Coherent Accelerates And Raises Its Targets, But A Capex-Heavy Buildout Meets A Stock That Has Lost 40%

Coherent delivered the kind of quarter growth investors usually reward, and it arrived with the stock near its lows. Fiscal first-quarter non-GAAP EPS of $2.09 topped the $2.00 consensus by 2.0% and edged past the $2.05 Earnings Whisper number. Revenue of $2.37 billion beat the $2.32 billion consensus by 2.2%. Earnings grew 86.6% year over year and revenue rose 49.9%. Management cited 80% EPS growth and 56% pro forma revenue growth on its own comparison basis. The beat itself was modest. The trajectory was not. Pro forma growth has accelerated from 22% to 27% to 42% and now 56% over four quarters. Guidance then moved every key forward marker higher. The central tension is that the fundamental story strengthened sharply while the stock fell almost 40% between reports, and the cost of building that growth is now showing up on the balance sheet.

The engine is Datacenter & Communications. Segment revenue reached $1.95 billion, up from $1.09 billion a year ago. Datacenter grew 85% and communications 84%, both faster than in the June quarter. Industrial was the soft spot at $418.6 million, down from $430.5 million sequentially and $491.4 million a year ago. The call described the segment as flat, which likely reflects adjustments for divestitures; the reported figures show a decline.

Margins are expanding steadily rather than spiking:

• Non-GAAP gross margin climbed for a fourth straight quarter, to 40.6% from 39.0% two quarters earlier.
• Non-GAAP operating margin reached 23.2%.

The GAAP picture deserves scrutiny. GAAP EPS of $1.90 benefited from a $22.8 million income-tax benefit. GAAP operating margin of 15.9% was slightly below the year-ago 16.4%. Share-based compensation rose to $73.2 million from $44.7 million.

The call preserved, and enlarged, a credible growth story. Q2 guidance calls for:

• revenue of $2.55 billion to $2.75 billion;
• non-GAAP gross margin of 40% to 42%;
• EPS of $2.28 to $2.48.

All of these sit above the prior quarter's guide and above estimates. Management expects fiscal 2027 pro forma growth above 60%, a first $3 billion quarter by the end of the fiscal year, and a first $4 billion quarter in fiscal 2028. The long-term gross margin target rose to above 45% before the end of calendar 2028, up from above 42%. The CFO attributed the improvement to pricing optimization and cost improvements.

The new disclosures carry weight:

• **PhotonLink contract:** a roughly $20 billion, five-year long-term agreement with a major AI company, in addition to the NVIDIA agreement.
• **PhotonLink revenue:** above $100 million expected in the March quarter, rising to more than $250 million per quarter before the end of calendar 2027.
• **Scale-across/DCI:** revenue above $200 million, roughly a $1 billion run rate, expected to about double by end of calendar 2027.
• **Capacity:** indium phosphide capacity doubled a quarter ahead of schedule.
• **Market size:** the addressable market estimate rose to about $90 billion by 2030, including roughly $30 billion for co-packaged and near-packaged optics.

Bears still have legitimate ammunition, and most of it sits in the cash-flow statement:

• **Capex:** spending jumped to $776 million from $556 million in Q4 and $104 million a year ago, with a further increase guided.
• **Operating cash flow:** negative $92.7 million, as inventories swelled by about $760 million to $3.34 billion.
• **Debt and leverage:** long-term debt rose to $3.98 billion, cash fell to $2.34 billion, and leverage climbed to 1.1x from 0.7x.
• **Contract timing:** the $20 billion agreement does not generate revenue until early calendar 2028.
• **Cost benefits deferred:** the internal-versus-external indium phosphide mix has not improved in a year, so the cost advantage of the 6-inch platform remains prospective.
• **Industry risks:** analysts raised the prospect of industry InP oversupply in 2028, Chinese laser pricing pressure, and data center financing and permitting constraints.
• **Competitive shifts:** the proposed Lumentum-Marvell combination reshapes the field, though management is pitching Coherent as the independent optical supplier.

The market setup is more complicated than the surprise implies. Shares opened at $344.88 after the August report and peaked at $362.32 days later. They have since slid to $207.49, down 39.8%. That leaves the stock just 4.5% above its November 2 inter-earnings low and nearly 30% below its 200-day moving average of $296.09. Investor sentiment cooled from 0.29 to essentially neutral at 0.005 heading into the print, so expectations had reset meaningfully. The Earnings Whispers trend readings are split. Sequential growth and momentum are positive, while price and AVWAP trends remain negative, which mirrors the gap between operating results and stock behavior.

The bottom line is that Coherent's quarter showed accelerating growth, rising margins, a higher long-term margin target, and a contract backlog that extends visibility into 2028. Those are not the hallmarks of a business losing its grip on the AI optics cycle. The stock's collapse reflects real questions instead: capital intensity, negative operating cash flow, rising leverage, and whether industry capacity outruns demand by the time the largest contract ramps. With sentiment reset and shares near their lows, the report gives investors a stronger fundamental case. The burden now shifts to execution on margins and cash conversion.

Read our earnings preview for Coherent Corp.: https://www.earningswhispers.com/article/COHR/21808

This earnings review was originally published on Earnings Whispers.

This article is for informational purposes only and is not investment advice. Earnings Whispers and its staff may hold positions in the securities mentioned. It is AI-assisted, based on proprietary Earnings Whispers data and company reports, and edited by Earnings Whispers staff.