansion. And then, again, I’ll just reiterate a significant cost structure advantage as well.

Paul Silverstein, Senior Vice President of Investor Relations, Coherent0: Thanks, Jim.

Conference Operator: Thank you. The next question we have comes from Karl Ackerman of BNP Paribas. Please go ahead.

Paul Silverstein, Senior Vice President of Investor Relations, Coherent1: Yes, I have two, if I may. Sherry, could you quantify the gross margin impact on your March and June outlook from these portfolio optimization actions taken in

Michael Mani, Analyst, Bank of America: the quarter? And I have a follow-up.

Sherry Luther, CFO, Coherent: Yeah, thanks Carl. So I think you’re referring to some of the restructuring that we’ve taken in the portfolio actions associated with it. And so what I would say is that the actions that were taken in terms of underutilized assets or underutilized businesses, that benefit certainly will contribute to our financials from a gross margin and OpEx perspective, depending on the nature of the actual divestiture. So for example, device and modules business that Jim talked about from our silicon devices business, I mean that didn’t affect our revenue because that was pre revenue, as he described, and so it really affected more from an OpEx perspective going forward, and not really from a revenue or gross margin perspective. So it depends on the nature of the businesses in terms of where it will impact in the P and L.

When you go forward in terms of going to the future, terms of our long term model, we’ll give you more color on how to think about our gross margin at our Investor Day, as well as our complete operating model from an OpEx perspective and revenue growth. I think it’s really all of those elements that come into play longer term that will be more useful for you to see at our Investor Day, looking at our overall model perspective, versus the actions that we took during the quarter having a significant impact in the quarter. I think it’s more long term impact, think is really the short answer to the question, where you would see the benefits. So the results that we had for Q3, you know, I wouldn’t say that there were significant impacts related to the portfolio analysis directly in the P and L, but what you have been seeing, even prior to Q3, is the shift in R and D spend. I mean, that was a big part of what we talked about in looking at portfolio review analysis, really making sure that we pull R and D out of those non strategic or underperforming assets, and really focus it towards the profit and growth engines.

And so those are the things that you already see that we’re doing. We’re seeing that in q three and prior quarters, so you’ll continue to see that going forward. But otherwise, would say it’s more more longer term that you’ll see the benefits of some of our the restructuring actions that we took.

Paul Silverstein, Senior Vice President of Investor Relations, Coherent1: Yep. Thank you. Jim, I was hoping you could address how you see the demand outlook for datacom transceivers, particularly 800 gig in the June and throughout the calendar year. And the reason why I ask is some investors have been concerned about this inventory build and heightened competition pressuring margins. That doesn’t seem to be the case for you.

But perhaps you could highlight how you see second half relative to first half in the context of your datacom transceiver business. Thank you.

Jim Anderson, CEO, Coherent: Yes, we don’t guide beyond the current quarter. But what I would say is, in datacom, we continue to see strong demand signals from our customers, both kind of shorter term demand signals, which would be purchase orders and backlog, but also longer term demand signals like the forecast that they’ll give us a twelve month or eighteen month forecast. And so we continue to see strong demand from the data center customers, so we’re expecting that business to continue to grow. And certainly, we’re not just maybe to clarify, we’re not just focused on matching the market growth. We’re also focused on share gain.

We believe we gained share over the last two to three quarters. And certainly, we’re very focused on continuing to gain share of wallet at our customers and overall share in the market.

Samik Chatterjee, Analyst, JPMorgan: Thank you.

Conference Operator: Thank you. The next question we have comes from Meta Marshall of Morgan Stanley. Please go ahead.

Paul Silverstein, Senior Vice President of Investor Relations, Coherent2: Great, thanks. A couple of questions for me. Maybe first, just kind of on the commentary about industrials in the second half potentially being a little bit weaker. Just wanted to get a sense, is there any pull forward that you observed in the first half that makes you more cautious? Or is that just kind of macro caution, you know, just given the uncertainty in the environment?

And then maybe a second question for me, I’ll just get

Conference Operator: in now. You know, you

Paul Silverstein, Senior Vice President of Investor Relations, Coherent2: do have a sizable military kind of business. Any impact from kind of what we’re seeing with the federal government just in terms of timing or approval processes? Thanks.

Jim Anderson, CEO, Coherent: Thanks, Meta. On industrial, we haven’t seen any signs of pull forward. The customer ordering patterns have been very normal and our cautious our sort of more cautious outlook around the industrial end market demand is really related to the second thing that you mentioned, just macroeconomic uncertainty. That’s causing us to just take a more cautious outlook on that market in the near term. But we still believe that that is a long term growth area for the company and certainly an area we’ll highlight as long term growth in our Investor Day later in May.

On the second part of your question around the aerospace and defense business, I would say that business has it’s a smaller part of our revenue, but that business has been doing quite well recently. We saw good sequential growth. If I take our most recent quarter, we saw good sequential growth in the most recent quarter and year over year growth as well.

Paul Silverstein, Senior Vice President of Investor Relations, Coherent2: Great. Thank you.

Conference Operator: Thank you. The next question we have comes from Ryan Koontz of Needham and Company. Please go ahead.

Paul Silverstein, Senior Vice President of Investor Relations, Coherent3: Great. Thanks for, getting me in here. With regards to DCI, is hot, we’re hearing everywhere, and the ZR designs for the pluggable transceivers there. If you pull out the DSP, what is your addressable kind of wallet share there in terms of the bill of materials that you can sell in your products into a ZR module?

Jim Anderson, CEO, Coherent: Well, we do two things with respect to DCI and ZR modules. We make modules and sell our own modules, but then we also sell components into other suppliers of those modules. So we kind of, you know, address the market from both perspectives. I think your question was about the second piece of it, where

Paul Silverstein, Senior Vice President of Investor Relations, Coherent3: you sell That’s right.

Jim Anderson, CEO, Coherent: Yeah. It’s I don’t know how to really break down the BOM opportunity, but I would say it’s a significant opportunity for us. And it’s a very good part of our business. It it we see good demand there. And also, I would say it’s a it’s a reasonably good gross margin as well.

I think we could probably give you a better picture when we meet at our Investor Day this month. DCI and our products in the DCI space is one of the topics we’ll hit at the Investor Day. So I would say probably stay tuned and we can provide a little bit more color Investor Day.

Paul Silverstein, Senior Vice President of Investor Relations, Coherent3: Sounds great, Jim. And then on your new OCS product, can you remind us where you are in terms of launch, introduction, trials, customer wins and remind us of the use case there for the OCS?

Jim Anderson, CEO, Coherent: Yeah. Happy to really great product. I’m really excited about it. So first of all, in the use case, the OCS replaces an electrical switch. So the reason a customer would wanna switch or change from an electrical switch to an optical switch is because then the data transmission stays in the optical domain, which has performance and power efficiency advantages.

Our OCS solution is very differentiated versus what else is out there in the market. The other solutions are mechanical MEMS based solutions. Ours is based on digital liquid crystal technology from our telecom business, which is much has much higher reliability and other benefits as well. We are we continue to expect revenue to begin to generate revenue from that product line this calendar year. And we do have existing customer orders in place.

So it’s something that we’re it’s a product line we’re really excited about in terms of TAM expansion and future revenue growth.

Paul Silverstein, Senior Vice President of Investor Relations, Coherent3: Got it. Is that playing to the AI clusters typically? Or are you kind of maybe in the front end of the network typically? Or where where you deploy that?

Jim Anderson, CEO, Coherent: Yeah. Good question. It can go into multiple parts of the market or or the data center deployment. So you would find it in potentially multiple different parts of the data center.

Samik Chatterjee, Analyst, JPMorgan: Got it. Thanks so much. Thanks.

Conference Operator: Thank you. Ladies and gentlemen, that is all the time we have for questions. I would now like to turn the floor back over to CEO, Jim Anderson, for closing comments. Please go ahead, sir.

Jim Anderson, CEO, Coherent: Thank you, operator, and and thanks, everybody, for joining us on the call today. I do wanna take the opportunity to once again thank my Coherent teammates for all their hard work and dedication and their fantastic innovation. And then thanks again for joining us, and we’re looking forward to sharing more details of the long term plans for the company at our Investor Day on May 28. Thank you.

Conference Operator: Thank you, sir. Ladies and gentlemen, that then concludes today’s conference. Thank you for joining us. You may now disconnect your lines.

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