Coherent delivered a broad Q4 FY2026 beat, with revenue, margins and earnings all improving. The more important update was management’s roadmap for another leg of AI-related growth: InP capacity is expanding rapidly, while CPO, PhotonLink, Multi-Rail and thermal-management products are expected to begin contributing over the next several quarters. The shares nevertheless fell after hours as strong execution met an already elevated expectations bar.
Will Coherent’s non-GAAP gross margin > 42% in FY2027 Q1?
Key Takeaways
· Results and guidance were stronger than expected. Q4 revenue reached $2.05bn, up 34% yoy and 13% qoq, while non-GAAP EPS rose 74% yoy to $1.74. Non-GAAP gross margin increased 215bps yoy to 40.2%, and operating margin reached 21.8%. Q1 FY2027 guidance calls for revenue of $2.2bn–$2.4bn and non-GAAP EPS of $1.85–$2.05, both above the consensus figures cited in the supplied market review.
· AI optical connectivity is driving an increasingly concentrated growth profile. Data Center & Communications revenue rose 59% yoy to $1.62bn and represented 79% of sales. Industrial revenue fell 16% on a reported basis to $431m. The quarterly trend shows that all net revenue growth over the past year came from the data-center and communications segment, increasing Coherent’s exposure to AI infrastructure spending and execution at major customers.
· InP capacity is still the central constraint. Internal InP output doubled yoy in Q4, while 6-inch laser output rose ~80%. Management expects internal InP capacity to double by calendar year-end and more than double again by end-2027. The 6-inch line produces CW lasers, EMLs and photodiodes, with management citing better yields and economics than 3-inch production. Backlog extends through FY2027, customer forecasts reach 2028, and many LTAs run three to ten years with pricing and minimum-volume provisions.
· Several new platforms now have specific revenue windows. CPO-related revenue and the PhotonLink integrated optical platform are expected to start increasing in Q2 FY2027. Multi-Rail should begin contributing in the first half, while Thermadite thermal-management revenue is expected in the second half. OCS revenue is already growing, and management raised its estimated 2030 addressable market to more than $4bn. These remain management timelines rather than realized sales.
· Earnings growth was strong, but cash conversion weakened. FY2026 non-GAAP EPS increased 59% as gross margin and operating leverage improved. However, operating cash flow fell to $80m from $634m, reflecting the working-capital and investment demands of the capacity build. Coherent ended the year with about $2.0bn of cash and short-term investments, while long-term debt declined to $3.21bn, limiting immediate liquidity concerns.
Market Reaction
Coherent rose ~2.8% in regular trading before the release, then fell ~3.5% initially and more than 6% at one point after hours, according to the supplied market review. Lumentum had rallied about 8% after its own stronger-than-expected report one day earlier, creating a demanding peer benchmark.
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Jiayi ZHANG
Coherent had also gained more than 200% over the prior 12 months and traded at roughly 42x forward earnings versus an industry average near 22x in that review. The decline therefore may reflect relative surprise, valuation and the modest near-term margin step-up rather than weaker reported demand.
Key Debates
· Can non-GAAP gross margin exceed 42% by Q4 FY2027?
· Will CPO and PhotonLink generate meaningful revenue in Q2 FY2027?
· Can inventory and capacity investment translate into stronger operating cash flow?
· Will Industrial return to yoy growth within the next two quarters?
Source:
- Company press release; https://www.coherent.com/news/press-releases/fourth-quarter-and-fiscal-year-2026-results
