Driven by AI computing demand and the evolution of network infrastructure towards higher bandwidth and lower power consumption, photonics leader Coherent delivered an earnings report that exceeded expectations. Financial results show the company achieved a record $1.80 billion in Q3 revenue, a 21% year-over-year increase and a 7% sequential increase. Non-GAAP earnings per share surged 55% compared to the prior year, and gross margin expanded to 39.6%.
However, as market analysts had cautioned, profit-taking dominated the reaction to the strong report, leading to a more than 7% decline in the stock price during after-hours trading. Looking beyond short-term price fluctuations, the company's management conveyed more fundamental insights during the earnings call.
The issue is no longer demand, but rather the race to overcome production bottlenecks and bring new technologies like CPO and thermal management to market.
CEO Jim Anderson stated on the call that orders are experiencing a "step-function increase," with the order backlog reaching a historic high and customer schedules extending into 2028 and towards the end of the decade. Concurrently, the upgrade to 6-inch indium phosphide capacity is progressing ahead of schedule, with a doubling of output now expected one quarter earlier than planned. Shipments of 1.6T optical transceivers are also accelerating at what was described as an "incredibly rapid pace."
Anderson also highlighted three new technologies—Co-Packaged Optics (CPO), Multi-Rail, and Thermadite thermal management material—as being poised for launch. Together, these represent a total addressable market exceeding $17 billion, opening new avenues for growth.
**Demand Shows "Step-Function" Growth, Orders Booked Through 2028** CEO Jim Anderson provided an exceptionally positive assessment of current industry conditions during the call, using strong language to describe the surge in orders. "We are at the center of an extraordinary expansion in optical network infrastructure, fueled by the rapid growth of AI and increasing demands for bandwidth and energy efficiency," Anderson stated in his opening remarks. "This quarter, our order book experienced another step-function increase, driving our backlog to a record level." Addressing concerns about sustainability, management offered reassurance. Anderson explicitly stated there are no signs of weakening customer demand. "Our visibility continues to extend further into the future; orders are now booked into calendar year 2028, with customer long-term agreements stretching to the latter part of this decade." The Datacom and Telecom segment, accounting for 75% of total revenue, was the primary growth driver, with segment revenue soaring over 40% year-over-year this quarter. For the fourth fiscal quarter, the company guided revenue to be between $1.91 billion and $2.05 billion, with gross margin expected to improve further to between 39% and 41%.
**Breaking Core Capacity Bottlenecks: 1.6T Ramping Rapidly, 6-Inch InP Capacity Doubling Early** In the context of the AI computing explosion, the industry-wide challenge is not a lack of orders but an inability to fulfill them. For Coherent, indium phosphide production capacity is the key bottleneck. This is also the margin driver most closely watched by Wall Street. The transition from 3-inch to 6-inch wafer production lines is yielding immediate financial benefits. "Moving from 3-inch to 6-inch means more than a fourfold increase in die per wafer, at less than half the cost," Anderson revealed. He added that yields on the 6-inch platform have already surpassed those of the traditional 3-inch lines, and the company shipped its first transceivers containing 6-inch components in the third fiscal quarter. To meet "exceptionally strong" demand, the company is aggressively accelerating its expansion timeline. "Our goal is to double internal indium phosphide capacity this year. The good news is, based on current execution, we now expect to achieve this milestone one quarter earlier than originally planned." Furthermore, the company expects to double its internal InP capacity again by the end of 2027, achieving a fourfold expansion within two years. When asked by an analyst about allocating this precious capacity between new and legacy product lines, Anderson's response reflected market-driven pragmatism: "Overall, the way we think about capacity allocation is: we allocate indium phosphide capacity to whatever generates the most, highest-margin dollars. Wherever we can generate the largest profit dollars for the company, that's where we allocate capacity." In the closely watched transceiver market, demand is rapidly shifting to higher speeds. Anderson noted that 800G products will continue to show year-over-year growth in 2024, but the more significant development is the emergence of 1.6T. "1.6T transceivers are ramping at an incredibly rapid pace; in fact, the ramp is happening faster than we envisioned a year ago." Both EML and silicon photonics-based 1.6T modules are now entering volume production.
**Expanding the Horizon: CPO, Multi-Rail, and Thermal Management "Black Tech"** While 800G and the rapidly ramping 1.6T transceivers form the foundation of the current valuation, the new technology roadmap outlined during the call represents Coherent's core strategy for addressing future market uncertainties. The first is Co-Packaged Optics, seen as a "transformative growth opportunity." The company estimates this represents an incremental market exceeding $15 billion, backed by a multi-billion-dollar long-term supply commitment from NVIDIA. Revenue from scale-out CPO solutions is expected to begin ramping in the second half of this year, while scale-up CPO revenue is projected to start in the second half of 2027. Secondly, addressing the growing power consumption and thermal challenges in AI data centers, Coherent presented an attractive "crossover" story—applying material technologies originally developed for industrial markets to AI data centers. Anderson highlighted the company's proprietary Thermadite material for analysts. "Compared to current thermal solutions typically based on copper, Thermadite, or other materials we provide, can offer 2 to 5 times better thermal conductivity." He used a vivid analogy to explain the commercial value of this thermal management technology to investors. "This is a huge win for our customers. It means an XPU or GPU can operate at higher frequencies or utilization because it can be cooled more effectively. It's almost like getting more tokens out of the same CPU or GPU." Additionally, the company disclosed a developing "Multi-Rail" technology aimed at addressing the growing bandwidth demands between AI data centers. This market is estimated to be worth over $2 billion, with initial revenue contributions expected to begin in the first half of 2027.
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