Coherent Corp (NYSE:COHR) reported its fourth-quarter earnings on Wednesday after the closing bell.

Below is the transcript from the Q4 earnings call.

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OPERATOR

Welcome to the Coherent fourth quarter and full fiscal year 2025 earnings webcast. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Silverstein, Senior Vice President of Investor Relations for Coherent. Please go ahead.

Paul Silverstein (Senior Vice President of Investor Relations)

Thank you Operator and good afternoon everyone. With me today are Jim Anderson, Coherent CEO, and Sherry Luther, Coherent CFO. During today’s call, we will provide a financial and business review of the fourth quarter, fiscal 2025 and full year fiscal 2025 and the business outlook for the first quarter of fiscal 2026. Our earnings press release can be found in the Investor Relations section of our company website at coherent.com I would like to remind everyone that during our conference call today we may make projections or other forward looking statements regarding future events for the future financial performance of the Company. We wish to caution you that such statements are predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that the Company files with the SEC, including our 10-Ks, 10-Qs and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward looking statements. This call includes and constitutes the Company’s official guidance for the first quarter of fiscal 2026. If at any time after this call we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call. Additionally, we will refer to both GAAP and non GAAP financial measures during this call by disclosing certain non GAAP information, Management intends to provide investors with additional information to permit further analysis of the Company’s performance and underlying trends for historical periods. We provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings release and investor presentation that can be found on the Investor Relations section of our website at coherent.com let me now turn the call over to our CEO Jim Anderson.

Jim Anderson (Chief Executive Officer)

Thank you Paul and thank you everyone for joining today’s call. Our fiscal 2025 was an outstanding year for Coherent as full year revenue increased by approximately 23% year over year to a record $5.81 billion driven by strong growth in our data center and communications business. Our revenue growth combined with gross margin expansion of 358 basis points led to an approximately 3x increase in our non GAAP EPS over the prior year. In addition, Q4 marked a strong end to the year with revenue increasing 16% year over year to a new record and non GAAP EPS approximately doubling year over year to a dollar per share. Having completed my first year with Coherent, I’d like to take the opportunity to thank my Coherent teammates for their outstanding focus and execution over the last year and their help in positioning the company for continued long term growth. At Coherent, almost everything we do touches a Photon in some way. We believe there is no other company with a broader and deeper portfolio of photonic technology, expertise and innovation. Photonics is becoming increasingly critical to many applications including AI data centers, communications and a wide range of industrial applications, and Coherent is well positioned to take full advantage of this opportunity. We’re excited about the future and I couldn’t be more proud to be part of such an incredible team. Let me provide some market and product updates from the past quarter. In our data center and communications market, revenue grew by 51% in fiscal 25. In Q4, revenue grew 5% sequentially and 39% year over year. For fiscal Q4 and full year, we saw strong growth in both AI data centers and communications. In the data center market, full year revenue increased by 61%. For Q4, we again achieved record quarterly revenue with data center revenue growth of 3% sequentially and 38% year over year. We continue to see strong bookings and demand forecasts across our data center customers as they continue to invest in AI data center capacity expansion. In fiscal Q4, we were pleased to see initial revenue shipments of our new 1.6 Tbps transceivers and we continue to expect 1.6 Tbps volumes to ramp throughout the balance of this calendar year with more meaningful revenue contribution in calendar 26. In the meantime, demand continued to grow in Q4 for our transceivers with data rates below 1.6 Tbps. Beyond 1.6 Tbps, we continue to make solid progress on the development of our 3.2 Tbps transceiver products and technologies which will support a range of optical data transmission form factors. Our 400G per lane differential EML, which we demonstrated earlier this year and is the foundation of 3.2 Tbps transceivers, is recognized by our customers as a key advantage of coherence technology roadmap. We also continue to make progress on CPO related products and technologies with strong engagements across a wide range of customers. For example, one of the key technologies behind CPO applications is CW lasers. We have a long history of producing CW lasers and we drove a significant increase both sequentially and year over year in our CW laser production in Q4 and we expect to continue to rapidly ramp CW laser volume over the coming quarters to meet the rising demand for our optical networking solutions that use EML or CW lasers, we continue to ramp internal production of Indium phosphide which is the key technology behind EML and CW lasers used in both pluggable transceivers and CPO applications. As a reminder, we’ve had Indium phosphide capability in house for over 20 years and Indium phosphide based transceivers account for a majority of our Datacom transceiver revenue. With the majority of our EML based transceivers utilizing our internally manufactured EMLs, we’ve tripled indium phosphide capacity year over year and expect to continue to expand capacity over the coming quarters to support the strong demand signals from our customers. For example, I’m pleased to announce that we will begin production this month of our new 6 inch indium phosphide line in Coherent’s Sherman, Texas facility. This is the world’s first 6 inch indium phosphide production platform and is expected to provide us significant advantages in terms of both lower cost and higher volume production and it will further enhance our industry leading supply chain resiliency. In addition to indium phosphide, our Sherman, Texas facility is also a site for VCSEL (Vertical-Cavity Surface-Emitting Laser) production on Gallium arsenide technology. As mentioned in a recent Apple announcement regarding their American Manufacturing program, we’ve entered into a new multi year agreement with Apple for a new generation of VCSEL (Vertical-Cavity Surface-Emitting Laser) products that support Apple’s iPhone and iPad products. We expect revenue from this expanded partnership with Apple to begin in the second half of calendar 26th. The VCSEL (Vertical-Cavity Surface-Emitting Laser)s for Apple are manufactured in our Sherman, Texas facility and will help support the long term growth and utilization of the site. I want to thank Apple, which has been a long standing customer for this important multi year agreement. This agreement highlights the importance of our supply chain resiliency and flexibility including our significant US manufacturing footprint. In fiscal Q4 we also began initial revenue shipments of our new optical circuit switch. As a reminder, this new product represents a $2 billion expansion of our addressable market opportunity. The underlying technology in our OCS has tremendous benefits versus mechanical MEMS based solutions offered by others as our solution is non mechanical and is based on field proven digital liquid crystal technology that’s been deployed for many years in demanding telecom applications. Customer engagements on this new product continue to grow and we expect revenue to ramp through the remainder of this calendar year and to contribute more meaningfully in calendar 26. We also delivered strong growth for both full year fiscal 25 and Q4 in our communications business. This business is comprised of both traditional telecom as well as data center interconnect communications. Revenue increased 23% for fiscal 25 for Q4 we saw accelerated growth in this segment AS Communications grew 11% sequentially and 42% year over year. Growth was driven by robust demand for our ZR ZR plus DCI focused new product introductions and ongoing recovery in end demand. In the traditional transport market. We saw continued growth in the ramp of our new products including our 100g, 400G and 800g ZR ZR plus coherent transceivers and expect these products to increase their revenue contribution throughout fiscal 26 and beyond. In particular, our 100G ZR product family is ramping rapidly driven by strong customer traction. For this uniquely differentiated solution, we productized multiple variants and have several more in development across multiple applications. We believe both AI data centers as well as communications will be strong long term growth drivers for the company given the exceptional breadth and depth of our photonic technology. Turning to our industrial related end markets, revenue decreased 2% for the year. For our fiscal Q4, revenue decreased 2% sequentially and 8% year over year. For the full year we delivered above market growth in our industrial laser products and services which was offset by a decline in our silicon carbide business which was consistent with softer end market demand in the automotive segment. In our industrial laser products where we lead the industry with the widest and deepest portfolio of industrial lasers, fiscal 2025 growth was driven by growth in both product sales as well as growth in our recurring services revenue stream. Year over year growth was driven primarily by display capital equipment and semi cap equipment markets. In particular, display capital equipment growth was driven by growing demand for our laser systems and services that are used to support the capacity expansion of OLED fabs. As OLED screen adoption continues to grow and total OLED surface area is expected to double over the coming years. Across our industrial laser products, our recurring services revenue stream grew faster than product sales. As we discussed at our investor day, we continue to expand the installed base of our industrial lasers and we expect the recurring service revenue stream to continue to become a larger component of our overall industrial revenue over time, which is a tailwind for our gross margin for our materials products. Fiscal 25 Revenue excluding Silicon carbide was flat year over year. As demand remained stable. During fiscal 25, we experienced a drop in silicon carbide demand which was a headwind to our overall industrial revenue. However, over the past months silicon carbide demand has stabilized and we do not expect this to be a headwind for us in fiscal 2017. We continue to see our industrial products and end markets as a strong long term revenue growth and gross margin expansion opportunity for the company. Given our leadership portfolio of hardware and software products and services on the topic of our investment strategy and our portfolio optimization initiative as discussed over the past quarters and at our recent Investor day, we’ve been driving a series of actions to streamline our portfolio and concentrate our investments in the areas of greatest long term growth and profitability. As part of our portfolio optimization, today we announced an agreement to sell our aerospace and defense business for $400 million. We expect to close this transaction this quarter. Upon closing, we plan to use the proceeds of the sale to pay down additional debt and we expect the sale to be accretive to our eps. We made the decision to sell our A and D business because it was not aligned with our long term strategic focus areas and it did not support our long term financial targets. I’d like to thank all of the A and D employees for their tremendous contributions to Coherent over the past years and wish them all the best moving forward. We will continue to look for ways to streamline and strengthen our portfolio moving forward and ensure that our investments are concentrated in the area of greatest shareholder value creation. Regarding the current tariff policy environment unchanged from last quarter, we do not expect significant impact from tariffs this quarter. Though we do not have full details yet, we believe President Trump’s recent announcement regarding semiconductor tariffs may present a competitive advantage for our business. Many of our products, such as transceivers, are today covered by the semiconductor exemption. And as a company with significant US Manufacturing operations today and new investments planned for our Sherman, Texas Easton, Pennsylvania and other US Facilities, we believe we would avoid the semiconductor tariff. Our extensive US Manufacturing footprint is a key part of our overall supply chain resiliency and we believe this is an important competitive advantage for us. Over the past months, you’ve heard me stress the importance of Coherent’s dynamic, flexible global manufacturing footprint as a competitive advantage and a hedge against geopolitical risk. Our US Footprint is a key part of that strategy. Coherent has a long and proud history of advanced manufacturing in the United States, leading US manufacturing innovation since our founding more than 50 years ago. Beginning with the company’s first manufacturing site in Saxenburg, Pennsylvania, which remains our company headquarters. Today, our US manufacturing footprint extends across more than 20 US manufacturing locations in 13 states. Across those US manufacturing locations, we employ thousands of people. These sites lead the industry in technical innovation and manufacturing and we continue to invest in our US Manufacturing footprint. In summary, I’m very pleased with the progress we made during our fiscal 2025. We expect fiscal 26 to be another growth year for the company and believe we are well positioned for continued long term growth as we drive market leading photonic innovation across our core markets and continue to progress toward the financial targets we provided at our Investor Day. Once again, I want to thank the Coherent team for all their hard work and dedication. I couldn’t be more proud of my teammates and their laser focus on unlocking the full potential of the company. I’ll now turn the call over to our CFO Sherri Luther.

Sherri Luther (Chief Financial Officer)

Thank you Jim we are pleased with our full year 2025 results. We drove strong double digit revenue growth, significant gross margin expansion and improved profitability. We increased our cash from operations enabling us to significantly pay down our outstanding debt and further strengthen our balance sheet. Let me now provide a summary of our results. Fourth quarter revenue was a record $1.53 billion, up 2% sequentially from the third quarter and up 16% year over year driven by growth in AI data center demand coupled with the continuing recovery in telecom. Full year 2025 revenue was a record 5.81 billion, up 23% from 2024. Revenue growth for the full year 2025 was driven by growth in both AI data center demand as well as Telecom. Our Q4 non-GAAP gross margin was 38.1% down 43 basis points compared to the prior quarter and was up 220 basis points compared to the year ago quarter. The sequential decline in gross margin was primarily driven by unfavorable foreign exchange in Q4 which was partially offset by benefits from our gross margin expansion strategy with improvements in both pricing optimization as well as cost reductions. Our non-GAAP gross margin for the full year 2025 was 37.9%, up 358 basis points from 2024. The improvements in non-GAAP gross margin for the full year 2025 were driven by our gross margin expansion strategy where we saw improvements in both pricing optimization as well as cost reductions offset somewhat by unfavorable mix and foreign exchange. Cost reductions included lower manufacturing costs as well as yield improvements. Fourth quarter non-GAAP operating expenses were $307 million compared to $297 million in the prior quarter and $269 million in the year ago quarter. The increases were primarily in R and D driven by increased investments in our product portfolio, in particular in data center and communications. We continue to focus on investing our R and D in those projects with the highest ROI while driving efficiency and greater leverage in SGA. Non GAAP operating expenses for the full year 2025 increased to $1.17 billion from $998 million in 2024, primarily driven by increased investments in our product portfolio as well as variable compensation. Our fourth quarter non-GAAP operating margin was 18% compared to 18.6% in the prior quarter and 15.4% in the year ago quarter. Our non-GAAP operating margin for the full year 2025 was 17.8%, up 472 basis points from 2024. Fourth quarter non-GAAP earnings per diluted share was $1 compared to $0.91 in the prior quarter and $0.51 in the year ago quarter. Non GAAP diluted earnings per share for the full year 2025 was $3.53 compared to $1.21 for the full year 2024. This represents a 191% year over year growth. We paid down $51 million in debt during the quarter using cash from operations. This brings our fiscal 2025 total debt payments to 437 million, nearly two times the amount of debt payments made in fiscal 2024. This significant increase in debt payments has reduced our debt leverage ratio to 2 times down from 2.5 as defined in the credit agreement at the end of 2024. As Jim noted, we plan to use the proceeds from the sale of the aerospace and defense business to further reduce our interest expense by paying down additional debt which will be immediately accretive to our EPS. For reference, this sale will result in coherence exit from 10 sites and will reduce our employee count by approximately 5, 550 employees that will remain with the A and D business. Over the past four quarters, this business contributed average quarterly revenue of approximately $50 million with a gross margin below Coherent’s average gross margin. We view this sale as a very positive outcome for shareholders as exiting this business will meaningfully streamline our portfolio, allow us to accelerate the paydown of our debt, increase our profitability and focus our investments in the areas that enhance shareholder value. I will now turn to our guidance. For the first quarter of fiscal 2026, we expect the sale of our aerospace and defense business to close this quarter. As a result, our outlook excludes approximately $20 million in aerospace and defense revenue that we expect will occur after we close the sale. We expect revenue to be between $1.46 billion and $1.6 billion. We expect non-GAAP gross margin to be between 37.5% and 39.5%. We expect total operating expenses of between $290 million and $310 million on a non-GAAP basis. We expect the tax rate for the quarter to be between 18% and 22% on a non-GAAP basis. We expect EPS of between 93 cents and $1.13 on a non-GAAP basis. In summary, I’m very pleased with the progress we have made in Q4 and throughout fiscal 2025. We are excited about the year ahead and remain focused on executing to our financial target model that we laid out at our Investor Day earlier this year. That concludes my formal comments Operator, Please open the call for Q and A.

OPERATOR

Thank you ladies and gentlemen. We will now begin the question and answer session. If you would like to ask a question, please press Star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press STAR and two 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. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from Samik Chatterjee with JPMorgan. Please go ahead.

JPMorgan (Equity Analyst)

Hi, thanks for taking my questions Jim. Maybe I can start on the data center side and if I’m doing based on your new segmentation you had pretty strong results in this fourth quarter with 40% year over year growth in revenue. How should we think about the growth outlook for the next fiscal year? I mean we’ve seen all the hyper-scalers increase their capital spending plans as well. So any color you can provide in terms of sort of the growth rates or how you think about the outlook for the data center business in fiscal 26 and then I have a follow up please.

Jim Anderson (Chief Executive Officer)

Yeah, thanks Ameek for the question. So yeah, looking back at fiscal 25, really pleased with the growth that we saw in data center and communications and again that’s a combination of data center and communications is our traditional telecom business plus dci. But if you look at the prior year we saw over 50% growth full year and the most recent quarter in the June quarter we saw 5% sequential growth and almost 40% growth year over year and very pleased with that growth Data center portion of that was the fastest growing in full year over 60%. So really strong growth and I want to thank the team for the great execution over the prior year. Looking forward, we continue to See really strong demand signals. The combination of the backlog that we have, the ordering that we’re seeing and the longer term forecast from the customers, I would say the demand outlook is very strong. We’re expecting data center and communications to be up sequentially again this quarter. We really, we only guide the current quarter but we’re expecting it to be up sequentially and then beyond that, as I said, a number of different, you know, things that are propelling our growth, a number of different drivers of the growth. I would flag number one, 800 gig transceivers are continuing to ramp. We believe the 800 gig transceiver will grow this calendar year and next calendar year as well. And then we’re really pleased to see the start of 1,6T revenue. So we had initial revenue shipments of our 1,6T transceivers in the prior quarter and we expect that to ramp through the rest of this calendar year and into next calendar year. On top of that, again really pleased to see OCS initial revenue for our optical circuit switch initial revenue began last quarter. We expect again that to continue to ramp through the rest of this calendar year into next. And then we did see accelerated an acceleration of growth in the communications part of our business in the most recent quarter where it grew double digits sequentially. And we are seeing very strong demand in the DCI portion of the market. The data center interconnect and that’s specifically around our ZRZR plus products. We have a very nice lineup of products there. So number of different growth areas that we see ahead of us. So we’re really quite excited about the year and the growth ahead of us and certainly also driving capacity expansion to meet those demand signals including not just capacity of assembly and test but also the key ingredients like indium phosphide. But yeah, I would say we’re really excited about the growth ahead of us in data center and comms. Got it.

JPMorgan (Equity Analyst)

And maybe for my follow up I did want to ask about your progress or ramp on the 6-inch indium phosphide platform in Sherman, Texas. I mean maybe if you can give us a update on how the ramp is going on that front and what are you seeing from customers in relation to interest in the US manufacturing that you have? I mean particularly what does the announcement with Apple mean in terms of incremental revenue or revenue opportunities? Any color on that front as well. Thank you.

Jim Anderson (Chief Executive Officer)

Yeah, thanks Ameek. I’ll start with the 6-inch indium phosphide and Sherman. Yeah, we view this as a really big milestone so this month in August is when we began production of that new 6-inch indium phosphide to line in Sherman. We believe this is the world’s first 6-inch indium phosphide production. And it’ll, you know, start this quarter but obviously ramp over the coming quarters. This is a big benefit to us in two ways. Both capacity. Obviously on a larger wafer size we get a significant increase in capacity, but also we expect a significant cost structure advantage. And so as we fully ramp that that capacity, both the ability to just drive higher volume but lower cost structure is a big advantage for that. So we’re really excited about that and looking forward to that ramp more generally. As you asked about the U.S. Manufacturing footprint, this is, I would characterize this as certainly part of a broader strategy to invest in US based manufacturing. I think if you step back the company looking over the last few years, the company has done a really great job of building a tremendous amount of resiliency and flexibility into our supply chain. Both in terms of our geographic diversity of supply, but also the strategic vertical integration of strategic components. But on the geographic diversity of supply, one of the main pillars of that has been a strong US manufacturing presence. We have over 20 sites across the US across 13 different states and that employs thousands of employees. And so we’re continuing to invest in U.S. Manufacturing. We view this as a competitive advantage. We hear that all the time from our top strategic customers. They view our supply chain resiliency, the U.S. Manufacturing footprint as a key competitive advantage. And I think a great proof point was same you asked about the recent Apple partnership that we announced. This is a great proof point. This is one of, I would say many large strategic customers that view that U.S. manufacturing footprint or the specific plant in Sherman is a strategic advantage. And we’re really pleased with that expansion of our partnership with Apple. I think you asked about revenue, the revenue from that expanded partnership. We expect that to kick in in the second half of next calendar year. But I think it just, it’s a proof point of that our strong presence in U.S. Manufacturing and our, you know, commitment to continuing to build our supply chain resiliency and U.S. Manufacturing presence.

JPMorgan (Equity Analyst)

Thank you. Thanks for taking my questions.

OPERATOR

Thank you. Our next question comes from Simon Leopold with Raymond James. Please go ahead.

Raymond James

Thank you very much for taking the question. First thing, I wanted to see if I could get an understanding of what product categories or segments might be down sequentially at the midpoint of your guidance. And I appreciate You’ve highlighted the 20 million for the Aerospace sale. But Apart from that, it sounds like there’s a number of things going well. So I’m trying to make sure I capture what might be down sequentially from the June quarter and then I’ve got a quick follow up. I’ll ask now is you talked about generating some revenue from the OCS (Optical Circuit Switch). Could you tell us a little bit about your pipeline and the thoughts on the trajectory for that product line?

Jim Anderson (Chief Executive Officer)

Thank you. Yeah, thanks Simon. On the first part of the question. So as I mentioned, we expect data center and communications up sequentially. We expect our industrial related markets to be down sequentially. Part of that is the 20 million that Sherry mentioned that we 20 million in revenue that we took out of the guidance. Assuming the transaction closes sometime during this quarter, if you set that aside sort of on a pro forma basis, I would say we expect industrial to be flat to down sequentially. We’re taking a bit of a cautious view on the broad based industrial market just given the macro economy, uncertainty around tariffs. We’re just taking a little bit more of a cautious view of that business in that end market. Now that said, that’s a very near term comment. Over the long term we still believe that the industrial segments represent a really good growth opportunity for the company. And I would highlight that if you look at Last year fiscal 25, our industrial segment, if you set aside the silicon carbide headwind that we had last year, we saw some nice growth in our industrial segment, especially in our industrial lasers. So over the long term we expect industrial to continue to be a good growth area for the company across the, across things like semi cap equipment, display capital equipment. But near term more of a cautious view on that market. And then the second part of the question I think was on OCS pipeline. Yeah, I would say the OCS pipeline is very healthy. We were really pleased with the initial revenue generation in the prior quarter. The customer engagement I would call very strong across multiple customers and, and we’re very excited about the ramp of this product. We are adding capacity to support the ramp of this product as fast as we can based on the demand outlook that we’re getting and the orders that we’re getting from our customers. Thank you. Thanks Amit.

OPERATOR

Thank you. Thank you. The next question comes from George Notter with Wolfe Research. Please go ahead.

Wolfe Research

Hi guys. Thanks very much. I guess I wanted to come back to the, the Apple relationship. I guess I’m just curious how much incremental revenue is, is in the offing from that relationship. You know, if I look back, obviously, you know there was A step down in the Apple business going back a couple of years ago, it was pretty significant for the company, I guess. I’m wondering if you’ve been able to kind of build in anything contractually that gives you more certainty of that run.

Jim Anderson (Chief Executive Officer)

Rate on a go forward basis. Yeah, thanks, George. Yeah, we feel really good about that expansion. I would describe it as an expansion of the partnership. It’s a new generation of VCSEL (Vertical-Cavity Surface-Emitting Laser)s that go into Apple, iPad and iPhones and we do see that as an increase in revenue that’ll start to have impact to our revenue in the second half of next calendar year. So second half of 26, but yeah, we see it. And this is a multi year partnership and I think a really good, healthy partnership between the two companies. We do have a long history of working with Apple and really pleased to, really pleased to see that partnership expand. And the other thing that I would note is again, these VCSEL (Vertical-Cavity Surface-Emitting Laser)s are being manufactured at our Sherman, Texas plant. That’s also a great way to continue to grow that plant and to make sure that plant is fully utilized. So it provides a great sort of underlying foundation of business for that plant as we ramp other products in that plant but plant as well, like the indium phosphide capacity that I talked about, that I talked about earlier and as I mentioned earlier as well, again I think this is just a great proof point of the importance of our US manufacturing footprint.

Wolfe Research

Just as a quick follow up, is there any sense for what your market share would look like in Apple on a 3D sensing basis? And then also do you have to make capital investments in Sherman? Is that something that Apple would help you with or is that, is that fully on Coherent?

Jim Anderson (Chief Executive Officer)

Thanks a lot. Yeah, on the first we do have a sense of the share. We’ll probably, you know, share more details about that as we just get closer to the ramp. So I would say stay tuned on that and we’ll provide sort of more thoughts on the size and the rate and the pace of that ramp as we get closer to 2H26. And then on capital, I think it’s. Yeah, there’s a little bit of incremental capital that we would be providing to support that business. Thank you.

OPERATOR

Thank you. The next question comes from Blaine Curtis with Jefferies. Please go ahead.

Jefferies

Hi, Ezra Weener. I’m Blaine. Thanks for taking my question. I guess the first one would be on the OCS competitive landscape. I know you guys talk about the liquid crystal versus mechanical. Can you talk a little bit about what that is from A performance benefit and what that means for cost for your customer.

Jim Anderson (Chief Executive Officer)

Yeah, thanks, Azer. First of all, let me just describe the technology difference. So if you look at what’s been deployed sort of historically around optical circuit switching, that’s been based on MEMS (Micro-Electro-Mechanical Systems) technology, which is inherently mechanical technology. Our technology is digital liquid crystal and this is a technology that we’ve used for years in our telecom business. And what we’ve done is we’ve taken that technology and repurposed it for optical circuit switch. And because it’s a non mechanical technology, it has a much, much higher reliability. And as you can imagine in a data center, an AI data center, reliability is an incredibly important attribute to our customers. So it has much higher reliability and the performance is very good. Performance is meeting the specs of our customers. And so that’s why we’re seeing, I would say again, very strong engagement across multiple customers. And we’re really excited about the ramp of this product.

Jefferies

Got it, thank you. Then the second one would be you talked about initial 1.6 Tbps shipments and that 800 Gbps is going to ramp this year, next year. Can you talk a little bit more about what you’re seeing a from a supply demand perspective on that as your capacity ramps and also a little bit more about what you’re internally sourcing from a laser perspective versus externally sourcing?

Jim Anderson (Chief Executive Officer)

Okay. On the first part of the discussion, I think the way to think about it is if you start with the 800G ramp, the 800G is obviously growing this calendar year versus prior. We expect 800Gig to grow again next calendar year and that’s ramping very quickly. And then on top of that 1.6T we believe starts to ramp on top of that 800G ramp. We saw initial revenue in the prior quarter. We expect that revenue to grow over the coming quarters. And the model for how to think about how the transitions or how the ramp happens over time, I’d refer you back to our investor day in May. We shared a multi year model of how we view the transitions and the layering of the different speeds and how that applies to the overall growth. We shared that at our investor day in May. So I’d take a look at that. But the short version is to think about 800 gig continuing to ramp into next year and 1.6 ramping on top of that. On the second part of your question, around capacity and laser, we’re certainly ramping our capacity to meet the demand signals that we’re seeing for both 800 gig as well as 1.6t that’s a combination of us ramping our assembly and test, but also ramping the internal, the ingredients that go into that transceiver, things like laser capacity, which is indium phosphide. That’s why I mentioned on the prepared remarks why it’s an important milestone that we hit production of indium phosphide 6 inch in this August, this August month and we’re ramping it from here. And then in terms of the mix of internal versus external laser, I think that was the last part of your question. You know we use a mix today and I would anticipate continuing to use a mix of internal and external today. Over half of our transceivers ship with EML lasers and over half of those EML based transceivers are internally sourced EMLs. And so that gives you a rough sense of the breakdown. But we believe we’ll continue to use a mix of both internal and externally sourced lasers.

Jefferies

Got it. Thank you.

OPERATOR

Thank you. The next question comes from Vivek Arya with Bank of America Securities. Please go ahead.

Bank of America

Thank you for taking my question for the first one, Jim. I realized this is a little bit more short term oriented but when I look at your data center and communication segment, sequential growth rate has gone from 9% in March to 5% in June. And I think your September implied is probably at or somewhat below this number even though you’re starting to ramp 1.60 and OCS. So what is the right way to interpret this kind of somewhat slowdown? Because when I look at the deployment of AI clusters they seem to be accelerating in the back half and one of your closest peers guided to double digit. So how would you address that pushback and do you think these sequential growth rates can start to re accelerate at some point?

Jim Anderson (Chief Executive Officer)

Yeah. Thanks Vivek. On a quarter to quarter basis the sequential growth rates can fluctuate quarter to quarter based on lumpiness of demand from our customers or supply or capacity related things. So but I think if you look over the full year of fiscal 25, I’m quite pleased with our growth in data center for full year we saw over 60% growth and even faster growth in the higher speed data rates. And we believe over that fiscal 25 we gain share over that fiscal 25. So we feel good about fiscal 25 results. And as I said looking forward into the current fiscal year again we see very strong demand ahead of us and a number of different growth vectors. 800Gig1.6T we talked about OCS as well as well as seeing very strong demand in our DCI segment. So we feel good about the growth ahead of us and certainly making sure that we’ve got all the capacity in place to meet those demand signals.

Bank of America

And for my follow up, maybe one on gross margins, I think Sherry, you mentioned there was some FX headwind in Q4. If you could perhaps quantify how much that impacted gross margin, are you assuming any headwind in Q1? And then as we look out into fiscal 26 and you look at the ramp you might have at Apple and just obviously the continued growth in transceivers, do you think that there is a chance that coherent gets towards that 40% gross margin that many have been expecting for a while? Or is there a different mix that we should keep in mind as we model gross margins for the fiscal year?

Sherri Luther (Chief Financial Officer)

Thank you, I’ll take that question. So the sequential decline in gross margin was due to FX unfavorable FX during the quarter. That was somewhat offset by pretty good contributions benefits from our gross margin expansion strategy. So cost reductions as well as pricing optimization. In fact, I’m really pleased with the progress that we’ve made on cost reductions and pricing optimization. In fact, if not for the headwinds from fx, our gross margin would have exceeded the high end of our guide for the quarter. So I’m really, really pleased with the progress that we’ve made to date on our gross margin expansion initiatives. A little bit more color in terms of where those came from. On cost reductions we had improvements in yield, we had improvements in manufacturing processes that generated benefits. And on pricing optimization we saw improvements in our lasers business as well as our Datacom business. So really good results there. And then in terms of you had mentioned about our Q1 guide in terms of FX and that’s really the guide is based upon the best information that we have right now. I’m not expecting it to be material, but it’s based on the best information that we have right now. I think frankly the FX impacts that we saw during the quarter are all time weaknesses of the USD versus a few different currencies that hasn’t occurred in a number of years. So I don’t expect that to be a material impact in the next quarter in Q1. And then you also asked about Apple and the impacts to gross margin there. I would expect that to certainly benefit our gross margin. The arrangement I’m really pleased with the arrangement that we have with Apple and that will certainly benefit our gross margin going forward. And then I think the other last part of your question was on our, you know, will we be able to get to our long term target model, which we put out earlier this year in May of greater than 42%. And so I’m very confident that we’ll be able to achieve the long term target model. You know, again, the improvements that we’ve made during Q4 and frankly for the full fiscal year of 2025, where our gross margin improved 360 basis points, that’s pretty good. I’m really pleased with that. And there’s certainly more to come. I consider us to still be in the early stages of this initiative and it will be ongoing and the timing of these, you know, when the impacts or in terms of the benefits, when they will kick in, you know, that can vary on a quarterly basis. But I feel very confident in our. Long term target model. Thank you.

OPERATOR

Thank you. The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Morgan Stanley

Great, thanks. Appreciate the question. Maybe a couple for me, just on the industrial lasers business, you know, is there any geographic concentration to where the customers are that perhaps kind of make you a little bit more cautious or just kind of general caution in industrial production? And then maybe just the second question on Datacom, is there any lumpiness? And maybe you mentioned lumpiness as a factor there, but just any design changes or things to be mindful of, even if they’re kind of staying with you overall as a customer, just to be mindful of that could cause some of that lumpiness. Thanks.

Jim Anderson (Chief Executive Officer)

Thanks, Metta. On the first part of the question on industrial lasers, I wouldn’t say anything unexpected in terms of customer concentration. You know, we have a wide range of customers and so those customers would be in typical industrial bases that you would expect, right? Certainly a large number of customers in Europe, you know, a big number of customers in Asia and some in North America as well. And so it’s not so much around customer concentration. Our caution around that business is just with high cost of capital, with still quite a bit of tariff uncertainty overall macroeconomic, we’re just taking a more cautious view on the near term outlook of that market. Now we could be wrong and it could be better than that, but we’re taking just a more cautionary stance on that. Now that said, if I look at fiscal 25 at our overall industrial business, if I set aside, you know, we saw a significant headwind in silicon carbide, but if I set that aside, the rest of the business, I was actually quite pleased with the performance our industrial lasers grew year over year. In fact, our service, the service component, the recurring revenue component of our revenue actually grew Faster than underlying product sales, which was great to see. That’s a key strategic focus area for us in a gross margin tailwind. So good performance last year. We’re taking a little bit more cautious view in the near term but we still believe over the long term it’s a very good growth area for the company. And then I think the second question around data center and we on the, you know, the fluctuation of growth rates, sequential growth rates quarter to quarter, you know we’ve historically seen growth rates fluctuate quarter to quarter. We don’t view that as out of the ordinary for this business. There certainly is with the 800 gig ramp. I think you were asking about transitions going on. Certainly with the 800 gig ramp there is a transition that some customers are going through from 400 gig to primarily 800 gig. And so there are underlying transitions that are happening which those transitions were expected and I would call those nothing out of the ordinary.

Morgan Stanley

Great, thank you.

OPERATOR

Thank you. The next question comes from Papa Sall with Citibank. Please go ahead.

Citibank

Thank you for taking my question. So I guess for my first question is on dci you seem to be kind of seeing a very strong growth there. Can you maybe touch a little bit on the nature of your customers or any visibility on the underlying factor there Is the growth kind of primarily coming from multi data center training or even more inference and maybe part of that question is kind of any color at this point on how we should think about these DCI cell versus traditional telco.

Jim Anderson (Chief Executive Officer)

Thanks Papa. On the first, I think that was a four part question there. On the first part of the question I’ll do my best to answer. Yeah, we are seeing very strong demand in dci. You know if I look at the communications part of our business which is a combination of traditional telecom and dci, you know we saw overall that communications up sequentially but I think about 11% in the most recent quarter. But underneath that the DCI even grew faster. And that’s a combination of our, for instance our products, our ZRZR plus products, 100 gig, 400 gig, 800 gig coherent transceivers. You know we’re seeing a really good ramp of those products. We’ve got a really good lineup of products. Very, very competitive. And so yeah, we’re pleased with the growth there. We’re seeing, we’re continuing to see very strong demand signals moving forward as well. I think you asked the second part was you asked about the customer. We actually in DCI we actually have two routes to market. We sell for instance coherent 00 plus transceivers and we also sell some related systems but then we’ll also sell components into other vendors as well. So we have both a sale of components and then a sale of things like transceivers. So it’s kind of a dual path to market and we’re seeing strong demand, I would say in both of those paths to market. And then in terms of the type of, I think you asked about multi data center versus inference. I think it’s a combination of both but probably more of the demand being driven by kind of this multi, multi data center workloads that are spanning multiple data centers and the interconnect that’s required between those data centers. And I think, papa, I think I hit each part of your question.

Citibank

Yeah, absolutely, you got them all. I’ll make sure that my follow up is a little bit shorter. I guess I was hoping on the data comm sequential group you can parse through a little bit. Obviously 800 gigs plus AI was very strong. But just any sense of the sub 400 gig kind of demand this quarter and then moving forward?

Jim Anderson (Chief Executive Officer)

Yeah, I think, you know, we expect 800 gig demand to continue to grow sequentially this quarter. We’re still seeing, I would say it is relatively strong demand on 400 gig and below. There are still a number of customers that are using significant quantities of 400 gig and below. So we think the demand there will continue to be strong here in the near term. But clearly we’re transitioning. The market is transitioning towards 800g. And then as I mentioned earlier, we’re just starting to see revenue related to 1.60. And if as I mentioned a little bit earlier at our investor day in May, we gave a breakdown of the market growth over the coming years and how we view the transition in terms of the data rates, how the market will transition from 400Gig to 800 to 1.6. We even have 3.2T on there. And so our view is the same as it was back in May. And I’d refer you back to the investor day for that kind of picture of the transitions we expect.

Citibank

Got it. Very helpful, thank you.

OPERATOR

Thank you. The next question comes from Christopher Rolland from with Susquehanna. Please go ahead. Susquehanna.

Susquehanna

Thank you very much. And my questions are really around transceiver. So outstanding growth in transceiver. But I did have some questions about the Chinese dynamic. You have guys like Inolite and Opto Link that are growing like 60 and 150% this year. So how do you view coherent market Share as we progress to 800 and eventually 1.6 pricing pressure from this Chinese dynamic. And what are your specific plans to put on transceiver capacity in 26 and beyond?

Jim Anderson (Chief Executive Officer)

Yeah, thanks. Thanks, Chris. On the first part of the question around market share, when we look at our fiscal 25 and we look at kind of third party independent data, we believe we gain shareholders in our fiscal 25. Right. I think it’s important not to look at just one single quarter, but to look over a multi quarter period. And we believe we gain share in the market overall, but specifically in the higher data rate transceivers. And we’re certainly focused on continuing to gain share moving forward. We feel like we’re very well positioned competitively. And that’s really based on two things. Number one, the technology roadmap that we have, but also number two, the supply chain resiliency and strategy that we have. On the first one on the technology roadmap, we feel like we’ve got a great lineup of 800 gig transceivers. We demonstrated at OFC earlier this year three different versions of 1,6T transceivers based on three different types of lasers, VCSELs, EMLs and silicon photonics. And so we feel really well positioned on the technology from a technology standpoint. And then I think on the supply chain, just hands down, we have a much more resilient supply chain. The combination of geographic diversity, the US manufacturing footprint, the vertical, you know, the vertical integration and internal supply of key components like indium phosphide, like EMls, I think makes our supply chain incredibly resilient and the most resilient supply chain out there. So I think customers recognize that, they see that and I think that definitely favors us, you know, continuing to gain share as we move forward. I would say on the second part of your question, on the pricing pressure, I would say the pricing has been very much as we expected. I don’t think we’ve seen any, anything unusual in pricing. And then on the last part of your question, around capacity, we are certainly ramping capacity as quickly as we can. And that’s a combination of assembly and test capacity, but also the capacity of the key ingredients. For instance, again on the indium phosphide capacity, ramping the ability to, to manufacture more EMLs, more CW lasers, we tripled our indium phosphide capacity on a year over year basis last quarter. We also increased CW laser production both sequentially and year over year. And so yeah, certainly we’re very focused on continuing to expand capacity given the strong demand signals, orders and forecasts that we’re seeing from our, our big data center customers.

Susquehanna

Very helpful, Jim. I also read an article suggesting that you guys inaugurated a new facility in Vietnam. This article suggested there were multiple products there, including expanding capacity for Silicon Carbide. I don’t know if all the facts in this article were correct or not, but could you talk about that Vietnam facility and your plans for Silicon Carbide as well moving forward?

Jim Anderson (Chief Executive Officer)

Yeah, thanks. We did inaugurate a new facility in Vietnam. This is part of our strategy around geographic diversity. And this facility is focused on a number of our materials related businesses and Silicon Carbide being one of them. And so yeah, we’re really pleased with opening of that facility. That will help us drive some additional flexibility, capacity and cost structure advantages on the silicon carbide business in general. If you remember, we recently stopped the investment in the device and modules portion of the silicon Carbide business. That was pre revenue investment. And so we shut down that and concentrated the investment on the wafers and the EPI that we supply. Silicon Carbide. Last year and fiscal year that was a headwind for us. We did see a significant drop in silicon carbide demand. But more recently that has now stabilized and we’ve started to see demand pick back up. And we don’t expect that silicon carbide business to be a headwind for us in fiscal 26. And so. Yeah, so certainly expecting a bit of growth from Silicon Carbide this fiscal year.

Susquehanna

Thanks Jim.

OPERATOR

Thank you. The next question comes from Karl Ackerman with BNP Paribas. Please go ahead.

BNP Paribas

Thank you. Hi Jim and Jerry. I have two questions if I may. First, do you believe you can be. In a position to service all or nearly all of your EML laser needs internally by the end of this calendar year as 6 inch comes online? And I have a follow up.

Jim Anderson (Chief Executive Officer)

Yeah. In the first part of the question, we’re certainly ramping 6 inch capacity as quickly as we can. Carl, just to make sure I correct, it’s not just about EMls. Indium phosphide is used in a lot of different products. EMLS is one also. CW lasers. CW lasers are used in both silicon photonics as well as CPO applications. And so we’re also ramping that indium phosphide to support those applications. They’re also used for photodiodes and other products. So there’s actually quite a number of products. But in terms of our in source versus outsource strategy, you know, I believe we’ll continue to use a mix for EMls. In particular, we’ll continue to use a mix of both internal supply and external as well. I think that gives us really good supply chain resiliency and optionality. And so I would see that we continue to have a mix in the foreseeable future.

BNP Paribas

Helpful. Thank you. And then, you know, you certainly gave comments around Datacom around, you know, in the September quarter. But just, you know, given rising, rising capex forecast by several, you know, key data center customers, do you believe that you can outgrow or at least grow in line with your Datacom growth rates that you’ve outlayed that you’ve laid out during your most recent analyst day? Thank you. Yeah, that’s certainly our target is to grow within that range that we provided in the May investor day, or certainly we’ll target growing faster if we can. We’re certainly adding capacity, as I mentioned a couple times during the call, to support that growth. We see strong demand signals from our customers and we’re certainly adding the capacity to meet that demand.

Jim Anderson(Chief Executive Officer)

Does that answer your question?

BNP Paribas

Yes. Thank you.

OPERATOR

Thank you. Ladies and gentlemen. This concludes the question and answer session. I would now like to hand the conference over to the CEO Jim Anderson for any closing comments.

Jim Anderson (Chief Executive Officer)

Yeah, thanks everybody for joining the call today. I just want to take the opportunity to once again thank my Coherent teammates for the great results in fiscal 25 and also for helping position Coherent for another strong growth year ahead of us as we kick off our fiscal 26. Thanks again for the support. Operator. That concludes our call.

OPERATOR

Thank you. Ladies and gentlemen, the conference of Coherent Corp. Has now concluded. Thank you for your participation. You may now disconnect your lines.

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