Coherent (COHR) Q1 2026: Data Center Orders Surge 26% as Indium Phosphide Capacity Set to Double
Coherent’s first quarter was defined by record data center and communications demand, gross margin expansion, and accelerated portfolio streamlining. With capacity constraints easing and indium phosphide production scaling at two sites, the company is positioned for continued sequential growth and margin gains. Portfolio divestitures and debt reduction further sharpen the focus on high-growth, high-return segments, setting up a pivotal year for durable value creation.
Summary
- AI Data Center Demand Drives Record Bookings: Broad-based customer orders and multi-quarter visibility are fueling production expansion.
- Indium Phosphide Capacity Doubling: Parallel six-inch wafer ramp at two global sites underpins sustained gross margin improvement.
- Portfolio Focus Sharpens: Divestitures and site exits accelerate deleveraging and align resources with core growth vectors.
Performance Analysis
Coherent delivered robust sequential and year-over-year growth, led by its data center and communications segment, which now accounts for the majority of company revenue. The segment posted 7% sequential and 26% year-over-year growth, reflecting both hyperscale AI data center buildouts and a rebound in traditional telecom. Industrial segment growth was more modest but stable, excluding the divested aerospace and defense business.
Gross margin expanded for the third consecutive quarter, benefiting from both cost reduction initiatives and the initial ramp of six-inch indium phosphide production, which is structurally lowering per-chip costs. Operating leverage improved as opex declined as a percentage of revenue, and debt paydown from asset sales reduced interest expense and leverage ratios. Management’s focus on pricing optimization and yield improvements further contributed to margin expansion, particularly in the industrial and data center segments.
- Data Center and Communications Outperformance: Segment now drives the bulk of revenue and margin expansion, with 1.6T transceiver adoption accelerating.
- Yield and Cost Structure Gains: Six-inch indium phosphide lines are producing higher yields than mature three-inch lines, driving lower costs and higher gross margin.
- Debt Reduction and Portfolio Streamlining: Divestitures funded $400 million in debt paydown, lowering leverage and interest expense while raising gross margin profile.
With capacity expansion underway and order visibility extending into 2028, Coherent’s operational momentum is set to continue, though near-term industrial demand remains cautious due to macro uncertainty.
Executive Commentary
"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... Our six inch Indium Phosphide line in Sherman, Texas, which is the world's first six inch Indium Phosphide production line, began production last quarter and continues to ramp well. I am very pleased to share that our initial six-inch indium phosphide production yields are actually higher than our current three-inch indium phosphide yields."
Jim Anderson, Chief Executive Officer
"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 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%."
Sherry Luther, Chief Financial Officer
Strategic Positioning
1. Data Center and Communications: AI Tailwinds and Technology Leadership
Coherent’s core growth engine is its data center and communications segment, where AI-driven networking demand and the transition to 800G and 1.6T transceivers are driving record bookings. The company’s unique ability to produce all three major 1.6T transceiver types—silicon photonics, EML, and VIXL—positions it as a technology leader. Customer adoption is broad-based, with multiple hyperscalers accelerating 1.6T ramps.
2. Manufacturing Scale-Up: Indium Phosphide as a Margin Lever
Coherent’s investment in six-inch indium phosphide wafer production is a structural game changer. Six-inch wafers yield over four times as many chips at less than half the cost of three-inch, and initial yields are already surpassing mature lines. With parallel ramp at Sherman, Texas and Jarfalla, Sweden, internal capacity will double over the next year, supporting both margin expansion and supply assurance as demand visibility extends several years out.
3. Portfolio Optimization and Capital Discipline
Management is aggressively streamlining the business, divesting non-core assets and exiting underutilized sites. Proceeds are funneled directly into debt reduction, improving the gross margin mix and freeing up capital for R&D and capacity investments in high-return segments. The sale of the Munich product division and ongoing site consolidation signal an ongoing commitment to focus and capital efficiency.
4. Product Innovation: OCS and Advanced Materials
The optical circuit switch (OCS) platform is emerging as a new multibillion-dollar addressable market, with shipments to seven customers and growing backlog. Adoption is initially driven by redundancy and spine switch applications, but customer engagement is broadening to new use cases, suggesting further TAM expansion. In the industrial segment, advanced thermal management materials are gaining traction for AI data center cooling, offering a differentiated growth vector.
5. Operational Flexibility and Customer Alignment
Vertical integration and a diversified supply chain enable Coherent to dynamically allocate indium phosphide production between EML and CW lasers based on customer mix, with planning cycles as short as four months. This flexibility is a key competitive advantage in a supply-constrained, rapidly evolving market.
Key Considerations
This quarter’s results underscore Coherent’s transition into a focused, high-growth photonics leader, with execution risk now centering on capacity ramp and technology transitions. Investors should weigh the following:
Key Considerations:
- AI Networking Demand Visibility: Multi-quarter and multiyear customer bookings provide rare order visibility in a cyclical industry, supporting sustained investment in capacity.
- Six-Inch Ramp Execution: Yield and throughput improvements are critical for margin trajectory; any setbacks could delay cost savings and supply relief.
- Portfolio Simplification: Ongoing divestitures and site exits are accretive to margin and capital efficiency but require careful execution to avoid operational disruption.
- OCS and New Product Adoption: Success in scaling OCS and advanced materials could open sizable incremental markets, but adoption curves remain uncertain.
Risks
Supply chain execution is paramount, as any delays in the six-inch indium phosphide ramp could constrain growth and margin gains. Macro uncertainty and regulatory/tariff pressures continue to weigh on the industrial segment, while technology transitions in data center networking carry inherent adoption and competitive risks. Management’s heavy reliance on a few high-growth segments increases exposure to cyclical swings or demand shocks in AI-driven infrastructure.
Forward Outlook
For Q2 2026, Coherent guided to:
- Revenue between $1.56 billion and $1.7 billion
- Non-GAAP gross margin between 38% and 40%
- Operating expenses of $300 million to $320 million (non-GAAP basis)
- EPS of $1.10 to $1.30 (non-GAAP basis)
For full-year 2026, management maintained a strong sequential growth outlook, citing:
- Exceptionally strong demand in data center and communications with order visibility extending into 2028
- Ongoing gross margin expansion from six-inch ramp and portfolio optimization
Management signaled continued investment in R&D and capacity as top priorities, with further debt reduction targeted as asset sales close.
Takeaways
Coherent’s Q1 marks a decisive pivot toward high-visibility, high-margin growth in AI networking and communications, underpinned by structural manufacturing and portfolio shifts.
- Capacity Ramp Is the Central Story: Six-inch indium phosphide production and new module assembly lines are scaling to meet demand, with execution critical for margin and revenue realization.
- Portfolio Streamlining Accelerates Value: Divestitures and site exits are refocusing the business and freeing capital for core growth investments, with immediate accretion to gross margin and EPS.
- Watch for OCS and Advanced Materials Uptake: Early customer wins in OCS and thermal management materials could unlock new growth vectors, but scale and adoption timelines remain to be proven.
Conclusion
Coherent’s operational momentum, strengthened balance sheet, and focused capital allocation signal a business in transition toward durable, high-return growth. The next quarters will test execution on capacity ramp and new product scaling, but current order visibility and manufacturing progress support a constructive outlook.
Industry Read-Through
Coherent’s results highlight robust, multi-year AI data center buildouts driving optical networking demand, with supply chain flexibility and vertical integration emerging as critical differentiators. Peers in photonics and semiconductor equipment should note the acceleration in 1.6T transceiver adoption and the growing importance of advanced materials for thermal management. OCS momentum and broadening customer engagement suggest the next wave of optical switching could expand TAM beyond initial redundancy use cases, with implications for both incumbent and challenger vendors.