Coherent reports 19% year-over-year revenue growth and 73% EPS increase, driven by robust demand in data center segment and strategic portfolio optimization.

OPERATOR - (00:00:00)

Continued strong sequential revenue growth throughout this fiscal year given the record level of orders we are receiving from our customers and the continued expansion of our production capacity. In addition, we continue to streamline our portfolio and ensure that our investments are focused on the areas of greatest long term growth and profitability for the company in order to drive sustained shareholder value creation. Turning to our Q1 operating results, revenue increased by 6% sequentially and 19% year over year on a pro forma basis basis, which excludes revenue from our recently divested aerospace and defense business, a sale that enhanced our portfolio focus and accelerated deleveraging. Non GAAP gross margin expanded by 70 basis points sequentially and 200 basis points year over year. The combination of revenue growth and gross margin expansion drove non GAAP eps growth of 16% sequentially and 73% year over year. I'll now provide some highlights from our two operating segments. We'll begin with our data center and communications segment, which is our largest and fastest growing business. Q1 revenue grew by 7% sequentially and by 26% year over year driven by growth in both our data center and communications markets. In our Data center business, Q1 revenue grew 4% sequentially and 23% year over year. Our Data center growth in Q1 was constrained by the supply of indium phosphide lasers However, we expect data center growth to accelerate to approximately 10% sequential growth in the current quarter, followed by strong sequential growth through the balance of this fiscal year. Given very strong demand and improving supply, I'd like to provide some additional color on both the demand and supply picture within our data center business. First, we are experiencing an exceptionally strong level of demand in our fiscal Q1. We received record bookings that represent a step function increase in already strong customer demand. We are seeing strong demand for both our 800G and 1.6T transceivers with broad adoption of our 800G transceivers and accelerated adoption of our 1.6T transceivers. A significant portion of the sequential growth we expect in the current quarter is driven by 1.6T adoption. As a reminder, earlier this year at OFC, we were the only company to demonstrate three different types of 1.6T transceivers based on three different types of laser, silicon photonics, EML and VCSEL. Our 1.6T transceivers Based on silicon photonics and EMLs are ramping first and we expect our 1.6T transceivers based on our 200G VCLs to ramp next calendar year. We see strong demand for 1,6T transceivers across multiple customers and expect both 800G and 1.6T to grow significantly in calendar 2026. Our deep portfolio of optical networking technology combined with our vertical integration and diversified supply chain are key competitive advantages with our customers and uniquely positioned coherent within the industry. On the supply side, given the strong demand growth we are seeing, we are continuing to expand our production capacity for transhuman modules and the key optical components used in those modules. For example, one of the key constraints across the industry is indium phosphide laser capacity. Over the course of Q1 we saw improving EML supply and we expect both internal and external EML supply to improve significantly in the current quarter and throughout the balance of this fiscal year. In particular, we continue to expand our internal indium phosphide production capacity. We are aggressively ramping 6 inch capacity because a 6 inch wafer compared to a 3 inch wafer will produce more than four times as many chips at less than half the cost. This will provide increasing benefit to our gross margin as we continue to ramp production. Our 6 inch indium phosphide line in Sherman, Texas, which is the world's first 6 inch indium phosphide production line, began production last quarter and continues to ramp well. I am very pleased to share that our initial 6 inch indium phosphide production yields are actually higher than our current 3 inch indium phosphide yields. This is an outstanding accomplishment by our production team and also a testament to the tremendous experience that we've gained over the past five years producing almost 2 billion VCSEL devices on our 6 inch gallium arsenide technology. Given the healthy yields we are seeing with 6 inch production, we began production of 6 inch indium phosphide at a second site in Jarofalla, Sweden. Ramping at two sites in parallel will significantly accelerate our production capacity ramp. Additionally, we are in production on three different types of key transceiver components on 6 inch indium phosphide, EMLs, CW lasers and photodiodes. With the ramp of 6 inch production at two sites in parallel, we expect to roughly double our total internal production capacity of indium phosphide over the next year. We also expect to continue to supplement our internal indium phosphide capacity with sourcing from external suppliers. We expect our external supply of EMLs to increase sequentially this quarter and next calendar year through continued partnership with our key external suppliers. In addition to critical laser production capacity, we are also expanding transceiver module assembly capacity while we continue to expand production at our existing site in Ipoh, Malaysia. We will now be expanding production capacity in parallel at a new transceiver production facility that we recently opened in Penang, Malaysia. In addition, we will be adding transceiver production capacity at our existing site in Vietnam, which already produces transceiver components. This additional production capacity allows us to continue to rapidly ramp module capacity to support the demand growth in front of us. I'd like to pivot to some technology developments that we expect to further benefit our data center business over the long term. We continue to make progress on lpo, lro, CPO and MPO related products and technologies with strong engagements across a wide range of customers. For example, we've shipped both LPO and LRO 800G and 1.6T transceivers to customers. Also, in September we announced that we have commenced sampling of our 400 milliwatt CW lasers designed for CPO and silicon photonics applications. We expect to address a broad range of CPO form factors for both scale out and scale up data center applications with this new product. We also continue to see significant customer engagement around our 200 gig VCL based solutions for NPO applications. Multiple customer engagements on integrated optics applications reinforce our view that the incremental market opportunity for optical solutions in the scale up portion of the AI data center networks will be very compelling and we believe Coherent is well positioned to address these applications using both CW and VCSEL based solutions. We continue to expect to see initial CPO deployments in calendar 2026 with growth continuing in the following years while pluggable form factor continues to grow in the scale out portion of the network. Another area of new growth is our optical circuit switch platform which continues to progress well with expanding customer engagement. We believe this product line adds over 2 billion of addressable market opportunity over the coming Both the breadth of customers and the range of applications are wider than our initial expectations. The underlying technology in our OCS system is a non mechanical field proven liquid crystal technology which has been successfully deployed for many years in demanding telecom applications and has a significant competitive advantage over other solutions. To date we've shipped systems to seven customers and expect that number to continue to expand this quarter. Shipments have included both 64 x 64 and 320 x 320 system sizes. Both revenue and backlog for OCS grew sequentially in our fiscal Q1 and we expect it to grow again in the current quarter. Our current backlog includes both 64x64 and 320x320 systems with the majority of the backlog weighted toward the larger system size. Given the strong customer demand and backlog, we are aggressively ramping production for both small and large capacity systems and we expect revenue to ramp throughout calendar 2026. Given the multiple growth vectors across pluggable transceivers, CPO and OCS, we are very excited about the opportunities ahead of our data center business. Turning to our communications market in Q1, revenue grew 11% sequentially and 55% year over year. Growth was driven by products for data center interconnect, but we also saw strong growth in traditional telecom applications. We expect our communications business to grow sequentially again in the current quarter and throughout the balance of this fiscal year. In hyperscale dci, we continue to see strong growth in customer demand for our ZR ZR Plus DCI focused products. Our product lineup which includes 100g, 400g and 800g ZR ZR plus coherent transceivers is growing quickly and we expect these products to continue to ramp throughout the course of the year. This fiscal year we also continue to see steady recovery in our telecom business. In addition to market recovery, we've introduced multiple new industry leading telecom platforms for which we are seeing significant customer interest and expect strong future revenue contribution such as our new award winning multi rail technology platform. This platform is a breakthrough solution that amplifies multiple fiber pairs while operating within the physical and electrical constraints of existing infrastructure infrastructure. Customer engagement on this new platform is very strong and we see this as one of many growth factors for our communications business in both the near and long term. Turning now to our industrial segment, revenue grew 2% quarter over quarter and 4% year over year on a pro forma basis excluding revenue from the recently divested aerospace and defense business. While we maintain a cautious outlook on near term demand, given the macroeconomic backdrop and ongoing tariff and regulatory uncertainty, we were pleased to see growth in our first fiscal quarter and we expect the industrial business to be stable to slightly up sequentially in our current quarter on a pro forma basis. Within our industrial segment there are several key growth areas. For example, we expect ongoing strong demand in display capital equipment driven by OLED screen adoption, expanding to larger format devices like tablets and laptops. We also expect growth over the long term in our semi cap equipment market given the industry wide expansion in semiconductor production. Another promising growth opportunity that I'd like to highlight is our advanced materials for thermal management and cooling. Traditionally, these materials are used in a wide range of applications in our industrial markets. However, the rapid expansion of AI data centers has created a significant growth opportunity. We see potential widespread adoption of these materials to address the thermal and power challenges posed by ever larger AI data centers. For example, our proprietary ThermalDyte material moves heat twice as effectively as copper, which is a tremendous advantage in data center cooling applications. We're engaged with multiple hyperscaler customers on this new emerging application of our materials technology. Lastly, I'd like to give an update on our portfolio optimization initiative. As a reminder, we are focused on streamlining our portfolio and concentrating our investments in the areas of greatest long term growth and profitability. We are shifting investment from non core areas and realigning our footprint to drive better asset composition and utilization efficiency across the organization. We completed the sale of our aerospace and defense business at the beginning of September. The proceeds of the sale were used to pay down debt and the sale is immediately accretive to both gross margin and eps. In addition, we recently announced the sale of our product division based in Munich, Germany that makes tools for materials processing and is part of our industrial segment. We made the decision to sell this product division because it was not aligned to our long term strategic focus areas and it did not support our long term financial goals. This transaction is expected to close in our fiscal Q3. The proceeds of this transaction will be used to reduce debt and the sale is expected to be immediately accretive to both gross margin and eps. In addition to streamlining the product portfolio, we are also continuing to streamline our physical footprint. Since the beginning of our last fiscal year roughly five quarters ago, we have sold or exited 23 sites and we plan to continue to streamline our footprint and exit additional underutilized or unnecessary sites over the coming quarters. While I'm pleased with the progress we've made streamlining our portfolio, we still have more work to do. I view portfolio optimization as an evergreen process and we will continue to reevaluate our asset portfolio to streamline and focus on the areas of greatest profit growth and ensure we are optimizing our return on invested capital. In summary, we delivered strong revenue and eps growth in Q1 and are on track for strong sequential growth over the coming quarters driven by exceptionally strong demand in our data center and communications segment along with continued expansion in our production capacity. I want to thank the coherent team for all their hard work and dedication. I'll now turn the call over to our CFO Sherry Luther.

Jim - (00:14:14)

Thank you Jim. We are pleased with our first quarter 2026 results and execution. We continue to drive strong double digit year over year revenue growth, gross margin improvement and enhanced profitability. We significantly paid down our debt, reducing our interest expense and further strengthening our balance sheet. At the end of the quarter, we successfully completed our debt refinancing, lowering our cost of capital and improving our financial flexibility. I will now provide a summary of our Q1 results. First quarter revenue was a record $1.58 billion, up 3% sequentially from the fourth quarter and up 17% year over year driven by growth in AI, data center and communications demand. In our Q4.25 earnings call, we announced an agreement to sell our aerospace and defense business. As expected, this transaction closed in Q1 26 on a pro forma basis excluding $33 million of aerospace and defense revenue. For Q1, revenue increased 6% sequentially and 19% year over year. Our Q1 non GAAP gross margin was 38.7%, a 70 basis point improvement compared to the prior quarter and a 200 basis point improvement as compared to the year ago quarter. I am especially pleased with the progress we have made on gross margin expansion driven by the cost reduction and pricing optimization initiatives that we continue to focus on as we drive to our target model of greater than 42%. The sequential and year over year increases in gross margin were driven by cost reductions in product input costs as well as yield improvements primarily in our data center and communications segment. Pricing optimization contributed meaningfully in both the industrial segment and the data center and Communications segment. First quarter non GAAP operating expenses were 304 million compared to $307 million in the prior quarter and $278 million in the year ago quarter. Operating expenses as a percentage of Revenue declined to 19.2% as compared to 20.1% in the prior quarter and 20.6% in the year ago quarter. The reduction in operating expenses as a percentage of revenue is due to the continued focus on driving efficiencies and greater leverage in sga. We have made good progress on these initiatives with the benefits expected to kick in at various points in time. The year over year increases in R and D were primarily in the data center and communications segment as we continue to focus on investments with the highest ROI that drive the future growth of the company. The sequential decline in R and D was driven by the timing of these investments which can fluctuate on a quarterly basis. Our first quarter non GAAP operating margin was 19.5% compared to 18% in the prior quarter and 16.1% in the year ago quarter. First quarter non GAAP earnings per diluted share was $1.16 compared to $1 in the prior quarter and $0.67 in the year ago quarter. From a capital allocation perspective, we paid down $400 million in debt, significantly reducing our debt leverage ratio to 1.7 times, down from 2.4 times in the year ago quarter. As mentioned in our Q4.25 earnings call, we used the proceeds from the sale of the aerospace and defense business to make this debt payment. We also completed the refinancing of our debt at the end of the first quarter, reducing our interest rate by 60 basis points and doubling the amount of our revolving credit facility to $700 million. We will use the revolving credit facility to increase liquidity and provide greater flexibility. As Jim noted, we plan to use the proceeds from the sale of our product division in Munich, Germany to further reduce our interest expense by paying down additional debt which will be immediately accretive to our gross margin and EPS. For reference, over the past four quarters, this business contributed average quarterly revenue of $25 million with a gross margin well below Coherent's corporate gross margin. The sale will reduce our employee headcount by approximately 425employees. I will now turn to our guidance. For the second quarter of fiscal 2026, we expect revenue to be between $1.56 billion and $1.7 billion. We expect non GAAP gross margin to be between 38% and 40%. We expect total operating expenses of between $300 million and $320 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 $1.10 and $1.30 on a non GAAP basis. In summary, I'm very pleased with the solid progress we made in Q1. Looking ahead, we're seeing exceptionally strong demand in our data center and communications segment. To meet this robust momentum, we are ramping capacity and investing strategically in the business. We remain focused on disciplined execution against our long term financial target model. These dynamics reinforce our confidence in driving long term growth and durable value creation for our shareholders. That concludes my formal comments. Operator, please open the call for Q and A.

OPERATOR - (00:19:48)

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press STAR and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press STAR and two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the STAR keys. Ladies and gentlemen, we Will wait for a moment while we poll for questions. Our first question comes from Samik Chatterjee with JPMorgan Chase. Please go ahead. Hi, thanks for taking my question, Jim. Maybe if I can start on the demand side. You do mention the strong demand you're seeing as well as record orders in some cases. Maybe if you can flesh that out a bit more like how broad based is this demand? What are you seeing in terms of or hearing from customers in terms of demand drivers and how broad based across the portfolio is the demand across your communications portfolio and have a follow up. Thank you.

Samik Chatterjee - Equity Analyst at JP Morgan - (00:20:59)

Yeah, thanks Samik. Yeah, I would call it very broad based. So very strong demand across both data center and communications. When I look back at our fiscal Q1 really saw record, record level of bookings in that quarter and bookings not just for near term quarters but bookings further out in time than we normally would see. So bookings leading out in some cases over a year, over a year from now. Right. So we see that as a very good, very good sign that customers placing orders well ahead of time that gives us great visibility, really allows us to do really good mix planning and product mix and capacity planning. But also as I said, broad based. Definitely saw strong orders for data center, strong orders in particular for 800Gig and 1.6T transceivers. We're seeing the adoption of 1.6T transceivers accelerate and so we're seeing certainly strong orders there, but also on the communications part of our business, very Strong orders in DCI, the data center interconnect portion. This is our ZRZR+ product lineup of transceivers and then also really pleased to see strong orders in what I call kind of traditional telecom as well. And so in particular in that communications segment, we've seen now 5/4 of sequential growth in that segment, really good grower last quarter of 11% sequential and 55% year over year. But we've seen now five sequential quarters of growth in not just DCI but also in traditional telecom. And we're expecting that communications segment to grow sequentially this quarter and through the balance of this fiscal year.

Jim - (00:22:54)

Got it, Got it. Indium phosphide capacity. I mean that's been quite a talking point this quarter for you guys. You outlined you're doubling the capacity over the next 12 months, but maybe if you can just flesh out for investors what are the milestones to watch on that front and how to think about the roadmap beyond even a 12 month horizon and where would that leave you from an EML Mix perspective in relation to sort of internal versus external.

Samik Chatterjee - Equity Analyst at JP Morgan - (00:23:20)

Sure. Thanks, Samik. So, first of all, I just want to thank the coherent team for the outstanding job They've done getting 6 inch indium phosphide up and running. This is something, when I joined the company that I asked the team to significantly accelerate their timeline. And I just want to take the opportunity to thank the team for the outstanding job they've done. We started production of 6 inch indium phosphide in the September quarter and started it at our Sherman, Texas facility. And really pleased with that ramp. As I mentioned in the prepared remarks, one of the big milestones that we achieved is the initial yields of that 6 inch indium phosphide are actually higher than our 3 inch indium phosphide lines. And keep in mind that those three inch lines are very mature full production lines. So that's a very positive milestone and a positive signal for us on yields of 6 inch. And that's exactly why we decided to double down on the ramp of 6 inch and begin 6 inch ramp at a second facility, one of our second or other indium phosphide facilities, which is in Yarfala, Sweden. And so now we're ramping at two sites in parallel. And so that's what really allows us to hit that 2x capacity goal about a year from now. And I think, you know, milestones along the way will certainly be, you know, we'll certainly share our progress along the way, but beyond the next 12 months, we expect to continue to expand capacity even beyond that 12 month goal. The demand that we're seeing from our customers is, I would call it, extremely strong. And with some of our big customers, they're showing now their forecasts out through calendar 2028. And given that demand signal that we're seeing not just for next calendar year, but now for 27 and 28, our plan is to continue to ramp indium phosphide capacity beyond the next 12 months as well. And certainly we'll share more thoughts on the rate and pace of that ramp over the next 12 months.

Jim - (00:25:40)

Got it. And I'll just squeeze one quick one in. You're guiding Datacom 10% quarter over quarter growth. Just wondering what's the supply demand gap that you see? How supply, what could that number be if you were sort of more flexible on supply or had more supply available relative to sort of the constraints on that front?

Simon Leopold - Equity Analyst at Raymond James - (00:25:59)

Yeah, we were certainly when I look back at the prior quarter, data center grew about 4% sequentially. That was certainly constrained by Indian fossil classified laser supply. And what we saw is the unmet backlog that we had in Q1 rolled into Q2. So that backlog is now in Q2 and we're servicing that in Q2. But on top of that, we had record bookings on top of that for, As I mentioned, 800, primarily 800 gig and 1.6T transceiver. And so the, the demand continues to grow. Now one of the really good things as we move into the current quarter is we're seeing indium phosphide supply, both internal and external, grow sequentially from prior quarter to current quarter. And we're expecting both external and internal supply to grow again from this quarter into the, into our fiscal Q3 as well. So we're seeing kind of steady, you know, good improvement in indium phosphide capacity. And again that's a combination of external but especially internal capacity expansion as well.

Jim - (00:27:12)

Thank you. Thanks for taking my questions. Thank you. Our next question comes from Simon Leopold with Raymond James. Please go ahead. Thanks for taking the question. I wanted to follow up on your discussion around the OCS optical circuit switches. There was quite a buzz at the ECOC show about this and you certainly sounded upbeat tonight. I guess what I'm looking for a little bit more help is understanding how to think about maybe let's call it calendar 2026 where one of your peers also participating in the market has sort of laid out a trajectory to get.

Simon Leopold - Equity Analyst at Raymond James - (00:27:52)

To 100 million a quarter.

Jim - (00:27:54)

How do you think about your trajectory and your place in the OCS market?

George Nodder - Equity Analyst at Wolf Research - (00:28:00)

Yeah, thanks Simon. So first of all, we feel really good about our place in the market. Starts with of course, the technology. We feel really good about the technology differentiation that we have. We have a non mechanical, our OCS is based on a non mechanical liquid crystal technology that has really superior reliability performance. And our customers recognize that. And I would say that we continue to see the opportunity around ocs. The total available market continue to be bigger than what we may have originally thought. Just the number of customers is broader than we thought that are interested in the technology but also the number of applications that they're considering deploying it in. And so as I mentioned in the prepared remarks, we've now shipped systems to seven different customers. And you know, we, if I look at last quarter, both our revenue and our backlog grew last quarter. We expect revenue and backlog to grow again this quarter. But I think more meaningful revenue contribution will come in next calendar year probably, you know, we'll see a steady ramp of revenue throughout Calendar year. Year. So it'd be certainly more weighted towards the second half of calendar year. But we feel really good about the progress, the backlog that we have and the revenue ramp in front of us. And, well, you know, as we get into next calendar year, I think we'll share more details about kind of the rate and pace of revenue that we see ahead of us.

Jim - (00:29:37)

Thanks. And then you talked a lot about the progress you've shown on the indium phosphide. I've been fielding investor questions that I find a bit puzzling, but maybe you could help us shake this out in that there's been sort of this narrative that the indium phosphide is producing photo diodes and hasn't helped you with laser production. But your outlook, your commentary on 800Gig1.6T certainly suggests that you're producing more lasers, both CW and eml. Can you explain maybe how people might have been confused or whether I'm confused? Can you give us some clarification on this debate? Thank you.

Blaine Curtis - Equity Analyst at Jeffries - (00:30:23)

Yeah, thanks, Simon. I'll try to un. Confuse. I don't know where the confusion is coming from, but I'll just kind of reiterate what I said in the prepared remarks, you know, so as I said, we're ramping production now in two sites, Sherman, Texas and Yarfala Suites. And across those two sites, we're ramping production of three different types of products based on indium phosphide. Right. So the EML lasers, certainly CW lasers as well, and then photodiodes. And all three of those are very critical, as you know, Simon, very critical components to our transceivers. And so really pleased to be ramping up production of all three of those devices across those two facilities. Thank you very much. Thanks.

Jim - (00:31:18)

Thank you. Our next question comes from George Nodder with Wolf Research. Please go ahead.

Tom o' Malley - (00:31:26)

Hi.

Jim - (00:31:26)

Thanks very much, guys. I'm just curious on, you know, interesting to hear your remarks on sort of the manufacturing moves and then the real estate footprint. Really, really great to see that. I guess I'm just curious on how much more opportunity is there. I know you're standing up capacity, I think in Penang, you said are there more moves for you to make in manufacturing, perhaps in industrial lasers? Is there more real estate consolidation left? Any more you could say would be great. Thanks.

Blaine Curtis - Equity Analyst at Jeffries - (00:31:57)

Yeah, thanks, George. So I would say definitely a lot of activity that we have going there. And it's kind of interesting because it's on one hand we're increasing capacity and expanding, and on the other hand, what we're trying to do is consolidate and reduce footprint in certain areas. And so we're in. Both of those activities are happening in parallel. So if I start with the consolidation, if we look at over the last roughly five quarters since the beginning of our fiscal 25, we've either sold or exited 23 sites. And I think that's great progress. We're really pleased with that. But we definitely have more work to do. I think both Sherry and I are focused on making sure we maximize return on investment capital and we're driving efficiency and productivity across our physical footprint. And so we both believe there's significant opportunities for to continue to consolidate. And so we'll continue to exit and downsize any site that we view as unnecessary or underutilized. And so definitely more work to do there. And I would say stay tuned on that. And then on the increase side, certainly especially for data center and communications, we're certainly increasing capacity. We talked a little bit already about indium phosphide capacity, but if we talk about module capacity, so this is transceiver module capacity. We're expanding capacity at our existing facility, our primary facility in Malaysia, which is in Ipoh, Malaysia. But now in parallel, we're expanding capacity at a new transceiver facility that we've recently opened, which is already in production on transceivers. We're going to be expanding and accelerating capacity at that Penang facility. And then what we're also doing is adding transceiver module capacity at our Vietnam site. So the great thing is our Vietnam site already exists and it's already building components for transceivers. And we have capacity and room there to add now transceiver production in addition to component production. And we're excited about that too. And so all of those capacity expansions we're driving in parallel. And that's really to support the strong demand that we see ahead of us for both data center and communications based on the customer not just ordering that we're seeing, but the forecasts that we're getting.

Jim - (00:34:36)

Got it. Any manufacturing moves on the industrial side of the business? Thanks a lot, guys.

Sila - (00:34:42)

Yeah, there a number of the consolidations that we've done. The 23 sites of sales exits, those have. Some of those have been on data center communication side, but many of those have been on the industrial side. And so I think we still see opportunity for consolidation on, I would say both data center and comms and industrial. But there are places within the industrial segment where we are investing and expanding in facilities as well. But it's all about trying to make sure that the footprint is optimal in terms of driving the maximum productivity and efficiency of the facility.

Jim - (00:35:24)

Thank you. Thank you. Our next question comes from Blaine Curtis with Jeffries. Please go ahead. Hey, good afternoon, guys. Thanks for my question. I wanted to go back to the Data center guide plus 10%. Is there a way to think about.

Michael Mani - Equity Analyst at Bank of America - (00:35:38)

How much that is still capacity constrained and is there anything beyond EMls that.

Jim - (00:35:44)

Is constrained in that?

Michael Mani - Equity Analyst at Bank of America - (00:35:46)

No, Blaine, I would say the, you know, the primary constraint we've hit, you know, for instance, last quarter is, as I said, it's indium phosphide capacity. That specifically EMLs, that was what was constraining us. Significant improvement from prior quarter into current quarter. As I said, in terms of both external and internal supply, I would say, you know, we still are constrained to some degree even in the current quarter, but we also expect indium phosphide laser supply to increase again from current quarter into next quarter and really to continue to the supply to continue to improve throughout. Sequentially throughout the next calendar year, given external capacity that we secured, but especially the internal capacity ramp that I talked about earlier.

Jim - (00:36:41)

Thanks.

Ruben Roy - Equity Analyst at Stiefel - (00:36:41)

Actually, maybe I'll follow up on that. I'm curious. You're doubling capacity, but it takes time to get your lasers in and qualified. So is there a way to think about the timing and is there any.

Jim - (00:36:52)

Difference between EMLs and CWs in terms.

Meta Marshall - (00:36:54)

Of the timing of recognizing revenue from.

Jim - (00:36:58)

Those lasers throughout the fiscal year?

Karl Ackerman - Equity Analyst at BNP Paribas Asset Management - (00:37:01)

Yeah, I would say not a big difference between EML and CW on the timing to get into production and fully qualified. By the way, you mentioned recognized revenue. Just to clarify, all of our EMLs and CWs are made for internal consumption, right? So we don't sell indium phosphide in the open market. The reason for that is it's 100. All of our capacity is 100% consumed by our own transceiver needs or meant within the transceiver. Sorry.

Jim - (00:37:34)

Okay.

OPERATOR - (00:37:34)

All right. I just want to make sure I clarified that. But within transceiver, what I would say is that once a laser is qualified within or a photodiode within a. Within a facility, you know, expanding capacity on a parallel line or on an existing line is a pretty normal occurrence. Right? No special qualification required or at least the, you know, qualification. Very straightforward. Right. So I think now that, you know, we're in production across, you know, multiple products across multiple facilities, look, that that production capacity is going to be, as we expand it over the course of the next year is going to be incredibly valuable. And certainly our customers are Very motivated to help make sure we, you know, we get anything qualified into production as quick as possible. Thanks, Jim.

C - (00:38:33)

Thank you. The next question comes from Tom o' Malley with Barclays. Please go ahead. Hey guys, thanks for taking my questions.

A - (00:38:42)

First one's a little more short term.

C - (00:38:43)

So you gave the sequential into December.

A - (00:38:45)

On Datacom, up 10%.

C - (00:38:47)

Could you maybe help us understand what was the driver in the September quarter? I think you called out Datacom as.

A - (00:38:52)

Maybe being a little bit more of a driver, but any color on the telecom side or the relative vectors of.

C - (00:38:57)

Both into the December quarter. What are you seeing from the telecom business?

A - (00:39:01)

Yeah, and maybe I'll just recap the prior quarter first. So on the prior quarter data center we saw grow 4% sequentially, 23% year over year. Communications, which is telecom and DCI in the prior quarter was 11% sequential growth and 55% year over year and into the current into the December quarter. We expect the data center growth to accelerate from that 4% prior quarter to about 10% sequential growth in the current quarter. And then comms again up sequentially. I would expect it to be a little bit less than what it was in the prior quarter. Comms would be up sequentially in the single digits. And then just to round it out and give you the full picture on the industrial part of our business, we expect that in the current quarter for that to be sequentially stable, maybe slightly up up.

C - (00:40:00)

Helpful. And then just a longer term question just on the six inch. Answered a couple questions on it here. But is there a way for us to tie production coming out of that 6 inch facility with margin improvement over the year? It sounds like things are accelerating pretty.

A - (00:40:16)

Materially past the extension side in the first half.

C - (00:40:19)

I think you had previously kind of talked about first kind of guide moving.

A - (00:40:23)

Into modules and calendar year 2025.

C - (00:40:26)

But as the kind of progress like you look at what gross margins have done, you would imagine that accelerate a bit. Any way for us to link the percentage of production or the amount of production to how much gross margin expansion? Thank you.

A - (00:40:39)

Yeah, maybe I'll kick it off and at least talk about it qualitatively. And then if Sherry wants to add anything to it, I think given that we just started production in prior quarter, actually this quarter will be our first quarter, our first full quarter of production. We started production last quarter kind of mid quarter. You know, the actual impact to gross margin in the current quarter is pretty minimal. But as we move into next calendar year, that's where we'll start to see the benefits. Of the 6 inch production moving into our gross margin. And as you would expect, as we ramp production, the impact to gross margin is more meaningful as we move throughout the calendar, throughout the calendar year. And so you should expect it to be more meaningful as we move through each sequential quarter. And Sherry, would you. Is there anything you'd add to that?

B - (00:41:37)

Yeah, I'd just add that when you look at these, the 6 inch Indian phosphide and the fact that it's less than half the cost of three inch, that will be beneficial to gross margin over time. And it's sort of looking at a cost structure, right? It's improving a cost structure. The 6 inch Indian phosphide is. And other examples of that would be with new products like 1.6T that's going to be beneficial to gross margin as well as when we ramp capacity. Those types of things will help improve the gross margin over time.

A - (00:42:08)

So we're certainly focused on 6 inches. I guess I'd recap it by saying 6 inch is one of the gross margin tailwinds. But there's certainly a wide range of other things we're focused on across the company to Drive towards Sherry's 42% gross margin target that she gave us. There's a number of other I just highlight in the industrial business, although the growth is relatively stable, we're not seeing a tremendous amount of growth in the industrial business at this time. We're certainly focused on driving gross margin expansion within that business. And so that's another area that we expect gross margin to continue to improve for the company.

C - (00:42:50)

Thank you. Our next question comes from Papa Sila with Citigroup. Please go ahead. Thank you. Thank you for taking my question and congrats on the way from below. Jim, I was hoping you can double click a little bit on the uptick you expect in the December quarter coming from 1.60. I understand you are quite flexible between EML, Sifo or even ZXEL. But in terms of kind of percentage or even qualitatively, where are you seeing perhaps the largest Demand between those three? And do you expect that to change in 2026?

A - (00:43:30)

Yeah, thanks for the question. So, as I mentioned in the prepared remarks, the sequential growth in data center, a good chunk of that is driven by 1.6T revenue. And then within that, that early wave or first wave of 1.6T revenue, it's really a combination. We expect a combination of silicon photonics which uses obviously CW lasers, but also EML based 1.6 T transceivers. So the first adoption in that first wave of or the beginning of the ramp of 1.60 that'll primarily be driven by a mix of silicon photonics and eml. And then later we'll start to see, we believe, adoption of VCSEL based 1,6T transceivers. So those use our 200 gig VCSEL technology which we demonstrated at I believe OFC earlier this year. We would expect that to begin to go into production in I would say mid calendar 2026. So it would start to generate revenue in kind of the second half of calendar 26. So definitely the early ramp or the first part of the, the ramp is driven by a combination of EML and silicon photonics.

C - (00:44:49)

Got it. That's very clear. And for my follow up, Jim, I'm curious on how you are thinking about allocation of your indium phosphorite capacity between EML, CW and PhotoDiode. I guess how far ahead do you need to make those decision and perhaps what are the factors that goes into, into those decision? Is the priority kind of feeding where demand is strongest or is there a profitability angle as well?

A - (00:45:19)

Yeah, it's a good question. Let me talk about the trade off between first of all EML and cw. I would say there's no, from our perspective, there's no significant profitability trade off between those two. Really what drives the, the mix of our production mix of EML versus CW is purely the demand from our customers. Right. So if, if it's more silicon photonics based transceivers, then, you know, then we'll allocate more capacity to CW lasers. If it's more eml, we'll add, you know, we'll allocate it to eml. And I think, you know, in general we can make those choices, you know, certainly six months ahead of time. You know, we can even, you know, make those choices even four months ahead of time. So I would say somewhere to the kind of four to six months ahead of time we have to do the capacity planning between EML and cw. And the good thing about the indium phosphide capacity is it's fungible. We can move the, we can move the capacity to either EML or. And then for photodiode, that's just the receiver for the laser, right? So we just build the number of photodiodes that are needed to receive the laser signal. So that's a pretty straightforward calculation. Right. So that's kind of how we do the capacity planning. Ultimately it's really driven by the mix that our customers want in terms of EML versus Silicon photonics transceivers. And we have both. So, you know, we're happy to support the the customers in whichever version that they need for their application. Got it.

C - (00:47:02)

Very helpful. Thank you. Thank you. The next question comes from Michael Mani with Bank of America. Please go ahead.

A - (00:47:15)

Hi, this is Michael Mani on purpose.

C - (00:47:17)

Aria, thank you so much for taking our questions. As you look out over the next.

A - (00:47:21)

Year, what's your confidence level and your.

C - (00:47:24)

Ability to expand your share in 1.6 over 800 gig?

A - (00:47:28)

And could you also talk about the.

C - (00:47:30)

1.6 C ramp from a customer breadth perspective?

A - (00:47:34)

Is this a ramp that's very concentrated.

C - (00:47:36)

With a few customers or are you.

A - (00:47:38)

Seeing more of a balanced ramp into next year?

C - (00:47:41)

Thank you.

A - (00:47:43)

Yeah, thanks, Michael. Maybe I'll answer the second part first and come back to the first part of the question. On the second part of the question, we're seeing 1.60 across ramp across multiple customers. So we have multiple customers that are engaged in 1.6 T and we expect to ramp with multiple in parallel. And I would say that the other color I would add is that number of customers are accelerating their time and their ramp on 1.6T. And we view that all as a good thing, right? We view that as positive. We have really proud of the lineup of 1.60 transceivers that we have. Just as a reminder, at OFC, earlier this year we were the only company that demonstrated 1.60 transceivers using three different technologies, silicon photonics, EML and VCSEL. So I think we have a great product lineup. We have good customer position. We've seen acceleration of 1.16 and we feel we're certainly well positioned for that. So I guess to the first part of your question. Yeah, we feel really well positioned on 1.60. I think as we enter the calendar 2026, we expect both on a year over year basis. We expect 800 gig will still grow on a year over year basis. We're seeing very strong demand on 800G, but on top of that we expect one point to ramp at a very healthy pace.

C - (00:49:15)

Great, thank you. And for my follow up, I just wanted to ask about your progress on portfolio optimization and specifically pricing. So it seems like there's been a good amount of progress there in the last couple quarters. But how much left is there in terms of these pricing tailwinds?

A - (00:49:33)

You can recognize whether you know, whether.

C - (00:49:36)

It'S from the core Datacom side industrial.

A - (00:49:39)

And maybe more specifically as well.

C - (00:49:41)

Just what are you seeing from a.

A - (00:49:43)

Pricing perspective for transceivers.

C - (00:49:47)

If you could talk about that environment.

A - (00:49:50)

Maybe I'll answer the last part of the question on transceivers, but I'll let Sherry also comment on pricing as it relates to gross margin. I would say on pricing of transceivers, pricing dynamic very much as we would expect. So I don't think we're seeing anything unexpected with respect to pricing. And then of course, in a more supply constrained market in general, that's certainly always a positive dynamic for pricing. And then kind of in the first part of your question, just sort of pricing optimization in general and how it relates to gross margin. I'll ask Sherry to answer that part.

B - (00:50:27)

Sure. Thanks, Michael. So from a pricing optimization perspective, I was really pleased to see that during the quarter we part of the improvement in gross margin, the 70 basis points improvement sequentially in the 200 basis points year over year, part of that was due to pricing optimization. Pricing optimization in our where we saw benefits in the industrial side of our business as well as in the data center and communications part of our business. So pricing is an area where we tend to expect that the greater magnitude would come from the industrial part of our business. But we do see benefits as well in the data center and communications part of our business. And pricing is really pricing our products for the value they provide. And in the industrial part of our business, that's the part of our business where in many cases we are the only provider of those products. And so our customers certainly value the products that we provide to them and how we help them differentiate. So that's one key part of the improvement that we saw during the quarter. The other part, just to round out the commentary on the gross margin, we also saw improvements from cost reductions. And so that was an area where we saw benefits in yield, which if you recall, for the past so many quarters we've been talking about yield improvements. We continue to focus on that and we saw those benefits in data center and the communications part of our business as well as lower product input costs. So those are two main levers that we're really focused on to drive to our long term target model of over 42%. So I was really pleased to see those results.

C - (00:51:59)

Thank you. Thank you. Our next question comes from Meta Marshall with Morgan Stanley Investment Management. Please go ahead.

B - (00:52:10)

Great, Thanks. A couple questions, Sherry. Last quarter you called out kind of FX headwinds to gross margin and just given some of those currencies have remained stronger. Just wanted to kind of get some context of whether there was additional kind of headwinds this quarter on gross margins. And then second, you know, noted that you guys are ramping the ZR kind of capacity. But just how you guys are thinking about kind of intersecting some of the scale across demand that we're seeing, you.

A - (00:52:44)

Know, whether that'll kind of the ZR.

B - (00:52:48)

Will layer into that or just how you guys are kind of ramping capacity there. Thanks. Yes. So Meadow, on the first part of your question regarding FX and the impacts to gross margin, did we have any headwinds during the quarter? So nothing material, certainly no incremental headwinds in terms of a negative impact from the prior quarter, but nothing significant during that quarter to node on fx.

A - (00:53:14)

And on the second part of the question on the scale across demand, yeah, I would characterize this demand as extremely, exceptionally strong. And obviously that's driven by these are the optical connections between the data centers where we're seeing these AI workloads that are spanning multiple data centers. And that's driving the need for expansion and high speed optical networking between these data centers. And our portfolio of products, our ZRZR plus portfolio products are just a really great match for this application. So we're seeing very good demand there. And we have 100 gig, 400 gig and 800 gig ZRZR transceivers. So we're certainly ramping capacity as quickly as we can on those transceivers. The other way we participate in that market though is we're a module vendor for ZRZR plus, but we also sell components into all sorts of DCI equipment and applications. And I would say there again the demand on the components right now is extremely strong. And we are also ramping capacity for all of the components that go into DCI applications and any related telecom application. So we're seeing just as one example, the pump lasers that we produce. We're seeing just very strong demand on those pump lasers.

C - (00:54:41)

Great, thank you. Thank you. Our next question comes from Ruben Roy with Stiefel. Please go ahead. Yeah, thanks Jim. Maybe a follow up on the OCS commentary with the shipments to seven different customers. Great to see the diversification of customers there.

A - (00:55:01)

In terms of applications.

C - (00:55:03)

You talked about, you know, sort of getting, you're talking through engagements on a broader number of applications. How would you characterize the, you know, kind of the wins that you have today are those. And I think, you know, the industry's been talking about redundancy, you know, the use of OCS for redundancy and maybe even, you know, packet switch replacement. Should we think about those as being sort of the initial applications or are you starting to see a broadening today of some of the other applications that you can address? And are there technical advantages of using a non mechanical in some of these.

A - (00:55:36)

New applications that you guys are talking about?

C - (00:55:38)

Thank you.

A - (00:55:39)

Yeah, thanks, Ruben. Great question. I would say that the initial adoption in terms of like the backlog and initial production ramp adoption is very much the way you summarized it in redundancy applications or spine switch applications in more of what we've seen historically as traditional applications for ocs. I think further out though, what we've been surprised about is if you look beyond just kind of the near term demand as we've engaged with a broader set of customers, is there's applications beyond that that customers are talking about and engaging with us on. All the way from some customers we're talking about even using an OCS switch in a scale up network, a scale up network where the connections are now optical and there's an OCS switch within that. And then on the other end of the spectrum, customers talking about using OCS switch even within DCI networks. So we've been surprised as we've engaged with customers by the real broadening of potential applications that they're exploring. And I would say that, you know, that's a little further out in time, but we view that as a great, you know, great indicator that the TAM may be, you know, significantly larger than what we first thought.

C - (00:57:09)

Perfect. Thanks, Jim. And really quick question. I hope for Sherry and apologies if I missed this, Sherry, but with the aerospace and defense divestiture and the leverage coming down below too, which is great to see, is there an update on the way you're thinking about debt on the balance sheet or capital allocation? Thank you.

B - (00:57:27)

Yeah. So Ruben, really pleased that we were able to reduce our debt leverage down to 1.7 times for the quarter after the $400 million debt debt pay down that you referenced from the sale of the A and D business. So I'm really pleased with that. And then we also mentioned that with the Munich division, product division that we announced that we would take the proceeds from the sale of that to pay off debt as well. That's expected to close a little bit later. And so once we do that, we'll take the proceeds from that as well. So certainly debt reduction is a priority. But I would say the number one priority now is continues to be making sure that we're investing for the long term in the business from an R and D perspective, from a capex perspective, and making sure that we're really driving investing for the long term growth. So that's the number one priority. And then certainly debt reduction, we'll continue to focus on that. But a close second priority operator.

C - (00:58:20)

We'll take one more question. Thank you. Our next question comes from Karl Ackerman with BNP Paribas Asset Management. Please go ahead. Yes, thank you for squeezing me in. Just one for me. Jim, you spoke of record transceiver module.

A - (00:58:39)

Bookings and datacom, but what about transceiver components for telecom?

C - (00:58:44)

And as you address that, can you quantify the level of order visibility with your customers?

A - (00:58:49)

Maybe in terms of quarters as you.

C - (00:58:51)

And your peers seek to add both laser and transceiver capacity and fulfill customer demand?

A - (00:58:57)

Yeah, thanks, Carl. Yeah, we definitely saw very strong record bookings on transceivers. But yeah, I'm glad you asked about for components going into a number of our communications applications, DCI and telecom, I would say same story, you know, record level of bookings there too. I mean just tremendous bookings across both data center and communications. And on the second part of your question around visibility, so what we're seeing is in those bookings is the normal bookings of booking out in kind of the nearer term. But we're also seeing customers on top of that book further out in time where they're ordering, they're putting orders in place in a year plus in advance. And I think that's really about, you know, they're seeing such strong increases in their demand and their supply needs that they want to get those bookings in place to get the supply coverage. And then the other very good trend from our perspective is, as I mentioned early in the call, a number of our large customers now giving us very good forecast business visibility not just next year, the following year, but out into 2028. So very large customers providing us with visibility three years out, which is, which is very, very helpful for our business.

C - (01:00:26)

Thank you very much. Thank you ladies and gentlemen, as we have come to the conclusion of the allotted time for today's call, I will now turn the floor Back to Coherent CEO Mr. Jim Anderson for closing comments.

A - (01:00:41)

Yeah, first, thanks everybody for being on the call today. I feel like we're off to a very strong start for our fiscal year with almost 20% pro forma revenue growth and over 70% EPS growth in Q1 on a year over year basis off to a really strong start. And again we expect this fiscal year to be a really strong growth year for the company. I'd like to, once again I just want to thank all of my coherent teammates for all of their great hard work, their dedication. Thank you very much and thanks, everyone for your support. Operator. That concludes our call.

C - (01:01:16)

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Sam.