Q3 2026 Coherent Corp Earnings Call

May 6, 2026

Speaker #1: Greetings, and welcome to the COHERENT CORP. Of fiscal year 2026, earnings call. It is now my pleasure to introduce your host, Mr. Paul Silverstein, Senior Vice President of Investor Relations for COHERENT.

Speaker #1: Please go ahead.

Speaker #2: 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 third quarter of fiscal 2026 and the business outlook for the fourth quarter of fiscal 2026.

Speaker #2: 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, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company.

Speaker #2: These are subject to a number of significant risks and uncertainties. And our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release.

Speaker #2: Our most recent forms, 10-K and 10-Q, and the reports that we may file in forms 8-K with securities and exchange commission. All our statements are made as of today, May 6th, 2026, based on information currently available to us.

Speaker #2: Except as required by law, we assume no obligation to update any such statements. During this call, we will discuss non-gap financial measures. You can find the reconciliation of these non-gap financial measures to gap financial measures in our earnings release, Investor Presentation, that can be found on the Investor Relations section of our website, at coherent.com.

Speaker #2: Let me now turn the call over to our CEO, Jim Anderson.

Speaker #3: Thank you, Paul, and thank you, everyone, for joining today's call. COHERENT 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: This quarter, we experienced another step in function increase in our order book, driving our backlog to a record level. Customer demand remains exceptionally strong, with no signs of attenuation.

Speaker #3: And our visibility continues to extend further into the future, with orders now reaching the calendar year 2028 and customer LTAs extending to the end of the decade.

Speaker #3: 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.

Speaker #3: We expect strong sequential revenue growth in our June quarter, and we continue to expect fiscal 27 growth rate to exceed our fiscal 26 growth rate.

Speaker #3: 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.

Speaker #3: Non-gap gross margin expandable sequentially and year over year in the combination of revenue growth, margin expansion, and operating leverage drove non-gap EPS growth of 55% year over year.

Speaker #3: We continue to grow profitability significantly faster than revenue. We are pleased with the continued execution, but we also see significant opportunity ahead as we scale the business to meet the demand environment in front of us.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: 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 year '26, 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.

Speaker #3: Given the exceptionally strong demand environment and the industry-wide constraint in Indianapolis side, capacity expansion remains one of our highest priorities. Importantly, we continue to make excellent progress on our six-inch Indianapolis side ramp, which is a key driver of our long-term capacity expansion and a meaningful differentiator for COHERENT.

Speaker #3: 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.

Speaker #3: We remain on track to achieve our goal of doubling internal Indianapolis side output capacity by the end of this calendar year and, based on current execution, we now expect to reach that milestone one quarter earlier than originally planned.

Speaker #3: We also expect a more than double of our internal Indianapolis side capacity again by the end of calendar year 2027. Our six-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 three-inch production lines.

Speaker #3: During this quarter, we shipped our first transceivers containing components produced on our six-inch line, and those shipments contributed to both sequential revenue growth and gross margin improvement.

Speaker #3: The initial six-inch production contribution came from our Sherman, Texas facility, which is the world's most advanced Indianapolis side production site, and will play an important role in ramping CW laser production for our CPO solutions, including those supporting our NVIDIA partnership.

Speaker #3: Given the success of the six-inch ramp to date, we have also announced plans to begin six-inch Indianapolis side production at a third site in Zurich.

Speaker #3: Overall, we are very pleased with the execution of our production teams as we continue to ramp six-inch output. We expect increasing benefits to both revenue and gross margin across our transceiver and CPO product lines over the coming quarters.

Speaker #3: 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.

Speaker #3: We believe OCS also expands our role into higher-value layers of AI networking infrastructure. We recently resolved the bottleneck in our production capacity and are now ramping output rapidly across two production facilities.

Speaker #3: As a result, we expect a 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.

Speaker #3: As we have discussed previously, CPO expands our role in AI data center architectures, particularly in scale-up portions of the network, where optics is expected to increasingly complement and, over time, displace copper.

Speaker #3: 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.

Speaker #3: This partnership includes both NVIDIA's $2 billion equity investment in COHERENT and a multi-year 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.

Speaker #3: More broadly, our CPO opportunity is supported by the breadth and depth of COHERENT's photonic technology platform. We believe our breadth of photonic technology and our manufacturing scale position us very well to support a broad range of customer requirements, across key optical components, subsystems, and higher-level assemblies.

Speaker #3: 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 year 2027.

Speaker #3: 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's long-term revenue growth and margin expansion, and will further strengthen our strategic position in AI data center infrastructure.

Speaker #3: 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.

Speaker #3: 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's strong competitive position.

Speaker #3: 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.

Speaker #3: One additional growth driver that we are particularly excited about is multi-rail. These solutions address the increasing need for greater bandwidth and connectivity between AI data centers.

Speaker #3: 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 the first half of calendar year 2027.

Speaker #3: 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.

Operator: Greetings, welcome to the Coherent Q3 fiscal year 2026 Earnings Call. It is now my pleasure to introduce your host, Mr. Paul Silverstein, Senior Vice President of Investor Relations for Coherent. Please go ahead.

Speaker #3: Across our data center and communications segment, the breadth and depth of COHERENT's photonic technology portfolio combined with our manufacturing scale continue to resonate strongly with our customers.

Paul Silverstein: Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Coherent CEO, and Sherri Luther, Coherent CFO. During today's call, we will provide a financial and business review of the Q3 of fiscal 2026 and a business outlook for the Q4 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, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. These are subject to a number of significant risks and uncertainties, and our actual results may differ materially.

Speaker #3: As a result, we have signed or are in the process of finalizing long-term supply agreements with multiple strategic customers that include both multi-year demand commitments and upfront investment to support capacity expansion.

Speaker #3: Turning to our industrial segment, revenue declined modestly both sequentially and year over year on a pro forma basis, reflecting continued softness in parts of the broader industrial market.

Speaker #3: However, we are seeing encouraging signs of improvement, particularly in semiconductor capital equipment, where bookings have increased meaningfully. We expect that improving demand to begin contributing to revenue growth in the current quarter and to support further sequential improvement through the balance of the calendar year.

Paul Silverstein: For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release, our most recent Forms 10-K and 10-Q, and the reports that we may file in Forms 8-K with the Securities and Exchange Commission. All our statements are made as of today, 6 May 2026, based on information currently available to us. Except as required by law, we assume no obligation to update any such statements. During this call, we will discuss non-GAAP financial measures. You can find a reconciliation 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.

Speaker #3: Over the longer term, we see important incremental growth opportunities for our industrial technologies in AI data center applications, and OFC highlighted our data center XPU cooling solutions and thermoelectric generators, which address the growing thermal and power challenges created by larger AI data centers.

Speaker #3: Our proprietary Thermadyte material can improve thermal performance and help enable higher XPU efficiency, while our advanced materials for thermoelectric generation can improve data center power efficiency through waste heat strategic customers on these technologies, and we believe they represent a meaningful expansion of our long-term market opportunity.

Speaker #3: We expect revenue from these products to begin ramping in the second half of calendar year 2027. Overall, while industrial remains a smaller contributor to our current growth than data center and communications, we believe this position to become an increasingly important source of incremental revenue and diversification over time.

Jim Anderson: Thank you, Paul, and thank you everyone for joining today's call. Coherent 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 an 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.

Speaker #3: In summary, we delivered another quarter of strong financial performance with accelerating revenue growth, expanding margins, and increasing visibility into future demand. We are operating in a highly favorable demand environment, driven by AI data center expansion, and we believe COHERENT is uniquely well positioned to capitalize on this opportunity.

Speaker #3: Given the breadth of our photonic technology portfolio, our manufacturing scale, our continued capacity expansion in increasing conversion of demand into backlog and revenue, I want to thank the entire COHERENT team for their strong execution and continued innovation.

Speaker #3: I'll now turn the call over to Jerry.

Speaker #1: 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.

Jim Anderson: 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 Q3, and we continue to expect fiscal 2027 growth rate 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.

Speaker #1: In addition, we also continue to strengthen our balance sheet, reducing our debt leverage ratio to below one-time. I will now provide a summary of our Q3 results.

Speaker #1: 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.

Speaker #1: 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 are sold in Q1 and Q3, respectively.

Speaker #1: 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-over-year quarter.

Jim Anderson: Non-GAAP gross margin expanded both sequentially and year over year. 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. We also see significant opportunity ahead as we scale the business to meet the demand environment in front of us. Our Data Center and Communication 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.

Speaker #1: We continued 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.

Speaker #1: These improvements were driven by reductions in product input costs, yield improvements from 6-inch indium boss bind, as well as significant benefits from pricing optimization.

Speaker #1: Third quarter non-GAAP operating expenses were $348 million, compared to $321 million in the prior quarter, and $297 million in the year-over-year 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-over-year quarter.

Jim Anderson: In our data center business, revenue increased 13% sequentially and 37% year-over-year, representing a 2nd 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.

Speaker #1: 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.

Speaker #1: We continue to focus on investments with the highest ROI that drive 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-over-year quarter, with continued progress on driving efficiencies and greater leverage in SG&A.

Speaker #1: We are already seeing benefits from our low-cost regional shared services initiatives within the G&A functions, as we streamline processes and gain better leverage and ERP consolidation project has made great progress, where the majority of the company is now in a single ERP platform.

Jim Anderson: 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. 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 1 quarter earlier than originally planned. We also expect to more than double our internal indium phosphide capacity again by the end of calendar 2027.

Speaker #1: 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-over-year quarter, due to strong revenue growth and continued gross margin expansion.

Speaker #1: Third quarter non-GAAP earnings per dilute share was $1.41, up 9% from the second quarter and up 55% from the year-over-year quarter. The acceleration in earnings outpaced revenue growth, driven by strong top-line performance, as well as gross margin expansion.

Jim Anderson: Our six-inch platform is producing EMLs, CW lasers, and photodiodes, and the yields for each of the three device categories continues to exceed those of our three-inch production lines. During the quarter, we shipped our first transceivers containing components produced on our six-inch lines, and those shipments contributed to both sequential revenue growth and gross margin improvement. The initial six-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 six-inch ramp to date, we have also announced plans to begin six-inch indium phosphide production at a third site in Zurich. Overall, we are very pleased with the execution of our production teams.

Speaker #1: 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 March 2, 2026.

Speaker #1: 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, in our R&D product roadmap, as well as capacity expansion.

Speaker #1: We also made $162 million in debt payment 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-over-year quarter.

Speaker #1: Our capital expenditures increased to $290 million, compared to $154 million in the prior quarter, and $112 million in the year-over-year quarter. These investments were focused on expanding our internal capacity to support the exceptional demand in data center and communications.

Jim Anderson: As we continue to ramp six-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 and 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.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: As a reminder, at the end of 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's corporate gross margin.

Speaker #1: Our Q3 results included $8 million in revenue from this business. I will now turn to our guidance for the fourth quarter of fiscal 2026.

Jim Anderson: 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. As we have discussed previously, CPO expands our role in AI data center 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 and a multi-year 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's photonic technology platform.

Speaker #1: 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.

Speaker #1: We expect 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.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: Operator, please open the call for Q&A.

Speaker #2: Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad.

Jim Anderson: We believe our breadth of photonic technology and our manufacturing scale position us very well to support a broad range of customer requirements across key optical components, subsystems, and higher level assemblies. We expect initial scale-out CPO revenue to begin ramping in H2 of this calendar year, with scale-up CPO revenue expected to begin ramping in H2 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'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.

Speaker #2: A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

Speaker #2: 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.

Speaker #2: So that others have an opportunity to do so as well. One moment, please, while we poll for questions. We take the first question from the line of Summit Chatterjee from JP Morgan.

Speaker #2: Please go ahead.

Speaker #3: Hi. Thanks for taking my question. And congrats on the road set of results. Numbers here. JP, maybe I can start off with the guide for the June quarter.

Speaker #3: It is implying an acceleration from Q3, so the increases you had in Q3 from a revenue perspective. And particularly when I look back through the year, every quarter you've managed to sort of accelerate the sequential revenue growth.

Speaker #3: So maybe if you can sort of dive into one, what's the driver on the demand side that's helping you lead to that acceleration? And maybe also contact you in terms of supply and how that's helping with the acceleration as well.

Jim Anderson: We expect strong sequential growth again in the current quarter. Demand remains broad-based across customers, products, and end applications. We are seeing strong momentum across our communications portfolio, which spans components, modules, and systems, reflecting both favorable market conditions and Coherent'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 and connectivity 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 the H1 of calendar 2027.

Speaker #3: And I have a follow-up after that. Thank you.

Speaker #4: Yeah, thanks, Amit, for the question. Yeah, if you look at midpoint in the June quarter guide, it certainly we expect an acceleration in growth versus prior quarter.

Speaker #4: And if you look at year-over-year growth rate as well, we really believe the current June quarter kind of represents a new inflection point in our revenue growth rate moving forward.

Speaker #4: 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.

Speaker #4: And on the demand side of the equation, I would say that just looks exceptional right now. Both in terms of the degree of demand, but also our visibility on demand.

Speaker #4: If we look at just bookings in the prior quarter, bookings in the prior quarter were up substantially from the previous quarter, record bookings an incredible amount of backlog.

Jim Anderson: 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 Communication Segment, the breadth and depth of Coherent'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 multi-year demand commitments and upfront investment to support capacity expansion. Turning to our industrial segment, revenue declined modestly both sequentially and year-over-year on a pro forma basis, reflecting continued softness in parts of the broader industrial market. However, we are seeing encouraging signs of improvement, particularly in semiconductor capital equipment, where bookings have increased meaningfully.

Speaker #4: And we've now got orders that extend out into calendar '28. And so we have tremendous demand ahead of us, but also great visibility on that demand.

Speaker #4: And that demand is coming from places you'd expect certainly data center and growth, both transceivers, but some of the new growth factors we're bringing on, as well as communications.

Speaker #4: And then probably more importantly on the supply side of the equation, that's probably really more of our focus, demand looks great. What we're doing is ramping supply very, very quickly.

Speaker #4: And both this quarter, but moving forward, we're bringing on substantially more capacity over the coming quarters. And probably the best single example of this is just the India FOSA fab capacity that's coming online.

Speaker #4: The Indian fossified has kind of been the key constraint for us for a number of quarters. It's a constraint for the industry. But our target this year is to double our Indian fossified capacity.

Jim Anderson: We expect that improving demand to begin contributing to revenue growth in the current quarter and to support further sequential improvement through the balance of the calendar year. Over the longer term, we see important incremental growth opportunities for our industrial technologies in AI data center applications. At OFC, we highlighted our data center XPU cooling solutions and thermoelectric generators, which address the growing thermal and power challenges created by larger AI data centers. Our proprietary Thermadite material can improve thermal performance and help enable higher XPU efficiency, while our advanced materials for thermoelectric generation can improve data center power efficiency through waste heat recovery. We are engaged with multiple strategic customers on these technologies, and we believe they represent a meaningful expansion of our long-term market opportunity. We expect revenue from these products to begin ramping in the H2 of calendar 2027.

Speaker #4: And the great thing is we're it looks like based on current execution, we'll achieve that goal next quarter, which is one quarter earlier than we thought.

Speaker #4: And when I look into next calendar year, we expect more than double Indian fossified capacity again. So that's a quadrupling of capacity over a two-year period.

Speaker #4: And so that looks really good. And so I think that really unlocks an acceleration in our revenue growth moving forward. And that's kind of on all the existing business.

Speaker #4: Then you layer on top of that some of the new growth areas, the new growth factors are coming online. OCS is ramping. We expect that to contribute to growth this quarter and growth sequentially.

Speaker #4: CPO revenue kicks in 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.

Speaker #4: And then we think thermal solutions will start to generate revenue in the second half of calendar year 2027. So we sort of have these multiple growth vectors that are layering on top of the existing business growth.

Jim Anderson: Overall, while industrial remains a smaller contributor to our current growth than data center and communications, we believe it is positioned to become an increasingly important source of incremental revenue and diversification over time. In summary, we delivered another quarter of strong financial performance with accelerating revenue growth, expanding margins, and increasing visibility into future demand. We are operating in a highly favorable demand environment driven by AI data center expansion. We believe Coherent is uniquely well positioned to capitalize on this opportunity, given the breadth of our photonic technology portfolio, our manufacturing scale, our continued capacity expansion, and the increasing conversion of demand into backlog and revenue. I want to thank the entire Coherent team for their strong execution and continued innovation. I'll now turn the call over to Sherri.

Speaker #4: So we feel really good about the growth and the sort of accelerated growth ahead of us.

Speaker #2: Got it. Got it. Thanks for that, Jim. And then maybe just to follow up on a similar lines, you mentioned the acceleration on the Indian fossified capacity given that you're tracking a bit ahead relative to your target for 2X in the first year.

Speaker #2: How should we think about potentially upside or accelerating the target for 2X sort of on next year as well? And as investors, how should investors think about the impact of that on growth margin?

Speaker #2: How material is it? When does it start to be material to your growth margin? Trajectory as well. Thank you.

Speaker #4: Yeah, thanks, Amit. Actually, on the second part of your question, on growth margin, we already started to see the impact of six-inch Indian fossified capacity which has a much better cost structure.

Sherri Luther: Thank you, Jim. In our Q3, we delivered accelerated double-digit year-over-year revenue growth and meaningful gross margin expansion, significantly improving profitability. We also continued to strengthen our balance sheet, reducing our debt leverage ratio to below 1 time. I will now provide a summary of our Q3 results. Q3 revenue was a record $1.8 billion, up 7% sequentially from Q2 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.

Speaker #4: So six-inch versus three inches, more than four times as many devices at less than half the cost. We already started to see that contribute to growth margin expansion in the in our fiscal Q3.

Speaker #4: As Sherry said, I think it prepared remarks our guide in the current June quarter has growth margin going up sequentially. Again, part of that, what's driving the growth margin expansion is six-inch Indian fossified capacity which just gives us a much, much better cost structure.

Speaker #4: But overall, I'm really pleased with the execution on our six-inch Indian fossified ramp. There's kind of two factors underneath there. There's just the raw capacity ramp, but also very important is the yields.

Speaker #4: And so the team has executed ahead of plan on the raw capacity ramp. But also we're seeing very healthy yields. We're in production on three different types of devices, EML, CWs, and PDs.

Speaker #4: And all three of those devices have yields on six-inch that are higher than our three-inch production yields. And Texas was the first facility we started ramping six-inch on.

Sherri Luther: 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 communication 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. Q3 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.

Speaker #4: Super pleased with the progress there because we saw such good yields out of the the gate from Texas. Which is a world-leading Indian fossified production facility.

Speaker #4: We started production in Sweden. And now we announced a third site that we're going to start production on six-inch Indian fossified. That's Zurich. And we'll start to see production from that third site at the beginning of calendar So this ramp of Indian fossified six-inch is both it unlocks a lot of additional growth for us.

Speaker #4: But it's also definitely contributed to growth margin as it becomes a bigger portion of our Indian fossified overall production capacity.

Speaker #2: Great. Thank you. Thank you for taking my questions.

Speaker #3: Thank you. We take the next question from the line of Simon Leopold from Raymond James. Please go ahead.

Speaker #5: Thank you very much for taking the question. The first thing I want to see if you could address is there's a perceived gap versus one of your primary competitors that stems from investors comparing their forecasts and your forecasts in categories like the OCS and CPO.

Sherri Luther: The sequential and year-over-year increases at R&D were primarily in the data center and communication 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 initiatives within the G&A functions as we streamline processes and gain better leverage and efficiency.

Speaker #5: How do you explain the difference? And then I've got a quick follow-up.

Speaker #4: Yeah. I think, Simon, on both of those new growth areas, we feel really good about the growth that's ahead ahead of us. On OCS, we recently just over the last couple of months at OFC, we doubled our forecasted market opportunity there.

Speaker #4: The revenue growth rate, the sequential growth that we're guiding in the current quarter—part of that growth, that sequential growth, is OCS systems growth.

Speaker #4: We feel great about the differentiation of our technology. It's very differentiated technology that provides both higher reliability, but much, much better power efficiency. And so we feel really good about the long-term, both the short and the long-term growth prospects on that product line.

Sherri Luther: In addition, our ERP consolidation project has made great progress where the majority of the company is now in a single ERP platform. We expect additional benefits from these initiatives in Q4 with more meaningful benefits into fiscal year 2027. Our Q3 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. Q3 non-GAAP earnings per diluted share was $1.41, up 9% from the Q2 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.

Speaker #4: And we've really been focused on just ramping capacity as fast as possible. And as I mentioned in the prepared remarks, we did kind of have a breakthrough over the last couple of months on removing a bottleneck in the production capacity that's allowed us to ramp production at a much faster rate.

Speaker #4: And we're ramping in two sites in parallel. So we feel good about the OCS, both the long-term opportunity and the ramp in the near term as well.

Speaker #4: And then look, CPO is I think it's a transformational growth opportunity for the company. We see that market size as over 15 billion and that's probably a conservative estimate over the coming years.

Speaker #4: We've CPO revenue for us will start in the second half of this calendar year. And that'll be initially scale-out CPO revenue. And then we expect to see the beginning of scale-up CPO revenue in the second half of calendar year 2027.

Sherri Luther: 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 2 March 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 in 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.

Speaker #4: And we're engaged with multiple customers. Obviously, we have a public announcement that we did with NVIDIA on our partnership with NVIDIA. That's all around CPO.

Speaker #4: That's a multibillion-dollar agreement that extends out through the end of the decade. And importantly, it's multiple different CPO solutions. So if you look at what we can provide in this CPO solution, it's not just the laser, right?

Speaker #4: We're certainly providing the high-power CW laser, but beyond that, we're providing the external laser source module. We can provide the fiber attach unit which includes micro lens arrays.

Speaker #4: It includes polarization maintaining fiber. So we have our own fiber optics fiber that will provide those solutions. Within that external laser source, we provide all of the ingredients, not just the laser, but the isolators, the thermal electric coolers.

Sherri Luther: 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, at the end of 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's corporate gross margin. Our Q3 results included $8 million in revenue from this business. I will now turn to our guidance for the fourth quarter of fiscal 2026.

Speaker #4: So there's a tremendous amount of content that we expect to provide in CPO. And I see this as a major new growth area for the company.

Speaker #4: And I think we're very, very well positioned in CPO. And like I said, first revenue will start in the sort of later this year.

Speaker #4: This calendar year.

Speaker #2: Great. And just to follow up, I appreciate you don't want to get speak micromanaging each product segment. But I'd like to see if you could confirm if the 1.6 terabit transceiver revenue exceeded, let's say, $100 million in the March quarter.

Speaker #2: And if not, when can we get to that milestone? Thank you.

Speaker #4: Yeah. So we don't break out to individual data rate revenue for our transceiver business. But we expect 800 gig to grow this year. It'll probably grow again next calendar year.

Speaker #4: And then on top of that, 1.6 is ramping at an incredibly rapid pace. In fact, as I think we shared in the past, that 1.6 ramp is actually faster than what we would have thought, say, a year ago, which we're really pleased with.

Sherri Luther: 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.

Speaker #4: And so if you look at our incremental or sequential growth in the current quarter, a good portion of that has driven by 1.6, the 1.6 ramp.

Speaker #4: And we expect 1.6 to not just contribute to the current quarter sequential quickly over the coming quarters as well. And so I think really the growth drivers for our transceiver business are really 800 and 1.6 combined, not just this calendar year, but next calendar year as well.

Speaker #2: Thank you.

Speaker #3: Thank you. We take the next question from the line of Thomas, O'Malley from Barclays. Please go ahead.

Speaker #6: Hey, guys. Thanks for taking my question. My first one's on growth margin. So if I look at growth margins in March at 39.6, and then I look at growth margins last year at 38.5, the incremental year-over-year basis is around 44%.

Sherri Luther: Operator, please open the call for Q&A.

Speaker #6: So since that time, I mean, you've increased since production. You've doubled in fossil almost. You've exited some businesses. In fact, your data center business, you kind of report well, you could assume some percentage of this Thomas business, but that's growing really nicely as well.

Operator: Thank you. We take the first question from the line of Samik Chatterjee from JP Morgan. Please go ahead.

Speaker #6: So why aren't you getting more incremental fall through on the growth margin side? Is there any puts that you could highlight that are preventing you from kind of breaking out on that line item?

Speaker #5: Yeah. Thanks, Thomas. So the way we think about this highlight from growth margin perspective is that if you go back to the end of Q4 of 2025, we increased our growth margin sequentially in 7 out of the past 8 quarters.

Speaker #5: And if you include the 57 basis points improvement from our just recent Q3 quarter, that's an increase of about 530 basis points. And then if you tack on to the midpoint of our guide for Q4, that takes you to 570 basis points improvement.

Samik Chatterjee: Hi, thanks for taking my question, and congrats on the robust set of results, numbers here. Jim, maybe if I can start off with the guide for the June quarter. It is implying acceleration from Q3, so the increases you had in Q3 from a revenue perspective, and particularly when I look back through the year, every quarter you managed to sort of accelerate the sequential revenue growth. Maybe if you can sort of dive into, one, what's the driver on the demand side that's helping you lead to that acceleration, and maybe also contextualize it in terms of supply and how that's helping with the acceleration as well. I have a follow-up after that. Thank you.

Speaker #5: So I think that's a pretty good progress. I mean, we're not done. But I am pleased with progress we've made there. And the target that we put out at our investor last year was greater than 42%.

Speaker #5: And we are super, super focused on making sure that we get to that target. And when you look at the drivers of growth margin expansion strategy that we've been executing on quarter over quarter over quarter, it's cost reductions.

Speaker #5: It's yield improvements. And it's pricing optimization. And when you look at our Q3 quarter, each of those areas increased quite significantly from the prior quarter in each of those categories.

Jim Anderson: Yeah. Thanks, Samik, for the question. Yeah, if you look at the midpoint of the Q2 guide, and certainly, we expect acceleration in growth versus prior quarter. If you look at the year-over-year growth rate as well. We really believe the current Q2 kind of represents a new inflection point in our revenue growth rate moving forward. 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 of the equation, I would say it looks exceptional right now, both in terms of the degree of demand, but also our visibility on demand.

Speaker #5: And so we talked a little bit about some of those prepared remarks. But from a cost reduction perspective, we had improvements from 6-inch indium phosphide.

Speaker #5: We've talked about the fact that at half the cost, right, when you go from 3-inch to 6-inch. So we're already seeing the benefit of 6-inch.

Speaker #5: We also talked about yield improvements in Q2 that we saw in 6-inch. So we're continuing to see yield improvements as we continue to ramp.

Speaker #5: And we talked about how we've got two sites running in parallel. We've got another site coming up. We expect to continue to see improvement on 6-inch as we bring the other site up.

Speaker #5: And as we continue to ramp 6-inch, that's going to continue to add benefit to our growth margin. Another area of cost reductions that we've seen, actually, that's been predominantly in our data center and communications business.

Speaker #5: So the majority of well over the majority of our improvements in growth margin have really been in the data center and communications business. So I'm really pleased with that progress.

Jim Anderson: If we look at just bookings in the prior quarter, bookings in the prior quarter were up substantially from the previous quarter. Record bookings, incredible amount of backlog, we've now got orders that extend out into calendar 2028. We have just tremendous demand ahead of us, but also great visibility on that demand. That demand is coming from, you know, the places you'd expect. Certainly data center and growth, both transceivers, but some of the new growth vectors we're bringing on, as well as communications. You know, probably more importantly on the supply side of the equation, that's probably really more about our focus. Demand looks great. What we're doing is ramping supply very quickly. Both this quarter, but moving forward, we're bringing on substantially more capacity over the coming quarters.

Speaker #5: We've also seen pricing optimization benefits. That's significantly increased quarter on quarter. And certainly, year over year. And that's been not only in the industrial business, but that was actually quite a sizable in our data center and communications business.

Speaker #5: So I'm really pleased with the progress we've made so far of we're going to continue to drive to get to our target. And super focused on doing that.

Speaker #5: But I'm quite pleased with the progress so far. And we're at early stages is the way that I would look at it.

Speaker #6: And just to follow up on the preamble you mentioned, some bottlenecks that were being relieved in the OCS business. What specifically are you referring to?

Speaker #6: And how much of an impact could that have on production?

Speaker #4: Yeah. There were some internal components, some components that we make internal to COHERENT that were facing our production capacity expansion. And so we were able to sort of dramatically improve the amount of internal components that we were producing.

Jim Anderson: Probably the best single example of this is just the indium phosphide capacity that's coming online. The indium phosphide has kind of been the key constraint for us for a number of quarters. It's a constraint for the industry. You know, our target this year is to double our indium phosphide capacity. The great thing is it looks like based on the current execution, we'll achieve that goal next quarter, which is one quarter earlier than we thought. When I look into next calendar year, we expect to more than double indium phosphide capacity again. That's a quadrupling of capacity over a 2-year period. That looks really good. I think that really unlocks an acceleration in our revenue growth moving forward. That's kind of on all the existing business.

Speaker #4: And so that really unlocked acceleration in our production capacity. And so over the last month or two, we've seen a really good ramp-up in our pace of production.

Speaker #4: I expect that to continue. We're seeing a much faster ramp of production on OCS than, say, a few months ago, which is really good.

Speaker #3: Thank you. We take the next question from the line of Blaine Curtis from Jefferies. Please go ahead.

Speaker #6: Hey, guys. Thanks for taking my question. Actually, I wanted to ask about scaling across just becoming a big talking point. You called it out in the COM business.

Speaker #6: If you could just talk about kind of where that is today. And as you look to fiscal 27, how do you frame that ramp for scale across?

Jim Anderson: You layer on top of that some of the new growth areas, new growth vectors that are coming online. OCS is ramping. We expect that to contribute to growth this quarter and grow sequentially. CPO revenue kicks in in the H2 of this year. That's we view that as all incremental. Our multi-rail systems will start contributing revenue in the H1 of next calendar year. We think thermal solutions will start to generate revenue in the H2 of calendar 2027. We sort of have these multiple growth vectors that are layering on top of the existing business growth. We feel really good about the growth and the sort of accelerated growth ahead of us.

Speaker #4: Yeah. Thanks, Blaine. Yeah. We're seeing just tremendous growth in the scale across part of the business. This follows within our communications segment, which I mentioned in the prepared remarks.

Speaker #4: So scale across or DCI, also within that communication segment, is traditional telecom. But the fastest growth that we're seeing is in that scale across piece of the business.

Speaker #4: In the most recent quarter, we saw 16% sequential growth and 60% year over year. And here again, similar to data center, just the demand is exceptional.

Samik Chatterjee: Got it. Got it. Thanks for that, Jim. Then maybe just to follow up on similar lines. You mentioned the acceleration on the indium phosphide capacity. Given that you're 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 sort of on next year as well? As investors, how should investors think about the impact of that on gross margin? How material is it? When does it start to be material to your gross margin trajectory as well? Thank you.

Speaker #4: The visibility is exceptional. We have LPAs that are in place with customers in that segment. And we're seeing it's really broad-based across almost every product we have in that segment.

Speaker #4: And broad across customers as well. Just to give you a sense of the products in that segment, it would cover components like pump lasers. It would cover modules like ZR, ZR Plus, and transceivers, which would be the 100-gig, 400-gig, and 800-gig ramping ZR, ZR Plus.

Speaker #4: It covers line cards, an amplifier, and then full systems as well. And so yeah, we expect this area just given the demand we see in front of us and growth area for us moving forward.

Jim Anderson: Yeah. Thanks, Samik. Actually, on the second part of your question on gross margin, we already started to see the impact of 6-inch indium phosphide capacity, which has a much better cost structure. 6-inch versus 3-inch is more than 4 times as many devices at less than half the cost. We already started to see that contribute to gross margin expansion in our fiscal Q3. As Sherri said, I think in her prepared remarks, our guide in the current June quarter has gross margin going up sequentially. Again, part of that, what's driving the gross margin expansion is the 6-inch indium phosphide capacity, which just gives us a much better cost structure. Overall, I'm really pleased with the execution on our 6-inch indium phosphide ramp. You know, there's kind of 2 factors underneath there.

Speaker #4: And then a new system that we think is going to continue to accelerate our growth rate here is multi-rail. And so our multi-rail technology, which we highlighted at OFC, helps provide a huge capacity increase within the same power and physical area of a prior solution.

Speaker #4: So it's a tremendous benefit to the customer. And we have a number of very differentiated component technology pieces that go into that system. That really position us very well.

Speaker #4: And we're selling full systems and we expect to have revenue to start in the first half of calendar 27. And so just another growth factor layering on top.

Jim Anderson: There's just the raw capacity ramp, very important is the yields. The team has executed ahead of plan on the raw capacity ramp, we're seeing very healthy yields. We're in production on 3 different types of devices, EML, CWs, and PDs, all 3 of those devices have yields on 6-inch that are higher than our 3-inch production yields. You know, Texas was the first facility we started ramping 6-inch on. Super pleased with the progress there. We saw such good yields out of the gate from Texas, which is the world's leading indium phosphide production facility, we started production in Sweden. Now we announced a 3rd site that we're gonna start production on 6-inch indium phosphide, that's Zurich.

Speaker #4: Very strong growth in this area. We expect that to continue, given the strong growth that we see ahead of us.

Speaker #6: Thanks, Jeremy. And then I just want to follow up on Tommy's growth margin question. I just want to better understand the tailwinds. You called out 6-inches being the biggest driver.

Speaker #6: I'm assuming the 6-inch volumes that you mentioned you're shipping in your units are still fairly small. So are there startup costs that kind of roll off there?

Speaker #6: And that’s what the savings are? And then, as for the $1.8T, is that a gross margin uplift as well?

Speaker #4: Yeah. So when I mentioned in the prior quarter the 6-inch, I mentioned that as it was one of the contributing factors. We're actually a number of other contributing factors to growth margin expansion in the prior quarter.

Speaker #4: And in our guide for the current quarter, it's going to be similar. 6-inch is a contributor. There's other factors as well. There's probably seen in other cost structure improvements that we've made.

Jim Anderson: We'll start to see production from that third site at the beginning of calendar 2027. This ramp of indium phosphide 6-inch is both, it unlocks a lot of additional growth for us, but it's also definitely contributed to gross margin as it becomes a bigger portion of our indium phosphide overall production capacity.

Speaker #4: And yeah, I would say we're still pretty early in the 6-inch ramp. If you think about 6-inch so we shipped our first transceivers last quarter that included devices from our 6-inch.

Speaker #4: And that was just the initial production that we started. That will ramp significantly over the coming quarters. So I think there's much more of the 6-inch benefit ahead of us.

Samik Chatterjee: Perfect. Great. Thank you. Thanks for taking my questions.

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

Speaker #4: The if you think about the total doubling of capacity, the fact that all of that doubling capacity is 6-inch, by the end of this year, next quarter, half of our capacity will be 6-inch.

Simon Leopold: Thank you very much for taking a question. The first thing I want to see if you could address is there's a perceived gap versus one of your primary competitors that stems from investors comparing their forecasts and your forecasts in categories like the OCS and CPO. How do you explain the difference? Then I've got a quick follow-up.

Speaker #4: So I think that benefit from 6-inch is more ahead of us. And then 1.6T question. Yeah. But we definitely see that as beneficial to growth margin.

Speaker #4: We expect just like we've always seen in prior transitions of speed, of data rates, at the beginning of the life cycle of new data rate, generally the growth margins are better than the prior data rate.

Jim Anderson: Yeah. I think, Simon, on both of those new growth areas, we feel really good about the growth that's ahead of us. On OCS, you know, we recently just over the last couple months at OFC, we doubled our forecast of the market opportunity there. The revenue growth rate, the sequential growth that we're guiding in the current quarter, part of that sequential growth is OCS systems growth. We feel great about the differentiation of our technology. It's a very differentiated technology that provides both higher reliability, but much better power efficiency. We feel really good about the long term, both the short and long-term growth prospects on that product line. We've really been focused on just ramping capacity as fast as possible.

Speaker #4: So we would expect 1.6T to be beneficial to the growth margin for the transceiver business.

Speaker #6: Thanks, Jim.

Speaker #3: Thank you. We take the next question from the line of George Nora from Wolf Research. Please go ahead.

Speaker #7: Hi, guys. Thanks very much. I was curious about anything more you could tell us on the new LTA that you're signing. Obviously, we learned a lot around the NVIDIA transaction.

Speaker #7: But you mentioned there's a number of other deals that you guys have brought in. Anything you can tell us in terms of how big those deals are, what kind of duration are we talking about?

Speaker #7: Are they funding your capital expansions? Anything you can tell us financially just in the aggregate more details would be interesting. Thanks.

Jim Anderson: As I mentioned in the prepared remarks, we did, you know, kind of have a breakthrough over the last couple months on removing a bottleneck in the production capacity that's allowed us to ramp production at a much faster rate, and we're ramping in 2 sites in parallel. We feel good about the OCS, both the long-term opportunity, but the ramp in the near term as well. Look, CPO is I think it's a transformational growth opportunity for the company. We see that market size as over $15 billion, and that's probably a conservative estimate over the coming years. We've, you know, CPO revenue for us will start in the H2 of this calendar year, and that'll be initially scale-out CPO revenue.

Speaker #4: Yeah. I think, George, yeah, there were a couple additional LTAs that we signed in the prior quarter. And then I would say there's a number of other ongoing discussions.

Speaker #4: We would expect to close additional LTAs this quarter, very soon. And those LTAs usually have three parts. You asked about kind of CAPEX commitment.

Speaker #4: There's usually an upfront investment from the customer to help with the CAPEX. And that can come in a number of different forms. But there's usually some upfront investment which kind of represents sort of the skin in the game from the customer.

Speaker #4: And which we view as really positive. And then there's, of course, a supply commitment from us. But the third element is there's almost always some sort of demand minimal, at least minimal demand commitment from the customer, to make sure that that capacity is going to get utilized.

Jim Anderson: We expect to see the beginning of scale-up CPO revenue in the second half of calendar 2027. You know, we're engaged with multiple customers. Obviously, we have a public announcement that we did with NVIDIA on our partnership with NVIDIA that's all around CPO. That's a multibillion-dollar agreement that extends out through the end of the decade. Importantly, it's multiple different CPO solutions. If you look at what can we provide in a CPO solution, it's not just the laser, right? We're certainly providing the high-power CW laser. We're providing the external laser source module. We can provide the fiber array unit, which includes microlens arrays. It includes polarization-maintaining fiber. We have our own fiber optics fiber that we'll provide in those solutions.

Speaker #4: So those are kind of three parts of the LTA. Almost every LTA has those three parts in it. And so yeah, I would say good progress last quarter in additional LTAs.

Speaker #4: And we anticipate more LTAs to come. And yeah, significant in size.

Speaker #6: Yeah. Anything about the genre of customer here? Is this cloud providers? Is this systems manufacturers? Anything else you could say? Thanks.

Speaker #4: It's both, right? We would see we expect LTAs from both hyperscalers as well as other system customers. So I would expect both.

Speaker #6: Thank you.

Speaker #4: Yep.

Speaker #3: Thank you. We take the next question from the line of Vivek Arya from Bank of America Security. Please go ahead.

Speaker #8: Hi. This is Michael Mani on Vivek Arya. Thanks so much for taking our questions. I wanted to dive in deeper with some of the CBO LTAs or long-term agreements that you're dealing with, including Vivek, but maybe some of the other deals that you're kind of eyeing over the next couple of years.

Jim Anderson: Within that external laser source, we provide all of the ingredients, not just the laser, but the isolators, the thermoelectric coolers. There's a tremendous amount of content that we expect to provide in CPO, and I see this as a major new growth area for the company. I think we're very, very well positioned in CPO. Like I said, you know, first revenue will start in the, you know, sort of later this year, this calendar year.

Speaker #8: What's the mix of these agreements between lasers, ELS modules that you highlighted, OFC, and the various other components that you could sell into CPO solution like fiber attachments?

Speaker #8: How does that vary by customer? What are the puts and takes there based on the deal? Thank you.

Speaker #4: Yeah. It kind of could depend by customer but it's important to keep in mind that we have a very broad portfolio of CPO technology that we can bring to the customers.

Simon Leopold: Great. Just as a follow-up, I appreciate you don't want to get The Street micromanaging each product segment, but I'd like to see if you could confirm if the 1.6T transceiver revenue exceeded, let's say, $100 million in the March quarter. If not, when can we get to that milestone? Thank you.

Speaker #4: I think it's a real advantage for us. And we at OFC, we laid out all the different types of technology that we can bring to a CBO solution, lasers, the high-power CW lasers, is certainly one important component but it's not the only.

Jim Anderson: Yeah, Simon, we don't break out individual data rate revenue for our transceiver business. You know, we expect 800G to grow this year. It'll probably grow again next calendar year. On top of that, 1.6T is ramping at an incredibly rapid pace. In fact, as I think we've shared in the past, that 1.6T ramp is actually faster than what we would have thought, say, a year ago, which we're really pleased with. If you look at our incremental or sequential growth in the current quarter, a good portion of that is driven by 1.6T, the 1.6T ramp.

Speaker #4: We can also bring 200 gig and in the future 400 gig pixels as well. There's some applications where pixels are sort of a better laser technology for near-package objects.

Speaker #4: But beyond that, if you look at the extra laser source, we can provide that module but within that, almost all those key optical ingredients we have in-house as well.

Speaker #4: Not just the laser but the isolators, the thermoelectric coolers, so all of the ingredients that go in that which customers view as a big strength.

Speaker #4: Because we're not dependent on others for those technologies. And then the actual fiber attach units. So this is the what connects the switch chip or the XPU to the faceplate or to the external laser source module.

Jim Anderson: We expect 1.6T to not just contribute to the current quarter sequential growth, but to continue to ramp very quickly over the coming quarters as well. I think really the growth drivers for our transceiver business are really 800G and 1.6T combined, not just this calendar year, but next calendar year as well.

Speaker #4: We can provide that entire assembly as well because we have the lens arrays, we have the polarization maintaining fiber. So we have all the ingredients for the CPO solution.

Simon Leopold: Thank you.

Speaker #4: And I would say most customers are leveraging, if not all of that portfolio, certainly a good portion of that portfolio.

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

Thomas O'Malley [Director of Research: Hey, guys. Thanks for taking my question. My first one's on gross margin. If I look at gross margins in March at 39.6, and then I look at gross margins last year at 38.5, the incremental on a year-over-year basis is around 44%. Since that time, I mean, you've increased 6-inch production. You've doubled indium phosphide almost. You exit some businesses. In fact, like your data center business, you kind of report, well, you could assume that some percentage of this comms business, but that's growing really nicely as well. Why aren't you getting more incremental fall through on the gross margin side? Is there any puts that you could highlight that are preventing you from kind of breaking out on that line item?

Thomas O'Malley: Hey, guys. Thanks for taking my question. My first one's on gross margin. If I look at gross margins in March at 39.6, and then I look at gross margins last year at 38.5, the incremental on a year-over-year basis is around 44%. Since that time, I mean, you've increased 6-inch production. You've doubled indium phosphide almost. You exit some businesses. In fact, like your data center business, you kind of report, well, you could assume that some percentage of this comms business, but that's growing really nicely as well. Why aren't you getting more incremental fall through on the gross margin side? Is there any puts that you could highlight that are preventing you from kind of breaking out on that line item?

Speaker #6: Great. Thank you. And from a follow-up, I just wanted to ask about the two incremental opportunities you highlighted for '27. Multi-rail and thermal management products.

Speaker #6: So you said with new timing for stuff, I think for multi-rail and second half for the thermal products. But what are the milestones between now and then from a customer perspective?

Speaker #6: Let me get a better sense of how large those ramps could be. And what does the competitive landscape look like in both of those areas?

Speaker #6: And how do you think you're especially differentiated if you articulate that? Thank you.

Speaker #4: Yeah. Michael, on the let me start with the multi-rail, which is the near-term one. I would say the milestones are just the typical engineering milestones that we would walk through with the customers.

Sherri Luther: Yeah. Thanks, Thomas. You know, the way a few things I'll just highlight from a gross margin perspective is that if you go back about to the end of Q4 of 2025, we've increased our gross margin sequentially in 7 out of the past 8 quarters. If you include the 57 basis points improvement from our just, you know, our recent Q3 quarter, that's an increase of about 530 basis points. If you tack on to the midpoint of our guide for Q4, that takes you to 570 basis points improvement. I think that's pretty good progress. I mean, we're not done, but I am pleased with the progress that we've made there.

Speaker #4: There would be a qualification, a pilot run—very normal engineering milestones that we're moving through. And again, we would expect revenue to start in the first half of '27.

Speaker #4: And I think as we get closer to that revenue ramp, we could provide just some better idea of what the rate and pace of that revenue ramp is.

Speaker #4: But we see that as a substantial new product line with significant revenue opportunity. I mean, the size of the market for multi-rail is at least $2 billion over the coming years.

Sherri Luther: You know, the target that we put out at our investor day last year was greater than 42%, and we are super focused on making sure that we get to that target. When you look at, you know, the drivers of our gross margin expansion strategy that we've been executing on a quarter over quarter over quarter, you know, it's cost reduction, it's yield improvements, and it's pricing optimization. When you look at our Q3, you know, each of those areas increased, you know, quite significantly from the prior quarter in each of those categories. We talked a little bit about some of those in my prepared remarks. You know, from a cost reduction perspective, you know, we had improvements from 6-inch indium phosphide.

Speaker #4: And it could be larger than that. And the technology that we have is very differentiated. With multi-rail, it's really all about the underlying technology.

Speaker #4: And without going into a bunch of the technical details, because we covered this at OFC, but there's a number of key components that go into that multi-rail that are unique that we have unique differentiation that position us really well.

Speaker #4: So we feel really good about the competitive positioning on multi-rail. And then the second part of your question, definitely thanks for asking about the thermal solutions.

Speaker #4: We're very excited about this. This is us taking our industrial technology some of our materials technology that we apply to the industrial market and repurposing this for data center.

Sherri Luther: We've talked about the fact that, you know, it's half the cost, right, when you go from 3-inch to 6-inch. We're already seeing the benefit of 6-inch. We also talked about yield improvements in Q2 that we saw in 6-inch. You know, we're continuing to see yield improvements as we continue to ramp, and we talked about how we've got 2 sites going in parallel. We've got another site coming up. I expect to continue to see improvements on 6-inch as we bring, you know, the other site up and as we continue to ramp 6-inch. That's gonna continue to add benefit to our gross margin. The other areas of cost reductions that we've seen, actually, that's been predominantly in our data center and communications business.

Speaker #4: An example is our Thermodyte technology. Thermodyte is a material that's a proprietary material that only Coherent provides. And if you look at Thermodyte, applied to the cooling of, say, a switch chip or an XPU or an ASIC chip, relative to the current thermal solutions which are usually copper-based solutions, Thermodyte or other type of material that we could provide can provide heat transfer that's either two times better than copper, sometimes up to five times better than a copper solution.

Sherri Luther: The majority of, well over the majority of our improvements in gross margin have really been in the data center and communications business. I'm really pleased with that progress. We've also seen pricing optimization benefits. That has significantly increased quarter-on-quarter and certainly year-over-year. That's been, you know, not only in the industrial business, but that was actually quite sizable in our data center and communications business. I'm really pleased with the progress we've made so far of, you know, we're gonna continue to drive to get to our target and super focused on doing that. I'm quite pleased with the progress so far and, you know, we're early stages is the way that I would look at it.

Speaker #4: So this is a massive improvement for customers because what that means is if we use one of those thermal solutions that have two to five times better thermal properties it allows the XPU, the GPU to run at a much higher frequency or utilization rate because it can be cooled much more effectively.

Speaker #4: So it's almost like getting certain sort of more tokens out of the same CPU or GPU. And so it's a big win for our customers.

Speaker #4: We're really excited about that very strong customer engagement there. And again, just kind of moving through the normal engineering milestones, but we would expect revenue in the second half of next year.

Thomas O'Malley [Director of Research: Just as a follow-up, in the preamble, Jim, 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?

Thomas O'Malley: Just as a follow-up, in the preamble, Jim, 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?

Speaker #4: By the way, the other one that I would mention which is really a great technology is our thermoelectric generators where we're harvesting waste heat from the CPU or GPU, harvesting the waste heat and converting that back into electrical energy which is pumped back into the data center.

Jim Anderson: Yeah, there were some internal components or some components that we make in internal to Coherent that were pacing our production capacity expansion. We were able to sort of dramatically improve the amount of internal components that we were producing. That really unlocked an acceleration in our production capacity. Over the last, you know, month or two, we've seen a really good ramp-up in our pace of production and expect that to continue. So we're seeing a much faster ramp of production on OCS than, say, you know, a few months ago, which is really good.

Speaker #4: So a great efficiency gain for power efficiency in the data center. So yeah, we're excited about those new thermal solutions.

Speaker #6: Thank you.

Speaker #7: Thank you. We take the next question from the line of Papasela from City. Please go ahead.

Speaker #8: Thank you. Thank you for taking my question and congrats on the results. Maybe my first question is around pricing in general. From a Transviewer perspective, obviously you were I guess too had one success of Transviewer but also a buyer of lasers and electrical components as well.

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

Speaker #8: And at least kind of yesterday or over the past couple of days, we have been hearing kind of some laser pricing increasing particularly for EMLs.

Blayne Curtis: Hey, guys. Thanks for taking my question. Actually wanted to ask about scale-across just becoming a big talking point. You called it out in the comm business. Maybe you could just talk about, you know, kind of where that is today. As you look to fiscal 2027, how do you frame that ramp for scale-across?

Speaker #8: So I'm curious if you are seeing that on one front but also are you able, if that's the case, under Transviewer will pass through those or are you do you have enough levers in general under Transviewer level to also increase pricing given the demand supply imbalance?

Jim Anderson: Thanks, Blayne. We're seeing just tremendous growth in the scale-across part of the business. This falls within our communication segment, which I mentioned in the prepared remarks. Scale-across or DCI, also within that communication segment is traditional telecom. The fastest growth that we're seeing is in that scale-across piece of the business. You know, in the most recent quarter, we saw 16% sequential growth and 60% year-over-year. Here again, similar to data center, just the demand is exceptional. The visibility is exceptional. We have LTAs that are in place with customers in that segment. We're seeing it's really broad-based across almost every product we have in that segment, broad across customers as well.

Speaker #4: Yeah. Let me start with the pricing and come back to cost. On price, yeah, I would call pricing very healthy. Very healthy dynamics around pricing because of the supply versus demand.

Speaker #4: I think pricing has been very good, right? And one of the things that always happens as we change data rates is the ASP goes up with a new data rate.

Speaker #4: So 1.60 pricing higher than 800 gig, etc. And so I would say the pricing dynamics are very healthy. And then the cost side, remember that most of the components that go into our transceivers are internally sourced.

Speaker #4: And so that buffers us from any increases provide some level of buffer against increases in pricing in externally sourced. Now, we do use some externally sourced components.

Jim Anderson: Just give you a sense of the products in that segment, you know, would cover components like pump lasers. It would cover modules like ZR/ZR+ transceivers, which would be the 100 gig, 400 gig, and 800 gig ramping ZR/ZR+. It covers line cards and amplifiers, and then full systems as well. We expect this area, just given the demand we see in front of us and the visibility of this, to be a very strong growth area for us moving forward. A new system that we think is gonna continue to accelerate our growth rate here is multi-rail.

Speaker #4: We do that for strategic reasons. But yeah, we do it as we've been successful at either passing along those external component price higher prices or offsetting that with our own internal production as well.

Speaker #4: So, we've—the combination of pricing and cost has been—we've seen higher gross margins. I think we very specifically shared in our prepared remarks, specifically in Data Center and Communications.

Speaker #4: We've seen the gross margin improvement we've seen is primarily becoming from that component of our business.

Speaker #7: Got it. That's very helpful. And then in terms of my follow-up, it seems like it's very clear that the demand you're saying for 1.60 is very strong.

Jim Anderson: Our multi-rail technology, which we highlighted at OFC, this helps provide a huge capacity increase within the same power and physical area of the prior solution. It's a tremendous benefit to the customer, and we have a number of very differentiated component technology pieces that go into that system that really position us very well. We're selling full systems and we expect to have revenue to start in H1 of calendar 2027. You know, just another growth factor layering on top. Very strong growth in this area, and we expect that to continue given the strong growth that we see ahead of us.

Speaker #7: The early deployments at least. So I'm curious if you can touch a little bit on the mix you're seeing between EMLs, CIFO, and perhaps even VIXEL.

Speaker #7: And maybe a follow-up to that is, generally speaking, what would be the margin implication of selling higher CIFO transceivers versus EML, or vice versa?

Speaker #4: Yeah, on the second part of your question, we really don't see a significant margin difference between EML- or CIFO-based transceivers. Both those transceivers are in the same ballpark of gross margin.

Speaker #4: And we're ramping both on 1.60. We are ramping both EML and CIFO-based 1.60. Remember, even a CIFO-based transceiver requires a CW laser based on native phosphide, right?

Blayne Curtis: Thanks, Jim. I just wanted to follow up on Thomas' gross margin question. I just wanna better understand the tailwinds. You called out 6 inches being the biggest driver. I'm assuming the 6-inch volumes that you mentioned you're shipping and your units are still fairly small. Are there startup costs that kind of roll off there, and that's what the savings are? As the Is 1.80, is that a gross margin uplift as well?

Speaker #4: So either way, they both require native phosphide capacity which is again ties back to wire driving. One of the reasons we're driving higher native phosphide capacity ramp.

Speaker #4: But for us, the mix is really determined by between EML and CIFO. It's really determined by kind of the customer applications. We work with the customer on which one of those two technologies just fits their application better.

Jim Anderson: Yeah. When I mentioned in the prior quarter, the 6-inch, I mentioned that as it was one of the contributing factors. There were actually a number of other contributing factors to gross margin expansion in the prior quarter. In our guide for the current quarter, it's going to be similar. 6-inch is a contributor, but there's other factors as well. There's pricing and other cost structure improvements that we made. Yeah, I would say we're still pretty early in the 6-inch ramp. If you think about 6-inch, we shipped our first transceivers last quarter that included devices from our 6-inch, and that was just the initial production that we started. That will ramp significantly over the coming quarters. I think there's much more of the 6-inch benefit is ahead of us.

Speaker #4: And there can be pros and cons depending on the type of application. And then we do expect VIXELs to be used later on as well.

Speaker #4: Our 200 gig VIXEL development going very well. And beyond just 200 gig VIXELs that go into transceivers, we see 200 gig where we expect 200 gig VIXELs to be adopted in some CEO applications or MPO applications as well.

Speaker #4: But yeah, that initial 1.60 ramp is a combination of EML and CIFO-based 1.60.

Speaker #7: Got it. Thank you, John. Thank you. We take the next question from the line of Ruben Roy from Steve Hill. Please go ahead.

Jim Anderson: The, you know, on, if you think about the total doubling of capacity and the fact that all of that doubling of capacity is 6-inch, you know, by the end of this year, next quarter, half of our capacity will be a 6-inch. I think that benefit from 6-inch is more ahead of us. On the 1.6T question, yeah, we definitely see that as beneficial to gross margin. We expect, you know, just like we've always seen in prior transitions of speed, of data rates, at the beginning of the life cycle of a new data rate, generally the gross margins are better than the prior data rate. We would expect 1.6T to be beneficial to gross margin for the transceiver business.

Speaker #9: Yeah. Thank you. Jim, the kind of discussion around CTO has certainly seemingly accelerated since the beginning of the year through OFC and then even over the past few weeks with some of your peers.

Speaker #9: And yourself talking about it, the first question is to clarification on the second half scale-out 27 scale-up ramp. Are those ramps tied to NVIDIA specifically or are there other customers contributing to those initial scale-out CPU revenues for you?

Speaker #9: And the second part of the question is, as you think about CPO and new opportunities like multi-rail, and the components that go into multi-rail, my understanding is some of those things have higher margin structures than maybe other native phosphide or silicon photonics components.

Blayne Curtis: Thanks, Jim.

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

Speaker #9: How are you thinking about allocating capacity across some of these sort of, let's call them, newer growth areas as you think about the next 12 to 18 months?

George Notter: Hi, guys. Thanks very much. I was just curious about anything more you could tell us on the new LTAs that you're signing. Obviously, we learned a lot around the NVIDIA transaction, but you mentioned there's a number of other deals that you guys have brought in. Anything you can tell us in terms of, you know, how big those deals are? What kind of duration are we talking about? Are they funding your capital expansions? Like, anything you can tell us, like financially, just in the aggregate, more details would be interesting. Thanks.

Speaker #9: Thank you.

Speaker #4: Yeah. Thanks, Ruben. On the CPO, certainly now that NVIDIA partnership is public, they're clearly they're probably our lead customer on CPO. And but we do expect other customers to follow as well.

Speaker #4: And we're engaged with multiple different customers. It's actually a pretty wide set of customers. And we expect to have CPO solutions across multiple customers but definitely NVIDIA would be kind of the lead customer for us.

Jim Anderson: Yeah. Thanks, George. Yeah, there were a couple additional LTAs that we signed in the prior quarter. I would say there's a number of other ongoing discussions. We would expect to close some additional LTAs this quarter very soon. You know, those LTAs usually have three parts. You asked about kind of a CapEx commitment. Yeah, there's usually an upfront investment from the customer to help with the CapEx, and that can come in a number of different forms. There's usually some upfront investment, which kind of represents sort of skin in the game from the customer, and which we view as really positive. There's, of course, there's a supply commitment from us.

Speaker #4: And then on the second question, on multi-rail, yeah, definitely higher gross margin structure in that part of the business. You're absolutely right that there's specific components that go into multi-rail solutions that are quite high margin that also rely on native phosphide capacity.

Speaker #4: In general, the way we look at capacity allocation is we allocate native phosphide capacity to whatever drives the most the highest margin dollars. So whatever drives the maximum amount of margin dollars for the company.

Speaker #4: That's where we allocate the capacity.

Jim Anderson: The third element is, there's almost always some sort of demand, minimal, at least minimal demand commitment from the customer to make sure that that capacity is gonna get utilized. Those are kind of three parts of the LTA. Almost every LTA has those three parts in it. Yeah, I would say good progress last quarter in additional LTAs, and we anticipate more LTAs to come and, yeah, significant in size.

Speaker #7: Thank you. We take the next question from the line of Shaun O'Laughlin from T. Calvin. Please go ahead.

Speaker #10: Hi, Jim. Sherry, thanks for letting me join the party. And congrats on the solid set of results as always. One of the things I think this speaks to a lot to maybe Blaine and Tom's questions earlier in the call is one of the things that investors are trying to get a better handle on is as you ramp 6-inch native phosphide and the capacity there, the delta between maybe shipping initial SKUs, initial transceivers to revenue, as you mentioned, versus having that line fully qualified at some of your customers for volume production.

George Notter: Yeah. Anything about the genre of customer here? Is this cloud providers? Is this systems manufacturers? Anything else you could say? Thanks.

Jim Anderson: It's both, right? We would see, you know, we expect LTAs from both hyperscalers as well as other system customers. I would expect both.

Speaker #10: And I'm going to ask the question in a way that I know is the wrong way to frame it. But if I think about—we're going to double native phosphide capacity next quarter—why hasn't that translated into doubling revenue?

George Notter: Thank you.

Operator: Thank you. We 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 so much for taking our questions. I wanted to dive in deeper with some of the CPO LTAs or long-term agreements that you're dealing with, including NVIDIA, but maybe some of the other deals that you're kind of eyeing over the next couple years. What's the mix of these agreements between lasers, ELS modules, which you highlighted OFC, and, you know, the various other components that you could sell into a CPO solution like fiber array units. How does that vary by customer? Like, what are the puts and takes there based on based on the deal? Thank you.

Speaker #10: And that's, I think, where I'm having conversations with a lot of folks. If you could just comment on that.

Speaker #4: Yeah. Remember that there is a latency from the native phosphide devices to when we actually ship transceivers, right? So when the native phosphide devices whether that's an EML or CW laser come out of the production facility, it's really probably the next quarter, two to three months later before we see the transceivers then shipped based on those devices, right?

Speaker #4: And as an example, those transceivers that shipped in our March quarter, that was native phosphide devices that were produced in either our September or the early part of our December quarter.

Jim Anderson: Yeah. It can depend by customer, but, you know, it's important to keep in mind that we have a very broad portfolio of CPO technology that we can bring to the customers. I think that's a real advantage for us. At OFC, we laid out all the different types of technology that we can bring to a CPO solution. Lasers, the high-power CW lasers, is certainly one important component, but it's not the only. We can also bring 200G and in the future, 400G VCSELs as well. There's some applications where VCSELs are sort of a better laser technology for like near package optics. Beyond that, if you look at the external laser source, we can provide that module.

Speaker #4: So it's usually a lag of a few months from when the devices are made to when we see those shipped show up in transceiver shipments.

Speaker #7: And then just can you comment, Jim, on anything on the customer side? Should we assume tighter relationship between once the transceiver ships, you've already been through the qualification process?

Speaker #7: Is that how we should think about it?

Speaker #4: Oh, yeah. Yeah. There's nothing unique about the devices on 6-inch versus 3-inch in terms of qualification. There may in some cases need to be qualification.

Speaker #4: But that would have already happened ahead of production shipments, right? So we're talking about production shipments, the qualification is already complete at that point.

Jim Anderson: Within that, almost all those key optical ingredients we have in-house as well. Not just the laser, but the isolators, the thermoelectric generators. All of the ingredients that go in that which customers view as a big strength, 'cause we're not dependent on others for those technologies. The actual fiber array unit, this is what connects the switch chip or the XPU to the faceplate or to the external laser source module. We can provide that entire assembly as well because we have the microlens arrays, we have the polarization-maintaining fiber. We have all the ingredients for the CPO solution. I would say most customers are leveraging, if not all of that portfolio, certainly a good portion of that portfolio.

Speaker #7: Got it. That's helpful. And then maybe related to the CWEML question—and I know I just was not listening—I know you're going to say it's sort of agnostic and you'd go to the customer and go, "But if you could maybe comment on the 400-gig silicon photonics that you demonstrated at OFC, and maybe some of the other industry commentary that may be questioning the viability of silicon photonics and CW lasers at 3.2T, that would be helpful."

Speaker #7: Thanks.

Speaker #4: Yeah. Thanks, John. Yeah. As you mentioned at OFC, we demonstrated 400-gig silicon photonics that would enable 3.2T that we demonstrated that it could be used in either transceiver or it could be used in CPO.

Michael Mani: Great. Thank you. For my follow-up, I just wanted to ask about the two incremental opportunities you highlighted for 2027 with multi-rail and thermal management products. You said revenue timing for H1, I think for multi-rail and H2 for the thermal products. What are the milestones between now and then from a customer perspective? When we get a better sense of how large those ramps can be, and what does the competitive landscape look like in both of those areas, and how do you think you're especially differentiated, if you can articulate that? Thank you.

Speaker #4: So, we demonstrated just the capability to do that—the form factor may be CPO, or transceiver, or both. But we believe we have a path to 3.2T, or 400-gig per lane silicon photonics, based on that demonstration.

Speaker #4: And we're certainly expect to have both solutions. Based on 400-gig differential EMLs, which we already have, but 400-gig silicon photonics as well. And by the way, we're we have 200-gig pixels that we're working on, but we're also have 400-gig pixels that are in development as well.

Jim Anderson: Yeah. Michael, let me start with the multi-rail, which is the near-term one. I would say the milestones are just the typical engineering milestones that we would walk through with the customers. You know, there'd be a qualification, a pilot run, very normal engineering milestones that we're moving through. Again, we would expect revenue to start in H1 2027. I think as we get closer to that revenue ramp, we can provide just some more better idea of what the rate and pace of that revenue ramp is. We see that as a substantial new product line with significant revenue opportunity. I mean, we sized the market for multi-rail at least $2 billion over the coming years, and it could be larger than that.

Speaker #4: Those are a little further out. But we're certainly working on that as well. So we think we've got a really robust roadmap of multiple different laser technologies to support the future roadmap for our customers.

Speaker #7: Thanks, John. Thanks again for letting me thank you. Ladies and gentlemen, we have reached the end of our question and answer session. I would now like to turn the floor back over to COHEREN's CEO, Jim Anderson, for his closing comments.

Speaker #4: All right. Thanks, operator, and thanks, everybody, for closing. We are certainly very pleased about the strong third-quarter performance and continued momentum across our business.

Speaker #4: Demand remains exceptionally strong and we see accelerating growth ahead of us as we ramp capacity significantly over the coming quarters. I want to thank our employees for the great execution and the continued innovation and we look forward to updating you at our next call in another quarter.

Jim Anderson: The technology that we have is very differentiated. With multi-rail, it's really all about the underlying technology. Without going into a bunch of the technical details, 'cause we covered this at OFC, but there's a number of key components that go into that multi-rail that are unique to us or we have unique differentiation that position us really well. We feel really good about the competitive positioning on multi-rail. The second part of your question, definitely thanks for asking about the thermal solutions. We're very excited about this. This is us taking our industrial technology, some of our materials technology that we apply to the industrial market and repurposing this for data center. An example is our Thermadite technology. Thermadite is a material that's a proprietary material that only Coherent provides.

Speaker #4: Thank you.

Jim Anderson: If you look at Thermadite applied to the cooling of, say, a switch chip or an XPU or an ASIC chip, relative to the current thermal solutions, which are usually copper-based solutions, a Thermadite or other type of material that we could provide can provide heat transfer that's either 2 times better than copper, sometimes up to 5 times better than a copper solution. This is a massive improvement for customers because what that means is if we use one of those thermal solutions that have 2 to 5 times better thermal properties, it allows the, say, the XPU, the GPU to run at a much higher frequency or utilization rate because it can be cooled much more effectively.

Jim Anderson: It's almost like getting, you know, sort of more, more tokens out of the same CPU or GPU. It's a big win for our customers. We're really excited about that. Very strong customer engagements there and again, just kind of moving through the normal engineering milestones, but we would expect revenue in H2 of next year. By the way, the other one that I would mention, which is really a great technology is our thermoelectric generators, where we're harvesting waste heat from the, again, the CPU or GPU, harvesting waste heat and converting that back into electrical energy, which is pumped back into the data center. Great efficiency gain for power efficiency in the data center. We're excited about those new thermal solutions.

Michael Mani: Thank you.

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

Papa Sylla: Thank you. Thank you for taking my question, and congrats on the results. Maybe, Jim, my first question is around pricing in general from, like, a transceiver perspective. Obviously, you were, I guess, too, had one as a seller of transceivers, but also a buyer of lasers and electrical component as well. At least kind of yesterday or over the past couple of days, we have been hearing kind of some laser pricing increases, particularly for EML. I'm curious if you are seeing that on one front, but also are you able, if that's the case, at a transceiver level, pass through those costs? Do you have enough levers in general at a transceiver level to also increase pricing given the demand supply imbalance?

Jim Anderson: Let me start with the pricing and come back to the cost. On price, yeah, I would call pricing very healthy. Very healthy dynamics around pricing. Because of the supply versus demand, I think pricing has been very good, right? One of the things that always happens as we change data rates is the ASP goes up with the new data rate. 1.6T pricing higher than 800G, et cetera. I would say the pricing dynamics are very healthy. On the cost side, remember that most of the components that go into our transceivers are internally sourced. That buffers us from any, you know, increases, provide some level of buffer against increases in pricing in externally sourced.

Jim Anderson: Now we do use some externally sourced components. We do that for strategic reasons. Yeah, we view it as we've been successful at either passing along those external component price, higher prices or offsetting that with our own internal production as well. We've, you know, the combination of pricing and cost has been, you know, we've seen higher gross margins. I think Sherri shared in her prepared remarks, specifically in data center and communications, the gross margin improvement we've seen, it's primarily coming from that component of our business.

Papa Sylla: Got it. That's very helpful. Then in terms of my follow-up, it seems like it's very clear that the demand you are seeing for 1.6T is very strong, the early deployments at least. I'm curious if you can touch a little bit on the mix you are seeing between EML, SiPhO, and perhaps even VCSEL. Maybe a follow-up to that is kind of what would be, generally speaking, the margin implication of selling a higher SiPhO transceivers versus EML or vice versa?

Jim Anderson: Yeah. On the second part of your question, we really don't see a significant margin difference between EML or SiPh-based transceivers. Both those transceivers are in the same ballpark of gross margin. We're ramping both. On 1.6, we are ramping both EML and SiPh-based 1.6. Remember, you know, even a SiPh-based transceiver requires a CW laser based on indium phosphide, right? Either way, they both require indium phosphide capacity, which is again, ties back to why we're driving one of the reasons we're driving higher indium phosphide capacity ramp. For us, the mix is really determined by, between EML and SiPh, is really determined by kind of the customer applications. We work with the customer on which one of those two technologies just fits their application better.

Jim Anderson: There can be pros and cons depending on the type of application. Then we do expect VCSELs to be used later on as well. You know, our 200 gig VCSEL development going very well. Beyond just 200 gig VCSELs that go into transceivers, we expect 200 gig VCSELs to be adopted in some CPO applications or NPO applications as well. Yeah, that initial 1.6T ramp is a combination of EML and SiPhO-based 1.6T.

Papa Sylla: Got it. Thank you, Jim.

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

Ruben Roy: Yes. Thank you. Jim, the kind of the discussion around CPO has certainly seemingly accelerated since the beginning of the year through OFC and then even over the past few weeks with some of your peers and yourselves talking about it. First question is a clarification on the H2 scale-out, 2027 scale-up ramp. Are those ramps tied to NVIDIA specifically, or are there other customers contributing to those initial scale-out CPO revenues for you? The second part of the question is, as you think about CPO and new opportunities like multi-rail and the components, you know, that go into multi-rail, that, you know, my understanding is some of those things have higher margin structures than maybe, you know, other indium phosphide or silicon photonics components.

Ruben Roy: How are you thinking about allocating capacity, you know, across some of these, you know, sort of, let's call them newer growth areas, you know, as you think about the next 12 to 18 months? Thank you.

Jim Anderson: Thanks, Ruben. On the CPO, certainly now that the NVIDIA partnership is public, they're Clearly probably our lead customer on CPO. We do expect other customers to follow as well. We're engaged with multiple different customers. It's actually a pretty wide set of customers, and we expect to have CPO solutions across multiple customers. Definitely NVIDIA would be kind of the lead customer for us. On the second question on multi-rail, definitely a higher gross margin structure in that part of the business. You're absolutely right that there's some specific components that go into multi-rail solutions that are quite high margin that also rely on indium phosphide capacity.

Jim Anderson: In general, the way we look at capacity allocation is we allocate indium phosphide capacity to whatever drives the most, the highest, margin dollars. Whatever drives the maximum amount of margin dollars for the company, that's where we allocate the capacity.

Operator: Thank you. We take the next question from the line of Sean O'Loughlin from TD Cowen. Please go ahead.

Sean O'Loughlin: Hi, Jim, Sherry, thanks for letting me join the party, and congrats on a solid set of results as always. One of the things, and I think this speaks a lot to maybe Blayne and Tom's questions earlier in the call, is one of the things that investors are trying to get a better handle on is as you ramp, you know, 6-inch indium phosphide and the capacity there, the delta between maybe shipping initial SKUs, initial transceivers to revenue, as you mentioned, versus having that, you know, that line fully qualified at some of your customers for volume production.

Sean O'Loughlin: You know, I'm gonna ask the question in a way that I know is the wrong way to frame it, but if I think about we're gonna double indium phosphide capacity, next quarter, why hasn't that translated into doubling revenue? That's, I think, where I'm having conversations with a lot of folks, if you could just comment on that.

Jim Anderson: Remember that there is a latency from the indium phosphide devices to when we actually ship transceivers, right? When the indium phosphide devices, whether that's an EML or CW laser, come out of the production facility, it's really probably the next quarter, 2 to 3 months later, before we see the transceivers then shipped based on those devices, right? As an example, those transceivers that shipped in our March quarter, that was indium phosphide devices that were produced in either our September or the early part of our December quarter. There's usually a lag of a few months from when the devices are made to when we see those show up in transceiver shipments.

Sean O'Loughlin: Just can you comment, Jim, on anything on the customer side, or should we assume that there's a much tighter relationship between, you know, once the transceiver ships there, we've already been through the qualification process. Is that how we should think about it.

Jim Anderson: Oh, yeah. Yeah. There's nothing unique about the devices on 6-inch versus 3-inch in terms of qualification. There may, in some cases, need to be qualification, that would've already happened ahead of production shipments, right? When we're talking about production shipments, the qualification is already complete at that point.

Sean O'Loughlin: Got it. That's helpful. Then maybe related to the CW EML question, I know I wasn't not listening. I know you're gonna say it's sort of agnostic and you go where the customer goes, but if you could maybe comment on the 400G, you know, silicon photonics that you demonstrated at OFC and maybe some of the other industry commentary that's questioning the viability of silicon photonics and CW lasers at 3.2T. That would be helpful. Thanks.

Jim Anderson: Yeah. Thanks, Sean. Yeah, as you mentioned, at OFC we demonstrated, you know, 400G silicon photonics that would enable 3.2T. We demonstrated that, but it could be used in either a transceiver or it could be used in CPO. We demonstrated just the capability to do that. The form factor may be CPO or transceiver or both. We believe we have a path to 3.2T or 400G per lane silicon photonics based on that demonstration. We certainly expect to have both solutions based on, you know, 400G differential EMLs, which we already have, 400G silicon photonics as well.

Jim Anderson: By the way, we're, you know, we have 200 gig VCSELs that we're working on, but we're also have 400 gig VCSELs that are in development as well. Those are a little further out, but we're certainly working on that as well. We think we've got a really robust roadmap of multiple different laser technologies to support the future roadmap for our customers.

Sean O'Loughlin: Thanks, Jim, and thanks again for letting me.

Operator: Thank you. Ladies and gentlemen, we have reached the end of our question and answer session. I would now like to turn the floor back over to Coherent's CEO, Jim Anderson, for his closing comments.

Jim Anderson: All right. Thank you, operator, and thanks everybody for joining us today. In closing, we are, you know, certainly very pleased about the strong Q3 performance and the continued momentum across our business. Demand remains exceptionally strong, we see accelerating growth ahead of us as we ramp capacity significantly over the coming quarters. I wanna thank our employees for the great execution and the continued innovation, we look forward to updating you at our next call in another quarter. Thank you.

Operator: Thank you. Ladies and gentlemen, you may disconnect your lines at this time. Thank you for your participation.