Coherent Guidance Below Optimistic Expectations, Falls 7% After Hours

Optical communications leader Coherent Corp (NYSE: COHR) announced its financial results for the third quarter of fiscal year 2026 on Wednesday, with revenue, gross margin, and earnings per share all exceeding Wall Street expectations. The company's order backlog reached a historic high and visibility has been extended to 2028, with long-term supply agreements covering up to 2030. Jefferies promptly raised its target price from $350 to $375 while maintaining a "buy" rating.

Due to guidance slightly below some optimistic expectations, the stock price plummeted by over 7% after the close.

Three Core Metrics Exceed Expectations Across the Board

The quarterly revenue reached $1.806 billion, a 7% sequential increase and a 21% year-over-year growth; excluding the divested aerospace and defense business and the Munich product division in Germany, the pro forma revenue grew by 27% year-over-year, accelerating the pace compared to the previous quarter.

The profitability was equally impressive. The non-GAAP gross margin reached 39.6%, increasing by 57 basis points quarter-over-quarter and 105 basis points year-over-year. It has seen quarter-over-quarter improvement in seven out of the last eight quarters, with a cumulative expansion of over 570 basis points. The non-GAAP diluted earnings per share were $1.41, a 55% year-over-year increase, with profit growth significantly outpacing revenue growth, as the operational leverage effect begins to materialize.

CEO Jim Anderson stated during the earnings call that the demand environment "remains excellent," with no signs of slowing down in the current backlog and customer demand strength.

Data Center and Communications Segment Takes Off

The data center and communications segment contributed 75% to the company's total revenue this quarter, with a year-over-year growth of over 40%.

Revenue from data centers was approximately $877 million, a 13% sequential increase and a 37% year-over-year growth, achieving double-digit sequential growth for two consecutive quarters; revenue from communications was approximately $407 million, a 16% sequential increase and a 60% year-over-year growth, driven by the simultaneous outbreak of demand for inter-data center interconnects (DCI) and traditional telecom.

The management pointed out that the revenue from 800G products will see a year-over-year increase throughout 2026, and the ramp-up of 1.6T products is faster than previously expected, which is one of the most important sources of incremental revenue in the current quarter, and the new product gross margin is higher than that of the previous generation, with a positive impact on overall margins materializing quarter by quarter.

6-inch Indium Phosphide Capacity Reaches Target Ahead of Schedule

The core bottleneck constraining the company's volume is indium phosphide (InP) production capacity. Management stated that the goal of doubling internal indium phosphide capacity by the end of 2026 will be achieved a quarter ahead of schedule, and it will double again by the end of 2027, achieving a fourfold increase over two years.

The 6-inch indium phosphide production line is the technological core of this expansion plan. Compared to the existing 3-inch production lines, the 6-inch platform produces more than four times the number of devices per wafer, with per-unit costs of less than half, and the yields of the three core devices—electrically-absorbed modulated lasers (EML), continuous-wave lasers (CW laser), and photodiodes—have all exceeded the levels of the 3-inch production lines. Optical modules搭载ing 6-inch components completed the first batch of shipments last quarter, beginning to directly contribute to revenue and margin improvement.

The production capacity layout is advancing expansion in three locations simultaneously: the Sherman factory in Texas has achieved mass production, the Swedish factory has started production, and the third site in Zurich is expected to start 6-inch indium phosphide production in early 2027.

It is worth noting that from the completion of production of indium phosphide devices to their final transformation into optical module shipments, there is a process cycle of about 2 to 3 months, and the contribution of production capacity increase to revenue has a quarterly lag, which means that the benefits of the current capacity expansion will continue to be released in the coming quarters.

OCS Breaks Through Capacity Bottleneck

During the call, management reiterated the commercialization timeline of multiple growth curves, with each wave of volume ramp-up initiated after the maturity of the previous