Coherent Signs a $20 Billion Handshake While Its Stock Halves
Record revenue, a raised 45% margin target and a second anchor LTA — all landing into a 50% drawdown that says the market has stopped paying for photonics promises.
COHR · Earnings Call · 2026-11-04
The quarter nobody wanted to buy
On the numbers, Coherent just delivered the best quarter in its history. Revenue of $2.37 billion rose 16% sequentially and 56% year over year on a pro forma basis, non-GAAP EPS of $2.09 climbed 80%, and guidance for the December quarter lands at $2.55–2.75 billion. Management added a first $4 billion revenue quarter in fiscal 2028 and full-year pro forma growth above 60%. “We expect the full-year pro forma revenue growth rate to exceed 60%, more than double our fiscal '26 pro forma growth rate.” — Jim Anderson, Chief Executive Officer · 2026-11-04
And the stock sits 50.5% below where it traded on June 30, and 54% below the June 2 peak of $426.89. A near-perfect print into a halved share price is the whole story here.
The tape explains the disconnect better than the P&L does. Look at the global keyword cross-section and the optical complex is being sold, not re-underwritten: co-package optics is among the sharpest 90-day decliners, joined over the last thirty days by active copper cable and high power laser. That is not a Coherent verdict — it is a de-rating of the entire optical supply chain after Broadcom's chief executive warned in mid-October that capital access and funding constraints could slow AI infrastructure build-out. Coherent fell 12.8% in a single session in August on essentially nothing the company said. The tape is voting on the customer's balance sheet, not the supplier's order book.
What is genuinely new
Two items, one financial and one structural.
The financial one is the margin target. Coherent now expects its first quarter above 45% gross margin before the end of calendar 2028 — 300 basis points above the long-term target it handed the Street only eighteen months ago. That promise was on the record: last quarter the CFO said “once we get to our target of greater than 42%, we will no doubt raise the target.” — Sherri R. Luther, Chief Financial Officer · 2026-08-12 She did it a quarter later, and non-GAAP gross margin has already reached 40.6%.
The structural one is the second anchor agreement. Beyond the previously disclosed NVIDIA partnership, Coherent signed another long-term agreement with a large AI customer, and for the first time put a size on it:
The total revenue value of this new LTA is approximately $20 billion over 5 years, with revenue beginning to ramp in early calendar '28.
That agreement is anchored by the ultra-high-power 400 milliwatt CW laser but sells a higher-level solution around it. Meanwhile PhotonLink revenue crosses $100 million in the March quarter and $250 million per quarter before the end of calendar 2027, with more than ten CPO, ten NPO and five chip-to-chip engagements behind it. The chip-to-chip optical link, management argues, is pure greenfield — copper converted to light, independent of whether AI capex accelerates or merely persists.
The margin is real; the cost tailwind keeps receding
Here the call gets more honest than the headline. The 184 basis points of year-over-year gross margin expansion came primarily from pricing and product mix, not from the six-inch indium phosphide cost advantage that has been the centrepiece of the equity story for over a year. Asked directly about the internal-versus-external split, the CEO conceded: “We're using about the same mix of internal versus external now as we were a year ago.” — Jim Anderson, Chief Executive Officer · 2026-11-04 A full year of doubling internal indium phosphide output produced no mix shift, because transceiver demand grew at precisely the same rate with a one-quarter lag.
That makes this the fourth consecutive call in which the cost benefit is described as still ahead. Last August: “The bulk of the 6-inch Indium Phosphide product ramp is still ahead of us.” — Sherri R. Luther, Chief Financial Officer · 2026-08-12 Today: most of the gross margin benefit of the expansion is still ahead. It is a credible claim — 6-inch wafers yield four times the devices at less than half the cost — but it is now a promise on a long leash, and it is pricing optimization, not yield, that has been paying the bills. Which is why the CEO's verbal slip is more revealing than the correction that followed it: “I don't think there's any structural barrier to us driving gross margin above 40%.” — Jim Anderson, Chief Executive Officer · 2026-11-04
The bill for all of this
Chasing demand at this rate is expensive. Capital expenditure hit $776 million in the quarter against $104 million a year earlier, and the last reported fiscal quarter already showed capex of $556 million, up 323% year over year. That produced negative free cash flow of $537 million — a capex-to-revenue ratio above 25% — and a $664 million net debt position.
The genuinely underrated offset is that customers are helping pay for it. Every LTA, the CEO said, typically carries an upfront payment — prepayment or NRE — used to co-fund the capacity: “almost every LTA that we've signed has that general pattern.” — Jim Anderson, Chief Executive Officer · 2026-11-04 That shifts part of the capital risk onto the customer and is why leverage at 1.1x is not the constraint. The constraint is the multiple: 10.8x price to revenue, with GAAP gross margin of 38.5% still below the 2011 peak.
Independence as a moat
Beneath the guidance debate was the most strategically interesting exchange of the call: the proposed combination of Lumentum and Marvell. The CEO's read is that it validates photonics as core data centre architecture — and that it hands Coherent a position no one else can occupy, a supplier with no competitive conflict: “for a lot of customers, I think it's really important that they have an independent photonic optical supplier and partner.” — Jim Anderson, Chief Executive Officer · 2026-11-04 The breadth spans VCSEL technology with capacity for over a billion arrays a year, the indium phosphide lines in Texas, Sweden and soon Zurich, and optical circuit switching in a market sized at least $4 billion by 2030.
The risk he waves away is oversupply. Asked about excess EML capacity in calendar 2028: “I don't see an oversupply risk through calendar '28.” — Jim Anderson, Chief Executive Officer · 2026-11-04 He has been saying some version of this for a year — in February it was “I don't foresee the supply-demand getting back in balance this calendar year.” — James Anderson, Chief Executive Officer · 2026-02-04 So far the demand has made him right.
The trade, then, is a simple one. Either the $20 billion handshake and the raised margin target are worth more than a market that has cut the shares in half on its customers' financing worries, or the optical cycle is peaking just as Coherent commits its largest capital programme ever. The tell will be the internal-versus-external mix. If that split finally shifts by mid-2027, 45% becomes a trajectory. If it does not, it is a slide.