Coherent (COHR) Q3 2026 Earnings Transcript

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DATE

Wednesday, May 6, 2026 at 4:30 p.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — James Robert Anderson
• Chief Financial Officer — Sherri R. Luther

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TAKEAWAYS

• Total Revenue -- $1.8 billion, representing 7% sequential and 21% year-over-year growth; on a pro forma basis, revenue increased 9% sequentially and 27% year over year, excluding Aerospace and Defense and Munich divisions sold in prior quarters.
• Non-GAAP Gross Margin -- 39.6%, up 57 basis points sequentially and 105 basis points year over year, driven by yield improvements from 6-inch indium phosphide, input cost reductions, and pricing optimization.
• Non-GAAP EPS -- $1.41, up 9% from prior quarter and 55% year over year, with EPS growth outpacing revenue growth due to margin and leverage effects.
• Data Center and Communications Segment Revenue -- Accounted for 75% of total revenue; segment up over 40% year over year.
• Data Center Business Revenue -- Up 13% sequentially and 37% year over year, marking a second consecutive quarter of double-digit sequential growth.
• Communications Segment Revenue -- Grew 16% sequentially and 60% year over year, with broad-based customer demand and momentum in ZR and ZR+ transceivers.
• Order Book and Backlog -- Backlog at record levels, with orders now reaching into calendar 2028 and long-term agreements (LTAs) extending to end of decade.
• Indium Phosphide Capacity Expansion -- Expected to double internal capacity by next quarter, one quarter ahead of prior plan; on track to more than double again by end of 2027, with yields on 6-inch lines exceeding 3-inch lines.
• OCS Outlook -- Market opportunity estimate increased to over $4 billion; sequential revenue growth guided for current quarter as production bottlenecks resolved, output ramping across two facilities.
• CPO Revenue Launch -- Initial scale-out CPO revenue expected to ramp in second half of calendar year, with scale-up CPO revenue set for second half of 2027; Nvidia partnership established including $2 billion equity investment and multiyear supply agreement.
• Capital Investments -- Capital expenditures of $290 million, up from $154 million in prior quarter and $112 million a year ago, focused on internal capacity expansion; capex to increase further sequentially in Q4.
• Debt Reduction -- Debt payments of $162 million lowered leverage ratio to 0.5 times, from 1.7 times in Q2 and 2.1 times a year ago.
• Cash Position -- Cash balance rose to $3 billion, driven mainly by the $2 billion NVIDIA equity investment.
• Guidance -- Q4 revenue expected between $1.91 billion and $2.05 billion; non-GAAP gross margin guided at 39%-41%; non-GAAP operating expenses expected between $360 million and $380 million; tax rate guided in 18%-20% range; non-GAAP EPS projected between $1.52 and $1.72.
• Long-term Agreements (LTAs) -- Recent and pending LTAs feature upfront customer investment, Coherent supply commitments, and minimum customer demand guarantees across both hyperscaler and systems customers.
• Product Mix and Margin Impact -- 1.6T transceivers are ramping rapidly and anticipated to benefit margins; EML and SiPho 1.6T transceivers offer similar gross margin profiles.

SUMMARY

Coherent (NYSE:COHR) reported a quarter of accelerating financial growth and operational execution, underpinned by record bookings and backlog visibility that now extends to calendar 2028. The company announced a major Nvidia partnership combining a $2 billion equity stake with a multiyear CPO supply agreement, materially increasing Coherent’s cash reserves and long-term demand assurance. Management expects to double indium phosphide output capacity by next quarter and more than double again by end of 2027, with production yields from 6-inch lines already exceeding those of 3-inch lines. Strategic capital deployment focused on internal capacity and R&D supports the ramp of key growth platforms, including CPO, OCS, multi-rail, and next-generation transceiver products. The business continues to sign and negotiate new LTAs involving customer-funded capex commitments and assured demand, signaling depth and durability of demand trends.

• CEO Anderson said, "we are bringing on substantially more capacity over the coming quarters," highlighting a shift from historical supply constraints to supply-driven expansion.
• LTAs signed in the latest quarter are described as “significant in size,” and frequently include upfront customer investment to offset capex requirements.
• Pricing dynamics are described as “very healthy,” with increased ASPs for 1.6T over 800G, and the majority of transceiver input costs internally sourced to buffer against supply chain inflation.
• On multi-rail, the milestones are the typical engineering steps with customers: qualification and pilot runs — very normal engineering milestones that we are moving through. We expect revenue to start in 2027.
• The OCS business realized productivity gains through dramatic improvement of internal component output, resolving production bottlenecks and enabling a faster shipment ramp.
• Thermadite thermal management products and thermoelectric generators are planned to launch revenue in late 2027, offering proprietary alternatives to copper for improved chip cooling and energy recycling.

INDUSTRY GLOSSARY

• Indium Phosphide: A semiconductor material central to high-speed photonic devices; Coherent’s scaling from 3-inch to 6-inch wafers directly drives transceiver and CPO production throughput and margin efficiency.
• OCS (Optical Circuit Switch): High-capacity switching platforms essential for modern data center architectures, enabling direct optical interconnections that improve network scalability and power efficiency.
• CPO (Co-Packaged Optics): Integrated solutions combining switch or compute silicon with embedded optical I/O for high-speed, low-latency connectivity, targeted as a major long-term growth area.
• EML (Electro-Absorption Modulated Laser): Key laser component for advanced high-speed optical transceivers, enabling multi-terabit data rates across optical links.
• SiPho (Silicon Photonics): Platform leveraging silicon processes to integrate photonic devices for transceivers; SiPho and EML both support 1.6T production at similar margin levels for Coherent.
• VCSEL (Vertical-Cavity Surface-Emitting Laser): Laser technology expected to be used for next-gen CPO and NPO solutions, with 200G devices now in development at Coherent.
• LTA (Long-Term Agreement): Multi-year supply contracts between Coherent and major customers, typically featuring customer-funded capex, production commitments, and demand guarantees.

Full Conference Call Transcript

James Robert Anderson: Thank you, Paul, and thank you, everyone, for joining today's call. Coherent, Inc. is a global leader in photonic technology, which is foundational to the performance and scalability of AI data centers and critical to many important industrial applications. We are at the center of an extraordinary expansion in optical networking infrastructure driven by the rapid growth of AI and the increasing need for bandwidth and energy efficiency. As a result, we delivered another quarter of strong financial performance, with accelerating growth, expanding margins, and improving profitability. Importantly, we are seeing continued strengthening in demand across our business. This quarter, we experienced another step-function increase in our order book, driving our backlog to a record level.

Customer demand remains exceptionally strong with no signs of attenuation, and our visibility continues to extend further into the future with orders now reaching into calendar 2028 and customer LTAs extending to the end of the decade. This demand is increasingly translating into near-term shipment and revenue opportunities as we continue to expand capacity. Given both the near- and long-term demand strength, combined with our continued expansion of production capacity, we expect a period of sustained strong revenue growth over the coming quarters. We expect strong sequential revenue growth in our June quarter, and we continue to expect fiscal 2027 growth to exceed our fiscal 2026 growth rate.

Turning to our Q3 operating results, revenue increased 9% sequentially and 27% year over year on a pro forma basis, representing an acceleration in our year-over-year growth rate versus the prior quarter. Non-GAAP gross margin expanded both sequentially and year over year, and the combination of revenue growth, margin expansion, and operating leverage drove non-GAAP EPS growth of 55% year over year. We continue to grow profitability significantly faster than revenue. We are pleased with the continued execution while we also see significant opportunity ahead as we scale the business to meet the demand environment in front of us.

Our Data Center and Communications segment continues to be the primary driver of our growth and accounted for 75% of total company revenue in Q3. Growth in this segment accelerated again this quarter with revenue increasing more than 40% year over year. Segment performance was driven by both accelerating demand and strong execution across our product portfolio. In our data center business, revenue increased 13% sequentially and 37% year over year, representing a second consecutive quarter of double-digit sequential growth. We expect data center growth to further accelerate in the current quarter, supported by exceptionally strong demand, improving supply, and continued progress in our capacity ramp.

Demand in our data center business remains exceptionally strong and broad-based across multiple customers and product categories. We expect the accelerated growth in the current quarter to be driven by both transceivers and OCS systems. Within transceivers, we expect growth to be driven by both 800G and 1.6T. In particular, we expect 800G revenue to grow year over year in calendar 2026, while 1.6T transceivers ramp rapidly through the balance of this calendar year and into next year as a broad range of customers adopt 1.6T. Given the exceptionally strong demand environment and the industry-wide constraint in indium phosphide, capacity expansion remains one of our highest priorities.

Importantly, we continue to make excellent progress on our 6-inch indium phosphide ramp, which is a key driver of our long-term capacity expansion and a meaningful differentiator for Coherent, Inc. We are now seeing the benefits of this ramp in both revenue and margin, and we expect those benefits to increase further over the coming quarters. We remain on track to achieve our goal of doubling internal indium phosphide output capacity by the end of this calendar year. Based on current execution, we now expect to reach that milestone one quarter earlier than originally planned. We also expect to more than double our internal indium phosphide capacity again by the end of calendar 2027.

Our 6-inch platform is producing EMLs, CW lasers, and photodiodes, and the yields for each of the three device categories continue to exceed those of our 3-inch production lines. During the quarter, we shipped our first transceivers containing components produced on our 6-inch lines, and those shipments contributed to both sequential revenue growth and gross margin improvement. The initial 6-inch production contribution came from our Sherman, Texas facility, which is the world's most advanced indium phosphide production site and will play an important role in ramping CW laser production for our CPO solutions, including those supporting our NVIDIA partnership.

Given the success of the 6-inch ramp to date, we have also announced plans to begin 6-inch indium phosphide production at a third site in Zurich. Overall, we are very pleased with the execution of our production teams. As we continue to ramp 6-inch output, we expect increasing benefits to both revenue and gross margin across our transceiver and CPO product lines over the coming quarters. We expect OCS revenue to grow this quarter as we ramp production capacity to meet demand. We have increased our view of the OCS market opportunity to over $4 billion, reflecting expanding use cases across data center interconnect, scale-out and scale-up networks, and continued broadening customer engagement.

We believe OCS also expands our role into higher-value layers of AI networking infrastructure. We recently resolved a bottleneck in our production capacity and are now ramping output rapidly across two production facilities. As a result, we expect strong sequential revenue growth over the coming quarters as production improvements translate into higher shipments and backlog conversion. We also continue to make strong progress in co-packaged optics, which we believe represents one of the most important long-term growth opportunities for Coherent, Inc. As we have discussed previously, CPO expands our role in AI data architectures, particularly in the scale-up portion of the network where optics is expected to increasingly complement and over time displace copper.

We believe CPO represents more than $15 billion of incremental addressable market opportunity. In March, we announced a strategic partnership with NVIDIA focused on multiple CPO-related products and solutions. This partnership includes both NVIDIA's $2 billion equity investment in Coherent, Inc. and a multiyear supply agreement extending through the end of the decade. The agreement covers multiple CPO-related products including our high-power CW laser, and provides meaningful long-term visibility into future demand. More broadly, our CPO opportunity is supported by the breadth and depth of Coherent, Inc.’s photonic technology platform. We believe our breadth of photonic technology and our manufacturing scale position us very well to meet a broad range of customer requirements across key components, subsystems, and higher-level assemblies.

We expect initial scale-out CPO revenue to begin ramping in the second half of this calendar year, with scale-up CPO revenue expected to begin ramping in the second half of calendar 2027. In addition to NVIDIA, we are also engaged with multiple other customers across a broad range of CPO and MPO opportunities. Overall, we believe CPO will become a significant contributor to Coherent, Inc.’s long-term revenue growth and margin expansion, and will further strengthen our strategic position in AI data center infrastructure. Turning to our communications business, revenue growth accelerated significantly in Q3 with revenue increasing 16% sequentially and 60% year over year, driven by strong demand across data center interconnect, scale across, and traditional telecom applications.

We expect strong sequential growth again in the current quarter. Demand remains broad-based across customers, products, and end-to-end applications. We are seeing strong momentum across our communications portfolio, which spans components, modules, and systems, reflecting both favorable market conditions and Coherent, Inc.’s strong competitive position. In particular, we continue to see robust demand for our DCI solutions, including ZR and ZR+ transceivers, as well as strong demand across our broader transport portfolio. One additional growth driver that we are particularly excited about is multi-rail. These solutions address the increasing need for greater bandwidth between AI data centers as workloads become more distributed across multiple locations.

We believe multi-rail represents a significant expansion of our communications addressable market opportunity, and we expect initial revenue to begin ramping in 2027. Overall, we believe our communications business is very well positioned for continued strong growth supported by current demand strength, our expanding portfolio, and the ramp of important new platforms over time. Across our Data Center and Communications segment, the breadth and depth of Coherent, Inc.’s photonic technology portfolio combined with our manufacturing scale continue to resonate strongly with our customers. As a result, we have signed or are in the process of finalizing long-term supply agreements with multiple strategic customers that include both multiyear demand commitments and upfront investment to support capacity expansion.

I will now turn the call over to Sherri.

Sherri R. Luther: Thank you, Jim. In our third quarter, we delivered accelerated double-digit year-over-year revenue growth and meaningful gross margin expansion, significantly improving profitability. We have strategically increased our capital investments to expand internal capacity in support of the rapidly growing demand in Data Center and Communications. In addition, we also continued to strengthen our balance sheet, reducing our debt leverage ratio to below one time. I will now provide a summary of our Q3 results. Third quarter revenue was a record $1.8 billion, up 7% sequentially from the second quarter and up 21% year over year, driven by growth in AI Data Center and Communications demand.

On a pro forma basis, revenue increased 9% sequentially and 27% year over year, excluding revenue from our Aerospace and Defense business and our Munich, Germany product division, which were sold in Q1 and Q3, respectively. Our Q3 non-GAAP gross margin was 39.6%, a 57 basis point improvement compared to the prior quarter and a 105 basis point improvement as compared to the year-ago quarter. We continue to execute on our gross margin expansion strategy, where we generated sequential and year-over-year increases in gross margin primarily in the Data Center and Communications segment. These improvements were driven by reductions in product input costs, yield improvements from 6-inch indium phosphide, as well as significant benefits from pricing optimization.

Third quarter non-GAAP operating expenses were $348 million compared to $321 million in the prior quarter and $297 million in the year-ago quarter. R&D expense as a percentage of revenue increased to 9.9% in Q3 compared to 9.4% in both the prior quarter and the year-ago quarter. The sequential and year-over-year increases in R&D were primarily in the Data Center and Communications segment product roadmaps. These investments are focused on multiple short- and long-term revenue growth drivers, namely in transceivers and CPO, as well as new high-margin, high-value systems such as OCS and multi-rail. We continue to focus on investments with the highest ROI that drive the future growth of the company.

SG&A expense as a percentage of revenue declined to 9.4% in Q3 compared to 9.6% in the prior quarter and 10.4% in the year-ago quarter, with continued progress on driving efficiencies and greater leverage in SG&A. We are already seeing benefits from our low-cost regional shared services initiative within the G&A functions as we streamline processes and gain better leverage and efficiency. In addition, our ERP consolidation project has made great progress, where the majority of the company is now on a single ERP platform. We expect additional benefits from these initiatives in Q4, with more meaningful benefits into fiscal year 2027.

Our third quarter non-GAAP operating margin increased to 20.3% compared to 19.9% in the prior quarter and 18.6% in the year-ago quarter, due to strong revenue growth and continued gross margin expansion. Third quarter non-GAAP earnings per diluted share was $1.41, up 9% from the second quarter and up 55% from the year-ago quarter. The acceleration in earnings outpaced revenue growth, driven by strong top-line performance as well as gross margin expansion. Our cash balance increased to $3 billion from $1.5 billion in the prior quarter, primarily due to the $2 billion equity investment from NVIDIA that we announced on 03/02/2026.

We focused our capital allocation priorities during the quarter on investments that drive long-term revenue growth and profitability—specifically, investments in our Data Center and Communications business and our R&D product roadmap, as well as capacity expansion. We also made $162 million in debt payments during the quarter, reducing our debt leverage ratio to 0.5 times, down from 1.7 times in Q2 and 2.1 times in the year-ago quarter. Our capital expenditures increased to $290 million compared to $154 million in the prior quarter and $112 million in the year-ago quarter. These investments were focused on expanding our internal capacity to support the exceptional demand in Data Center and Communications.

Due to our strong bookings and the rapidly growing demand, we expect capital expenditures will increase sequentially in Q4. We continue to be on track with our capacity expansion plans. With a strong balance sheet and continued focus on improving profitability, we are well positioned to support the unprecedented customer demand with investments to rapidly expand our production capacity. As a reminder, in January we closed the sale of our Munich, Germany product division. For reference, over the prior four quarters, this business contributed average quarterly revenue of $25 million with a gross margin well below Coherent, Inc.’s corporate gross margin. Our Q3 results included $8 million in revenue from this business.

I will now turn to our guidance for 2026. We expect revenue to be between $1.91 billion and $2.05 billion. We expect non-GAAP gross margin to be between 39% and 41%. We expect total operating expenses of between $360 million and $380 million on a non-GAAP basis. We expect the tax rate for the quarter to be between 18% and 20% on a non-GAAP basis. We expect EPS of between $1.52 and $1.72 on a non-GAAP basis. With our strong backlog and excellent visibility, we are focused on rapidly expanding our internal capacity with investments that drive the long-term growth and profitability of the company.

We will continue to allocate capital in a disciplined manner as we execute against our long-term financial target model and drive durable shareholder value. That concludes my formal comments. Operator, please open the call for Q&A.

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask analysts to limit themselves to one question and a follow-up so that others have an opportunity to do so as well. One moment, please, while we poll for questions. We will take the first question from the line of Samik Chatterjee from JPMorgan.

Please go ahead.

Samik Chatterjee: Congrats on the robust set of results here. James, maybe if I can start off with the guide for June. It is implying an acceleration from Q3. So the increases you had in Q3 from a revenue perspective—particularly, I look back through, every quarter you managed to accelerate the sequential revenue growth—maybe if you can dive into what is the driver on the demand side that is helping you lead to that acceleration, and also contextualize it in terms of supply and how that is helping with the acceleration as well. And I have a follow-up after that. Thank you.

James Robert Anderson: Thanks, Samik, for the question. Yes, if you look at the midpoint in the June guide, we certainly expect acceleration in growth versus the prior quarter, and if you look at the year-over-year growth rate as well. We really believe the current June quarter represents a new inflection point in our revenue growth rate moving forward—so faster growth this quarter, and as we look forward into fiscal 2027, which starts in July, we expect our fiscal 2027 growth rate to be above fiscal 2026. On the demand side, it looks exceptional right now—both in terms of the degree of demand and also our visibility.

Bookings in the prior quarter were up substantially from the previous quarter—record bookings—an incredible amount of backlog, and we have orders that extend out into calendar 2028. We have tremendous demand ahead of us and great visibility. Demand is coming from places you would expect—certainly data center growth, both transceivers with some of the new growth vectors we are bringing on, as well as communications. On the supply side—that is really more of our focus—demand looks great, and we are ramping supply very quickly. This quarter and moving forward, we are bringing on substantially more capacity over the coming quarters. The best single example is the indium phosphide capacity coming online.

Indium phosphide has been the key constraint for us for a number of quarters—it is a constraint for the industry. Our target this year is to double our indium phosphide capacity, and based on current execution, we will achieve that goal next quarter, one quarter earlier than we thought. Looking into next calendar year, we expect to more than double indium phosphide capacity again—a quadrupling over a two-year period. That unlocks an acceleration in our revenue growth moving forward. That is on existing business. Then you layer on top some new growth vectors coming online: OCS is ramping—we expect it to contribute to growth this quarter and grow sequentially.

CPO revenue kicks in the second half of this year—we view that as all incremental. Our multi-rail systems will start contributing revenue in the first half of next calendar year. Then we think thermal solutions will start to generate revenue in 2027. We should have multiple growth vectors layering on top of the existing business, so we feel really good about the accelerated growth ahead of us.

Samik Chatterjee: Got it. Thanks for that, James. As a follow-up, you mentioned indium phosphide capacity. Given that you are tracking a bit ahead relative to your target for 2x in the first year, how should we think about potentially upside or accelerating the target for 2x next year as well? And how should investors think about the impact of that on gross margin? How material is it, and when does it start to be material to your gross margin trajectory as well? Thank you.

James Robert Anderson: Thanks, Samik. On gross margin, we have already started to see the impact of 6-inch indium phosphide capacity, which has a much better cost structure—6-inch versus 3-inch yields more than four times as many devices at less than half the cost. We already saw that contribute to gross margin expansion in our fiscal Q3. As Sherri said in her prepared remarks, our guide in the current June quarter has gross margin going up sequentially again; part of what is driving that is the 6-inch indium phosphide capacity. I am very pleased with the execution on our 6-inch ramp. There are two factors: raw capacity and yield.

The team has executed ahead of plan on raw capacity, and we are seeing very healthy yields. We are in production on three device types—EML, CWs, and PDs—and all three have yields on 6-inch that are higher than our 3-inch production yields. Texas was the first facility we started ramping 6-inch on; given such good yields out of the gate from Texas—which is a world-leading indium phosphide production facility—we started production in Sweden, and now we announced a third site in Zurich. We expect to see production from that third site at the beginning of calendar 2027.

The 6-inch ramp both unlocks additional growth and contributes to gross margin as it becomes a bigger portion of our overall indium phosphide production.

Operator: Thank you. We will take the next question from the line of Simon Matthew Leopold from Raymond James. Please go ahead.

Simon Matthew Leopold: There is a perceived gap versus one of your primary competitors that stems from investors comparing their forecasts and your forecasts in categories like OCS and CPO. How do you explain the difference? And then I have a quick follow-up.

James Robert Anderson: Simon, on both of those new growth areas, we feel really good about the growth ahead of us. On OCS, over the last couple of months at OFC, we doubled our forecast of the market opportunity. Part of the sequential growth we are guiding to in the current quarter is OCS systems growth. We feel great about the differentiation of our technology—higher reliability and much better power efficiency. We are focused on ramping capacity as fast as possible. We had a breakthrough over the last couple of months removing a bottleneck in production capacity, which has allowed us to ramp production at a much faster rate, and we are ramping in two sites in parallel.

We feel good about both the long-term opportunity and the near-term ramp. On CPO, I think it is a transformational growth opportunity for the company. We see that market size as over $15 billion, probably a conservative estimate over the coming years. CPO revenue for us will start in the second half of this calendar year—initially scale-out CPO revenue. We expect to see the beginning of scale-up CPO revenue in 2027. We are engaged with multiple customers. We publicly announced our NVIDIA partnership around CPO—a multibillion-dollar agreement extending through the end of the decade—covering multiple different CPO solutions.

In a CPO solution, we are not just providing the high-power CW laser; we provide the external laser source module, the fiber attach unit—including microlens arrays and polarization-maintaining fiber—and, within the ELS, all the ingredients: the laser, isolators, thermoelectric coolers. There is a tremendous amount of content we expect to provide in CPO. We see this as a major new growth area, and we are very well positioned. First revenue will start later this calendar year.

Simon Matthew Leopold: As a follow-up, I appreciate you do not want The Street micromanaging each product segment, but could we confirm if the 1.6 terabit transceiver revenue exceeded $100 million in March? If not, when can we get to that milestone?

James Robert Anderson: We do not break out individual data rate revenue for our transceiver business. We expect 800G to grow this year and likely again next calendar year, and on top of that, 1.6T is ramping at an incredibly rapid pace—faster than what we would have thought a year ago. A good portion of our sequential growth in the current quarter is driven by the 1.6T ramp. We expect 1.6T to continue to ramp very quickly over the coming quarters. The growth drivers for our business are really 800G and 1.6T combined, not just this calendar year but next as well.

Operator: Thank you. We will take the next question from the line of Thomas O'Malley from Barclays. Please go ahead.

Thomas O'Malley: Thanks for taking my question. My first one is on gross margin. If I look at gross margins in March at 39.6% and then last year at 38.5%, the incremental on a year-over-year basis is around 44%. Since that time, you have increased 6-inch production, nearly doubled indium phosphide, exited some businesses, and your data center and comms businesses are growing nicely. Why are you not getting more incremental fall-through on the gross margin side? Are there any puts you could highlight that are preventing you from breaking out on that line item?

Sherri R. Luther: Thanks, Thomas. A few things to highlight. If you go back to the end of Q4 of 2025, we have increased our gross margin sequentially in seven of the past eight quarters. Including the 57 basis point improvement in our recent Q3, that is an increase of about 530 basis points; if you tack on the midpoint of our guide for Q4, that takes you to 570 basis points of improvement. That is solid progress. We are not done, and we remain super focused on our Investor Day target of greater than 42%. The drivers of our gross margin expansion strategy—cost reductions, yield improvements, and pricing optimization—each increased quite significantly quarter on quarter in Q3.

On cost reductions, we had improvements from 6-inch indium phosphide, which is roughly half the cost of 3-inch on a per-device basis. We are already seeing that benefit. We also saw ongoing yield improvements as we continue to ramp 6-inch across two sites in parallel, with a third site coming up. That will continue to add benefit. Most of our gross margin improvements have been in the Data Center and Communications business, which I am pleased about. We also saw pricing optimization benefits increase significantly quarter on quarter and year over year, not only in Industrial but quite sizably in Data Center and Communications.

We will continue to drive to our target, but I am pleased with the progress so far—we are still in the early stages of the 6-inch ramp and other initiatives.

Thomas O'Malley: As a follow-up, in the preamble, James, you mentioned some bottlenecks that were being relieved in the OCS business. What specifically are you referring to, and how much of an impact could that have on production?

James Robert Anderson: There were some components that we make internally at Coherent, Inc. that were pacing our production capacity expansion. We were able to dramatically improve the output of those internal components, which unlocked an acceleration in our production capacity. Over the last month or two, we have seen a strong ramp in our pace of production and expect that to continue. We are seeing a much faster production ramp in OCS than a few months ago, which is really good.

Operator: Thank you. We will take the next question from the line of Blayne Curtis from Jefferies. Please go ahead.

Blayne Curtis: Thanks for taking my question. I wanted to ask about scale across becoming a big talking point. You called it out in the comms business. Where is that today, and as you look to fiscal 2027, how do you frame that ramp for scale across?

James Robert Anderson: Thanks, Blayne. We are seeing tremendous growth in the scale across part of the business. This falls within our Communications segment—scale across or DCI, along with traditional telecom. The fastest growth is in scale across. In the most recent quarter, we saw 16% sequential growth and 60% year over year. Demand and visibility are exceptional. We have LTAs in place with customers, and it is broad-based across almost every product and across customers. Products in that segment include components like pump lasers; modules like ZR/ZR+ transceivers—100G, 400G, and ramping 800G ZR/ZR+; line cards and amplifiers; and full systems. We expect this area to be a very strong growth driver moving forward.

A new system that will accelerate growth here is multi-rail. Our multi-rail technology, highlighted at OFC, provides a huge capacity increase within the same power and physical area as prior solutions, which is a tremendous customer benefit. We have several very differentiated component technologies that go into that system, and we are selling full systems. We expect revenue to start in 2027—another growth vector layering on top. Very strong growth here, and we expect it to continue.

Blayne Curtis: Thanks, James. As a follow-up on the margin tailwinds—you called out 6-inch as a driver. I am assuming 6-inch volumes in units are still fairly small. Are there startup costs that roll off, and is that what drives the savings? And is 1.6T a gross margin uplift as well?

James Robert Anderson: In the prior quarter, 6-inch was one of several contributing factors to gross margin expansion; similar in our current quarter guide—6-inch is a contributor along with pricing and other cost structure improvements. We are still early in the 6-inch ramp. We shipped our first transceivers last quarter that included 6-inch devices—initial production that will ramp significantly over the coming quarters. Much more 6-inch benefit is ahead. All of the doubling of capacity by next quarter is 6-inch, and by the end of this year, half of our capacity will be 6-inch. On 1.6T, yes, we see it as beneficial to gross margin.

As with prior data rate transitions, at the beginning of the lifecycle, gross margins are generally better than the prior data rate. We would expect 1.6T to be beneficial to transceiver gross margin.

Blayne Curtis: Thanks, James.

Operator: Thank you. We will take the next question from the line of George Charles Notter from Wolfe Research. Please go ahead.

George Charles Notter: Thanks very much. Anything more you could tell us on the new LTAs that you are signing? We learned a lot around the NVIDIA transaction, but you mentioned there are a number of other deals. Anything you could tell us in terms of how big those deals are, duration, whether they are funding your capital expansions—anything you can tell us financially in the aggregate would be interesting. Thanks.

James Robert Anderson: Thanks, George. We signed a couple of additional LTAs in the prior quarter, and we have a number of ongoing discussions. We expect to close additional LTAs very soon this quarter. These LTAs usually have three parts. First, there is usually an upfront investment from the customer to help with CapEx—this can come in a number of forms and represents customer skin in the game, which we view as very positive. Second, there is a supply commitment from us. Third, there is some sort of minimum demand commitment from the customer to ensure that capacity is utilized. Almost every LTA has those three parts. We made good progress last quarter and anticipate more LTAs to come—significant in size.

George Charles Notter: Anything about the genre of customer—cloud providers versus systems manufacturers?

James Robert Anderson: It is both. We expect LTAs from both hyperscalers and systems customers.

Operator: Thank you. We will take the next question from the line of Vivek Arya from Bank of America Securities. Please go ahead.

Michael Mani: Hi, this is Michael Mani on for Vivek Arya. Thanks for taking our questions. I wanted to dive deeper into some of the CPO LTAs you are dealing with, including NVIDIA, and other deals you are eyeing over the next couple of years. What is the mix of these agreements between lasers, ELS modules—which you highlighted at OFC—and the various other components you could sell into a solution like fiber attach units? How does that vary by customer, and what are the puts and takes?

James Robert Anderson: It can vary by customer, but it is important to keep in mind we have a very broad portfolio of CPO technology to bring to customers—that is a real advantage. At OFC, we laid out the different technologies we can bring to a CPO solution. High-power CW lasers are certainly important, but not the only component. We can also bring 200G and, in the future, 400G VCSELs. There are applications where VCSELs are a better laser technology for near-package optics. Beyond that, we can provide the external laser source (ELS) module, and within that, we have almost all key optical ingredients in-house—not just the laser, but isolators and thermoelectric coolers.

Customers view this as a strength because we are not dependent on others for those technologies. The fiber attach unit—which connects the switch chip or XPU to the faceplate or to the ELS—we can provide that entire assembly as well, including lens arrays and polarization-maintaining fiber. We have all the ingredients for the CPO solution. Most customers are leveraging, if not all, then a good portion of that portfolio.

Michael Mani: For my follow-up, on the two incremental opportunities you highlighted for 2027—multi-rail and thermal management products—you said revenue timing is first half for multi-rail and second half for the thermal products. What are the milestones between now and then from a customer perspective? When will you have a better sense of how large those ramps can be? What does the competitive landscape look like in both areas, and how are you differentiated?

James Robert Anderson: On multi-rail, the milestones are the typical engineering steps with customers: qualification and pilot runs—very normal engineering milestones that we are moving through. We expect revenue to start in 2027. As we get closer, we can provide a better idea of the ramp rate. We see it as a substantial new product line with significant revenue opportunity—we sized the market at least $2 billion over the coming years, potentially larger. The technology is highly differentiated. Without going into all the technical details we covered at OFC, we have several key components unique to us or with unique differentiation that position us well. On thermal solutions, we are very excited.

We are taking our Industrial materials technologies and repurposing them for data centers. An example is our Thermadite material, which is proprietary to Coherent, Inc. Applied to cooling a switch chip or an XPU/ASIC relative to current copper-based solutions, Thermadite can provide heat transfer two to five times better. That allows the XPU or GPU to run at higher frequency or utilization due to more effective cooling—essentially more performance out of the same device. We have very strong customer engagements and are moving through normal engineering milestones; we expect revenue in the second half of next year.

Another great technology is our thermoelectric generators, which harvest waste heat from CPUs/GPUs and convert it back into electrical energy, improving data center power efficiency. We are excited about these thermal solutions.

Operator: Thank you. We will take the next question from the line of Papa Talla Sylla from Citi. Please go ahead.

Papa Talla Sylla: Thank you for taking my question, and congrats on the results. James, my first question is around pricing in general from a transceiver perspective. You are a seller of transceivers, but also a buyer of lasers and electrical components. We have been hearing about some laser price increases, particularly for EML. Are you seeing that, and if so, are you able at the transceiver level to pass through those costs? Do you have enough levers at the transceiver level to also increase pricing given the demand-supply imbalance?

James Robert Anderson: On pricing, dynamics are very healthy given supply versus demand. One thing that happens as we change data rates is ASPs go up—1.6T pricing is higher than 800G, etc. Pricing dynamics are very healthy. On cost, most of the components that go into our transceivers are internally sourced, which provides a buffer against external price increases. We do use some externally sourced components for strategic reasons, but we have been successful at either passing along those higher prices or offsetting them with our own internal production. The combination of pricing and cost has resulted in higher gross margins. As Sherri shared, the gross margin improvement has primarily been coming from Data Center and Communications.

Papa Talla Sylla: It is clear that demand for 1.6T is very strong in early deployments. Can you touch on the mix you are seeing between EML, SiPho, and perhaps VCSEL? And what would be the margin implications of selling a higher SiPho transceiver versus EML, or vice versa?

James Robert Anderson: We do not see a significant margin difference between EML- or SiPho-based transceivers; both are in the same ballpark of gross margin, and we are ramping both. On 1.6T, we are ramping both EML- and SiPho-based products. Remember, even a SiPho-based transceiver requires a CW laser based on indium phosphide, so both require indium phosphide capacity—another reason we are driving the indium phosphide ramp. For us, the EML versus SiPho mix is determined by customer application—pros and cons vary by use case, and we work with customers to choose the best fit. We do expect VCSELs to be used later as well.

Our 200G VCSEL development is going very well, and we expect 200G VCSELs to be adopted in some CPO or NPO applications. The initial 1.6T ramp is a combination of EML and SiPho.

Operator: Thank you. We will take the next question from the line of Ruben Roy from Stifel. Please go ahead.

Ruben Roy: Thank you. James, the discussion around CPO has certainly accelerated since the beginning of the year—through OFC and over the past few weeks with some of your peers and yourselves talking about it. First, just a clarification on the second-half scale-out and 2027 scale-up ramps. Are those ramps tied to NVIDIA specifically, or are there other customers contributing to those initial scale-out CPO revenues for you?

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