Optical module and communications supplier Coherent reported quarterly results and guidance for the current quarter that both surpassed Wall Street expectations, but its stock price fell sharply in after-hours trading.
On Wednesday, May 12, after the U.S. market close, Coherent announced results for its fiscal fourth quarter ended June 30, 2026. Revenue surged 34% year-over-year to $2.05 billion, beating market estimates by about 3%. Adjusted earnings per share (EPS) rose 74% to $1.74, exceeding analyst forecasts by more than 7%.
Profit quality also improved. On a non-GAAP basis, adjusted gross margin was 40.2%, up 215 basis points from a year ago. Adjusted operating profit reached $446 million, up 62.1% and surpassing analyst expectations by over 4%, while the adjusted operating margin climbed to 21.8%, a 381-basis-point improvement. Under GAAP, EPS was $1.19, compared to a loss of $0.83 in the same period last year.
More critically, the company's guidance for the current quarter significantly exceeded market forecasts. Coherent expects fiscal first-quarter 2027 revenue of $2.2 billion to $2.4 billion, with a midpoint of $2.3 billion, nearly 7% above the consensus analyst estimate. Adjusted EPS is projected at $1.85 to $2.05, with a midpoint about 10% higher than market expectations.
During regular trading before the earnings release, Coherent shares closed up over 8.2%. However, after the report, the stock failed to hold gains and turned negative, falling more than 6% in after-hours trading.
Analysts suggest the sharp post-market decline does not indicate weak results from Coherent itself, but likely reflects excessive recent gains in the AI optical communications sector and overly high market expectations. As the leading optical module player, Coherent's stock had accumulated nearly 16% gains over the past month through Wednesday's close and surged over 200% in the last 12 months, indicating crowded trades around the "AI data center optical interconnect demand explosion" theme.
AI data center demand remains the core driver, with the data communications business contributing the bulk of revenue
From a revenue structure perspective, the core growth driver for Coherent last quarter was still data centers and communications. In the fiscal fourth quarter, data center and communications revenue was approximately $1.6 billion, accounting for nearly 80% of total company revenue, serving as the primary force behind the 34% year-over-year revenue surge. In contrast, industrial business revenue was $430.5 million. While still an important segment, the current capital market focus is clearly on AI data center-related demand.
CEO Jim Anderson stated in a release that the company enters fiscal 2027 facing "unusually strong customer demand," while expanding production capacity and ramping up multiple new growth platforms. He also noted that data centers are increasingly transitioning from copper to optical connections.
This is the core logic behind Coherent's AI trading premium: as AI cluster scales expand, the demand for data transmission bandwidth between GPUs, switches, and servers rises sharply. Traditional copper connections face bottlenecks in distance, power consumption, and bandwidth, elevating the importance of optical interconnects and high-speed optical modules. As a supplier of photonics, lasers, and optical communication components, Coherent occupies a key position in this industrial chain.
Beyond revenue beat, margin improvement is the quarter's more significant highlight
Last quarter, Coherent not only saw strong revenue growth but also more pronounced profit-side improvements. The fourth-quarter adjusted gross margin of 40.2% was up 215 basis points year-over-year. Adjusted operating profit reached $446 million, a 62.1% increase, and the adjusted operating margin of 21.8% was up 381 basis points. Adjusted net income was $351 million, up 82.7% year-over-year.
This indicates the company did not merely rely on AI demand to drive revenue growth in the quarter but also achieved significant progress in operating leverage, product mix, and cost control. CFO Sherri Luther stated that strong operational execution drove significant gross margin expansion and translated revenue growth into robust GAAP and non-GAAP EPS growth.
Adjusted EPS reached $1.74, above the market expectation of around $1.62 and significantly higher than the $1.00 from the same period last year. On a GAAP basis, EPS swung from a loss of $0.83 last year to a profit of $1.19, reflecting a substantial profit recovery.
For the market, this point is particularly important. A common question for AI optical communication suppliers is whether high demand can translate into high profits, rather than being eroded by capacity expansion, pricing pressure, or supply chain costs. Coherent's simultaneous improvement in gross margin and operating margin this quarter provides a relatively positive answer at the current stage.
Next quarter guidance continues to exceed expectations, but the market has already priced in 'stronger growth'
Coherent's outlook for the first fiscal quarter of 2027 remains strong. The company expects first-quarter revenue of $2.2 billion to $2.4 billion, with a midpoint of $2.3 billion, above the consensus analyst estimate of approximately $2.15 billion. Adjusted EPS is forecast at $1.85 to $2.05, with a midpoint of $1.95, also exceeding market expectations of $1.77.
On the margin front, the company projects a non-GAAP gross margin of 39.5% to 41.5% for the first quarter, with a midpoint of about 40.5%, roughly stable and slightly improved from the fourth quarter's 40.2%. Coherent also expects non-GAAP total operating expenses of $400 million to $420 million and a tax rate of 18% to 20%.
This guidance itself has no obvious weaknesses: revenue above expectations, EPS above expectations, gross margin maintained around 40%, and management emphasizing strong demand, capacity expansion, and multiple growth platforms ramping up. However, the problem is that Coherent's stock had already risen significantly before the earnings report, and market expectations for its guidance may not have been simply to "beat consensus," but to see a more substantial upward revision. In other words, following the heating up of AI optical module trading, "beat and raise" may have become the baseline, no longer sufficient to drive the stock price higher.
Why did the stock fall after hours despite results exceeding expectations?
Coherent's after-hours decline is most directly explained not by poor earnings, but by expectations being too high, valuations too expensive, and trades too crowded.
First, the stock price had already reflected optimistic expectations before the earnings release. In regular trading on Wednesday, Coherent closed up over 8.2%. It had risen nearly 16% over the past month and over 200% in the last 12 months. After such gains, even a better-than-expected earnings report can easily trigger a "sell the news" reaction.
Second, valuations across the AI optical communications sector have noticeably increased. Barron's noted that Coherent currently trades at a forward price-to-earnings ratio of about 39 times based on expected earnings for the next 12 months, compared to around 25 times a year ago. Peer Lumentum's forward P/E is also around 41 times. High valuations mean the market demands not just strong performance, but sustained, rapid, and beatable performance.
Third, another optical communications concept stock, Lumentum, released very strong results after Tuesday's market close, raising the short-term bar for the entire optical communications sector. While Coherent's results and guidance are robust, after sector sentiment has been pushed higher, investors may want to see more aggressive revenue guidance, clearer margin upside, or a more defined pace of capacity release.
Fourth, the company's emphasis on "prioritizing investment to expand manufacturing capacity" is a positive signal long-term, but short-term, it may also raise market concerns about capital expenditure, operating expenses, and free cash flow. The first-quarter non-GAAP operating expense guidance of $400 million to $420 million indicates that amid strong demand, the company still needs to continue investing to support expansion.
Therefore, the after-hours decline more likely reflects a market repricing of "high-expectation trades" rather than a rejection of the company's fundamentals. The earnings report itself shows that the optical interconnect demand from AI data centers continues to release strongly, and Coherent is benefiting in terms of revenue, gross margin, and profitability.
Future focus: Can capacity expansion keep up with demand, and can the 40% gross margin be sustained?
Going forward, market attention on Coherent may shift from "is there AI demand?" to "how much profit can demand translate into?"
On one hand, the company has clearly stated that customer demand is exceptionally strong and it is expanding capacity. For the AI optical communications supply chain, capacity is a key variable determining the pace of revenue release. If capacity ramps smoothly, the company's subsequent revenue could still have room for upward revision.
On the other hand, whether gross margin can stabilize around 40% is also critical. The fiscal fourth quarter non-GAAP gross margin reached 40.2%, and the first-quarter guidance range of 39.5% to 41.5% suggests management expects margins to remain relatively stable. However, during a rapid expansion phase, manufacturing efficiency, yield rates, product mix, and customer pricing will all impact margin performance.
Additionally, investors will continue to monitor the growth sustainability of the data center and communications business. With revenue of approximately $1.6 billion in the fourth quarter, this segment has become Coherent's most important growth engine. If AI cluster construction and optical interconnect upgrades continue to advance, Coherent remains in a favorable position within the industry trend. However, after the significant stock price appreciation, the market will be more sensitive to quarterly orders, guidance, and margin fluctuations.
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