Coherent (Trans): RMB 20bn long-term contract secured, GPM target raised to 45%

Below is Dolphin Research's recap of $Coherent Corp.(COHR.US) FY27Q1 earnings call Trans

I. Key takeaways

1. Next-quarter guide (FY27Q2)

a. Revenue: $2.55–2.75 bn. This is the Q2 guide.

b. Margins & opex: non-GAAP GPM of 40%–42%, non-GAAP opex of $430–450 mn, non-GAAP tax rate of 18%–20%. These are for Q2.

c. EPS: non-GAAP diluted EPS of $2.28–2.48. This is the Q2 outlook.

2. Mid/long-term revenue goals

a. New targets: first $3.0 bn revenue quarter within FY27, with FY27 pro forma revenue growth above 60% (over 2x FY26 pro forma growth). First $4.0 bn revenue quarter targeted in FY28.

b. Base this quarter: Q1 revenue of $2.37 bn (+56% YoY on a pro forma basis), non-GAAP EPS of $2.09 (+80% YoY). Profit is growing faster than revenue.

3. GPM target raised

a. New target: achieve the first >45% GPM quarter by end-CY2028, 300 bps above the >42% long-term target given 18 months ago at Investor Day (originally a 3–4 year goal). This advances the bar.

b. Drivers: ongoing pricing optimization, ramp of new growth platforms, full utilization of 6-inch InP capacity, and other cost reductions. These will lift mix and unit economics.

c. This quarter: non-GAAP GPM was 40.6% (+37 bps QoQ, +184 bps YoY), driven by pricing, lower input costs, and yield gains. Opex ratio fell to 17.4% (vs. 18.4% in Q4), with OPM at 23.2%.

4. Capex & balance sheet

a. Capex: $776 mn in Q1 (vs. $556 mn in Q4 and $104 mn a year ago), with another QoQ increase expected in Q2. Capacity can be flexed across multiple product lines.

b. Balance sheet: cash was $2.34 bn at quarter-end (vs. $2.59 bn), leverage at 1.1x. Liquidity remains solid.

II. Call details

2.1 Management highlights

1. Data center & comms: segment growth accelerated for the fourth straight quarter, with orders now extending into CY28. Visibility continues to improve.

a. Segment revenue rose +21% QoQ and +79% YoY, accounting for 82% of total. Within that, data center grew +85% YoY, and is expected to remain strong QoQ and YoY this quarter.

b. CY27 order coverage is ample, and more customer orders are extending into CY28. Multiple LTAs were signed in Q1, typically running through the end of the decade; management sees no sign of demand weakening.

c. Optical modules: 1.6T is ramping at multiple customers; 800G growth continues into CY27. At ECOC, the company showcased a 3.2T OSFP based on 400G differential EML, and sees pluggables remaining the mainstream for scale-out.

2. PhotonLink: the integrated photonics platform launched in Sep., spanning the full chain from light generation to detection and photoelectric conversion. It targets end-to-end needs.

a. The company estimates the CPO, NPO, and chip-to-chip optical interconnect market at approx. $30 bn by 2030, with the broader data center & comms TAM around $90 bn. These are large adjacencies.

b. This quarter's shipments included ultra-high-power 400 mW CW lasers and fiber components among CPO products. Scale-up products for CPO/NPO will begin shipping in 2H CY27.

3. InP capacity: 6-inch expansion is tracking ahead, with most cost benefits still to come. The capacity plan leads peers.

a. In Q1, in-house InP capacity doubled YoY, one quarter ahead of plan. EML output (100G, 200G) hit record highs.

b. Yields on the 6-inch lines in Texas and Sweden continue to exceed 3-inch lines. The Zurich 6-inch line will start production in 1H CY27; further expansion is planned after CY27.

4. Comms: revenue rose +34% QoQ and +84% YoY, with scale across now the largest revenue source within comms. The portfolio has broadened.

a. Building on pump lasers, the company has added modules, line cards, subsystems, and multi-rail solutions to help customers boost existing fiber utilization and link distributed AI data centers.

5. Industrial: Q1 pro forma revenue was flat QoQ and YoY, with strong orders and a return to growth this quarter. Momentum is improving.

a. Near-term drivers: a clear rebound in front-end semi equipment orders; CO2 lasers and ZnSe optics for PCB drilling in AI servers; pulsed laser deposition systems for superconducting tapes used in fusion.

b. Long-term opportunities: Thermodite material to enhance XPU performance, with samples shipped to multiple strategic customers this quarter and revenue contribution starting in 2H CY27. The company is also investing in quantum technologies.

2.2 Q&A

Q: What is the ramp cadence for PhotonLink, especially considering the $2.0 bn LTA?

A: Small shipments this quarter, >$100 mn in the Mar. quarter, and >$250 mn per quarter by end-CY27. Customer engagements span 10+ for CPO, 10+ for NPO, and 5+ for chip-to-chip; the $2.0 bn LTA is over five years with revenue starting in early CY28.

PhotonLink is a one-stop platform for integrated photonics covering the full optical signal chain. The first shipments are all CPO within scale-out networks; entering scale-up networks via CPO/NPO will drive larger adoption, with shipments expected by end-CY27. Over time it could become a multi-billion-dollar product line.

Q: What underpins the plan to double scale across (DCI) revenue by end-CY27 in terms of customers and products?

A: Q1 revenue exceeded $200 mn, roughly 4x YoY, and is set to double again by end-CY27 from that base. Growth has outpaced the company's own expectations, with Q1 on a ~$1 bn annualized run-rate. Most of the YoY growth in comms is from DCI, driven by AI workloads spanning multiple data centers and needing much higher inter-DC optical bandwidth.

Customers include both equipment makers and cloud operators buying directly. The product set spans multiple layers of the value chain, including components such as pump lasers, ZR/ZR+ modules, line cards, amplifiers, and ROADM subsystems, as well as some turnkey solutions. The growth so far has not included multi-rail; multi-rail will ramp starting in the Mar. quarter.

Q: How is OCS progressing and what are the expectations?

A: OCS is expanding from scale-out into more use cases, with parallel capacity expansions at two sites. OCS is booked under the data center business (+85% YoY in Q1), and deployments have broadened from scale-out into scale-across and scale-up; 320x320 systems are already shipping, with higher-density configs more used in scale-up.

The technology is liquid crystal-based and non-mechanical, with better power and reliability than MEMS approaches. The company estimates the OCS market at at least $4 bn by 2030, potentially larger, and expects contributions to revenue growth to increase over the next few quarters.

Q: Thoughts on Lumentum's proposed industry consolidation?

A: It validates optics as core to data center architecture, and the company's positioning as an independent supplier is advantageous. Links for scale-up and even chip-to-chip will move from copper to optics. Management believes the company has the industry's broadest and deepest photonics portfolio, spanning generation, fiber transmission, and detection.

Many customers value an independent optical supplier, allowing the company to serve both cloud and chip customers without conflicts. Management sees strong advantages in technology, manufacturing, and strategy, already reflected in the PhotonLink revenue ramp.

Q: Why provide longer-term revenue targets now? Is supply secured?

A: CY27 orders are largely booked, and customers are placing into CY28; supply agreements underpin the targets. Management acknowledged the outlook horizon is longer than usual. Multiple new LTAs include high-quality long-term forecasts, giving strong near- and long-term visibility. The $3 bn and $4 bn quarterly revenue goals are supported by supply agreements, and the company is highly vertically integrated, relying heavily on internal capacity.

Over the past 18 months InP was the main bottleneck; InP capacity has already doubled a quarter ahead of plan, and management believes it can more than double again by end-CY27.

Q: What is the customer and product mix behind the $2.0 bn long-term agreement?

A: The LTA is centered entirely on PhotonLink, anchored by the 400 mW CW laser. It also includes higher-level solutions. The customer was not named, described only as a well-known leading AI data center operator. Revenue is expected to start in early 2028 and ramp for several years; more PhotonLink LTAs are expected to be signed over the next few quarters.

Q: Does the 45% GPM target assume capping optical module growth?

A: No; upside comes from new product ramps and InP cost leverage. The model assumes reasonable growth for optical modules; new platforms such as PhotonLink, DCI offerings, and OCS are accretive to margins. On cost, most of the GPM tailwind from InP expansion is still ahead, a key support for the target.

Q: Can GPM exceed 45% over the long term?

A: 45% is an interim milestone; there is no structural barrier to further expansion. The prior '>42%' target was a 3–4 year goal that was raised after 18 months; once approaching 45%, the company will reassess subsequent targets. In addition, the opex ratio will continue to reflect operating leverage.

Q: What are the prospects for micro-VCSEL in scale-up/scale-in, and can you quantify next year's revenue?

A: VCSEL will be adopted relatively quickly for NPO, with chip-to-chip around 2029–30. No quantification for next year was provided. VCSEL should be used for scale-up NPO in a shorter timeframe, while chip-to-chip (scale-in) is likely in 2029–2030.

Multiple PhotonLink projects involve multi-core VCSEL paired with the company's own multi-core fiber. Over the past year the company shipped over 700 mn VCSELs to data centers; at ECOC, when launching PhotonLink, it demonstrated micro VCSELs, VCSEL arrays, and industry-leading energy efficiency of 1 pJ/bit.

Q: With Chinese laser makers expanding, will there be competition in ultra-high-power CW lasers?

A: No competitive activity is seen from Chinese vendors at 400 mW ultra-high-power CW lasers. Management said there is currently only one competitor in this domain.

Q: For initial scale-up optics, will CPO or NPO lead, and will it be VCSEL or InP?

A: Scale-up will start with CPO, followed by NPO, landing between end-CY27 and early CY28. If NPO is not deployed by end-CY27, it will be deployed in early CY28. The initial deployments will use InP high-power CW lasers for CPO, first in scale-out and then scale-up; VCSEL will land with NPO in early CY28.

Q: What is the split between internal and external InP sourcing, and the timing of GPM impact?

A: The mix is similar to a year ago, shifting toward in-house over the next few quarters. No specific split was disclosed. In-house InP is mainly for data center optical modules, and module growth tracks InP capacity (with about a one-quarter lag: lasers produced this quarter, modules shipped next quarter), so the structure has not changed yet.

As capacity more than doubles again by end-CY27, the mix will tilt toward in-house, while some external sourcing will remain. The cost advantage of 6-inch in-house lasers is substantial, and 'most of the 6-inch InP benefit is ahead' refers to this mix shift.

Q: Of the $15,000 per chip value for a full stack, how much can you capture near term?

A: $15,000 is an upper bound assuming the full stack, with actual share varying by customer. No near-term percentage was given. The figure refers to a chip requiring 100 Tbps I/O using the full PhotonLink stack, including lasers, isolators, TECs, laser modules, fiber components, and connectors.

Over the next 1–2 years some customers will adopt most of the stack, while others will take only parts of it; the company supports both approaches. Regardless of share, PhotonLink is primarily driven by scale-up and represents net-new demand as copper migrates to optics.

Q: Rank the drivers to >45% GPM and comment on China competition and price sensitivity.

A: Biggest contributions come from new product ramps and 6-inch InP operating leverage, followed by pricing optimization, then cost-downs. Each kicks in at different times. New products are margin-accretive; shifting supply from external to internal creates significant headroom.

Pricing optimization is most evident in data center and comms, and has been a major contributor this quarter and in recent quarters; there is also room in industrial. Cost reductions are a continuous effort. Management did not directly address China competition or price sensitivity.

Q: How do you align laser capacity with major customers, and do you seek prepayments?

A: Nearly all LTAs include prepayments or NRE and other upfront payments to finance capacity for customers. The only disclosed LTA was signed with NVIDIA in Mar. Upfront payments give customers skin in the game and help the company share capex risk, with strong customer willingness.

Demand planning is closely coordinated with customers; InP demand is driven by two factors: data center growth and the technology shift from copper to optics independent of DC demand. To achieve required bandwidth and link rates for scale-up and chip-to-chip, optics are necessary.

Q: Will 6-inch and 3-inch substrate supply constrain expansion?

A: Substrates are locked for another capacity doubling by end-CY27, with further substrates for subsequent expansions being secured. The company is still buying 3-inch wafers and keeping 3-inch lines, but expansion is focused on 6-inch. There are 5+ substrate suppliers, and multiple LTAs have been signed with them.

Q: Can InP and GaAs capacity be interchanged if the VCSEL path outperforms?

A: There is some interchangeability, but switching is not easy; GaAs can produce 1 bn+ VCSEL arrays per year. This data point was disclosed at the PhotonLink launch. If VCSEL adoption accelerates, management believes no one in the industry is better positioned to supply; InP capacity is also expanding rapidly.

Q: Could industry InP EML capacity become oversupplied by CY28?

A: No risk seen before CY28. Demand comes from pluggable modules, integrated photonics, and parts of DCI. Currently, all in-house InP is consumed internally and still insufficient for needs; the company does not sell InP lasers externally, so external supply would only increase if that changed, which is not a primary concern. The self-supply ratio will continue to rise.

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