Laser and optical components manufacturer Coherent delivered strong performance in the first quarter of its fiscal year, with both revenue and earnings per share exceeding market expectations. Surging demand from AI data center operations pushed orders for its optical networking products to record levels, prompting management to actively expand production capacity to meet growing customer needs.
On November 6, Coherent reported earnings per share of $1.16 for the quarter ending September 2025, surpassing Wall Street's average estimate of $1.04. This marks the company's fourth consecutive quarter of outperforming market profit expectations.
Revenue for the quarter reached $1.58 billion, up 17% year-over-year and exceeding the anticipated $1.54 billion. Excluding aerospace and defense business segments, revenue growth accelerated to 19%. The outperformance was primarily driven by robust demand from AI data centers and communications sectors, though management acknowledged constraints from indium phosphide laser supply shortages that limited full market demand fulfillment.
Key financial highlights: - Revenue: $1.58 billion, up 3% sequentially and 17% YoY. Excluding aerospace and defense, pro forma revenue grew 6% QoQ and 19% YoY. - Non-GAAP gross margin: 38.7%, improving 70 basis points sequentially and 200 basis points YoY. - Non-GAAP operating expenses: $304 million, down from $307 million last quarter. - Non-GAAP operating margin: 19.5%, up from 18% last quarter. - Non-GAAP EPS: $1.16, compared to $1.00 last quarter and $0.49 YoY. - Debt reduction: $400 million repaid, lowering leverage ratio to 1.7x. - Q2 FY2026 revenue guidance: $1.56-$1.70 billion. - Q2 FY2026 non-GAAP gross margin outlook: 38%-40%. - Q2 FY2026 EPS forecast: $1.10-$1.30 on non-GAAP basis.
Buoyed by the strong results, Coherent shares surged over 15% in pre-market trading. The stock has gained more than 33% year-to-date, significantly outpacing the S&P 500's 15.1% rise.
Margin Expansion Initiatives: The company's non-GAAP gross margin improved to 38.7%, with CFO Sherri Luther attributing the 200 basis point YoY gain to pricing optimization, cost reductions, and yield improvements. Operating margin expanded to 19.5% from 18% last quarter, while operating expenses declined to $304 million. Net income reached $226.3 million.
CEO James Anderson emphasized the company's value-based pricing strategy, particularly in exclusive supply segments. Combined with cost controls and yield enhancements, this approach supports the long-term target of exceeding 42% gross margins.
Capacity Expansion to Address Supply Constraints: Responding to surging AI data center demand, Coherent is aggressively expanding indium phosphide laser production. Anderson revealed plans to double indium phosphide capacity within 12 months through simultaneous expansions at facilities in Sherman, Texas and Järfälla, Sweden.
The company is building the world's first 6-inch indium phosphide production line, a technological breakthrough expected to significantly boost efficiency and reduce costs. Initial yields on the 6-inch line have surpassed those of existing 3-inch production.
Record bookings in data center operations featured extended order timelines, providing enhanced visibility. Strong demand spanned 800G and 1.6T transceivers, data center interconnect solutions, and traditional telecom applications. With customer forecasts extending to 2028, the company plans continued capacity expansions beyond the 12-month horizon.
Earnings Call Highlights: - 200bps YoY non-GAAP gross margin improvement reflects successful cost reduction and pricing strategies - Unprecedented AI-driven demand for optical networking products generated record bookings - Capacity expansion includes pioneering 6-inch indium phosphide line for improved efficiency - Strategic divestitures and refinancing reduced debt leverage ratio from 2.4x to 1.7x in one year - Q1 data center growth constrained by indium phosphide laser supply limitations - Ongoing supply chain bottlenecks persist, particularly for indium phosphide lasers - Macroeconomic uncertainty and regulatory factors pose risks to industrial segment demand - Portfolio optimization and footprint consolidation remain ongoing initiatives - Near-term capacity constraints may limit ability to fully capitalize on strong market demand
Management expressed confidence in maintaining sequential growth across data center and communications segments throughout FY2026, while anticipating stable performance in industrial operations. The 6-inch indium phosphide production is expected to contribute meaningfully to margin expansion as volumes scale through the calendar year.