管理層發言
Greetings, and welcome to the Coherent Third Quarter Fiscal Year 2026 Earnings Call. It is now my pleasure to introduce your host, Mr. Paul Silverstein, Senior Vice President of Investor Relations for Coherent. Please go ahead.
Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Coherent's CEO; and Sherri Luther, Coherent's CFO. During today's call, we will provide a financial and business review of the third quarter of fiscal 2026 and the business outlook for the fourth quarter of fiscal 2026. Our earnings press release can be found in the Investor Relations section of our company website at coherent.com. I would like to remind everyone that during our conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. These are subject to a number of significant risks and uncertainties, and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release, our most recent Forms 10-K and 10-Q and the reports that we may file on Form 8-K with the Securities and Exchange Commission. All our statements are made as of today, May 6, 2026, based on information currently available to us. Except as required by law, we assume no obligation to update any such statements. During this call, we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release and investor presentation that can be found on the Investor Relations section of our website at coherent.com. Let me now turn the call over to our CEO, Jim Anderson.
Thank you, Paul, and thank you, everyone, for joining today's call. Coherent is a global leader in photonic technology, which is foundational to the performance and scalability of AI data centers and critical to many important industrial applications. We are at the center of an extraordinary expansion in optical networking infrastructure, driven by the rapid growth of AI and the increasing need for bandwidth and energy efficiency. As a result, we delivered another quarter of strong financial performance with accelerating growth, expanding margins and improving profitability. Importantly, we are seeing continued strengthening in demand across our business. This quarter, we experienced another step function increase in our order book, driving our backlog to a record level. Customer demand remains exceptionally strong with no signs of attenuation, and our visibility continues to extend further into the future with orders now reaching into calendar 2028 and customer LTAs extending to the end of the decade. This demand is increasingly translating into near-term shipment and revenue opportunities as we continue to expand capacity. Given both the near- and long-term demand strength, combined with our continued expansion of production capacity, we expect a period of sustained strong revenue growth over the coming quarters. We expect strong sequential revenue growth in our June quarter, and we continue to expect fiscal '27 growth rate to exceed our fiscal '26 growth rate. Turning to our Q3 operating results. Revenue increased 9% sequentially and 27% year-over-year on a pro forma basis, representing an acceleration in our year-over-year growth rate versus the prior quarter. Non-GAAP gross margin expanded both sequentially and year-over-year and the combination of revenue growth, margin expansion and operating leverage drove non-GAAP EPS growth of 55% year-over-year. We continue to grow profitability significantly faster than revenue. We are pleased with the continued execution, but we also see significant opportunity ahead as we scale the business to meet the demand environment in front of us. Our Datacenter & Communications segment continues to be the primary driver of our growth and accounted for 75% of total company revenue in Q3. Growth in this segment accelerated again this quarter with revenue increasing more than 40% year-over-year. Segment performance was driven by both accelerating demand and strong execution across our product portfolio. In our data center business, revenue increased 13% sequentially and 37% year-over-year, representing a second consecutive quarter of double-digit sequential growth. We expect data center growth to further accelerate in the current quarter, supported by exceptionally strong demand, improving supply and continued progress in our capacity ramp. Demand in our data center business remains exceptionally strong and broad-based across multiple customers and product categories. We expect the accelerated growth in the current quarter to be driven by both transceivers and OCS systems. Within transceivers, we expect growth to be driven by both 800 gig and 1.6T. In particular, we expect 800 gig revenue to grow year-over-year in calendar '26, while 1.6T transceivers ramp rapidly through the balance of this calendar year and into next year as a broad range of customers adopt 1.6T. Given the exceptionally strong demand environment and the industry-wide constraints in indium phosphide, capacity expansion remains one of our highest priorities. Importantly, we continue to make excellent progress on our 6-inch indium phosphide ramp, which is a key driver of our long-term capacity expansion and a meaningful differentiator for Coherent. We are now seeing the benefits of this ramp in both revenue and margin, and we expect those benefits to increase further over the coming quarters. We remain on track to achieve our goal of doubling internal indium phosphide output capacity by the end of this calendar year. And based on current execution, we now expect to reach that milestone one quarter earlier than originally planned. We also expect to more than double our internal indium phosphide capacity again by the end of calendar 2027. Our 6-inch platform is producing EMLs, CW lasers and photodiodes and the yields for each of the three device categories continues to exceed those of our 3-inch production lines. During the quarter, we shipped our first transceivers containing components produced on our 6-inch lines, and those shipments contributed to both sequential revenue growth and gross margin improvement. The initial 6-inch production contribution came from our Sherman, Texas facility, which is the world's most advanced indium phosphide production site and will play an important role in ramping CW laser production for our CPO solutions, including those supporting our NVIDIA partnership. Given the success of the 6-inch ramp to date, we have also announced plans to begin 6-inch indium phosphide production at a third site in Zurich. Overall, we are very pleased with the execution of our production teams. As we continue to ramp 6-inch output, we expect increasing benefits to both revenue and gross margin across our transceiver and CPO product lines over the coming quarters. We expect OCS revenue to grow this quarter as we ramp production capacity to meet demand. We have increased our view of the OCS market opportunity to over $4 billion, reflecting expanding use cases across data center interconnect, scale-out and scale-up networks and continued broadening customer engagement. We believe OCS also expands our role into higher-value layers of AI networking infrastructure. We recently resolved the bottleneck in our production capacity and are now ramping output rapidly across two production facilities. As a result, we expect strong sequential revenue growth over the coming quarters as production improvements translate into higher shipments and backlog conversion. We also continue to make strong progress in co-packaged optics, which we believe represents one of the most important long-term growth opportunities for Coherent. As we have discussed previously, CPO expands our role in AI data center architectures, particularly in the scale-up portion of the network, where optics is expected to increasingly complement and, over time, displace copper. We believe CPO represents more than $15 billion of incremental addressable market opportunity. In March, we announced a strategic partnership with NVIDIA focused on multiple CPO-related products and solutions. This partnership includes both NVIDIA's $2 billion equity investment in Coherent and a multiyear supply agreement extending through the end of the decade. The agreement covers multiple CPO-related products, including our high-power CW laser and provides meaningful long-term visibility into future demand. More broadly, our CPO opportunity is supported by the breadth and depth of Coherent's photonic technology platform. We believe our breadth of photonic technology and our manufacturing scale position us very well to support a broad range of customer requirements across key optical components, subsystems and higher-level assemblies. We expect initial scale-out CPO revenue to begin ramping in the second half of this calendar year with scale-up CPO revenue expected to begin ramping in the second half of calendar 2027. In addition to NVIDIA, we are also engaged with multiple other customers across a broad range of CPO and MPO opportunities. Overall, we believe CPO will become a significant contributor to Coherent's long-term revenue growth and margin expansion and will further strengthen our strategic position in AI data center infrastructure. Turning to our Communications business. Revenue growth accelerated significantly in Q3, with revenue increasing 16% sequentially and 60% year-over-year, driven by strong demand across data center interconnect, scale-across and traditional telecom applications. We expect strong sequential growth again in the current quarter. Demand remains broad-based across customers, products and end applications. We are seeing strong momentum across our communications portfolio, which spans components, modules and systems, reflecting both favorable market conditions and Coherent's strong competitive position. In particular, we continue to see robust demand for our DCI solutions, including ZR and ZR+ transceivers as well as strong demand across our broader transport portfolio. One additional growth driver that we are particularly excited about is multi-rail. These solutions address the increasing need for greater bandwidth and connectivity between AI data centers as workloads become more distributed across multiple locations. We believe multi-rail represents a significant expansion of our communications addressable market opportunity, and we expect initial revenue to begin ramping in the first half of calendar 2027. Overall, we believe our communications business is very well positioned for continued strong growth, supported by current demand strength, our expanding portfolio and the ramp of important new platforms over time. Across our Datacenter & Communications segment, the breadth and depth of Coherent's photonic technology portfolio, combined with our manufacturing scale, continue to resonate strongly with our customers. As a result, we have signed or are in the process of finalizing long-term supply agreements with multiple strategic customers that include both multiyear demand commitments and upfront investment to support capacity expansion. Turning to our Industrial segment. Revenue declined modestly both sequentially and year-over-year on a pro forma basis, reflecting continued softness in parts of the broader industrial market. However, we are seeing encouraging signs of improvement, particularly in semiconductor capital equipment, where bookings have increased meaningfully. We expect that improving demand to begin contributing to revenue growth in the current quarter and to support further sequential improvement through the balance of the calendar year. Over the longer term, we see important incremental growth opportunities for our industrial technologies and AI data center applications. At OFC, we highlighted our data center XPU cooling solutions and thermoelectric generators, which address the growing thermal and power challenges created by larger AI data centers. Our proprietary Thermadite material can improve thermal performance and help enable higher XPU efficiency, while our advanced materials for thermoelectric generation can improve data center power efficiency through waste heat recovery. We are engaged with multiple strategic customers on these technologies, and we believe they represent a meaningful expansion of our long-term market opportunity. We expect revenue from these products to begin ramping in the second half of calendar 2027. Overall, while industrial remains a smaller contributor to our current growth than data center and communications, we believe it is positioned to become an increasingly important source of incremental revenue and diversification over time. In summary, we delivered another quarter of strong financial performance with accelerating revenue growth, expanding margins and increasing visibility into future demand. We are operating in a highly favorable demand environment driven by AI data center expansion, and we believe Coherent is uniquely well positioned to capitalize on this opportunity, given the breadth of our photonic technology portfolio, our manufacturing scale, our continued capacity expansion and the increasing conversion of demand into backlog and revenue. I want to thank the entire Coherent team for their strong execution and continued innovation. I'll now turn the call over to Sherri.
Thank you, Jim. In our third quarter, we delivered accelerated double-digit year-over-year revenue growth and meaningful gross margin expansion, significantly improving profitability. We have strategically increased our capital investments to expand internal capacity in support of the rapidly growing demand in data center and communications. In addition, we also continued to strengthen our balance sheet, reducing our debt leverage ratio to below 1x. I will now provide a summary of our Q3 results. Third quarter revenue was a record $1.8 billion, up 7% sequentially from the second quarter, and up 21% year-over-year, driven by growth in AI data center and communications demand. On a pro forma basis, revenue increased 9% sequentially and 27% year-over-year, excluding revenue from our Aerospace and Defense business and our Munich, Germany product division, which were sold in Q1 and Q3, respectively. Our Q3 non-GAAP gross margin was 39.6%, a 57 basis point improvement compared to the prior quarter and a 105 basis point improvement as compared to the year ago quarter. We continue to execute on our gross margin expansion strategy, where we generated sequential and year-over-year increases in gross margin, primarily in the Datacenter & Communications segment. These improvements were driven by reductions in product input costs, yield improvements from 6-inch indium phosphide as well as significant benefits from pricing optimization. Third quarter non-GAAP operating expenses were $348 million compared to $321 million in the prior quarter and $297 million in the year ago quarter. R&D expense as a percentage of revenue increased to 9.9% in Q3 compared to 9.4% in both the prior quarter and the year ago quarter. The sequential and year-over-year increases in R&D were primarily in the Datacenter & Communications segment product road maps. These investments are focused on multiple short- and long-term revenue growth drivers, namely in transceivers and CPO as well as new high-margin, high-value systems such as OCS and multi-rail. We continue to focus on investments with the highest ROI that drive the future growth of the company. SG&A expense as a percentage of revenue declined to 9.4% in Q3 compared to 9.6% in the prior quarter and 10.4% in the year ago quarter with continued progress on driving efficiencies and greater leverage in SG&A. We are already seeing benefits from our low-cost regional shared services initiatives within the G&A functions as we streamline processes and gain better leverage and efficiency. In addition, our ERP consolidation project has made great progress where the majority of the company is now in a single ERP platform. We expect additional benefits from these initiatives in Q4 with more meaningful benefits into fiscal year 2027. Our third quarter non-GAAP operating margin increased to 20.3% compared to 19.9% in the prior quarter and 18.6% in the year ago quarter due to strong revenue growth and continued gross margin expansion. Third quarter non-GAAP earnings per diluted share was $1.41, up 9% from the second quarter and up 55% from the year ago quarter. The acceleration in earnings outpaced revenue growth, driven by strong top line performance as well as gross margin expansion. Our cash balance increased to $3 billion from $1.5 billion in the prior quarter, primarily due to the $2 billion equity investment from NVIDIA that we announced on March 2, 2026. We focused our capital allocation priorities during the quarter on investments that drive long-term revenue growth and profitability, specifically investments in our data center and communications business and our R&D product road map as well as capacity expansion. We also made $162 million in debt payments during the quarter, reducing our debt leverage ratio to 0.5x, down from 1.7x in Q2 and 2.1x in the year ago quarter. Our capital expenditures increased to $290 million compared to $154 million in the prior quarter and $112 million in the year ago quarter. These investments were focused on expanding our internal capacity to support the exceptional demand in data center and communications. Due to our strong bookings and the rapidly growing demand, we expect capital expenditures will increase sequentially in Q4. We continue to be on track with our capacity expansion plans. With a strong balance sheet and continued focus on improving profitability, we are well positioned to support the unprecedented customer demand with investments to rapidly expand our production capacity. As a reminder, at the end of January, we closed the sale of our Munich, Germany product division. For reference, over the prior four quarters, this business contributed average quarterly revenue of $25 million with a gross margin well below Coherent's corporate gross margin. Our Q3 results included $8 million in revenue from this business. I will now turn to our guidance for the fourth quarter of fiscal 2026. We expect revenue to be between $1.91 billion and $2.05 billion. We expect non-GAAP gross margin to be between 39% and 41%. We expect total operating expenses of between $360 million and $380 million on a non-GAAP basis. We expect the tax rate for the quarter to be between 18% and 20% on a non-GAAP basis. We expect EPS of between $1.52 and $1.72 on a non-GAAP basis. With our strong backlog and excellent visibility, we are focused on rapidly expanding our internal capacity with investments that drive the long-term growth and profitability of the company. We will continue to allocate capital in a disciplined manner as we execute against our long-term financial target model and drive durable shareholder value. That concludes my formal comments. Operator, please open the call for Q&A.
分析師問答
The conference call is now open for questions. We take the first question from the line of Samik Chatterjee from JPMorgan.
Congrats on the robust set of results, numbers here. Jim, maybe if I can start off with the guide for the June quarter. It is implying an acceleration from Q3, so the increases you had in Q3 from a revenue perspective. And particularly when I look back through the year, every quarter, you've managed to sort of accelerate the sequential revenue growth. So maybe if you can sort of dive into, one, what's the driver on the demand side that's helping you lead to that acceleration? And maybe also contextualize it in terms of supply and how that's helping with the acceleration as well? And I have a follow-up after that.
Yes. Thanks, Samik, for the question. If you look at the midpoint in the June quarter guide, we certainly expect acceleration in growth versus the prior quarter and year-over-year growth as well. We believe the current June quarter represents a new inflection point in our revenue growth rate, with faster growth this quarter. Looking into fiscal '27, which starts in July, we expect our fiscal '27 growth rate to be above fiscal '26. On the demand side, it looks exceptional right now, both in terms of the degree of demand and our visibility into that demand. Bookings in the prior quarter were up substantially from the previous quarter, with record bookings, an incredible backlog, and orders extending into calendar 2028. So we have tremendous demand ahead and great visibility on it. That demand is coming from expected areas, particularly data center growth, transceivers with new growth vectors we’re bringing on, and communications. More importantly, on the supply side, that’s really our focus. Demand looks great, and we are ramping supply very quickly. This quarter and moving forward, we’re bringing on substantially more capacity over the coming quarters. The best example is the indium phosphide capacity coming online. Indium phosphide has been a key constraint for us and the industry for a number of quarters. Our target this year is to double our indium phosphide capacity, and based on current execution, we expect to achieve that goal next quarter, one quarter earlier than planned. Looking into next calendar year, we expect to more than double indium phosphide capacity again, which would be a quadrupling of capacity over a two-year period. That looks really good and should unlock acceleration in our revenue growth across the existing business. On top of that, we have new growth areas coming online. OCS is ramping and we expect it to contribute to growth this quarter and grow sequentially. CPO revenue kicks in in the second half of this year and we view that as incremental. Our multi-rail systems will start contributing revenue in the first half of next calendar year, and thermal solutions should start generating revenue in the second half of calendar '27. These multiple growth vectors are layering on top of the existing business growth, so we feel really good about the growth and the accelerated growth ahead of us.
Got it. Got it. And then maybe just a follow-up on similar lines. You mentioned the acceleration on the indium phosphide capacity. Given that you're tracking a bit ahead relative to your target for two times in the first year, how should we think about potentially upside or accelerating the target for two times sort of next year as well? And as investors, how should investors think about the impact of that on gross margin? How material is it? When does it start to be material to your gross margin trajectory as well?
Thanks, Samik. On the second part of your question about gross margin, we’ve already begun seeing the impact of 6-inch indium phosphide capacity, which has a much better cost structure. Six-inch wafers produce more than four times as many devices at less than half the cost compared with 3-inch wafers. That has started contributing to gross margin expansion in our fiscal Q3. As Sherri mentioned in our prepared remarks, our guidance for the current June quarter calls for gross margin to increase sequentially. A key driver of that expansion is the 6-inch indium phosphide capacity, which gives us a significantly better cost structure. I’m very pleased with the execution on our 6-inch indium phosphide ramp. There are two important elements: the raw capacity ramp and the yields. The team has executed ahead of plan on capacity, and we’re also seeing very healthy yields. We’re in production on three device types—EML, CWs, and PDs—and all three have higher yields on 6-inch than on our 3-inch production. Texas was the first facility where we ramped 6-inch, and we saw excellent yields right out of the gate; Texas is the world’s leading indium phosphide production facility. We’ve started production in Sweden, and we’ve announced a third site, Zurich, which will begin 6-inch production at the start of calendar 2027. The ramp of 6-inch indium phosphide not only unlocks substantial additional growth for us, it has also contributed to gross margin as it becomes a larger portion of our overall indium phosphide production capacity.
We take the next question from the line of Simon Leopold from Raymond James.
The first thing I want to see if you could address is there's a perceived gap versus one of your primary competitors that stems from investors comparing their forecasts and your forecast in categories like the OCS and CPO. How do you explain the difference? And then I've got a quick follow-up.
Yes. Simon, on both of those new growth areas, we feel very good about the growth ahead. For OCS, just over the last couple of months at OFC we doubled our forecast of the market opportunity. Part of the sequential revenue growth we are guiding for the current quarter comes from OCS systems. We feel great about the differentiation of our technology — it delivers higher reliability and far better power efficiency. We feel good about both the near- and long-term growth prospects for that product line and have been focused on ramping capacity as fast as possible. As I mentioned in the prepared remarks, we recently removed a production bottleneck, which has allowed us to ramp production much faster, and we are ramping in two sites in parallel. So we’re confident about the OCS long-term opportunity and the near-term ramp. CPO, I think, is a transformational growth opportunity for the company. We see that market as over $15 billion, and that is probably a conservative estimate over the coming years. CPO revenue for us will start in the second half of this calendar year, initially as scale-out CPO revenue, and we expect to see the beginning of scale-up CPO revenue in the second half of calendar 2027. We are engaged with multiple customers and have a public announcement about our partnership with NVIDIA, which is centered on CPO. That is a multibillion-dollar agreement that extends through the end of the decade, and it covers multiple different CPO solutions. Our CPO offering is not just the laser; we will provide the high-power continuous-wave laser, the external laser source module, the fiber attach unit including micro-lens arrays and polarization-maintaining fiber, and our own optical fiber. Within the external laser source we supply all of the components, not just the laser, but also isolators and thermoelectric coolers. There is a substantial amount of content we expect to provide in CPO. I see this as a major new growth area for the company, and we are very well positioned. As I said, first revenue will begin later this calendar year.
Great. And just as a follow-up, I appreciate you don't want to get into micromanaging each product segment, but I'd like to see if you could confirm whether 1.6-terabit transceiver revenue exceeded $100 million in the March quarter. If not, when can we expect to reach that milestone?
Yes, Simon, we don't break out individual data rate revenue for our transceiver business. But we expect 800 gig to grow this year. It will probably grow again next calendar year. And then on top of that, 1.6T is ramping at an incredibly rapid pace. In fact, as I think we've shared in the past, that 1.6T ramp is actually faster than what we would have thought, say, a year ago, which we're really pleased with. And so if you look at our incremental or sequential growth in the current quarter, a good portion of that is driven by the 1.6T ramp. And we expect 1.6T to not just contribute to the current quarter sequential growth, but to continue to ramp very quickly over the coming quarters as well. And so I think really the growth drivers for our transceiver business are really 800 gig and 1.6T combined, not just this calendar year, but next calendar year as well.
We take the next question from the line of Thomas O'Malley from Barclays.
My first one is on gross margin. So if I look at gross margins in March at 39.6% and then I look at gross margins last year at 38.5%, the incremental on a year-over-year basis is around 44%. So since that time, I mean, you've increased 6-inch production, you've doubled indium phosphide almost, you exited some businesses. In fact, like your data center business, you kind of report, well, you could assume some percentage of this comms business, but that's growing really nicely as well. So why aren't you getting more incremental fall-through on the gross margin side? Is there any puts that you could highlight that are preventing you from kind of breaking out on that line item?
Yes. Thanks, Thomas. A few things I'll highlight from a gross margin perspective: if you go back to the end of Q4 2025, we've increased our gross margin sequentially in seven of the past eight quarters. Including the 57 basis point improvement from our recent Q3 quarter, that's about a 530 basis point increase. If you add the midpoint of our guide for Q4, that reaches a 570 basis point improvement. That's pretty good progress. We're not done, but I'm pleased with what we've achieved. The target we set at Investor Day last year is greater than 42%, and we are very focused on reaching that target. The drivers of our gross margin expansion strategy that we've executed quarter after quarter are cost reductions, yield improvements, and pricing optimization. In Q3, each of those areas increased significantly from the prior quarter. From a cost reduction perspective, we've had improvements from 6-inch indium phosphide. We've said it's half the cost when you go from 3-inch to 6-inch, so we're already seeing benefits from 6-inch. We also saw yield improvements in Q2 for 6-inch. We continue to see yield improvement as we ramp. We have two sites running in parallel, another site coming up, and I expect continued improvements as we bring the other site online and continue ramping 6-inch, which will further benefit our gross margin. Other cost reductions have come predominantly in our data center and communications business, so over the majority of our gross margin improvements have been in that segment. I'm really pleased with that progress. We've also seen pricing optimization benefits that increased significantly quarter-on-quarter and year-over-year, not only in the industrial business but also sizable in data center and communications. I'm pleased with the progress so far. We'll continue to drive toward our target and are very focused on doing that, but we're still in the early stages.
And then just as a follow-up, in the preamble, Jim, you mentioned some bottlenecks that were being relieved in the OCS business. What specifically are you referring to? And how much of an impact could that have on production?
Yes, there were some internal components or some components that we make internal to Coherent that were pacing our production capacity expansion. And so we were able to dramatically improve the amount of internal components that we were producing. And so that really unlocked an acceleration in our production capacity. And so the last month or two, we've seen a really good ramp-up in our pace of production and expect that to continue. So we're seeing a much faster ramp of production on OCS than, say, a few months ago, which is really good.
We take the next question from the line of Blayne Curtis from Jefferies.
Actually, I wanted to ask about scale-across just becoming a big talking point. You called it out in the comm business. Maybe you could just talk about kind of where that is today? And as you look to fiscal '27, how do you frame that ramp for scale-across?
Thanks, Blayne. We are seeing tremendous growth in the scale-across part of the business, which falls within our Communications segment. Scale-across, or DCI, sits alongside traditional telecom in that segment, but the fastest growth is coming from scale-across. In the most recent quarter, we saw 16% sequential growth and 60% year-over-year. Similar to data center, demand and visibility are exceptional, and we have long-term agreements in place with customers in this segment. The strength is broad-based across almost every product and across customers. Products in this segment include components like pump lasers, modules such as ZR and ZR+ transceivers (the 100 gig, 400 gig, and 800 gig ramping ZR/ZR+), line cards, amplifiers, and full systems. Given the demand and visibility, we expect this area to be a very strong growth driver going forward. A new system that we believe will accelerate our growth is multi-rail. Our multi-rail technology, which we highlighted at OFC, provides a large capacity increase within the same power and physical footprint as prior solutions, delivering significant customer benefit. We have a number of differentiated component technologies that position us well, and we are selling full systems. We expect revenue from multi-rail to begin in the first half of calendar 2027, providing another growth vector on top of the strong momentum we see.
And then I just wanted to follow up on Tommy's gross margin question. I just want to better understand the tailwinds. You called out 6-inch as being the biggest driver. I'm assuming the 6-inch volumes that you mentioned you're shipping in your units are still fairly small. So are there start-up costs that kind of roll off there, and that's what the savings are? And then as the 1.6T ramps, is that a gross margin uplift as well?
Yes. When I mentioned the 6-inch in the prior quarter, I said it was one of the contributing factors, but there were actually a number of other contributing factors to gross margin expansion in that quarter. In our guide for the current quarter it’s similar: 6-inch is a contributor, but there are other factors as well, including pricing and other cost-structure improvements we made. We’re still pretty early in the 6-inch ramp. We shipped our first transceivers last quarter that included devices from our 6-inch, and that was just the initial production we started. That will ramp significantly over the coming quarters, so much more of the 6-inch benefit is ahead of us. With the total doubling of capacity and the fact that all of that doubling is 6-inch, by the end of this year, which is next quarter, half of our capacity will be 6-inch, so that benefit is still ahead of us. On the 1.6T question, we definitely see that as beneficial to gross margin. As with prior transitions to higher data rates, at the beginning of a new data-rate life cycle gross margins are generally better than the prior data rate, so we would expect 1.6T to be beneficial to gross margin for the transceiver business.
We take the next question from the line of George Notter from Wolfe Research.
I was just curious about anything more you could tell us on the new LTAs that you're signing. Obviously, we learned a lot around the NVIDIA transaction. But you mentioned there's a number of other deals that you guys have brought in. Anything you can tell us in terms of how big those deals are? What kind of duration are we talking about? Are they funding your capital expansions? Like anything you can tell us like financially just in the aggregate, more details would be interesting.
Yes. Thanks, George. Yes, there were a couple of additional LTAs that we signed in the prior quarter. And then I would say there's a number of other ongoing discussions. We would expect to close some additional LTAs this quarter very soon. And those LTAs usually have three parts. You asked about kind of a CapEx commitment. Yes, there's usually an upfront investment from the customer to help with the CapEx. And that can come in a number of different forms, but there's usually some upfront investment, which represents sort of skin in the game from the customer and which we view as really positive. And then of course there's a supply commitment from us. But the third element is there's almost always some sort of, at least a minimal, demand commitment from the customer to make sure that that capacity is going to get utilized. So those are kind of three parts of the LTA. Almost every LTA has those three parts in it. And so yes, I would say good progress last quarter in additional LTAs, and we anticipate more LTAs to come and yes, significant in size.
Anything about the genre of customer here? Is this cloud providers? Is this systems manufacturers? Anything else you could say?
It's both, right? We expect LTAs from both hyperscalers as well as other system customers. So I would expect both.
We take the next question from the line of Vivek Arya from Bank of America Securities.
This is Michael Mani on for Vivek Arya. I wanted to dive in deeper with some of the CPO LTAs or long-term agreements that you're dealing with, including NVIDIA, but maybe some of the other deals that you're kind of eyeing over the next couple of years. What's the mix of these agreements between lasers, ELS modules, which you highlighted OFC and the various other components that you could sell into a CPO solution like fiber attach units. How does that vary by customer? Like what are the puts and takes there based on the deal?
Yes. It can depend on the customer, but it's important to remember that we have a very broad portfolio of CPO technology we can offer. I think that's a real advantage for us. At OFC we laid out all the different types of technology we can bring to a CPO solution. High-power CW lasers are certainly one important component, but they're not the only ones. We can also provide 200-gig and, in the future, 400-gig VCSELs. Some applications favor VCSELs for near-package optics. For the external laser source, we can supply that module, and we manufacture almost all the key optical components in-house as well, not just the lasers but isolators and thermoelectric coolers. Customers see that as a big strength because we're not dependent on others for those technologies. We can also provide the fiber attach unit — the assembly that connects the switch chip or XPU to the faceplate or to the external laser source module — because we have the lens arrays and polarization-maintaining fiber. So we have all the ingredients for the CPO solution, and most customers are using most, if not all, of that portfolio.
Great. And for my follow-up, I just wanted to ask about the two incremental opportunities you highlighted for '27, right, with multi-rail and thermal management products. So you said revenue timing for first half, I think, for multi-rail and second half for the thermal products. But what are the milestones between now and then from a customer perspective? Like when do we get a better sense of how large those ramps can be? And what does the competitive landscape look like in both of those areas? And how do you think you're especially differentiated, if you could articulate that?
Yes. Michael, let me start with the multi-rail, which is the near-term one. I would say the milestones are just the typical engineering milestones that we would walk through with the customers. There would be a qualification, a pilot run, very normal engineering milestones that we're moving through. And again, we would expect revenue to start in the first half of '27. I think as we get closer to that revenue ramp, we can provide just some better idea of what the rate and pace of that revenue ramp is. But we see that as a substantial new product line with significant revenue opportunity. We sized the market for multi-rail at at least $2 billion over the coming years, and it could be larger than that. The technology that we have is very differentiated. With multi-rail, it's really all about the underlying technology. Without going into a bunch of the technical details because we covered this at OFC, there are a number of key components that go into that multi-rail that are unique to us or where we have unique differentiation that position us really well. So we feel really good about the competitive positioning on multi-rail. On thermal solutions, we're very excited about this. This is us taking our industrial technology and some of our materials technology that we apply to the industrial market and repurposing it for data center use. An example is our Thermadite technology. Thermadite is a proprietary material that only Coherent provides. If you look at Thermadite applied to the cooling of, say, a switch chip or an XPU or an ASIC chip relative to the current thermal solutions, which are usually copper-based, a Thermadite or other type of material that we could provide can deliver heat transfer that is two times better than copper, sometimes up to five times better. This is a massive improvement for customers because it allows the XPU or GPU to run at a much higher frequency or utilization rate since it can be cooled much more effectively. It's almost like getting more performance out of the same CPU or GPU. So it's a big win for our customers. We're really excited about that and have very strong customer engagements. Again, just moving through the normal engineering milestones, but we would expect revenue in the second half of next year. Another technology I would mention is our thermoelectric generators, where we're harvesting waste heat from the CPU or GPU, converting that back into electrical energy, and feeding it back into the data center. That's a great efficiency gain for power efficiency in the data center. So yes, we're excited about those new thermal solutions.
We take the next question from the line of Papa Sylla from Citi.
Congrats on the results. Maybe, Jim, my first question is around pricing in general from a transceiver perspective. Obviously you are both a seller of transceivers and a buyer of lasers and electrical components. Over the past couple of days we've been hearing about laser price increases, particularly for EML. Are you seeing that, and if so, at the transceiver level can you pass through those costs? Do you have enough levers at the transceiver level to increase pricing given the demand-supply imbalance?
Yes. Let me start with pricing and come back to cost. On price, I would call pricing very healthy, with very healthy dynamics. Because of supply versus demand, pricing has been very good. One of the things that always happens as we change data rates is the ASP goes up with the new data rate. So 1.6T pricing is higher than 800G, etc. I would say the pricing dynamics are very healthy. On the cost side, remember that most of the components that go into our transceivers are internally sourced, which buffers us from increases in externally sourced component prices. We do use some externally sourced components for strategic reasons, but we have been successful at either passing along those higher external component prices or offsetting them with our own internal production. So the combination of pricing and cost has led to higher gross margins. I think Sherri shared in her prepared remarks, specifically in data center and communications, that the gross margin improvement we've seen is primarily coming from that part of our business.
Got it. That's very helpful. And then in terms of my follow-up, it seems like it's very clear that the demand you are seeing for 1.6T is very strong, the early deployments at least. So I'm curious if you can touch a little bit on the mix you are seeing between EML, SiPho and perhaps even VCSEL. And maybe a follow-up to that is kind of what would be, generally speaking, the margin implication of selling higher SiPho transceivers versus EML or vice versa?
Yes. On the second part of your question, we really don't see a significant margin difference between EML or SiPho-based transceivers. Both those transceivers are in the same ballpark of gross margin. And we're ramping both 1.6T, we are ramping both EML and SiPho-based 1.6T. Remember, even a SiPho-based transceiver requires a CW laser based on indium phosphide, right? So either way, they both require indium phosphide capacity, which is, again, ties back to why we're driving one of the reasons we're driving higher indium phosphide capacity ramp. But for us, the mix is really determined by the customer applications. So we work with the customer on which one of those two technologies just fits their application better. And there can be pros and cons depending on the type of application. And then we do expect VCSELs to be used later on as well. Our 200-gig VCSEL development going very well. And beyond just 200-gig VCSELs that go into transceivers, we see 200 gig where we expect 200-gig VCSELs to be adopted in some CPO applications or NPO applications as well. But yes, that initial 1.6T ramp is a combination of EML and SiPho-based 1.6T.
We take the next question from the line of Ruben Roy from Stifel.
Jim, the kind of the discussion around CPO has certainly seemingly accelerated since the beginning of the year through OFC and even over the past few weeks with some of your peers and yourselves talking about it. First question, just a clarification on the second half scale-out, '27 scale-up ramp. Are those ramps tied to NVIDIA specifically? Or are there other customers contributing to those initial scale-out CPO revenues for you? And then the second part of the question is, as you think about CPO and new opportunities like multi-rail and the components that go into multi-rail, my understanding is some of those things have higher margin structures than maybe other indium phosphide or silicon photonics components. How are you thinking about allocating capacity across some of these sort of, let's call them, newer growth areas as you think about the next 12 to 18 months?
Thanks, Ruben. Regarding CPO, now that the NVIDIA partnership is public, they are clearly our lead customer on CPO, and we expect other customers to follow. We are engaged with a wide set of customers and expect to have CPO solutions across multiple customers, with NVIDIA serving as our lead. On multi-rail, that part of the business has a higher gross margin structure. There are specific multi-rail components that are high margin and also rely on indium phosphide capacity. Generally, we allocate indium phosphide capacity to whatever generates the most margin dollars for the company.
We take the next question from the line of Sean O'Loughlin from TD Cowen.
Jim, congrats on a solid set of results, as always. One of the things, and I think this speaks a lot to maybe Blayne and Tom's questions earlier in the call is one of the things that investors are trying to get a better handle on is, as you ramp 6-inch indium phosphide and the capacity there, the delta between maybe shipping initial SKUs, initial transceivers revenue, as you mentioned, versus having that line fully qualified at some of your customers for volume production. And I'm going to ask the question in a way that I know is the wrong way to frame it. But if I think about we're going to double indium phosphide capacity next quarter, why hasn't that translated into doubling revenue? And that's, I think, where I'm having conversations with a lot of folks, if you could just comment on that.
Yes. Remember that there is a latency from the indium phosphide devices to when we actually ship transceivers, right? So when the indium phosphide devices, whether that's an EML or CW laser come out of the production facility, it's really probably the next quarter, two to three months later before we see the transceivers then shipped based on those devices, right? And as an example, those transceivers that shipped in our March quarter, that was indium phosphide devices that were produced in either our September or the early part of our December quarter. So there's usually a lag of a few months from when the devices are made to when we see those show up in transceiver shipments.
And then just can you comment, Jim, on anything on the customer side? Or should we assume that there's a much tighter relationship between once the transceiver ships there, we've already been through the qualification process. Is that how we should think about it since it's...
Yes, there's nothing unique about the devices on 6-inch versus 3-inch in terms of qualification. There may, in some cases, need to be qualification, but that would have already happened ahead of production shipments, right? So when we're talking about production shipments, the qualification is already complete at that point.
Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to turn the floor back over to Coherent's CEO, Jim Anderson, for his closing comments.
All right. Thank you, operator, and thanks, everybody, for joining us today. In closing, we are certainly very pleased about the strong third quarter performance and the continued momentum across our business. Demand remains exceptionally strong, and we see accelerating growth ahead of us as we ramp capacity significantly over the coming quarters. I want to thank our employees for the great execution and the continued innovation, and we look forward to updating you at our next call in another quarter. Thank you.
Thank you. Ladies and gentlemen, you may disconnect your lines at this time. Thank you for your participation.