Coherent (COHR) Q1 FY2027 Earnings Call: Q&A Summary

Q: Joseph Cardoso from JPMorgan asked for more color on the PhotonLink ramp and the backdrop of the $20 billion agreement.

A: Jim Anderson, CEO, stated that customer engagement is extensive across CPO, NPO, and chip-to-chip, with the $20 billion LTA starting revenue in early calendar 2028. He added that PhotonLink revenue will exceed $100 million in the March quarter and $250 million per quarter before the end of calendar 2027, eventually becoming a multibillion-dollar product line.

Q: Gianmarco Conti from Deutsche Bank asked for details on the scale-in and scale-up opportunity with micro-VCSELs and any revenue to come online next year.

A: Jim Anderson, CEO, highlighted Coherent's history of shipping over 700 million VCSELs, industry-leading efficiency of 1 picojoule per bit, and multiple customer engagements, noting that NPO deployments will happen relatively soon while chip-to-chip applications are further out in 2029 to 2030.

Q: An analyst from Bernstein asked whether initial scale-up optics deployments are NPO or CPO, and whether they rely on VCSELs or indium phosphide lasers.

A: Jim Anderson, CEO, stated that initial scale-up deployments will be CPO and NPO in late calendar 2027 or early 2028, with initial deployment relying on indium phosphide high-power CW lasers before VCSELs are used in the NPO time frame.

Q: Papa Sylla from Citi asked about the $15,000 content per 100-terabit chip mentioned at ECOC and what percentage Coherent expects to capture near term versus long term.

A: Jim Anderson, CEO, explained that $15,000 represents the full PhotonLink content opportunity per chip, and customers will utilize either the entire solution or a subset depending on the application, representing entirely greenfield growth driven by the conversion of copper links to optical links.

Q: Joseph Cardoso from JPMorgan asked how to think about the customers and products underpinning the DCI scale across revenue outlook to double by the end of next calendar year.

A: Jim Anderson, CEO, explained that growth is driven by AI workloads spanning multiple data centers, with customers including equipment makers and hyperscalers, and products spanning components, subsystems, modules, and complete solutions. He noted Q1 scale across revenue exceeded $200 million and is expected to double again before the end of calendar 2027.

Q: Simon Leopold from Raymond James asked for an update on progress and expectations for the OCS product group.

A: Jim Anderson, CEO, reported extensive customer engagement spanning scale-out, scale-across, and scale-up applications across 320x320 and denser configurations, with production ramping at two sites to meet demand for their nonmechanical liquid crystal technology.

Q: Simon Leopold from Raymond James asked what the proposed consolidation of Lumentum and Marlow means for Coherent.

A: Jim Anderson, CEO, stated it demonstrates the critical importance of optics and photonics in data center architecture and highlights the strategic value of Coherent's broad optical signal chain portfolio. He added that customers value an independent optical supplier without competitive conflict, positioning Coherent well as the partner of choice.

Q: Tom O'Malley from Barclays asked why management is providing longer-term visibility now and whether the $3 billion and $4 billion targets are backed by supply and existing bookings.

A: Jim Anderson, CEO, responded that visibility is driven by exceptional backlog, with calendar 2027 basically booked out and customers booking out calendar 2028, supported by LTAs with high-quality forecasts and internal supply expansion led by indium phosphide.

Q: Tom O'Malley from Barclays asked for more color on the customer behind the $20 billion LTA and the specific solutions involved.

A: Jim Anderson, CEO, described the customer as a leading AI data center name and noted the LTA is anchored by the 400-milliwatt CW laser alongside higher-level solutions, with revenue beginning in early 2028.

Q: Karl Ackerman from BNP Paribas asked how the team aligns laser production capacity plans with major customers given data center financing concerns, and whether customer prepayments are considered.

A: Jim Anderson, CEO, confirmed that LTAs include upfront payments or NREs to help co-fund capacity expansion and give customers skin in the game, while noting that indium phosphide demand is also driven by the independent technology trend of converting copper links to optical links.

Q: George Notter from Wolfe Research asked whether reaching the 45% gross margin target before the end of 2028 requires gating the transceiver business or if everything can ramp naturally.

A: Jim Anderson, CEO, stated that management has not assumed any artificial gating of the transceiver business, but rather assumes normal transceiver growth layered with accretive new products, DCI, OCS, and gross margin leverage from the indium phosphide ramp.

Q: George Notter from Wolfe Research asked if gross margins could rise even higher than 45% over time.

A: Jim Anderson, CEO, and Sherri Luther, CFO, both affirmed there are no structural barriers preventing gross margins from exceeding 45%, viewing 45% simply as a step along the way rather than a stopping point.

Q: Cody Acree from Stonex Financial asked Sherri Luther to stratify the gross margin drivers between 6-inch ramp yields, utilization, mix, and competitive dynamics.

A: Sherri Luther, CFO, ranked the drivers in order of contribution as new product ramps, full operational leverage of 6-inch indium phosphide capacity, pricing optimization, and cost reductions.

Q: An analyst from Needham asked about the split between internal and external laser supply and how it relates to margin expansion.

A: Jim Anderson, CEO, noted that the internal versus external split has not changed much over the past year because internal production growth has tracked the rapid growth of data center transceivers. However, as capacity more than doubles by the end of calendar 2027, the mix will shift more toward internal, delivering a major cost structure advantage.

Q: Meta Marshall from Morgan Stanley asked about substrate availability for 6-inch versus 3-inch wafers and how it impacts expansion plans.

A: Jim Anderson, CEO, stated that Coherent works with over five different substrate suppliers with long-term agreements in place, securing the necessary substrates for doubling capacity by calendar 2027 and planning further expansions beyond.

Q: Sean O'Loughlin from TD Cowen asked how fungible the capital installed base is between indium phosphide and gallium arsenide.

A: Jim Anderson, CEO, explained that while individual production lines cannot be easily switched between indium phosphide and gallium arsenide, Coherent has enormous gallium arsenide capacity to produce over 1 billion VCSEL arrays annually, positioning the company well for VCSEL adoption.

Q: Ananda Baruah from Loop Capital asked about the potential for an industry-level oversupply situation for indium phosphide EMLs through calendar 2028.

A: Jim Anderson, CEO, stated he does not see an oversupply risk through calendar 2028 due to strong demand from transceivers, integrated optics, and DCI applications, adding that Coherent consumes all of its own indium phosphide production internally rather than selling externally.