Coherent (COHR) Q3 revenue $1.81bn beats; shares fall 6% on profit miss

Coherent Corp. (COHR) reported fiscal third-quarter revenue of $1.81 billion on 6 May, up 20.5 per cent from a year earlier and ahead of the company’s guidance range, as demand for optical transceivers from hyperscale data centres accelerated. Non-GAAP earnings per share of $1.41 rose 55 per cent year over year and beat the $1.39 Street consensus. The shares fell 6 per cent in after-hours trading.

The decline followed an adjusted operating income miss. The company reported $366 million in adjusted operating income against the $372.7 million analysts expected, as capital spending surged to support a multiyear supply agreement with Nvidia, which made a $2 billion equity investment in Coherent in March. The sell-off swept across the optical networking trade: Applied Optoelectronics fell 14 per cent and Lumentum dropped 7 per cent in the same session.

The Datacenter & Communications segment, which accounted for 75 per cent of total revenue, generated $1.36 billion, up more than 40 per cent from the prior-year period. Within that, data-centre revenue rose 13 per cent sequentially and 37 per cent year over year, while communications revenue jumped 16 per cent sequentially and 60 per cent from a year ago, driven by data-centre interconnect demand.

The Nvidia deal, announced on 2 March, includes a supply agreement extending through the end of the decade covering multiple co-packaged optics products, including Coherent’s high-power continuous-wave laser. Chief executive Jim Anderson told analysts on the post-earnings call that 1.6-terabit transceivers would “ramp rapidly through the balance of this calendar year” and that the company’s order backlog reached into calendar 2028. He framed co-packaged optics as a greater-than-$15 billion incremental addressable market, with scale-out revenue beginning in the second half of 2026 and scale-up revenue ramping in the second half of 2027.

Non-GAAP gross margin widened to 39.6 per cent, up 57 basis points sequentially and 105 basis points from the prior year. Chief financial officer Sherri Luther said the company had increased gross margin sequentially in seven of the past eight quarters, citing yield improvements from six-inch indium phosphide production, input cost reductions, and pricing optimisation. The six-inch yields now exceed those of Coherent’s legacy three-inch lines across electro-absorption modulated lasers, continuous-wave lasers, and photodiodes. Coherent is doubling internal indium phosphide capacity one quarter ahead of schedule and plans to more than double it again by the end of calendar 2027.

What the print showed

Revenue of $1.81 billion landed above the top end of the company’s prior guidance, which had pointed to $1.72 billion to $1.80 billion. GAAP diluted EPS was $0.97. The non-GAAP operating margin reached 20.3 per cent, up from 19.9 per cent in the prior quarter and 18.6 per cent a year earlier. Research and development spending ran at 9.9 per cent of revenue.

The Industrial segment was a drag, with revenue of $444 million down from $529.2 million in the same quarter last year, as softer end-market demand in precision manufacturing and instrumentation weighed.

Free cash flow was negative $536.9 million, as capital expenditure jumped to $290 million in the quarter, nearly double the $154 million in the prior quarter. Property, plant, and equipment additions across the first nine months of the fiscal year reached $547.2 million, up from $309.5 million in the prior-year period. Cash on the balance sheet stood at $3 billion, up from $1.5 billion in the preceding quarter, after the Nvidia equity injection. Debt leverage fell to 0.5 times from 1.7 times in the prior quarter.

The guidance

For the fiscal fourth quarter ending June, Coherent guided revenue of $1.91 billion to $2.05 billion, with the midpoint roughly 3.4 per cent ahead of Wall Street targets. Non-GAAP EPS was guided to $1.52 to $1.72, with the $1.62 midpoint above the $1.54 consensus. Non-GAAP gross margin is expected at 39 per cent to 41 per cent and operating expenses at $360 million to $380 million. The tax rate is forecast at 18 per cent to 20 per cent.

Anderson said fiscal 2027 growth would exceed the fiscal 2026 growth rate, underpinned by the ramp of 1.6T transceivers, co-packaged optics revenue, and multi-rail products expected to contribute in 2027. The company also flagged its optical circuit switch opportunity at over $4 billion and thermal management solutions under the Thermadite brand, with revenue expected in late 2027.

How analysts read it

Stifel analyst Ruben Roy raised his price target to $412 from $275, maintaining a Buy rating on Coherent alongside Lumentum and Ciena. Stifel ranked Coherent at the top in optical networking.

The after-hours sell-off reflected concern that the capacity buildout is draining cash before profits materialise. Management flagged uncertainties including swings in end-market demand, shifts in how customers buy, tariffs, and the timing of product launches.

Coherent shares closed at $319.19 on 7 May and have returned 64.3 per cent year to date. Anderson told analysts the company was “bringing on substantially more capacity over the coming quarters” and that the long-term supply agreements in place include customer upfront investment, Coherent supply commitments, and minimum demand guarantees.