Coherent reported record revenue of $1.81 billion for the third quarter, representing a 21% year-over-year increase and a 7% sequential rise. On a pro forma basis, growth accelerated to 27%. More importantly, the midpoint of the fourth-quarter revenue guidance is $1.98 billion, implying a 10% sequential increase. Management explicitly stated that the growth rate for fiscal year 2027 will exceed that of fiscal year 2026, a commitment made even as the revenue base has already doubled.
The company achieved its target of doubling six-inch indium phosphide wafer capacity a quarter ahead of schedule. The goal, originally set for the end of the year, will now be met next quarter. Plans are in place to double capacity again by the end of 2027, resulting in a fourfold increase in just two years. The yield rate for six-inch wafers has already surpassed that of the three-inch production lines, with costs less than half and chip output per wafer more than four times greater. This serves as the core engine for ongoing gross margin expansion.
A significant development was NVIDIA's $2 billion strategic investment, accompanied by a multi-year co-packaged optics supply agreement extending to the end of the decade. The agreement covers a full suite of CPO components. Revenue from scale-out CPO is expected to begin in the second half of 2026, followed by scale-up CPO revenue in the second half of 2027. The total addressable market for CPO exceeds $15 billion.
The Data Centers and Communications segment, accounting for 75% of total revenue, grew over 40% year-over-year. Within this segment, the Data Centers sub-segment grew 37% year-over-year and 13% sequentially, marking the second consecutive quarter of double-digit sequential growth. The Communications sub-segment accelerated, posting 60% year-over-year and 16% sequential growth, driven by strong demand for data center interconnect and scale-across solutions.
The addressable market opportunity for optical circuit switching was revised upward to over $4 billion. Internal bottlenecks for key components were resolved in the past two months, with two factories now ramping production in parallel. Additionally, the Multi-Rail system, which addresses a market exceeding $2 billion, is expected to begin contributing revenue in the first half of 2027.
Financially, the company's debt leverage ratio improved dramatically, dropping from 2.1x to 0.5x, fundamentally transforming the balance sheet. This was achieved through NVIDIA's equity investment and $162 million in debt repayment. However, operating cash flow over nine months was only $10 million, as cash was heavily consumed by working capital, with inventory increasing from $1.4 billion to $2.1 billion and accounts receivable rising from $1.0 billion to $1.2 billion.
Understanding these results requires context from Coherent's transformation over the past three years. Following the acquisition of II-VI in 2022, the company carried significant debt. The narrative for the company has now shifted from a "de-leveraging story" to an "AI-driven scale expansion story," supported by the mass production of six-inch InP wafers and the strategic investment from NVIDIA.
The most notable aspect of the report is not the record revenue itself, but the counter-intuitive signal that growth is accelerating from an already-doubled base. However, Wall Street's reaction indicates that for a stock that has risen over 400% in the past year, "good" is not sufficient—it must be "better than expected." Non-GAAP earnings per share of $1.41 missed the consensus estimate by $0.02, and revenue was slightly below expectations, leading to a stock decline of approximately 6.7% post-earnings. This pattern was similar to peer Lumentum's experience. Analyst reactions were more measured, with Stifel raising its price target significantly, and the majority of analysts maintaining Buy ratings.
A comparison with Lumentum reveals differences in strategy. While Coherent's revenue is 2.2 times larger, its gross and operating margins are lower, influenced by its industrial segment and higher level of system integration. Coherent's first-mover advantage in six-inch InP production is a key structural advantage, with cost benefits expected to gradually narrow the margin gap. Both companies, however, signal strong industry-wide demand, with order visibility extending into 2028.
Looking ahead, three key factors will determine the medium-term trajectory: the speed at which six-inch InP capacity translates into revenue, the ability to achieve the gross margin target of over 42%, and the successful monetization of new growth vectors like OCS, CPO, and thermal management products. The recent stock pullback reflects a market waiting for tangible evidence of these growth drivers materializing on the income statement.
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