Coherent Stock

Greetings, and welcome to the Coherent Corp. First Quarter Fiscal Year 2027 Earnings Webcast. [Operator Instructions] Please note this event is being recorded.

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 first quarter of fiscal 2027 and the business outlook for the second quarter of fiscal 2027. 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, November 4, 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. Q1 marked a strong start to fiscal 2027. Revenue increased 16% sequentially and 56% year-over-year on a pro forma basis. Non-GAAP EPS increased 80% year-over-year, reflecting continued gross margin expansion and operating leverage. Strong customer demand and our rapid capacity expansion are supporting this growth with near-term bookings and newly signed LTAs providing multiyear visibility. We remain on track to achieve our first $3 billion revenue quarter by the end of fiscal '27. We expect the full year pro forma revenue growth rate to exceed 60%, more than double our fiscal '26 pro forma growth rate. We also have a clear line of sight to our first $4 billion revenue quarter in fiscal '28.

Coherent is a photonics platform company, bringing together technologies across the optical signal chain from materials and components through subsystems and complete solutions. Our breadth positions us to support customers across Datacenter & Communications networks. We're at the center of an extraordinary expansion in optical networking infrastructure, driven by rapid AI growth, the transition from copper to optical connectivity and rising demand for bandwidth and energy efficiency across increasingly large and complex datacenter architectures.

Our established businesses continue to grow rapidly, with datacenter revenue up 85% year-over-year in Q1. At the same time, new growth areas are ramping as well. For example, scale-across datacenter interconnect revenue is growing rapidly with Q1 revenue roughly quadrupling year-over-year and reaching a nearly $1 billion annualized revenue run rate.

In addition, PhotonLink, our newly announced integrated optics platform, is also beginning to ramp, and we expect PhotonLink revenue to exceed $100 million in our March quarter. Accelerating revenue growth, continued gross margin expansion and operating leverage position us to grow profitability faster than revenue. We expect fiscal '27 to be an exceptional year for Coherent.

Moving to our Datacenter & Communications segment. Revenue increased 21% sequentially and 79% year-over-year, marking a fourth consecutive quarter of accelerating growth on both a sequential and year-over-year basis. The segment now accounts for 82% of Coherent's total revenue.

Near-term demand remains strong and our visibility into long-term demand continues to improve. Order coverage through calendar '27 is exceptional, and customer orders increasingly extend into calendar '28. We signed multiple new LTAs in Q1, and customer LTAs typically extend through the end of the decade. We continue to see no signs of attenuation in demand. Within the segment, Datacenter revenue increased 17% sequentially and 85% year-over-year, marking our fourth consecutive quarter of double-digit sequential growth. We expect another quarter of strong sequential and year-over-year growth in the current quarter.

In Datacenter transceivers, we're ramping 1.6T products with multiple customers, while continuing to grow 800-gig revenue. We expect strong transceiver revenue growth in Q2, driven by both 1.6T and 800 gig. We expect 1.6T revenue to continue ramping rapidly over the coming quarters, while 800-gig revenue continues to grow through calendar '27.

At ECOC in September, we demonstrated our progress beyond 1.6T with a 3.2T OSFP pluggable transceiver built with our 400-gig differential EMLs and photodiodes. We expect pluggable transceivers to remain the dominant form factor for scale-out networks over the coming years. Coherent is helping shape the industry ecosystem for emerging formats, demonstrating XPO at OFC and also supporting the new USFP form factor.

Turning to OCS. Customer engagement is broadening across scale-across, scale-out and scale-up networks, spanning our 320x320 platform and denser configurations. We're expanding production at 2 sites to meet demand. As capacity ramps, we expect OCS to become an increasingly meaningful contributor to revenue growth and margin expansion.

At ECOC in September, we launched PhotonLink, our new platform for integrated optics. It's designed to address the transition from copper to optical connectivity in AI datacenters, creating a significant opportunity for Coherent. We estimate that CPO, NPO and chip-to-chip optical interconnects represent approximately $30 billion of market opportunity by 2030, bringing our total market opportunity for Datacenter & Communications to about $90 billion in 2030.

PhotonLink brings together Coherent's photonic technologies and manufacturing capabilities in an end-to-end platform that spans the optical signal chain from generating and shaping light through transmission and detection to converting the signal to electrical form. The platform is designed for a wide range of architectures and applications, including CPO and NPO, scale-out and scale-up networks and scale-in chip-to-chip links. It includes lasers, laser modules, complex fiber assemblies and other optical components and supports indium phosphide-based CW lasers and VCSEL-based technologies. We believe this breadth and depth differentiates us. For an xPU or switch chip with 100 terabits per second of bandwidth, we estimate our content opportunity can reach approximately $15,000 per chip.

Customer engagement is validating the opportunity. In Q1, we signed another significant PhotonLink LTA with a major AI company. The total revenue value of this new LTA is approximately $20 billion over 5 years, with revenue beginning to ramp in early calendar '28. This is in addition to our previously announced LTA with NVIDIA. Beyond these 2 anchor customers, we have more than 10 additional CPO engagements, more than 10 NPO engagements and more than 5 chip-to-chip engagements.

We expect PhotonLink revenue to ramp quickly over the coming quarters. We expect revenue to exceed $100 million in our March quarter and to exceed $250 million per quarter before the end of calendar '27. Expected shipments in the current quarter include a range of CPO products, including our ultra-high power 400-milliwatt CW laser, our fiber assembly solutions and other products.

PhotonLink is initially being deployed in CPO scale-out applications. We expect to begin shipping PhotonLink products for CPO and NPO scale-up applications in the second half of calendar '27. Over time, we expect PhotonLink to become a multibillion-dollar product line for Coherent.

Expanding our indium phosphide capacity is a key enabler of growth in both indium phosphide pluggable transceivers and indium phosphide-enabled PhotonLink solutions. Our 6-inch indium phosphide expansion is progressing well. We doubled our internal indium phosphide output capacity year-over-year in Q1, 1 quarter ahead of our original plan. Q1 was our highest production quarter ever for EMLs, including both 100-gig and 200-gig devices. The ramp contributed meaningfully to datacenter growth, and we expect it to remain an important driver of revenue and gross margin.

Most of the gross margin benefit of our indium phosphide expansion is still ahead of us as the expansion will enable us to increase our mix of internally sourced indium phosphide components, which have a tremendous cost advantage. We remain on track to more than double our internal indium phosphide output capacity again by the end of calendar '27. We've secured the substrates and other critical inputs needed to support this ramp. And given the strength of customer demand are planning additional capacity expansion beyond 2027.

Our 6-inch lines in Texas and Sweden are producing EMLs, CW lasers and high-speed photodiodes with yields that continue to exceed those of our 3-inch lines. Production includes our 400-milliwatt CW laser for CPO, which is covered by our NVIDIA partnership and is expected to begin generating revenue this quarter. We also remain on track to begin 6-inch indium phosphide production in Zurich in the first half of calendar '27, further extending what we believe is a meaningful manufacturing advantage.

Moving to Communications. Revenue increased 34% sequentially and 84% year-over-year, and we expect another quarter of strong sequential and year-over-year growth in the current quarter. Traditional telecom continued to grow, but the primary growth driver was scale-across, which has quickly become the largest source of revenue within Communications.

Over the past year, we've expanded our datacenter interconnect portfolio to help customers connect datacenters with greater capacity and efficiency. Building on our leadership in pump lasers and our broad component portfolio, we've introduced higher level products, including modules, line cards, subsystems and our new multi-rail solution. These offerings are seeing strong customer demand and help customers make better use of existing fiber while scaling high-capacity links between distributed AI datacenters.

In Q1, scale-across revenue exceeded $200 million, up 53% sequentially and nearly fourfold year-over-year. That puts the business at a nearly $1 billion annualized revenue run rate, making it one of our fastest-growing businesses. With multi-rail beginning to ramp in our March quarter, we expect quarterly scale-across revenue to roughly double from the Q1 level by the end of calendar '27.

Turning to Industrial. Q1 revenue was flat sequentially and year-over-year on a pro forma basis. Bookings were strong, led by semiconductor capital equipment customers. And we expect growth to resume in the current quarter. Near-term growth is being driven by semiconductor capital equipment, AI infrastructure and fusion energy. In semiconductor equipment, our lasers, precision optics and engineered materials serve front-end applications and we've seen a strong uptick in bookings.

In AI infrastructure, our CO2 lasers and zinc selenide optics are used to drill advanced circuit boards for AI servers. Demand is also growing for our pulsed laser deposition systems used to produce high-temperature superconductor tape for magnetic fusion.

Over the longer term, we see significant opportunities in datacenter xPU cooling and quantum technologies. For AI datacenters, our Thermadite material can enable higher xPU performance and token generation. We're shipping prototypes to several strategic customers this quarter, and we expect revenue to begin ramping in the second half of calendar '27.

In quantum, we supply lasers and materials to leading quantum technology developers and are engaged in next-generation programs. Given the multiple growth areas, we expect our Industrial segment to return to growth and build momentum over the coming quarters.

In summary, Q1 demonstrated the strength of our growth momentum and the breadth of our opportunity. Demand remains strong, customer commitments continue to deepen our visibility and we are expanding capacity ahead of plan.

Established businesses continue to grow rapidly while new growth areas are ramping quickly. Our focus is on execution, expanding capacity, delivering for our customers and improving profitability as we grow. We believe this combination positions Coherent for sustained growth in fiscal '27 and beyond.

I want to thank our team for their outstanding work this quarter. I'll now turn the call over to Sherri.

Thank you, Jim. I'm extremely pleased with the outstanding Q1 financial results. Our performance in the first quarter represents a powerful continuation of our growth trajectory, characterized by accelerating top line momentum, durable structural gross margin expansion and significant operating leverage. The compounding impact of these operational drivers fuels non-GAAP EPS growth to significantly outpace revenue growth. We achieved this strong performance while preserving balance sheet flexibility and strategically directing capital towards targeted capacity expansions and making investments in our product road map to support robust AI Datacenter & Communications demand.

Let me now provide a summary of our results. First quarter revenue was a record $2.37 billion, representing a sequential acceleration of 16% and a substantial 50% increase year-over-year. This performance was driven by the continued AI infrastructure build-out across our Datacenter & Communications businesses. On a pro forma basis, excluding the financial impact of the Aerospace and Defense business, and the Munich, Germany, product division, both of which were divested in 2026, revenue increased 16% sequentially and 56% year-over-year.

Our non-GAAP gross margin for the first quarter was 40.6%, representing a 37 basis point increase sequentially and a 184 basis point improvement as compared to the year ago quarter. This continuous expansion reflects durable pricing optimization and structural cost improvements, particularly within our Datacenter & Communications segment.

The improvements in gross margin, both sequentially and year-over-year, were driven primarily by pricing optimization, lower product input costs and improved manufacturing yields. We have made significant progress with our pricing optimization strategy to ensure that we price our highly differentiated products for the value they provide to our customers.

Our gross margin profile is also benefiting from the transition to 6-inch indium phosphide as we continue to scale our production capacity. Given the progress that we have made over the past couple of years and our current trajectory, it is clear that we need to raise our gross margin target. We now expect to achieve our first quarter with gross margin above 45% before the end of calendar 2028. We believe the drivers of this gross margin expansion are continued pricing optimization, ramp of new growth platforms, full operational leverage of our 6-inch indium phosphide capacity and other cost improvements.

I also want to note that the new over 45% target is 300 basis points higher than the long-term target we provided to the investment community only 18 months ago.

First quarter non-GAAP operating expense was $412 million compared to $377 million in Q4 and $304 million in the year ago quarter. Non-GAAP operating expenses as a percentage of revenue decreased meaningfully to 17.4%, down from 18.4% in the prior quarter and 19.2% in the year ago quarter. This improvement reflects enhanced operational discipline and underscores the powerful operating leverage inherent in our business.

From an R&D perspective, we are strategically directing our capital toward high conviction long-term growth drivers, which Jim outlined in his remarks. This disciplined approach ensures our investments are concentrated where they generate the highest financial returns and drive sustainable revenue growth.

Our first quarter non-GAAP operating margin increased to 23.2% from 21.8% in the prior quarter and 19.5% in the year ago quarter. The sequential and year-over-year increases were driven by strong revenue growth, expanding gross margin and structural expense discipline. First quarter non-GAAP earnings per diluted share was $2.09, up 20% from the prior quarter and up 80% from the year ago quarter. Earnings growth continued to exceed revenue growth, demonstrating gross margin expansion and operational leverage accelerating our bottom line profitability.

Turning to the balance sheet. We closed the quarter with a healthy cash balance of $2.34 billion compared to $2.59 billion at the end of the prior quarter and $1.55 billion at the end of the year ago quarter. Our debt leverage ratio at the end of Q1 was 1.1x as we continue to maintain a highly resilient and flexible balance sheet. Consistent with our capital allocation priorities, we strategically invested in opportunities that will drive long-term growth and profitability.

Capital expenditures for the first quarter increased sequentially to $776 million, up from $556 million in the prior quarter and $104 million in the year ago quarter. These investments directly support the future growth of our Datacenter & Communications businesses with excellent financial returns. Our conviction to deploy this capital at an accelerated rate is backed by exceptional customer visibility, a robust pipeline of committed purchase orders and additional multiyear supply agreements.

Furthermore, this capacity offers significant fungibility as our infrastructure can be efficiently repurposed to support multiple product lines. Given the strong visibility and record backlog, we expect capital expenditures to increase sequentially again in the second quarter. With our strong balance sheet and profitability trajectory, we possess the scale and flexibility to continue investing capital toward high ROI growth initiatives while supporting customer demand.

I will now turn to our guidance for the second quarter of fiscal 2027. We expect revenue to be between $2.55 billion and $2.75 billion. We expect non-GAAP gross margin to be between 40% and 42%. We expect total operating expenses of between $430 million and $450 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 non-GAAP diluted EPS to be between $2.28 and $2.48.

In summary, fiscal 2027 is off to a powerful start with strong financial momentum backed by deep demand visibility. Our focus remains on rapidly ramping capacity to meet demand, expanding our gross margin, capitalizing on the immense operating leverage in our model and executing a disciplined capital allocation strategy focused on maximizing returns that drive long-term shareholder value.

That concludes my formal comments. Operator, please open the line for the Q&A session.

[Operator Instructions] The first question today comes from Joseph Cardoso with JPMorgan.

Really appreciate some of the disclosures that you provided this quarter. And I wanted to first start with PhotonLink and the initial visibility you provided there. I was hoping you could provide more color with respect to the ramp itself, especially just given the backdrop of the $20 billion agreement that you've highlighted? And then I have a follow-up.

Yes. Thanks, Joe. So first of all, yes, we're certainly really pleased with the momentum that we have around PhotonLink and kind of whether you measure it by customer engagement or LTAs, as you mentioned, or just the revenue outlook that I mentioned in the prepared remarks, we're just really pleased with the progress there.

And just as a reminder, PhotonLink is -- we kind of consider it a one-stop shop for integrated optics. It's basically our platform for allowing customers to basically have a platform that allows for the optical link from end to end. It's the complete optical signal chain and all the technology along the optical technology along that path. And really excited about the progress, as I mentioned in the prepared remarks, over 20 customer engagements on CPO, over 10 -- or sorry, over 10 on CPO, over 10 on NPO and then over 5 chip-to-chip engagement. So the customer engagement is very extensive and they continue to grow.

You mentioned or asked about the LTA. Really pleased about that major AI customer and that LTA is, as I said, $20 billion over a 5-year period. And the revenue for that would start at the beginning of calendar '28. But the PhotonLink revenue ramp is starting ahead of that. We'll ship a little bit of -- a small amount of PhotonLink revenue this quarter, but we expect to ship over $100 million in our March quarter. And then before the end of calendar '25 (sic) [ '27 ], expect to ship over $250 million a quarter. So really pleased with all of that progress.

And I guess the other thing that I would add is, if we look further out, we're expecting this over time to become a multibillion dollar product line. The initial shipments of PhotonLink are all around CPO in the scale-out network. But when we start to ship into a CPO and NPO into scale-up networks, I think that drives another huge leg of demand for this technology. I think that will be the much bigger adoption that we see. And that we expect to start to ship revenue into CPO and NPO applications in the scale-up domain towards the end of calendar '27. So yes, we're excited about the progress and expect this to become a major product line for us.

And maybe in a similar vein, I wanted to touch on the scale-across DCI opportunity. Particularly curious how we should think about the customers and products that are underpinning the revenue outlook to double by the end of the next calendar year.

Yes. Thanks again. This has been a really great growth area for us over the past year. In fact, it's surprised us a little bit how quickly this has grown. So overall, so DCI and scale-across that falls within our Communications part of our business, which is essentially everything outside of -- all communications outside of the Datacenter. And if we look at that segment overall, Communications grew 84% year-over-year. But while telecom grew most of that -- the vast majority of that growth was driven by DCI. And so what's going on there is you're seeing these large AI workloads that are spanning multiple datacenters. And so that's driving the need for much greater bandwidth and connectivity -- optical connectivity between datacenters. And so that's what's driving. That's the underlying market dynamic that's driving the growth.

And then you asked about customers and products. So customers would be either equipment makers. So we're certainly selling into multiple different equipment makers that -- whose equipment goes into scale-across applications, but also selling directly to hyperscalers as well. And so it's a mixture of both types of customers. And then the products, it's interesting, we sell -- in this part of the market, we sell products at multiple levels of the value chain. So we sell in components like, for instance, pump lasers that go into a wide range of different equipment. At one level up in the value chain, we sell subsystems and modules, so ZR/ZR+ modules, line cards, amplifiers, ROADMs, et cetera. And then one level up from that, in some cases, sell complete solutions to our customers as well. So we're selling across multiple levels of value chain. And so I think that's helped us really maximize the growth here as well.

And as I mentioned in the prepared remarks, if we look at our Q1 revenue, it was over $200 million. So we're basically at about $1 billion annualized revenue run rate now. And that's -- that Q1 growth had quadrupled year-over-year. And we expect that if you take that Q1 baseline, we expect the revenue to double again before the end of calendar '27. And so that growth that we've seen to date, that's ahead of multi-rail. So we expect multi-rail revenue, which is a -- multi-rails are great solutions, some great technology that we have there. We expect that to start -- that revenue to start to ramp in our March quarter. And so it's been a really good area of growth, and we expect this to continue to be a very good area of growth over the coming quarters as well.

The next question comes from Simon Leopold with Raymond James.

First, Jim, I want to thank you for the increased transparency on Slide 7. I know this is something I've been probably annoying you about. So thank you. The slide did not mention OCS. I know you talked about the product group in your prepared remarks. But could you update us on your progress and expectation for this product group? And then I've got a follow-up, please.

Yes, sure. Thanks, Simon. Thanks for the feedback, as always. We're always looking to improve. So I appreciate the feedback. But yes, in OCS, I did mention in the prepared remarks OCS falls within our Datacenter part of our business. And just reiterating, Datacenter was up 85% year-over-year in our Q1. OCS continues to make good progress. We've got really extensive customer engagement. We've seen that customer engagement, continue to expand across more applications and not just scale-out applications, but scale-across and scale-up applications as well. And that's across -- in terms of products, that's across both 320x320 systems, which are shipping as well as denser configurations. I think the denser configurations will be used more in the scale-up applications.

We're ramping production at 2 different sites in parallel, and that's really to meet the demand that we're seeing. We have a very differentiated technology. It's liquid crystal. It's nonmechanical technology, has better power efficiency and better reliability than MEMS-based solutions. So we feel really well positioned. We're ramping production. And I think it will be an increasingly larger contributor to our revenue growth in the quarters to come. And maybe last thing to add is we see the market opportunity for OCS as at least $4 billion by 2030. It could be larger than that.

And as a follow-up, I have a hard question, one that I imagine you anticipate getting is, what does the proposed consolidation of Lumentum and Marvell mean to you?

Yes. Thanks, Simon. No, I don't think that's a hard question at all. I think happy to answer that. I'd give a few thoughts on this. I think number one is it definitely demonstrates that optics and photonics is becoming an absolutely critical part of datacenter architecture.

As we look forward, as we convert the entire scale-up network and then even the scale-in chip-to-chip communication links, over time, all of that getting converted from copper to optical. Photonic technology is absolutely critical to making that happen to driving the innovation and datacenter architecture. So I think it's a proof point around just the criticality of optics and photonics.

And then I think for Coherent, I think it just -- it highlights the tremendous strategic value of the portfolio that is within Coherent. There's no other company, I believe, on the planet that has a broader and deeper set of photonic and optical technology. If you look at the entire optical signal chain from the generation of the light to the transmission through our fiberoptic cable that we make to the detection on the other side, I don't think there's any other company that's got a better portfolio of technology.

So I think it definitely highlights the strategic importance of our technology platform. And then look, I think from a customer perspective, I think that -- I think a lot of -- for a lot of the customers, our customers, I think it's really important that they have an independent photonic optical supplier and partner. And so I think it positions us really well to be that independent optical supplier that's going to support -- without any competitive conflict can support multiple different customers and support both hyperscaler customers, can support semiconductor customers.

And so I think it positions us really well to be that partner of choice in terms of optics for the industry. So look, we think we're really well positioned from both the technology standpoint, manufacturing standpoint and strategically. And I think we're on a really great growth trajectory. And I think you can see some of that already in the PhotonLink technology and the PhotonLink revenue ramp.

The next question comes from Tom O'Malley with Barclays.

I guess the first part of the question for you, Jim, is why now in terms of giving the longer-term forecast? It's been something that you've kind of held off on doing for a while. You gave $3 billion and then $4 billion next year.

And then the second part of the question is, is that all backed with supply? How are you able to get visibility that far out? Is that already in the books today? Or perhaps you could give us like what percentage of that is backed with supply today? Or if you need to add any to get you to those numbers?

Yes. Thanks, Tom. I think it is a little bit different. We are providing a little bit longer-term visibility than we normally would. I think it's really backed by the -- just extraordinary level of visibility that we have on the business. When I look at the backlog, the bookings both -- so both near-term visibility and long-term visibility. If I look at just the backlog that we have, I mean, calendar '27 is basically booked out and the customers are booking out calendar '28 now. So from a near-term booking demand perspective, we have great visibility.

We've signed a number of new LTAs over the past quarter. I mentioned one of the big LTAs as part of the PhotonLink prepared remarks. But the LTAs also give us really good visibility because they include very high-quality forecast, long-term forecast. So I think that's -- given that really good visibility, that's certainly giving us confidence.

And then also, great that you mentioned supply. We've done a number of things within our supply base to make sure that we've got the right supply in place to support that as well. So yes, I would say that, that's -- those views that we gave, whether it's $3 billion this year and the $4 billion quarter next year is underpinned by supply agreements. Also, remember that we're highly vertically integrated. So a lot of that's underpinned by our own internal supply that we're ramping, right?

One of the constraints, if we look back over the past year or 1.5 years, one of the constraints has been indium phosphide. And I'm just really pleased with how the team has executed very, very well on the indium phosphide production ramp. We've doubled production capacity a quarter earlier than what we thought we would, and that gives me the confidence that they're going to achieve -- the team is going to achieve our plan to more than double capacity again by the end of calendar '27. So you put all that together and yes, we're feeling really good about the outlook and the visibility for the business.

Super helpful. And then just as my follow-up for that LTA. Obviously, $20 billion, a pretty robust number over that 5 years. Could you just give us any color just around that customer perhaps? And then if you can talk about the customer around some of the solutions that, obviously, it's PhotonLink, so it spans a large number of your products, but any more specificity would be really helpful, just given the size of that customer.

Yes, sure. So definitely a leading AI datacenter customer name you will definitely recognize, right? And so we're really proud of that partnership, excited about it. That's all -- that LTA for $20 billion is all around PhotonLink technology. I would call it -- I would say it's anchored by our laser, our 400-milliwatt CW laser. That's kind of the anchor of that LTA. But there's -- it's more than -- we're selling more than just that laser. So we're selling more, call it, a higher level solution than that. So more than just that laser.

So we're really, really pleased by that. As I mentioned, the revenue -- we expect the revenue to start to flow from that in early 2028 and to ramp over the course of the quarters and years after that. And so really pleased with that. And I think given the engagement that we have on PhotonLink across many different customers, many different solutions, we certainly expect to sign more long-term agreements and partnerships with PhotonLink over the coming quarters as well.

The next question comes from George Notter with Wolfe Research.

I guess I just wanted to ask you a question about the 45% gross margin outlook before the end of '28. So I guess I'm curious like what does that assume about your transceiver business? I'm just wondering if, to hit that, you need to gate your transceiver supply or transceiver ramp? Or is this just a case where everything can ramp in units then naturally would ramp and you wind up at 45% gross margins. What's the view there?

Yes. Thanks, George. I'll start and see if Sherri has any color to add. But yes, we haven't assumed that we're kind of artificially gating the transceiver business. So there's no assumption on that. We're assuming that the transceiver business grows at what we think is a reasonable growth rate to expect from the transceiver business. But on top of that, we do have new products that are ramping on top of that. PhotonLink, a number of new products and datacenter interconnect, OCS ramping over time as well. And so you put all those products ramping over time. And those products are accretive to the company's margin. I think the new product ramp helps as well.

And then in addition to that, the other thing that I would add more on the cost side is a number of different cost activities that we're driving. But certainly, a big one of it is we expect additional leverage in terms of gross margin from our indium phosphide ramp. I think there's -- as I mentioned briefly in the prepared remarks, I think most of the benefit from indium phosphide expansion is still ahead of us. And so I think there's a good component of the margin expansion that's kind of underpinned by the indium phosphide expansion as well.

Is it possible to get the company to higher margins than 45% over time? I mean, I guess I'm maybe looking at Lumentum as an example. Those guys obviously have had quite a bit of margin expansion. Obviously, the fastest-growing parts of that business are many of the areas where you're kind of looking for growth going forward. Is 45% just a stop in a bigger picture or a bigger number? What do you think?

I don't think there's any structural barrier to us driving gross margin above 40%. In fact, I think Sherri, in her remarks, I think she said over 45% before the end of calendar '28, I think, is the way she said it, right? So I -- yes, we certainly don't view just like our old target of 42%, where we said over 42%, we never viewed that as a stopping point. We viewed that as stop along the way. And I would say 45% is -- yes, stop along the way, and I don't see any structural reason why the company couldn't continue to drive gross margins beyond that.

Yes. I would just add that the target that we put out about 18 months ago at our Investor Day of over 42%, that was a 3- to 4-year target that we put out, but we pulled that in, right, in only 18 months now raising our target to over 45%. So as we get close to that target, we'll certainly reevaluate and look at what makes sense beyond that, but it's just a step along the way.

Yes. And George, maybe the other thing I'd add is we're certainly super focused on gross margin expansion. But the other thing that we're very focused on is operating leverage, right? And I think we're quite pleased to see that we're gaining operating leverage in terms of OpEx as a percentage of sales, and we expect that to continue as well. So I think you should expect continued operating leverage as well.

The next question comes from Gianmarco Conti with Deutsche Bank.

Yes. Great. Congrats on the quarter. Maybe starting with PhotonLink. I wanted to touch on the scale-in/scale-up opportunity with micro-VCSEL. You mentioned you had 5 engagements, I believe, chip-to-chip. I'm curious if you could talk a little bit more detail here whether there is anything you can quantify in terms of revenue to come online next year? Anything around micro-VCSEL?

Yes. So thanks for asking about micro-VCSEL. So certainly, when I look across the PhotonLink engagements, there is, I would say, many VCSEL, micro-VCSEL, we call it multi-core VCSEL because it -- the multi-core VCSEL attaches to our multi-core fiber that we produce. And so -- but multiple of those engagements involve our VCSEL technology. I mean maybe just as a reminder of the company's sort of depth in VCSEL technology. Number one is we've shipped over 700 million VCSELs into datacenter applications over the past year. So we have enormous manufacturing expertise in VCSELs.

Also at the ECOC conference, when we launched PhotonLink, we talked about our technology in VCSELs, micro-VCSELs, VCSEL arrays, et cetera. We showed that -- one of the things that we showed was that we had industry-leading energy efficiency around VCSELs of -- we showed a 1 picojoule per bit capability, which I think is very industry-leading capability. And so VCSEL is definitely a core technology, something that the company has a long history in and we have multiple engagements.

I think you'll see that deployed in NPO applications relatively in scale-up NPO applications in relatively short amount of time. I think you also asked about scale-in chip-to-chip. I think that's a little further out in time. I think PhotonLink and scale-in applications is more in the 2029 to 2030, but we'll definitely see, I think, VCSELs deployed in NPO applications well before that.

If I could just ask a follow-up. It's going to be a tough question, sorry to put you on the spot. But I've been receiving a lot of questions from investors around Chinese laser suppliers. I was wondering if you could provide any kind of thoughts on basically more supply coming in online? And whether you see them competing for ultra-high-powered lasers for CWs?

Yes. So I don't see that those competitors in terms of ultra-high power. If you're talking about like the 400-milliwatt CW laser, we're not seeing competition from really -- we really only have one competitor there as far as we can see, right? So really not seeing any other competitors out there with high-power seated laser capability.

Operator, before we go to the next analyst, if we could ask all the other analysts to limit themselves to one question with the goal of trying to accommodate everybody on the call. All right. Thank you.

The next question comes from Dan Zhu with Bernstein.

You mentioned that scale-up optics should start towards the end of calendar 2027. Anything you can share about whether the initial deployments are NPO or CPO? And also about how -- whether sort of this is primarily going to be on VCSELs or will this start with InP-based lasers?

Yes. Thanks, Dan. So I think what we'll see -- we'll definitely see CPO in scale-up. We certainly believe that. I think we'll see NPO scale-up soon after that as well. If not by the end of calendar '27, I think we'll certainly see deployment in the early part of '28. So I think in scale-up, both CPO and NPO within either that late '27 or early '28 time frame in the scale-up applications.

And then I think -- did you ask -- what was the second part of your question, Dan?

How much of it is VCSEL versus InP?

Yes. I think the initial deployment is indium phosphide, the high-power CW lasers. That's for CPO in both initially scale-out and then in scale-up. And then I think VCSELs will happen in that NPO kind of early '28 time frame.

The next question comes from Ryan Koontz with Needham.

This is Jeff Hopson on for Ryan. You noted ramping the indium phosphide supply for your own laser supply and that'd be able to lead to the margin expansion from weaning off external sources. I was just curious if there's any color on what the split is currently versus internal versus external? And kind of how -- or the time line of that over time as it relates to the margin expansion?

Yes. Thanks, Jeff. We haven't broken out the split, but I can tell you the split hasn't changed much in a year. We're using about the same mix of internal versus external now as we were a year ago. So although we've doubled our internal indium phosphide supply our -- the primary usage of our internal indium phosphide parts is in our datacenter transceivers.

And if you look at the growth rate of our datacenter business, datacenter transceivers, it's basically tracked the growth of our indium phosphide capacity, although -- basically one quarter later because when -- in the quarter we produce the lasers, the next quarter is when we ship the transceivers. And so essentially, our transceivers have been -- business has grown at the same rate as our internal indium phosphide, which means that our mix of internal versus external really hasn't changed much over the past year.

Now as we continue to expand indium phosphide now looking forward, more than doubling it by the end of '27, we do believe over the coming quarters, we'll start to shift more of the mix from external towards internal.

Now we always think -- we always believe we'll have some portion of our supply from external for our transceiver business. But we believe over the coming quarters, we'll start to shift more towards internal. And that's really because it's a tremendous cost advantage for us to use our internally produced lasers, especially the ones that are made on the 6-inch platform. And in my prepared remarks, when I said the majority of the benefit from 6-inch indium phosphide is ahead of us, that's actually what -- really what I'm referring to is that benefit of changing the mix towards internal is largely ahead of us and that's a much bigger cost structure improvement.

The next question comes from Papa Sylla with Citi.

Congrats on the very impressive results. Jim, I wanted to maybe double-click on the $15,000 of content per, I think, 100-terabit chip you mentioned earlier at ECOC. So assuming that is probably the full stack opportunity, which might be a longer-term figure. But I thought it would be helpful to also have a sense, even qualitatively, on what percentage, I guess, of that $15,000 you expect to capture in the near term versus longer term and how it may change kind of beyond '27?

Yes. Thanks, Papa. Yes, the $15,000 basically represents -- if you take an example of a chip that needed 100 terabit of I/O and if you were using our full PhotonLink portfolio, which would include not just the lasers, but all the other components, isolators, thermoelectric coolers, laser modules, our full fiber assembly kit, all the connectors, et cetera. So everything that we do, if you use all of that, the content per chip would be we estimated about $15,000 per chip.

Now it will depend on the customer and their particular application, how much of that content they utilize, whether they utilize a portion of that, all of it, that will really depend on the particular engagement. But that $15,000 is sort of the opportunity that's out there for us. I think we'll see over the next year or 2 as PhotonLink ramps, I think we'll see customers that leverage the vast majority of that. And I think we'll also see customers that leverage a subset of that. So I think we'll definitely -- we'll see a mix of that.

And we're happy to support our customers, whether they want the entire solution or they want a portion of it, we'll work with them on whatever works best for them. But regardless of the amount of content they take, for us, this -- we see this as all greenfield growth because most of PhotonLink adoption over time will be driven by scale-up. And again, that's all greenfield growth for us because that's us and the industry converting copper links to optical links over time. So we see it as greenfield revenue growth.

The next question comes from Cody Acree with StoneX Financial.

Sherri, maybe for you, if we go back to the gross margin discussion. Can you maybe help to stratify the contribution part of that? Can you talk about the indium phosphide 6-inch ramp yields increasing utilization rates, maybe even your mix thoughts? And just if you can also factor into that the competitive dynamics on your module, on your transceiver piece of more global Chinese competition and what's inherently just a more price-sensitive market?

Yes. Sure, Cody. I think you cut out a little bit, but I think you were asking for more color on what the drivers are to gross margin expansion over 45%. That's what I think your question is.

Yes, yes, that's right.

Yes. Okay. So if I were to rank order, I think that the largest contributors are going to be our new product ramps and that full operational leverage of our 6-inch indium phosphide capacity and then pricing optimization, followed by cost reduction. That's kind of how I would rank order it. And the timing of some of those things kicking in, right, will vary.

But certainly, new product ramps. I mean those are gross margin accretive and new products that Jim referred to earlier in his prepared remarks. Those are gross margin accretive. And so that will benefit our gross margin. As we continue to shift our supply from external to internal, as Jim talked about a little bit ago, that's going to drive significant opportunity in our gross margin.

And then pricing optimization, rather, I mean, that is an area where I think we will continue to have benefit there fully in our Datacenter & Communications segment, certainly in our Industrial too, but definitely in Datacenter & Communications, there's opportunity for that. We saw that to be a large contributor during the current quarter as well as in prior quarters. And so that will continue to be a benefit as well to drive to over 45% and cost reductions that will always continue to be something that we focus on, but that's how I would rank order them.

The next question comes from Karl Ackerman with BNP Paribas.

Jim, you spoke about how customers are beginning to book out to calendar 2028 that gives you confidence in your growth forecast. At the same time, there is investor concern about the financing and permitting of data centers here in the United States. In light of this, how does the team align its laser production capacity plans with your major customers? And has the team considered customer prepayments for additional laser production capacity?

Yes. Thanks, Karl. The answer to the last part of the question is yes, definitely. Maybe I'll start with the end of the question. So we've signed a number of LTAs over the past quarters. The one public LTA that is the one with NVIDIA that we signed back in March, but we've signed a number of other LTAs. The LTAs follow -- all follow a general pattern. And one part of the LTA is typically some sort of upfront payment from the customer either -- it could be either a prepayment or NRE. There's different forms of payment, but there's some sort of upfront payment from the customer.

And what we do that for is for 2 reasons. Number one is it makes sure that the customers have skin in the game. But number two is we use that upfront payment to help fund the CapEx to build the capacity for that customer, right? We think it's important that if we're going to go build the capacity that the customers either fund that or help co-fund that. And so far, we've had customers to be very, very willing to do that. And I think that's worked really well for us. And so I would say almost every LTA that we've signed has that general pattern. And so that certainly gives us better confidence and helps offset the risk in terms of our own capital deployment.

But I guess on the first part of your question, we certainly worked very, very closely with our customers on planning out the demand. I think one thing that -- to keep in mind with indium phosphide capacity, is remember that it's not just being driven by datacenter demand. There's 2 things driving optics -- in general, optics demand, right? Number one is datacenter growth. But number two is in the case of integrated optics, it's the conversion of the copper links to optical over time. And that is a technology trend that in my view is independent of the market demand. That's a technology trend that will happen and regardless of the datacenter demand because that's necessitated by the ability to achieve the bandwidth and the link speeds that we need to achieve in the scale-up domain or chip-to-chip is we have to switch to optics over time. And so that's an independent technology trend. And that's certainly part of what's driving the indium phosphide capacity demand over the long term.

The next question comes from Meta Marshall with Morgan Stanley.

Maybe just a question on substrate availability. I think there have been some concern in the market around availability of 6-inch versus 3-inch. I know you noted in the prepared remarks that you had gotten capacity, but maybe if you could just speak about kind of 6-inch versus 3-inch substrate availability and how that's impacting expansion plans.

Yes. Thanks, Meta. So we have over -- on 6-inch in particular, but 3-inch as well, we do continue to buy 3-inch wafers. We do still have 3-inch production, but all of our expansion is mostly on 6-inch moving forward.

And we have over 5 different suppliers of substrates. We've signed long-term agreements with a number of those suppliers. And when I look at our next step of more than doubling the capacity by the end of calendar '27, we believe we've secured the necessary substrates for that capacity expansion. And then we've certainly -- we have plans in place to further expand capacity beyond '27, and we're certainly working with or already have in place, substrate capacity for that as well. So I think the summary is we have multiple different suppliers, and we've made sure that we have the substrate capacity for the expansion.

The next question comes from Sean O'Loughlin with TD Cowen.

Great. I'll make it quick. Jim, can you just talk about how fungible your capital installed base is across indium phosphide versus gallium arsenide, if we maybe we end up in a world that is more VCSEL or multi-core VCSEL heavy than it is ultrahigh-power CW?

Sure. I would say there's some fungibility, but not -- it's not like you can easily switch a line from indium phosphide to gallium arsenide or vice versa. But I will note that we have a tremendous amount of gallium arsenide capacity. One of the stats that we shared at the PhotonLink launch is that today, we have capacity to produce over 1 billion VCSEL arrays annually. So we have a tremendous amount of capacity that we could deploy.

And so to the extent that we saw a broad-based adoption and rapid ramp of VCSEL technology, I don't think we -- there's probably anybody else in the industry that's better positioned to source or to supply that demand than Coherent is. And so we feel really well positioned on gallium arsenide VCSEL technology and/or capacity. And then on indium phosphide, obviously, we're ramping that very, very quickly. And so I think on both, we're on a good path.

Our last question today comes from Ananda Baruah with Loop Capital.

Congrats on the progress here. And I guess, Jim, let me ask you a capacity -- supply -- capacity supply question from the other direction. Yes, there's also been a conversation just in the financial community about at an industry level excess InP EML capacity at some point in calendar '28. You're also -- now you're also talking about sort of contract agreements going sort of well into that time frame. So I would love to get your opinion on sort of how you view the potential for an oversupply situation at the industry level going through '28.

Yes. I think through '27 and into '28, I don't see that as a risk, given that -- given not just the demand that pluggable transceivers is creating, but also the demand that integrated optics is going to create for lasers as well as there's quite a bit of indium phosphide, that's also used in some of the DCI applications, too. So when I look across all of that, I don't see an oversupply risk through calendar '28.

I also think for us because most of our indium phosphide gets used in our -- well, I guess today all of it, today, all of our indium phosphide gets used in our own products. And we don't even produce enough today for -- to meet all the demand of our own products. For us, I don't -- that's not a primary concern for us. If I think if we were -- if there were more supply externally, that may affect us if we were supplying indium phosphide lasers externally, but we're not. And I think our plan is to -- over time, start to use more indium phosphide -- more of our internal indium phosphide production in our -- to change to increase the mix towards internal over time. So yes, I guess the short answer to your question is we don't see any big oversupply situation into '28.

This concludes our question-and-answer session. I would like to turn the conference back over for any closing remarks.

Thanks, operator, and thanks, everybody, for joining us on the call today. So we certainly enter the remainder of the year with great momentum, exceptional customer demand and as we were just talking about rapidly expanding capacity. I just want to say thanks to -- especially to all of our employees, our customers, our partners and, of course, our shareholders for the continued support. And we look forward to updating you again next quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good evening, everybody. It's so great to see all of you here, so many familiar faces. For those of you who don't know me, I'm Sanjai Parthasarathi, I'm the Chief Marketing Officer of Coherent. We are so excited that all of you could join us here in person and those of you who are joining us by webcast for our launch of our PhotonLink platform. PhotonLink is our integrated optics platform purpose-built for AI data center connectivity.

Before we get started, I'll have to refer you to Slide 2 of our presentation, which contains our forward-looking statements and disclosures. The presentation in its entirety will be available in the Investor Relations section of our website after the event. Moving on to an agenda. We've got a great program for you today. Jim Anderson, our CEO, will start us off by introducing PhotonLink. Jim will be followed by Beck Mason, EVP of Semiconductor Devices, who will present the Generate section of PhotonLink. Beck will be followed by Julie Eng, our EVP of Optical Components and our CTO, who will present the Shape, Guide and Receive sections of the PhotonLink. Julie will also present our Integrated Solutions.

Without further ado, please join me in welcoming Jim Anderson, our CEO, to the stage.

All right. Thank you, Sanjai, and thank you, everybody, for being with us here today. We've been really excited about the launch of PhotonLink. We've been looking forward to this for a long time. Thanks. We're here in Spain at ECOC. Thanks to everybody that's joining us on the webcast. But thank you, especially for everybody that's joining us here in this room because there is a beautiful sunny beach about 200-meters away from this location. And so the fact that you chose to sit in this conference room instead of on a sunny beach, I appreciate it. But there are a few people that walked in with flip flops and shorts. So -- but again, thanks for being with us here today. We're really excited to share this with you.

Just to kind of kick it off. So what is the motivation? Why are we launching PhotonLink? And the motivation or the reason for us to launch PhotonLink is very simple. It's to try to make it as easy as possible for our customers to move from electrical connections to photonic connections in the data center, to make that transition seamless and easy to bring the complete solution to our customers. If you look at any particular distance of links in data centers, if you look at long distances, but connecting 2 data centers. If you look at the very short distances, connecting maybe 2 chips that are sitting right next to each other on a board, regardless of the distance, as you increase the data rate, as you increase the amount of bandwidth you're trying to send through that connection, if it's an electrical connection, you'll eventually hit the limit of that connection. And what you want to do is you'll have to convert to a photonics link in order to achieve the data rate and the data transmission goals that you're trying to achieve. And that's what PhotonLink is all about, is making that transition from electrical to photonic link as easy as possible.

So if you look at the data center today, actually, a lot of the data center is already completely optical photonic. The telecom network, the scale across the scale-out networks, all of those originally started out as electrical networks, but were long ago converted to photonic optical networks. And over the coming years, we'll start to convert the only remaining electrical portions of the network, the scale-up network and even the chip-to-chip links will become photonic over the coming years. And that's what we're really excited about helping our customers make that transition.

Now for Coherent, that's also a big opportunity for us. When we look out at the end of this decade, at 2030, if we look at our addressable market, it's about $60 billion for the existing portfolio of products that we have. What PhotonLink does is it allows us to access another $30 billion of integrated optics market opportunity by the end of this decade. So another reason we're really excited about this technology.

Now as we've engaged with customers across integrated optics over the past months, actually, the level of engagement and the intensity of engagement, the number of engagements with customers over just the last 6 months to 12 months has ramped up really significantly. And so we've got a number of different engagements across many different architectures. It's very clear to us that there's not just a one-size-fits-all, one particular architecture that will be implemented, we're going to see a wide range of different architectures that our customers are going to implement as they implement integrated optics. So some customers will adopt co-packaged optics right away. Some customers will first adopt near-packaged optics and then over time, move to CPO later on. And we are already engaged with a number of customers talking about photonic links between the individual chips themselves. So a lot of different architectural options that we're working on with our customers.

But regardless of those architectural options, one of the things that our customers are struggling with is if you look at the amount of optical technology that needs to be pulled together, there's a significant amount of complexity there. It's a combination of laser sources, the fiber optic cable that has to be pulled together, the complex optical assemblies, passive optics lot of technology has to be stitched together. And so a number of our customers came to us and asked us, rather than just providing components or a subset of components, can you bring the complete optical solution, the complete assembly to make it easier for us to transition to optical. And that's exactly the purpose of PhotonLink is to bring a single integrated platform that's architecture-agnostic that works across CPO, MPO, chip-to-chip as well, but brings the whole solution to our customers.

And when we look at PhotonLink, it spans all the way from the beginning where we generate the photon through the shaping and guiding of that signal to the detection of the signal on the other end. So that's the complete PhotonLink platform.

Now we believe that Coherent, more than any other company in the world is best positioned to help our customers make this transition for a couple of key reasons. First of all, because there's no other company in the world that has that complete set of photonic optical technology. So if you look across the generate, shape, guide, detect and look at all the different optical connections, all the different optical technology that's required to make that happen, it's really only Coherent that's got that full portfolio that we can bring together, stitch together in a single solution. There's other vendors that provide the laser source. There's other vendors that provide maybe the fiber optic cable, but only Coherent has all that technology in-house, and that helps our customers innovate faster and get those optical connections to market much quicker. So that's number one is the complete technology portfolio.

But the second reason is the ability to manufacture that at tremendous scale, the scale that's required for data center. And so if you look at complex optical components, complex optical assemblies over the past years, we've delivered hundreds of millions of components and optical assemblies. So not just the full portfolio of technology, but the ability to ramp that quickly and ramp that at scale for our customers. So an example of the complete solution that we can bring, not just the component ingredient technologies, is here, I'm showing just an example of -- this could be a CPO or an NPO example for a switch chip or a compute chip using an external laser source. In this example, we'd be bringing the complete external laser source, the complete optical assembly that goes from that ELS to the switch chip or the processor chip that it's supporting and then the complete optical assembly that goes back out to the face plate to provide the I/O, the photonic I/O to the rest of the system. So that complete set of solutions and all the underlying components that go into that, and we can manufacture that at scale.

So we have anchor customers already secured for both CPO as well as NPO architectures. We'll talk a little bit more about that. To give you an idea of the value of the content that we can bring if we're using the full PhotonLink solution, if we take, for instance, a switch chip or a processor chip that, let's say, needs 100 terabit of I/O capacity and let's say, we're using 200-gig optical lanes, the content for Coherent would be up to about $15,000 per system or per 100T chip in the case of where we're bringing all the content for the customer. So a significant amount of content that we're delivering for our customers.

Now we'll talk about today, of course, all the different ingredient technologies. I've got our two experts, Julie and Beck, to talk through all the ingredient technologies that are underneath PhotonLink. But I think more importantly, what we'll also do is we'll talk about a number of specific examples that we're working on with customers, different architectures. We'll show a CPO example, a couple of different NPO examples and a chip-to-chip example, too, of the solutions that we're bringing to our customers. And across these different architectural choices, a number of different types of light sources, whether it's CW lasers or VCSEL arrays, et cetera. As I mentioned earlier, the customer engagement across these different architectures has ramped up very significantly, especially over the last 6 months. We now have over 10 unique customer engagements on CPO, over 10 on NPO and over 5 different engagements on chip-to-chip connections. So a lot of activity across the customer base.

I talked about how much content we're delivering in the case of when we bring the full solution. To give you an idea of the production timing for CPO, our first production will start to ramp in our December quarter, this -- Q4 of this calendar year. That initial CPO will ramp for scale-out applications. And then about a year later in the second half of '27, we'll start ramping CPO for scale-up applications. And then NPO similar, we expect that to start to ramp in the second half of next calendar year, again, primarily for scale-up applications. Chip-to-chip is a little further out there. We expect that to be further out in the 2029, 2030 time line, but definitely a lot of intensity with our customers on designs around chip-to-chip photonic connections as well. So a lot of customer activity going on.

So I'm going to pass it next to our two experts, Beck and Julie. But what they're going to talk about is they're going to talk about -- think about it as two parts of their presentation. Number one is they're going to walk you through some of the specific technologies underneath PhotonLink that are really some of the key technologies that we stitch together into the full solution. But then Julie at the end will talk about three different architectural examples, CPO, NPO and chip-to-chip and give you specific applications and what this full solution is that we're bringing to our customers.

So thanks again for being with us here today, and I'm going to pass it off to expert #1, Dr. Beck Mason.

Thank you, Jim. I appreciate it. So I'm going to present to you today on our Generate technology. And so it generates maybe the core or the heart of the PhotonLink from a photon generation standpoint. And what I'm going to cover are the four main technology platforms within PhotonLink that generate the photons that serve all of that link capability. And these are our ultra-high power lasers, our high-power CW lasers, our VCSEL arrays and our high-density VCSEL arrays. So first, I'm going to start with the high power -- or the ultra-high-power CW laser array.

So this is one of the areas where we have really strong traction from a number of customers. It's an exciting platform. And this platform, the lasers are actually remote from the transmission, and they're put inside an external laser source. That external laser source contains up to 8 ultra-high-power CW lasers. Each ultra-high-power CW laser can typically feed multiple links usually around 4. This provides the photons that go into the silicon photonic modulators that are co-packaged with the xPU or switch chip or near-packaged with that switch chip or xPU in order to provide the source for the link. The lasers are designed specifically to produce very low noise, high output power and very high efficiency to enable the link. And we're very excited about this platform because we have 2 long-term agreements signed with leading hyperscale AI data center customers for both CPO and NPO solutions.

Our ultra-high power laser is designed to deliver industry-leading performance. It's a very unique design. It enables very high output power at very high efficiency and very low noise performance. And why that matters? High output power lets a single laser drive multiple links with that solution, so you can split it and share it that helps you drive cost and efficiency. High power conversion efficiency is important. These are producing very high optical powers. High power efficiency lowers the overall power dissipation in the system. That's critical in AI data centers where power is key. And finally, very low phase noise and very low amplitude noise from these lasers delivers superior link performance with better bit error rate performance. All of these lasers today exceed all of our customer requirements. We're starting to ramp these in the fourth quarter of this calendar year, and we're having -- we're seeing significant volume throughout next year. And these are ramping on our 6-inch indium phosphide platform that we have in our Sherman, Texas fab, where we're seeing very good yield and very great performance from the lasers.

The next laser I'm going to talk about is our high-power CW laser for NPO applications. So in some architectures, the NPO solution or near-packaged optical solution has the laser embedded within it, co-packaged with the silicon photonic modulator. That gives you greater flexibility and a different approach to the architecture that can be valuable in certain situations. The smaller size and lower power dissipation and high efficiency of our high-power buried heterostructure CW lasers is ideal for this application. And this is a laser that we're already shipping millions of units a month in because it's used widely in our pluggable data center transceiver solutions as well. It's a laser with proven field reliability and proven link performance, and it's optimized for both low-power dissipation and very high efficiency. And it's production-ready now. So as I said, we're already shipping it. We've got a long history in indium phosphide, and we've shipped over 300 million indium phosphide lasers to the field so far. And the pace of that is only ramping up and continuing to increase.

The next type of solution for Generate is our VCSEL arrays. Now VCSEL arrays for NPO come in two different flavors. The reason why VCSELS are very attractive for this application is they enable the lowest energy per bit for NPO applications. They also allow us to get to very high channel counts in a very dense solution, giving us the lowest cost and the best bandwidth density of any application we can use for integrated photonic links. The massively parallel optical inter-connectivity that we can achieve here is really ideal for NPO applications where we need high density. So I'm going to talk about 2 types, our Type 1 and our Type 2, the Type 1 being conventional and Type 2 being high density. Type 1 is designed for use with ribbon fiber assemblies. And it's similar to what we have been selling for many, many years. We've been supplying VCSEL arrays and PD arrays for more than 10 years. In fact, we're the world's largest supplier of datacom VCSELs today. Now those PD arrays and VCSEL arrays are used in pluggable transceivers. These new arrays are high-density arrays. That means they're 2-dimensional. They have more VCSEL channel count. They're also available in flip-chip versions that allows us to mount them directly on top of driver ICs. The photodiodes are also available in flip-chip versions, so they can be mounted on TIAs. And because they're flip-chip, we can put lenses directly on the backside of the devices. Those integrated lenses will allow much more relaxed coupling, higher coupling efficiency and better overall link performance. So these solutions will be production ready in the first half of next calendar year.

The other area is our high-density 2D VCSELS. And these are actually kind of some of the most exciting and interesting solutions, and we're actually demonstrating this product today in our booth on the ECOC floor, almost said OFC. So these are super compact solutions for NPO, and they have very, very high density rates. And the VCSELs are so tightly spaced here that we're able to couple all of these VCSELs into a single fiber, which is a multi-core fiber. So we make fibers with up to 37 separate cores, and we have a VCSEL array and a PD array with 37 elements. We can flip-chip those. We have the backside lenses. And with that solution, we can get very high capacity in a single fiber. And so it's the most dense solution we have out there. And this is suitable for both PAM4 and NRZ applications. So it does slow and wider, I'd like to say, medium frequency and light as well as fairly fast and narrow. And these will be in production in second half of calendar '27.

Just to complement this, I'm going to speak very briefly about our photo detectors. It's important because to date, we've shipped over 1 billion photo detectors to the field, both short-wave gallium arsenide and long-wave indium phosphide. Our latest generation of photodiodes goes all the way up to 200-gig today, and we have 400-gig devices in development. These devices are capable of being flip-chipped directly on to TIAs, for example, with backside integrated lenses to allow better coupling efficiency, and they're an exciting solution for us for the other part of the CPO link.

So all the devices that we make today come from our internal wafer fabs. And we have 4 major wafer fabs that are spread out across the globe. Our largest and arguably the world's largest and most advanced indium phosphide and gallium arsenide fab is in Sherman, Texas. Here, we have 6-inch indium phosphide lines and 6-inch gallium arsenide lines for multiple different devices running. The second fab we have is in Järfälla, Sweden, also running 6-inch indium phosphide. Our Järfälla, Sweden is some -- is the place where we built some of our most advanced devices. We've been in production there for over 2 decades, and we have a broad mix of solutions, again, there. The third fab is in Zurich, Switzerland. Zurich, Switzerland is historically our gallium arsenide fab, where we run 6-inch VCSELS in very high volume for datacom applications, but we are now ramping up 6-inch indium phosphide in that fab as well to enable the immense ramp we're seeing in demand on high-power lasers for PhotonLink and CPO applications. And then finally, we have a fab in Fremont, California. This fab is running our 3-inch production line and is where a lot of our most advanced devices are developed as well. So that rounds out our complete suite of wafer fabs. We're expanding capacity in all of these fabs today.

Our laser capacity expansion has really been driven by our 6-inch transition. So about 6 years ago, we transitioned all of our gallium arsenide production over to 6-inch. And we've been running 6-inch gallium arsenide in both Sherman, Texas and Zurich, Switzerland since that time. And we finally completed around last year, the final transition, which was our pump laser platforms over to 6-inch. And through that period of time, we've increased capacity on our gallium arsenide lines by about a factor of 4. And today, we have capacity for over 1 billion VCSEL arrays per year. I can't even count the number of VCSELs that is, but it's a huge volume of capability. Indium phosphide, when we've learned from the success of that 6-inch transition in gallium arsenide, we're now transitioning all of our indium phosphide lines to 6-inch. And that's been a tremendous success for us so far. We have the bulk of our high-power CW lasers, our EMLs and our photodiodes all qualified now on our 6-inch platform and ramping. Last year, we doubled our capacity of indium phosphide globally. We did that a quarter ahead of schedule. And this -- next year, we're planning to double that again or more than double that again. So we're laser-focused on our ramp, "no pun intended". And we're doing it with our largest form factor wafer size in the world. We're the first to ramp on 6-inch indium phosphide of anyone globally.

So that wraps up my section. I've gone through the four critical types of lasers that we use for the Generate function for our Integrated Optics PhotonLink platform, our ultra-high-power CW lasers that are good for remote applications with the highest performance, both CPO and NPO, our high-power CW lasers that are flexible and replaceable and can be easily used inside NPO solutions; our conventional VCSEL arrays, which provide low power, high efficiency and high density and then our ultra-dense VCSEL arrays, which provide the smallest and most compact solution for getting high-capacity data across these short links.

Now I'm going to pass it to my colleague, Julie, who will give us an overview of the Shape, Guide and Receive portion of the PhotonLink architecture. So Julie, thank you.

Hi. Good evening, everybody. It's great to see so many familiar faces. And for any of you I haven't met, I'm Julie Eng. I'm EVP of our Optical Components Group and also the CTO. And as Beck said and Jim, I'm going to share with you the shape, guide and receive portions of the PhotonLink portfolio. And then I'm also going to give you some examples of how we're bringing these integrated solutions to our customers.

So as Jim said, what we're going to do here, we're going to follow the path of the photon from where Beck generated them, which he called it the heart. I think this -- the rest of it is like the cardiovascular system, shape, guide and receive. But actually, if you double-click on it, it's much more complex than this. And this is a picture of what it actually looks like. There's a tremendous amount of optical components and technology that are between the laser and the receiver. And I hope I'll show you today that we have the broadest and deepest portfolio of products and of technologies. And also, as Jim mentioned and Beck mentioned, we're manufacturing these at scale. So in these optical components that I'll introduce to you today, we shipped over 650 million optical components. So we're in high volume in all of these components.

So if you start first, Beck showed you about the laser. We have to get the laser light into an isolator into a fiber. And the first way we do that is with glass-molded lenses. So the glass-molded lenses give us efficient light coupling. We have excellent coupling performance. These are in production by the end of this calendar year. And if you look at our entire lens portfolio, we've actually shipped 0.25 billion of lenses. And these lenses would go inside of the ELS and focus the light into the isolator and into the fiber. So once the light gets focused, the next step is the isolator. Now the isolator protects the laser from unwanted back reflection that otherwise harms the performance of the link. So isolators are based on a magneto-optic material called garnet. And Coherent, we're vertically integrated in garnet. We literally grow the garnet boule in the United States actually. And then we slice that garnet boule up into substrates and polish them. We grow the garnet epitaxy on top of those substrates. We dice them and then we attach polarizers, which is how you make an isolator. And we actually supply a significant fraction of the industry's garnet and isolators today. And isolators are becoming a key component in the CPO and NPO ramp. And in fact, we have customers securing capacity for garnet and isolators with long-term agreements.

And then the ELS, you can really think of the external laser source as an integration platform. It provides a platform to integrate that laser with the coupling lenses with isolator. There's other components in there like an ELS fiber assembly, a thermoelectric cooler, which keeps the laser at the constant temperature and all of those internal components we design and manufacture and then we integrate them into the ELS. And because we have all those vertically integrated components, we can get faster responses to customer specifications. And the assembly and test of an ELS is built on our transceiver line, which we have demonstrated manufacturing at scale. And we are sampling ELSs to customers today.

Okay. And then we have to get the light from the ELS to the received side. And the way we do that, of course, is by fiber. Now it's not -- maybe not so well known, but Coherent, we have an internal fiber design and manufacturing capability. We've actually had that for 25 years. We've shipped over 300 million meters of fiber. But where we focus is on the specialty fiber, like really hard to make fibers. We're not competing on standard commodity SMF or MMF. It's really hard stuff to make, and we're really, really good at making the hard stuff. So one thing that's hard is polarization-maintaining fiber. So polarization-maintaining fiber is key for the silicon photonics with the remote laser CPO architecture, and we're production-ready on that fiber now.

Here at the ECOC 2026, we're introducing this Mode-Matched Fiber. And what this is, is a fiber that improves coupling efficiency to edge-coupled silicon photonics. And then finally, on the right, we have Multi-Core Fiber. And as Beck mentioned, that's very valuable, especially for these VCSEL highly dense VCSEL array-based solutions and from NPO, CPO and chip-to-chip. And right now, we're undergoing -- executing a very significant fiber manufacturing expansion for both CPO and NPO.

Okay. So once you get the light through the fiber, now you have to get the light into the receiver. And so in the silicon photonics implementations, we're making Micro Lens Arrays. So Micro Lens Arrays are lithographically-formed in silicon lenses. They have to be very precisely uniform one to the next and all have good focusing capability. And if you're using grading coupled silicon photonics, they turn the light also. So that's called Prism, Prism Micro Lens Arrays. So we're making those. And then Fiber Guides. So this is a precisely v-groove etch that then holds the fiber. And the two of those things together help you get good precise coupling efficiency in your integrated solutions. Then we can integrate those components with our Polarization-Maintaining Fiber into a Fiber Attached Unit. So that provides an integration step that we can deliver to those customers. Here at ECOC, we're also introducing our Detachable FAU Connector, which helps with serviceability and installation. And we can integrate all those FAUs also into a Precision Fiber Assembly. And this helps route and protect the fibers for ease of deployment and also for reduction of fiber damage. And then all of those things put together are either in production now by the end of this year or early next year. And this is one way in which we can help solve the integration problem for our customers.

And then once you start having fiber inside, say, the rack at very high amounts, it becomes very important to our customers to try to reduce the fiber count. And one way you can do that is with a component called a Circulator. So circulator takes a beam that might be going this direction with a signal that might be going this direction and combines them out on the same fiber. So it reduces your fiber count by a factor of 2. And circulators are also based on garnet, and they also require a crystal called Yttrium Vanadate, which we also manufacture and design internally. Then we have WDM multiplexers. These take many wavelengths and combine them on to one wavelength. And those rely on super precision optical coatings, which we're also an expert at and we deliver in scale. And finally, fiber shuffles organize that high fiber -- high-density fiber routing and can help reduce fiber breakage. So we can put the circulators and the WDM multiplexers in that fiber shuffle in the ELS or in connectors. And all of those products are in production.

And so now as we get to the receive side, Beck told you about indium phosphide and gallium arsenide receivers, some of the CPO and NPO implementations have silicon photonics receivers. So we have an in-house silicon photonics design team. We use multiple foundries as is common in the silicon industry. And then we do in-house assembly and test. So we've demonstrated 200-gig per lane silicon photonics, and we're shipping that in production in our transceivers today. At OFC earlier this year, the Optical Fiber Conference in March of this year, we demonstrated 400 gigabit links based on silicon photonics. We're the only person in the world, to my knowledge that's shown that and demonstrated -- we demonstrated it on the show floor and also got a post- deadline paper at OFC on that topic.

And then just like the ELS can integrate a lot of components, little NPO modules can also integrate a lot of the components, do the integration work for our customers. So here at ECOC and also at OFC, we showed our 6.4T silicon photonics NPO module. So this integrates the silicon photonics with the drivers. So the silicon photonics has modulators and photo detectors with drivers, TIAs and all the optical coupling, and this is 32 lanes of 200G. And we -- in addition to that then, if you look at NPO, you can have a common form factor, common socket that can accommodate either silicon photonics or VCSELs. So we also showed our VCSEL NPO at OFC, and that integrated the VCSEL, the photodiodes, the drivers, the TIAs and the coupling optics into a single deployable NPO. We are a founder of the Open CPX MSA. So we are helping to develop an open ecosystem for a common connector among vendors, which gives our customers actually architectural flexibility.

Okay. So hopefully, now I've shown you the products and the technology portfolio, both the depth, the breadth, the ability of us to manufacture it at scale. And now I'm going to give you some PhotonLink examples of how these integrated optics come together to solve solutions for our customers. And I'm going to give you four examples. I'll give you a CPO example, two NPO examples and then a chip-to-chip example.

So starting first with CPO. So this is a CPO solution with an external laser source. The CPO architecture is putting the optical engine actually literally on the package of the switch or xPU chip. So it offers the lowest power consumption and in many cases, the highest density. So we have an end-to-end solution for CPO with ELS and a remote laser. So you can see we can provide the ELS with our own laser, lens, isolators, [ techs ] and fiber assembly. You can couple from that to our FAU, which has our PMLA, our Fiber Guide and our PMF, we can integrate all of the FAUs into a Precision Fiber Subassembly, so handling all that fiber routing and fiber protection for our customers. And finally, then we can provide the modulation and the detection with our 6.4T Silicon Photonics. So what you can see here is we can provide an integrated end-to-end solution for our customers. And as Jim mentioned, we have over 10 active customer engagements in this area. He estimated our content at $15,000 per 100 TIO. And we do have an anchor customer an LTA secured. This is our NVIDIA agreement, which is a public agreement, which we can mention our customer for that agreement. And we see -- expect to see scale out in Q4 of '26 and scale up in next -- second half of next year.

Okay. So now I'm going to take an example, NPO solution. So the NPO solution takes that little 6.4T silicon photonics socketed NPO I mentioned, just for those of you who think of this way. This is actually 15 gigabits per second per millimeter. You think about that like the end of the pencil is like a millimeter, and we're cranking out 15 gigabits per second in every millimeter. So you could start from that optical engine, go into our FAU, the same precision fiber subassembly. And if you're doing it remotely, you could have an ELS. Of course, you could integrate the laser into the silicon photonics NPO also. So in these type of applications, we have greater than 10 customer engagements also, similar Coherent content. In this application, we also have an anchor customer and an LTA secured, and we see this ramp at the second half of next year.

And then as I mentioned, because NPO gives you a common form factor, part of -- I forgot to say that the NPO is moving off of the package onto the board right next to the package, and there are trade-offs with that. An advantage of the NPO is it gives -- it's easier to deploy and it's more serviceable. But it comes at a price. And that price is you move it a little bit away from the chip that requires power consumption and that socket impacts the signal integrity. So there are trade-offs with all of these architectural decisions. But one great thing about the NPO is it's an architectural platform. So you can use silicon photonics or you can use VCSELs. So this VCSEL, one I'm showing you on the left is our NPO solution with the 2D VCSEL array that Beck mentioned. In this case, we integrate the substrates, the drivers and TIAs, our 2D VCSELs, 2D photodiode arrays is a heat spreader, a lens array. And we've actually demonstrated this at 1.2 picojoules per bit, which as far as I know, is the lowest CPO or NPO power consumption, including the laser.

And then we also have an NPO solution based on our high-density VCSEL that Beck mentioned, and we have the high-density VCSEL and photodiode there. We integrate it with the TIAs and the drivers. And then some of our customers want to take the light out the top. Some of our customers want to take the light out the side. You take the light out the side, we incorporate also a turning mirror. We have lenses, we have a lens fiber array. And so we can bring that whole end-to-end solution for our customers.

And then the last example I'll tell you about is called chip-to-chip interconnect. And we're seeing a lot more interest in this in the last, I would say, 3 months to 9 months for this calendar year. And I think the way you can think about it is that as the bandwidth between compute and memory scales, the optical link moves from the edge of the package to the interior of the package. Or another way to think about it, as Jim mentioned, I mean, with photonics transition from electronics to photonics always happens when the data rate goes up and the distance is fixed. And so it happened first on the intercontinental telecom network, then the terrestrial network, which is shorter than intercontinental. Then the next thing was inside the data center. Now we're talking about inside the rack. So this is the next frontier, inside the chip package. And we're seeing people look at multiple architectures, including ELS with ultra-high power lasers or integrated lasers, but also high-density VCSEL solutions for this.

One thing you see is with all the lanes here, there's a lot of discussion about using WDM. And this is a case where circulators and WDM multiplexers come in as a very important architectural tool. So here, we have over 5 customer engagements, and this type of deployment is more like an end of the decade deployment.

Okay. So hopefully, I've been able to demonstrate through this CPO, NPO and chip-to-chip, how we bring this PhotonLink platform and integrated end-to-end solution for our customers. As I mentioned, we have a ton of customer engagement on all three of these areas. And we've discussed the timing of end of this year, end of next year and then 2029, 2030. But more -- what I also wanted to point out was because we have -- one of the ways in which we can be the trusted adviser to the customer is because we have all these technologies. So if you, as our customer come to us and say, I'm trying to solve this architectural problem, we can openly tell you, if you do it with VCSELs, here's your power consumption, here's your cost. If you have integrated laser, here's your complexity, here's your impact to your signal integrity. So we can give you an honest assessment of all the choices if you tell us your architectural requirements. And so I think that our customers find that very powerful that they're not just being sold a solution. They're being -- because we have all the solutions, we think about your problem and try to give you the best tools in our toolkit to provide you an integrated solution with PhotonLink.

So with that, that will conclude the formal part of our presentation. Hopefully, I've been between myself and Jim and Beck, we've been able to show you that we do have -- I believe we have the broadest portfolio and the deepest portfolio and technologies in optics for the Integrated Photonics Solution. And with our PhotonLink platform, we're pulling this together as a complete integrated end-to-end solution for our customers, and we're highly capable. We've demonstrated in the past that we're able to manufacture at scale, and we're definitely scaling all of these technologies and products today. So with that, I'd like to thank you all again for coming. Thank you for your attention, and I will hand it off back to Sanjai. Thanks.

Greetings, and welcome to the Coherent Fourth Quarter and 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 CEO; and Sherri Luther, Coherent CFO. During today's call, we will provide a financial and business review of the fourth quarter of fiscal 2026 and the business outlook for the first quarter of fiscal 2027. Our earnings press release can be ending 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, August 12, 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. Fiscal 2026 was an outstanding year for Coherent. On a pro forma basis, revenue increased 28% to a record $7 billion. Our revenue growth, combined with gross margin expansion and continued operating leverage drove non-GAAP EPS growth of approximately 59%, more than twice the rate of revenue growth. We also finished the year with significant momentum. In Q4, our pro forma revenue growth rate accelerated significantly with revenue increasing 14% sequentially and 42% year-over-year, while non-GAAP EPS increased 74% year-over-year. Our accelerated growth rate reflects the exceptional demand environment and our continued rapid expansion of production capacity.

While we're very pleased with our fiscal 2026 performance, we are even more excited about the year ahead. We expect our growth to accelerate significantly in fiscal '27 having achieved our first $2 billion revenue quarter we now expect to achieve our first quarter with over $3 billion of revenue by the end of fiscal '27. Coherent is a global leader in photonic technology. Our broad photonic technology platform is foundational to the performance and scalability of AI data centers. AI runs on compute, but it scales on optical connectivity. Coherent is at the center of an extraordinary expansion in optical networking infrastructure driven by the rapid growth of AI, the transition from copper to optical connectivity and the increasing need for bandwidth and energy efficiency across increasingly large and complex data center architectures.

Our confidence in fiscal '27 is based on 3 factors: First, customer demand continues to grow, as demonstrated by another quarter of record bookings. Second, our supply of critical components is increasing, including the planned doubling of our internal indium phosphide output year-over-year by the end of the current quarter. Third, multiple new revenue streams are expected to ramp over the coming quarters, including optical circuit switching, copackage optics, multi-rail systems in advanced materials for data center thermal and power management. Along with strong revenue growth, we expect continued gross margin expansion and operating leverage, enabling us to grow EPS significantly faster than revenue. We expect fiscal '27 to be another outstanding year for Coherent.

Our data center and communications segment continues to be the primary driver of our growth and accounted for 79% of total company revenue in fiscal Q4. Segment revenue increased 40% for full year fiscal '26. In Q4, our segment revenue growth rate accelerated significantly with revenue increasing 19% sequentially and 59% year-over-year. Demand continues to strengthen, driving another quarter of record bookings and extending our visibility further into the future. Our order coverage through calendar '27 is exceptional. Customer orders now extend into calendar '28, customer LTAs extend through the end of the decade. We continue to see no signs of attenuation in customer demand. Our broad photonic technology portfolio, manufacturing scale and significant U.S. production footprint are increasingly differentiating Coherent with customers and translating into deeper, longer-term partnerships and revenue opportunities.

In our data center business, revenue increased 41% for full year fiscal '26. In Q4, our data center revenue growth rate accelerated significantly, with revenue increasing 24% sequentially and 56% year-over-year. This marked our third consecutive quarter of double-digit sequential growth, and we expect strong sequential growth again in the current quarter. Demand in our data center business remains exceptionally strong and broad-based across multiple customers and product categories. Within transceivers, we expect growth to be driven by both 800 gig and 1.60 -- we expect 800-gig revenue to continue growing year-over-year in calendar '26, while 1.60 transceivers ramp rapidly through the balance of calendar '26 and into calendar '27 as adoption broadens across customers.

Beyond transceivers, OCS revenue increased sequentially in Q4, we expect continued growth over the coming quarters as we expand production capacity. We also expect CPO began contributing to revenue growth in fiscal Q2, consistent with our planned production ramp. Our 6-inch indium phosphide capacity expansion is a key driver of revenue growth and margin expansion. We remain on track to double our internal indium phosphide output capacity year-over-year by the end of the current quarter, 1 quarter ahead of our original plan. This ramp contributed meaningfully to our data center revenue growth in Q4, and we expect it to remain an important growth driver in Q1. Looking further ahead, we remain on track to more than double our internal indium phosphide capacity again to the end of calendar '27. We've secured the substrates and other critical inputs required to support this ramp, -- given the strength of customer demand, we are planning additional capacity beyond 2027.

Our capacity expansion is being driven by the transition to 6-inch indium phosphide production. Our 6-inch lines in Texas and Sweden are producing EMLs, CW lasers and photodiodes with yields that continue to exceed our 3-inch lines. We remain on track to begin 6-inch production in Zurich during the first half of calendar '27, further extending what we believe is a meaningful manufacturing advantage. Our Texas facility has also begun ramping our ultra high-power CW laser for CPO solutions including those covered by our NVIDIA partnership with revenue expected to begin ramping in fiscal Q2.

Turning to OCS. Revenue increased in Q4 as we continue to ramp production. Given strong customer demand across our 320x320 platform and other system sizes, we expect OCS revenue to grow significantly through fiscal '27. We continue to estimate that OCS represents more than $4 billion of addressable market opportunity across data center interconnect, scale out and scale up networks as we expand production across 2 manufacturing locations we expect OCS to become an increasingly meaningful contributor to revenue growth and margin expansion. CPO, NPO and other forms of integrated optics represent a tremendous growth opportunity for Coherent. These technologies enable the transition from copper to optical connectivity represent more than $15 billion of incremental addressable market opportunity over the coming years.

At the ECOC industry event in September, we plan to unveil coherent Photon Link or new platform for integrated optics. Photon Link spans the complete optical signal chain from light generation and beam shaping retransmission, detection and conversion back to an electric signal for the XPU or Switch. Platform supports CPO, NPO and other forms of optical integration. Photon Link leverages the breadth of Coherent's photonic technology portfolio and manufacturing capabilities to enable next-generation data center architectures that use optical links to achieve new levels of bandwidth, performance and energy efficiency. We have deep engagements with multiple customers across both CPO and NPO applications, which we believe offer comparable content opportunities for Coherent -- we expect initial revenue from Photon Link related products to begin in our December quarter. We will share additional details about PhotonLink at our launch event on September 21.

Turning to our communications business. Customer demand remained exceptionally strong in Q4. Communications revenue increased approximately 54% for full year fiscal '26. Q4 revenue increased 11% sequentially, 56% year-over-year, driven by continued strength across data center interconnects, scale across and traditional telecom applications. We expect another quarter of strong sequential growth in Q1. Demand remains broad-based across our portfolio with particular strength in DCI solutions including ZR and ZR plus transceivers as well as pump lasers and complex high-end optical subsystems. Multi-rail is an important new growth opportunity in our communications business addressing scale across AI networking as workloads increasingly span multiple data centers and require greater bandwidth between locations.

We estimate a more than $2 billion addressable market by calendar 2030, continue to expect initial revenue to ramp in the first half of calendar '27. Preparation for the expected revenue ramp, we recently delivered samples to multiple customers. We believe Coherent is well positioned with a broad technology portfolio, differentiated density and power efficiency, strong customer engagement. We expect multirail to become a meaningful contributor to revenue growth and margin expansion over time.

Turning to our Industrial segment. Revenue was roughly flat on a pro forma basis in both fiscal '26 and Q4. In Q4, semiconductor capital equipment and display capital equipment, both grew sequentially and year-over-year, offset by continued weakness across broader industrial markets. We expect growth to resume over the coming quarters, led by semiconductor capital equipment, where bookings continue to strengthen. Over the longer term, we see meaningful growth opportunities across several emerging applications. One example is data center XPU cooling, where our proprietary thermadid material can improve thermal performance and enable higher XPU performance, which can translate into greater AI token generation per XPU. We are engaged with multiple strategic customers and have delivered samples of our ThermoDit cooling solutions. We expect revenue to begin ramping in the second half of calendar '27, representing a meaningful expansion of our long-term market opportunity.

We also see longer-term opportunities in fusion energy, Quantum Technologies and micro LED display capital equipment. Overall, we believe industrial is positioned to return to growth and become an increasingly important source of revenue diversification over time.

In summary, we entered fiscal '27 with exceptional customer demand, record visibility, expanding production capacity and multiple new growth platforms beginning to ramp. We believe Coherent is uniquely positioned to capitalize on the multiyear expansion AI data center infrastructure, supported by the breadth of our photonic technology portfolio, our manufacturing scale and our significant U.S. production footprint. I want to thank the entire Coherent team for their outstanding execution and innovation throughout fiscal '26.

I'll now turn the call over to Sherri.

Thank you, Jim. Fiscal 2026 was an exceptional year for Coherent. We delivered record revenue of $7.12 billion, expanded gross margin by over 150 basis points, increased operating margin by nearly 300 basis points and grew non-GAAP earnings per share by 59%, significantly faster than revenue growth. We also strengthened our balance sheet, reducing debt leverage to 0.7x from 2x at the end of FY '25 while continuing to invest in capacity as well as our product road map to support the growing AI data center and communications demand.

Let me now provide a summary of our results. Fourth quarter revenue was a record $2.05 billion, up 13% sequentially and 34% year-over-year, driven by growth in AI data center and communications demand. On a pro forma basis, revenue increased 14% sequentially and 42% year-over-year excluding revenue from the Aerospace and Defense business and the Munich, Germany product division, which were sold in Q1 and Q3, respectively. Full year 2026 revenue was $7.12 billion up 23% from 2025 and up 28% on a pro forma basis. AI data center and communication strength was the key driver of our full year 2026 revenue growth. Fiscal 2026 was the first year in Coherent's history to exceed $7 billion in revenue.

Our Q4 non-GAAP gross margin was 40.2% a 66 basis point improvement compared to the prior quarter and a 215 basis point improvement compared to the year ago quarter. Our full year 2026 non-GAAP gross margin was 39.4% up 152 basis points from 2025. Gross margin performance continued to improve both sequentially and year-over-year as a result of the initiatives we have been executing throughout fiscal 2026. We saw benefits from our gross margin expansion strategy, primarily within data center and communications segment. These improvements were driven by lower product input costs, improved manufacturing yields and efficiencies including continued progress on our 6-inch indium phosphide platform as well as benefits from our pricing optimization efforts.

We expect gross margin to continue to improve over the coming quarters as pricing optimization and cost structure improvements, such as increasing capacity from our 6-inch indium phosphide platform continued to take effect. Fourth quarter non-GAAP operating expense was $377 million compared to $348 million in the prior quarter and $307 million in the year ago quarter. Non-GAAP operating expense as a percentage of revenue decreased 18.4% in Q4 from 19.3% in Q3 and 20.1% in the year ago quarter. As we continue to focus on driving better leverage and operating efficiencies. Full year 2026 non-GAAP operating expense increased $1.35 billion from $1.17 billion in FY '25 primarily driven by increased investments in our product portfolio. As a percent of revenue, operating expenses decreased 19% in 2026 from 20.1% in 2025.

R&D expense as a percentage of revenue increased to 10.2% in Q4 from 9.9% in the prior quarter and 9.8% in the year ago quarter. For the full year, R&D expense as a percentage of revenue increased to 9.7% compared to 9.5% in FY '25. The sequential and year-over-year increases were driven primarily by investments within the data center and communications segment product portfolio. R&D investments remain focused in areas where we see the strongest long-term growth opportunities including transceivers, CPO, OCS systems and thermal management solutions. We continue to prioritize investments that address customer demand while generating attractive returns and supporting future growth.

SG&A expense declined to 8.2% of revenue in Q4 compared to 9.4% in the prior quarter and 10.3% in the year ago quarter. For the full year, SG&A expense decreased 9.2% of revenue from 10.5% in FY '25, reflecting continued progress in driving efficiencies and generating greater operating leverage. During fiscal 2026, we made significant progress simplifying our operating model and driving greater operational efficiency. The expansion of our regional shared services structure has reduced costs improved process consistency and improved leverage across our global operations. The benefits realized during the year exceeded our original expectations, and we expect these benefits to continue to increase throughout fiscal year 2027.

Our fourth quarter non-GAAP operating margin increased to 21.8% compared to 20.3% in the prior quarter and 18% in the year-ago quarter. Our full year 2026 non-GAAP operating margin increased to 20.5% from 17.8% in FY '25. The increases for both Q4 and FY '26 were driven by strong revenue growth, continued gross margin expansion and improved operating leverage. Fourth quarter non-GAAP earnings per diluted share was $1.74, up 23% from the third quarter and up 74% from the year ago quarter. FY '26 non-GAAP earnings per share was $5.61 up 59% from FY '25. Earnings growth continued to outpace revenue growth in both the quarter and the full year, driven by strong revenue performance, gross margin expansion and improved operating leverage.

Our FY '26 year-end cash balance of $2.59 billion compares to $3.05 billion at the end of the prior quarter and $1.63 billion at the end of FY '25. Consistent with our capital allocation priorities, we continued investing in opportunities that we believe will drive long-term growth and profitability. These investments were primarily focused on expanding data center and communications capacity and advancing our product development road maps. During FY '26, we made $513 million in debt payments exiting the year with a debt leverage ratio of 0.7x compared to 2x at the end of FY '25. Our capital expenditures increased $556 million, up from $290 million last quarter and $131 million in the year ago period. This acceleration directly supports future growth across our data center and communications business.

These strategic investments are expected to yield excellent financial returns. For example, the investments we are making in the data center business have a roughly 18-month payback period. Our conviction in these high-return investments is backed by excellent visibility from our customers with a robust pipeline of strong purchase orders and long-term agreements. This CapEx is primarily directed towards advanced tooling and state-of-the-art manufacturing equipment that accelerates our volume manufacturing capabilities and optimizes production yields. Furthermore, as a vertically integrated manufacturer, this capacity offers significant fungibility as our infrastructure can be dynamically repurposed, support multiple product lines.

Given the exceptional demand profile and clear ROI visibility, we expect capital expenditures to increase sequentially again in Q1. These results reflect strong customer demand, disciplined operational execution, continued progress on our gross margin expansion initiatives and investments in the products and technologies that we believe will drive future growth.

I will now turn to our guidance for the first quarter of fiscal 2027. We expect revenue to be between $2.2 billion and $2.4 billion. We expect non-GAAP gross margin to be between 39.5% and 41.5%. We expect total operating expenses of between $400 million and $420 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 $1.85 and $2.05 on a non-GAAP basis. We are entering fiscal 2027 with strong momentum reported by record backlog, excellent visibility into customer demand and a significantly stronger financial position. We remain focused on expanding capacity, improving profitability and allocating capital in a disciplined manner as we support future growth and drive long-term shareholder value.

That concludes my formal comments. Operator, please open the call for Q&A.

[Operator Instructions] Our first question is from Joe Cardoso with JPMorgan.

Maybe for my first, it sounds like you continue to make good progress on the 6-inch ramp and even hinting at further expansion beyond 2027. Can you provide us an update on the ramp? And specifically, how we should be thinking about how it translates into revenue and gross margins? And then I have a follow-up.

Yes. Thanks, Joe, for the question. Yes, I would say, I'm quite pleased with the progress on our 6 Ingenia phosphide ramp. I think the team is doing just an outstanding job of ramping that production -- as I mentioned in the prepared remarks, we're on track to double the output capacity of indium phosphide production this quarter. That's 1 quarter earlier than our original plan. And then by the end of next calendar year, we expect to more than double it again. So we're on a pretty fast pace of expansion and executing well to that and actually a little ahead of our plans.

So really pleased with that. And maybe a helpful data point just to kind of measure our progress along the way is if I look at our June quarter, and I look at, well, how many lasers -- indium phosphide lasers did we produce in our June quarter on a year-over-year basis. We produced about 80% more indium phosphide lasers in our June quarter than we did the prior year. So 80% year-over-year growth. And those are the lasers that go specifically into our 800 gig transceivers and our 1.60 transceivers. And so that sort of 80% growth year-over-year, I see that as a really good measure of progress towards continuing to expand our indium phosphide capacity. And then I think you asked, how does that relate to revenue that 80% growth in lasers in the June quarter, we used those basically go into transceiver shipments in the current quarter. And so we would expect our data center growth, for instance, this quarter, on a year-over-year basis to exceed 80% trade. We've certainly got the lasers this quarter to make that happen.

And so that's kind of how you can think about how it impacts the data center transceiver revenue growth. And just a couple of other comments on the progress. One of the things I continue to be pleased by is our yields. Our yields are -- continue to be better than our 3-inch production, so yields of 6-inch better than 3 inch. And that's across all 3 devices that we have in production that CW, EML and photodiodes. And so all 3 showing better yields in 3-inch. And another milestone that I mentioned in prepared remarks, we've now we're starting production and ramping production of our ultra high-power CW lasers that go into CPO applications. We'll see revenue from those. We expect in our December quarter. It's our Texas and Sweden plants that are ramping right now. So we're ramping in 2 locations, 6-inch, and we'll bring a third 6-inch location online we expect in the first half of calendar '27. So yes, I would say the progress quite pleased with it. So thanks. And then it sounded like, Joe, you had a follow-up question.

Yes, the -- and the second 1 -- and very useful color there. Then the second 1 is -- and maybe you started touching on this, but the CPO revenue starting in the December quarter -- just curious, can you shed any light or additional color around the opportunity both near and long term. Just particularly given the recent noise surrounding it from a market perspective around concerns around delays and maybe the forward pull of NPO. Just curious in terms of if there's any other color you can share there, just given kind of that really surrounding it.

Yes, sure. Thanks, Joe. Yes. First of all, we've seen absolutely no pushout of CPO demand. In fact, it's been the opposite. We've seen demand increase and demand request from customers demand getting pulled in. And so we've only seen the opposite. And then that's on CPO specifically. And then the other thing that we've seen, especially over the last 3 to 6 months is a significant ramp-up in the engagement with customers on not just CPO, but now NPO. So I would say we have multiple very important engagements across many customers around either CPO or NPO. And so the -- yes, the intensity has really gone up over the last 3 to 6 months. And so we're really pleased to see that. And just as a reminder, when we talk about integrated optics, whether it's CPO or NPO or any other form of it, we have a very wide portfolio that we can bring to our customers it's not just 1 ingredient but a really wide range of products. It's -- of course, it's the laser. We have very strong laser capabilities. But the laser, the laser -- the external laser module the optical components that go into that external laser module, like isolators.

We manufacture polarization maintaining fiber. This is the type of fiber that you would use to connect the laser module to the device or the device back to the front panel. We've got -- we can do the full assembly of the entire fiber attached kit, we do the SIFO PICCs, et cetera. So we're able to bring to our customers a full range of integrated optics capability. And we see NPO or CPO to us, it's just a different form factor. The amount of content that we would have in an NPO application versus a CPO is very comparable, very similar. And so we're just we're driving whatever the customer prefers in terms of their type of application, CPO or NPO. We're there to support them. And then the other thing that we've we're going to be launching in September that I mentioned is a new platform -- technology platform called Photon link.

And what we were seeing with customers around CPO and MPO is customers not wanting to just buy a point individual ingredients like a laser or in isolated, but really wanting help bringing the full solution. And so what Photon Link is it our complete integrated platform for basically being the one-stop shop for integrated optics platform. And so it spans all the way from light generation to beam shaping and transmission to detection and conversion back to the electrical signal. So we'll talk more about it at our product launch event in September, but we think that's based on the initial customer reaction, great solution for customers that want more of a complete solution. So we're pretty excited about that as well.

Our next question is from Simon Leopold with Raymond James.

Great. The first thing I wanted to ask you about, and I know that it's not a done deal, but there's been press coverage on potential import restrictions for optical transceivers. And I think I have 2 parts to this question. The first aspect is, what does it mean to Coherent specifically? And part of this would -- I think it applies to jobs at creating U.S. jobs. So could you in practice move transceiver manufacturing? Would you or could you move that to the U.S.? And then I've got a follow-up.

Yes. Thanks, Simon. So that reported speculative at this point. But certainly, we would benefit from something like that. As the main -- the largest U.S. supplier of transceivers, something like that would certainly be beneficial although we always want to compete for our customers' business based on our technology and based on our manufacturing. And we think we've got the broadest, deepest photonic technology in the industry and the most extensive manufacturing footprint. And 1 of the things that we're really proud about on our manufacturing is, of course, we're a global manufacturer with locations all over the world, which gives us resiliency and of course, we're also vertically integrated.

We built a number of the very important components ourselves. But Simon, as you mentioned, we have an outstanding footprint in the U.S. We have over 20 production facilities in the U.S. And that, I think, is really a strategic advantage for us. Just 1 example is that Sherman, Texas facility. We're making very critical components in Sherman, Texas for not just transceivers, but for CPO and NPO applications. And there's other facilities throughout the U.S. where we make other critical components like fiber optic cable, like growing the garnet that goes in the isolators for transceivers -- so to the extent that we need to -- we're already investing in U.S. manufacturing, but to the extent we need to increase that U.S. manufacturing we would certainly be open to doing that. We've got -- we were founded over 50 years ago as a U.S. manufacturing company. And so we have a great footprint, and we could certainly build off of that.

And then just the follow-up is I think it was -- you gave us a target for 4Q '27, June '27 of revenue exceeding $3 billion. I think that's well above current consensus I'd like to get a better sense then of what you're thinking about your gross margin. I know in the past, you've talked about a target of 42.5%. I'm wondering if you could update us given sort of the shifts in growth in the mix, how you're thinking about the gross margin trajectory?

Yes. I'll pass that 1 off to SherrI to comment on gross margin. But the quick version is that we've made, I think, great progress over the past quarters, and we're certainly super focused on continuing to make progress moving forward. But SherrI, do you want to add color to that?

Sure, sure, Jim. Thanks, Simon. So first of all, I'd like to say I'm extremely pleased with the progress we've made in improving gross margin. We increased gross margin 66 basis points sequentially and 250 basis points year-over-year. In fact, in 8 out of the past 9 quarters, we have increased our gross margin. So that's not just a trend. That's showing that we are actively driving gross margin improvement. And the accumulation of an improvement that have driven in those 8 quarters is over 660 basis points of improvement. So clearly, an area that we're actively driving and focused on.

Now the target that we gave at our Investor Day, Simon, it was greater than 42%. And at the midpoint of our Q1 guide, which is at 40.5% -- that is -- certainly, we're still early. We have a little bit of ways to go. I do view that we are early in our strategy for gross margin expansion. But we are extremely focused on getting to greater than 42%.

And let me tell you why I'm confident. The bulk of the 6-inch indium phosphide product ramp is still ahead of us. That's still to come. New product ramps for 1.60 OCS system, CPO, multi-rail systems, thermal management solutions, all of those new products, those ramps are all still to come. They're all ahead of us. And of course, we will continue to drive cost reductions, pricing optimization improvements, the bulk of those improvements driven to date are in these areas, and we have clear plans to drive what I view as a very significant opportunity ahead. So once we get to our target of greater than 42%, we will no doubt raise the target.

Our next question is from George Notter with Wolfe Research.

I guess I was just curious about where you are in terms of your transceiver mix right now. Obviously, there's an initiative to in-source as much of those laser datacom chips as you can. I'm just curious, like how much of your mix is now in-sourced in terms of the laser datacom chip. And then also, I know there was a plan to kind of exceed your own internal needs and supply EMLs externally. I'm just curious like what the road map looks like for selling EMLs commercially in the market.

Yes. Thanks, George. I think on the last point, given the demand that we see in our data center business with transceivers, I don't see any time in the near future where we would be selling indium phosphide lasers externally. Our data center transceiver demand is absorbing every bit of capacity that we have and then some. So I don't see any near-term ability to do that. Maybe further out. But today, we use a mix of internal -- internally produced and externally sourced. I still believe that over the long term, we'll have some portion of our datacom transceivers that will be supported by external sources. I think that's -- there's a number of strategic reasons why that's good for the transceiver business.

But certainly, I think as we expand our internal production, which is growing very quickly, I talked about the 80% year-over-year growth that we saw in laser production in our June quarter, and that will grow from here given the ramp in indium phosphide. I would expect over time for a greater percentage of our transceivers to be serviced with internal indium phosphide.

Great. And then just as a quick follow-on. I'm curious about where you are on VCSELs. It seems like there's a lot of new enthusiasm around VCSELs in scale-up applications Obviously, you guys are working on a 200-gig VCSEL. I'm just curious about where that is and how you see that opportunity for Coherent.

Yes. I think that's a great tool in our chest, right, as in our tool chest is the 200-gig VCSEL. We continue to make good progress on that. I do think that the 200 gig VCSEL will see adoption in integrated optics applications in like NPO type of applications. And so we are actively working with customers on VCSEL-related NPO or integrated optics application. So that's certainly an important tool. And yes, we think that will be deployed.

Our next question is from Ryan Kutz with Needham & Company.

Want to ask about your capacity constraints here. I wonder if you could look at kind of your input capacity constraints as well as your own internal production capacity constraints. And how should investors think about those? And where you're investing now, but where are your sharpest pain points now to grow the business over the next 12 months?

Yes. Thanks, Ryan. I wouldn't say that indium phosphide capacity continues to be our primary constraint. That's why we are so focused on ramping that 6-inch production that we're not constrained for instance, if you look at transceivers, we're not constrained in the assembly and test capacity right now. We have that capacity available. We're really just constrained by the ramp of the indium phosphide production. And so as we continue to ramp that indium phosphide output, we expect that to continue to help drive revenue growth for our transceivers. So it's really as simple as that. That's the primary constraint.

Helpful. And maybe as you think about the telecom side of the world and multi-rail pump lasers and all that's involved there. How do you think about that monetization opportunity in terms of various parts or systems you might sell into that market?

Yes. Thanks, Ryan. In that market, we actually sell at multiple different levels. So we do sell components into that market. We sell what I would call subsystems. So these would be amplifiers, line cards and in some cases, we'll sell kind of full systems. And so we sell at multiple levels. And I would say the growth there is incredibly strong. In communications, this kind of scale across DCI falls within our Communications business. We saw in our June quarter, a 56% year-over-year growth in that segment. I think that segment moving forward, we're going to continue to see faster growth just as we've seen in the sort of data center applications.

And that's across just multiple different products, whether it's our RZR transceivers, whether it's some of the components like the pump lasers or the products that go into the pump lasers. And then as I mentioned in the prepared remarks, soon we'll start to see revenue from multirail systems. So our technology for multirail systems is in the hands of customers now. We've sampled that and we expect revenue to start to flow from multi-rail in the first half of calendar '27. So yes, there's just a wide range of products there. And I would say the demand just continues to go up for anything DCI or scale across related.

Our next question is from Blayne Curtis with Jefferies.

I had 2 questions. First, maybe you can just talk about the OCS demand. I mean you mentioned the $4 billion TAM. I think you're starting to ship in smaller volumes. Can you just talk about where you're seeing the demand, how broad that is? And I think there's expanding applications as well in track and such. Can you just comment on that?

Yes, definitely, Blayne. We're certainly seeing an expanding range of applications. So originally, when we started working on OCS, we were thinking about it mostly in the context of scale out. But now clearly, we think we'll see adoption and scale across and then a clear path to scale up as well. So we have active customer engagements in scale-up applications. And so that's really what led us to double the size of our market outlook at OFC earlier this year. So we doubled it from $2 billion to over $4 billion. And we may have even been conservative on that $4 billion number in terms of the addressable market over time. I think that was for a 2030 time frame.

And so yes, we've only seen the applications widen and the demand looks stronger than what we had thought 6 or 12 months ago. So it looks very good. And then in terms of our progress, yes, I'm pleased with our progress. The demand is clearly there. And so we're really just focused on ramping manufacturing capacity as fast as we can. We saw revenue grow in our June quarter. And as I look forward over the coming quarters, we expect to continue to expand production capacity and then drive faster revenue growth as well. So we believe it becomes a very meaningful product line over time for us.

And then I want to go back to MPO. If you could just talk about is there a way to kind of think about how many projects you're working on? And then I just want to drill down on -- there's a lot of questions on -- you said the content would be dissimilar to CPO -- but then I think there's some talk about integrated and then you answered your question talking about VCSELs. So can you just walk through that content? Where are you seeing the demand? Is it kind of even on the projects you're working on now and it might change in the future. Can you just walk through that?

Sure. And what I would say is we -- almost every customer that we work with, certainly large strategic customers. We have either a CPO or an NPO or in some cases, a CPO and MPO project ongoing. So -- and that is really that sort of intensity and engagement around CPO and/or MPO has really gone up over the last 3 to 6 months. And so I would say those engagements are very active -- and just as a reminder, as I said earlier, we're not just bringing 1 ingredient to like a laser to the solution. We're bringing a full platform solution, the laser, the interconnect, the different optical components, et cetera. So I would say, engagements across all the major customers.

And then on the second part of your question on the dollars of content, yes, we see comparable levels of content for both CPO and NPO -- to us, it's just a different attach point, whether it's connecting directly near the piece of silicon or whether it's on the motherboard, CPO or NPO, the level of content that we would see, we view as very similar. And maybe that's because we're providing a pretty broad range of solutions in both of those types of applications. But we see the level of content similar. And I would say all of this, I would point out is incremental addressable market for us, but also for the optics industry in general. I mean most of these projects are focused on scale up applications where we're going to be converting more of those copper electrical lines to optical over the coming years.

So it's great addressable market expansion for us, and we expect it to be a major growth area for us.

Our next question is from Karl Ackerman with BNP Paribas.

If I may. First question, Jim, you talked about quarterly revenue exceeding $3 billion by the end of fiscal '27, which is quite robust. Could you unpack that a bit and describe how much of that has an uplift from perhaps 1.6 terabit transceivers? You talked about OCS demand. You talked about multi-rail. And perhaps how much of this is coming from any backlog or pricing as well? I you just kind of bucketize those would be very helpful. And I have a follow-up.

Yes. Thanks, Karl. So first of all, that's all -- the primary driver there is data center and communications. We expect some improvement in industrial, but it's really the bulk of that is driven by data center and communications, given that that's 80% of our revenue. And then within that, I would say, certainly transceivers is a big driver of that. We've got 800 gig is still growing very robustly on a year-over-year basis. And then 1.6 is ramping incredibly fast. In fact, we've seen the 1.6 ramp only be pull in, be stronger demand increase. And so that ramp is even faster than what we thought 3 months ago.

So 800 gig, 1.6 transceiver is certainly a key part of that. But beyond that, OCS ramping through the course of this fiscal year, CPO now starting to really kick in, in the December, our December quarter and ramping in the following quarters. We talked about multi-rail as well. And then yes, there are pricing improvements that we're driving either kind of normal pricing improvements or pricing improvements that are part of our LTAs, long-term agreements with our customers that are kicking in as well. So it's really a number of factors. Across data center and communications we're -- I'm trying to think if there's any product line we're not supply constrained. The demand is robust across almost every single product across data center and comms. And it's really just a matter of as fast we can sell as fast as we can ramp production.

And so our -- we've had just an extreme focus on ramping production as quickly as possible.

And then you also spoke about how customer orders extend into 2028 and LTAs to the end of the decade. When you discuss LTAs extending into 2028, is that volume committed in 2018 at a higher volume commitment than 2 -- perhaps if you could provide some guardrails with respect to the volume commitments that you're seeing today and how that's improved over the last 90 days.

Yes. Thanks, Karl. So first of all, when I'm talking about the near term, we're talking about purchase orders or backlog. And so in terms of backlog and bookings, if we take like our June quarter, we saw I would call it just an extraordinary level of bookings, record bookings again in our June quarter. And so our backlog now extends out fiscal '27 is basically completely booked out were booked really through the end of calendar '27. And what we're seeing now is customers now looking into calendar '28 -- so those are purchase orders for specific products, et cetera. So that's really good because that's very high-quality near-term demand visibility -- and then at the same time, in parallel, a lot of customers putting in place long-term agreements with us, where long-term agreements for supply over a multiyear period, many of those periods extending out through the end of the decade.

And yes, generally, those agreements have increasing supply each year because what we're doing is we're expanding capacity to bring on or to support their demand requirements moving forward. So expanding capacity, expanding demand for them. And then they have pricing related commitments. And then they also have sort of minimum demand guarantees from our customers or sometimes you refer to those as take-or-pay agreements. So those LTAs are also really helpful. Those give us great visibility just beyond '28, those give us really good visibility into the key products we need to be building and the capacity we need to be expanding through the rest of the decade.

Our next question is from Meta Marshall with Morgan Stanley.

Great. Maybe a question. Sherri, I know you alluded to 6-inch yields kind of being a big portion of the gross margin increase. But just as we think about into the next year, how much of that improvement is really the yield improvement versus maybe some of the product mix or pricing?

And then second question, just Jim, a question for you. I know it was kind of asked about the potential restrictions being put into place. But just have you seen kind of a change in customer urgency to get product? I know you're kind of sold out. But just in terms of a change in customer communication since over the past couple of weeks.

Thanks, Meta, for your question. So in terms of 6 end yields, what I was mentioning, it's 6-inch cost structure. Because if you remember, we've talked about the fact that 6-inch wafers are we at times the amount of output from that wafer versus 3-inch, right, 4x, but it's at half the cost. So it's that cost structure that's beneficial to us. And when I talk about what's ahead of us that will help drive gross margin improvement. It's really that ramp of 6-inch indium phosphide products that will be beneficial to us because of the cost structure of 6-inch. I think, Jim, you want to say.

Yes. And I'll just reiterate what I said earlier that when we look at yields for 6-inch, the yields for 6-inch are actually higher than our 3-inch production. And so again, it's more the benefit of the 6 inches, the cost structure cost structure benefit.

And then on the second part of your question around customer sort of customer reaction to the recent writers article. I would say, yes, we have seen -- there's a number of customers that have reached out to us and have engaged in a discussion around manufacturing and exploring different options around that. And so yes, I would say that, that has spurred some new customer demand and supply discussions. And so those discussions are ongoing.

Our next question is from Vivek Arya from Bank of America.

For the first one, Jim, CPO for scale up, what is the time line for Coherent? Is it second half of '27? Is it '28 -- and then how broad is it? And what's the pushback from customers who don't want to adopt it early.

Thanks, Vivek. Yes, we've -- as I think we've said this in the past, we continue to expect revenue from CPO for scale-up applications to start to flow in the second half of calendar '27. And yes, that's been consistent for quite a while for us. And so the CPO that we're ramping right now will first go into scale out applications and then that will continue to grow and then scale up will kick in the second half of 2017.

And then customers, I would say with -- in the scale-up domain with customers, if we're not having a CPO discussion, they're at least considering or engaged with us in NPO. So I think almost every customer that we have, certainly the big strategic customers, are engaged with us in a discussion of CPO or NPO. And there's just a differing views by our customers depending on their architecture, whether they would prefer an NPO sort of form factor to start with or CPO. And some customers that were engaged with on NPO, I expect to eventually transfer to CPO further down the line and some are choosing to go directly to CPO. It really depends on the particular customer and comes down to their specific architecture.

Got it. And for my follow-up, maybe 1 more on gross margins. in the -- this is probably more nitpicking, but in the first half of the year, we saw incremental gross margins that were more in the, I think, mid-40s or better. I think what you guided to for September is sort of in the low 40s. I'm just curious if there's anything specific for September? And just broadly, how should we think about incremental gross margin fall through for fiscal '27 given that you've kind of given us the bookends for the year?

Yes. So when you think about -- back you think about gross margin improvement going forward, it's really driving the initiatives that I talked about, right, continued cost reductions, pricing optimization. We'll continue to focus on that. The timing of those benefits, it's going to differ because depends on the initiatives and when they kick in. As we ramp throughout the rest of this year, as Jim mentioned, that $3 billion revenue number by the end of FY '27, and you talked about the revenue opportunities there. He mentioned new products, right? You mentioned 1.60 OCS, CPO, all these things kicking in, which are going to be beneficial to our gross margin. And so that will help drive improvements in gross margin as we move ahead.

But when you talk about flow through on gross margin and what you can think about the other thing that I'd like to make sure that I call your attention to is that if you look at our operating expenses, in the Q1 guide that we provided at the midpoint of that guide, we're already below our operating -- our target model rather. So we gave a target model for OpEx just last year, in fact, of 18% for OpEx. And so the midpoint of our Q1 guide, we're already below that. And we're going to continue to drive operating efficiency. We've made tremendous progress on the SG&A front, but there's more operating leverage that we'll get out of R&D as well. So when you think about total flow-through keep that in mind as well, I just want to point that out because I expect that there's significant opportunity to drive even greater operating leverage for the reasons that I just stated.

Our next question is from Michael Genovese with Rosenblatt Securities.

Jim, it's really good to see the expectation for CPO laser revenues in the fiscal second quarter because that would imply that you're either qualified or have line of sight to qualification and would kind of go against some of the funds, I think that's not coming from Wall Street, but more coming from substack saying you guys are having trouble with that laser. So just any more color on like the confidence that you'll be ready for the customer to actually recognize revenue.

Yes. I'm really pleased with the progress. I think the team has done a great job. I actually think our design on that particular laser outstanding and has some significant technical advantages and production advantages. And yes, we've already started production wafers for those shipments in our December quarter. and that customer continues to tell us to please ship more as fast as possible. So yes, I think we feel really good about.

And -- but just as a reminder, it's not just lasers, right? We supply lasers, external laser modules, the different optical connectors, the fiber optic cable, the fiber attached unit, there's a lot of content that we supply just beyond just the laser. But certainly, laser is a key ingredient.

Great. Sounds good. Last question. You've mentioned already repeatedly about the LTAs, which gives you revenue visibility. My question is, does that also give you pricing visibility and specifically, how far into the future do you think that prices of lasers will keep rising when you sort of lay your LTAs and the amount of capacity that's been added and the potential for increasing competition may be coming from China. But your confidence sort of how far out you think before we have to worry about laser prices not going up anymore.

Yes. It's a good question, Michael. So when we do LTAs, they almost always have not just a volume commitment, but agreed upon pricing as well. And so the pricing is set for, I think, all or almost all of our LTAs out through the length of the LTA -- some of those are 3 years, many of those go out through the rest of the decade. And so that gives us great visibility on not just the volume that we need to go drive about the pricing that we can expect as well. So it's good visibility from both those aspects.

This concludes our Q&A session. I would like to turn the floor back over to Jim Anderson for closing comments.

Yes. Thanks, operator, and thanks again for joining us on the call today. So we're certainly entering our fiscal '27 with great momentum, exceptional customer demand and really an accelerating growth prospect, given the capacity and the ramp in new growth platforms ahead of us. I think with our photonic technology and manufacturing scale, I think the company is just really well positioned moving forward. So I just want to say thanks again to our employees for their great work in fiscal '26 and to all of our customers, partners and shareholders for their support. So thank you, and we look forward to updating you again in another quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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 CEO; and Sherri Luther, Coherent 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, while 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 Datacenter 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 constraint 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 1 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 in the yields for each of the 3 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 2 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 overtime 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 in 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 NPO 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 bans 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. We 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 Datacenter & 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 Datacenter & Communications business in 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 4 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.

[Operator Instructions] We take the first question from the line of Samik Chatterjee from JPMorgan.

And 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 accurate 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 activation as well? And I have a follow-up after that.

Yes. Thanks, Samik, for the question. Yes, if you look at the midpoint of the June quarter guide, certainly, we expect an acceleration in growth versus prior quarter end, if you look at the year-over-year growth rate as well. I -- we really believe the current June quarter kind of represents a new inflection point in our revenue growth rate moving forward. So faster growth this quarter. And as we look forward into fiscal '27, which starts in July. We expect our fiscal '27 growth rate to be above fiscal '26.

And on the demand side of the equation, I would say that just -- it looks exceptional right now, both in terms of the degree of demand but also our visibility on demand. If we look at just bookings in the prior quarter, bookings in the prior quarter were up substantially from the previous quarter, record bookings, incredible amount of backlog, and we've now got orders that extend out into calendar '28.

And so we have just tremendous demand ahead of us, but also great visibility on that demand. And that demand is coming from the places you'd expect, certainly, data center and growth, both transceivers, but some of the new growth vectors we're bringing on as well as communications.

And then probably more importantly, on the supply side of the equation, that's probably really more than our focus. Demand looks great. What we're doing is ramping supply very, very quickly. and both this quarter, but moving forward, we're bringing on substantially more capacity over the coming quarters. And probably the best single example of this is just the indium phosphide capacity that's coming online. The indium phosphide has kind of been the key constraint for us for a number of quarters. It's a constraint for the industry. But our target this year is to double our indium phosphide capacity. And the great thing is we're -- it looks like based on the current execution, we'll achieve that goal next quarter, which is 1 quarter earlier than we thought.

And when I look into next calendar year, we expect to more than double indium phosphide capacity again. So that's a quadrupling of capacity over a 2-year period. And so that looks really good. And so I think that really unlocks an acceleration in our revenue growth moving forward. And that's kind of on all the existing business. Then you layer on top of that some of the new growth areas, new growth vectors that are coming online. OCS is ramping. We expect that to contribute to growth this quarter and grow sequentially. CPO revenue kicks in, in the second half of this year. That's -- we view that as all incremental, our multi-rail systems will start contributing revenue in the first half of next calendar year. And then we think thermal solutions will start to generate revenue in the second half of calendar '27.

So we sort of have these multiple growth vectors that are layering on top of the existing business growth. So we feel really good about the growth and the sort of accelerated growth ahead of us.

Got it. Got it. And then maybe just to follow up on a similar -- on similar lines. You mentioned the acceleration on the NIM phosphide capacity, given that you're tracking a bit ahead relative to your target for 2x in the first year. How should we think about potentially upside or accelerating the target for 2x sort of on 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. Actually, on the second part of your question on gross margin, we already started to see the impact of 6 Ingenium phosphide capacity, which has a much better cost structure. So 6-inch versus 3 inches, more than 4x as many devices at less than half the cost. We already started to see that contribute to gross margin expansion in the -- in our fiscal Q3. As Sherri said, I think in our prepared remarks, our guide in the current June quarter has gross margin going up sequentially.

Again, part of that, what's driving the gross margin expansion is the 6-inch in phosphide capacity, which just gives us a much, much better cost structure. But overall, I'm really pleased with the execution on our 6-inch indium phosphide ramp. There's kind of 2 factors underneath there. There's just the raw capacity ramp, but also very important is the yields. And so the team has executed ahead of plan on the raw capacity ramp, but also we're seeing very healthy yields.

We're in production on 3 different types of devices, EML, CWs and PDs. And all 3 of those devices have yields on 6-inch that are higher than our 3-inch production yields. And Texas was the first facility. We started ramping 6-inch, super pleased with the progress there because we saw such good yields out of the gate from Texas, which is a world's leading indium posted production facility. We started production in Sweden. And now we announced a third site that we're going to start production on 6-inch indium phosphide to that Zurich and we'll start to see production from that third site at the beginning of calendar '27. So this ramp of indium phosphide 6 inches is both. It unlocks a lot of additional growth for us, but it's also definitely contributed to gross margin as it becomes a bigger portion of our indium phosphide overall 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. I think, Simon, on both of those new growth areas, we feel really good about the growth that's ahead of us. we recently, just over the last couple of months at OFC, we doubled our forecast and the market opportunity there. The revenue growth rate, the sequential growth that we're guiding in the current quarter Part of that growth, that sequential growth is OCS systems growth. We feel great about the differentiation of our technology. It's a very differentiated technology that provides both higher reliability, but much, much better power efficiency.

And so we feel really good about the long-term -- both the short and the long-term growth prospects on that product line. And we've really been focused on just ramping capacity as fast as possible.

And as I mentioned in the prepared remarks, we did kind of have a breakthrough over the last couple of months on removing a bottleneck in the production capacity that's allowed us to ramp production at a much faster rate we're ramping in 2 sites in parallel. So we feel good about the OCS, both the long-term opportunity, but the ramp in the near term as well.

And then look, CPO is -- I think it's a transformational growth opportunity for the company. We see that market size as over $15 billion, and that's probably a conservative estimate over the coming years. We've -- CPO revenue for us will start in second half of this calendar year, and that will be initially scale-out CPO revenue. And then we expect to see the beginning of scale up CPO revenue in the second half of calendar '27, and we're engaged with multiple customers. Obviously, we have a public announcement that we did with NVIDIA on our partnership with NVIDIA. That's all around CPO. That's a multibillion-dollar agreement. That extends out through the end of the decade.

And importantly, is it's multiple different CPO solutions. So if you look at what can we provide in the CPO solution, it's not just the laser, right? We're certainly providing the high-power CW laser. But beyond that, we're providing the external laser source module. We can provide the fiber attach unit, which includes micro lens arrays, -- it includes polarization maintaining fiber. So we have our own fiber optics, fiber that will provide in those solutions within that external laser source, we provide all of the ingredients, not just the laser but the isolators, the thermoelectric coolers.

So there's a tremendous amount of content that we expect to provide in CPO. And I see this as a major new growth area for the company. And I think we're very, very well positioned in CPO. And like I said, first revenue will start in sort of later this year, this calendar year.

Great. And just as a follow-up. I appreciate you don't want to get the speed micromanaging each product segment. But I'd like to see if you could confirm. If the 1.6 terabit transceiver revenue exceeded, let's say, $100 million in the March quarter? And if not, when can we get to that milestone?

Yes, Simon, we don't break out individual data rate revenue for our transceiver business. But we expect 800-gig 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 1.6T -- the 1.6T ramp. And we expect 1.6T 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 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 exit 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. So the way -- a few things I'll just highlight from a gross margin perspective is that if you go back about to the end of Q4 of 2025, we've increased our gross margin sequentially in 7 out of the past 8 quarters. And if you include the 57 basis points improvement from our -- just in our recent Q3 quarter, that's an increase of about 530 basis points. And then if you tack on to the midpoint of our guide for Q4, that takes you to 570 basis points improvement. So I think that's pretty good progress. I mean we're not done, but I am pleased with the progress that we've made there.

And the target that we put out at our Investor Day last year was greater than 42%, and we are super, super focused on making sure that we get to that target. And when you look at the drivers of our gross margin expansion strategy that we've been executing on a quarter-over-quarter-over-quarter, it's cost reductions, it's yield improvement and it's pricing optimization.

And when you look at our Q3 quarter, each of those areas increased quite significantly from the prior quarter in each of those categories. And so we talked a little bit about some of those in my prepared remarks. But from a cost reduction perspective, we had improvements from 6-inch indium phosphide. We've talked about the fact that it's half the cost, right, when you go from 3-inch to 6-inch. So we're already seeing the benefit of expense. We also talked about yield improvements in that we saw in 6-inch.

So we're continuing to see yield improvement as we continue to ramp. And we talked about how we've got 2 sites going in parallel. We've got another site coming up. We -- I expect to continue to see improvements on 6-inch as we bring the other side up and as we continue to ramp 6-inch, that's going to continue to add benefit to our gross margin.

And the other areas of cost reductions that we've seen, actually, that's been predominantly in our data center and communications business. So the majority of -- well over the majority of our improvements in gross margin have really been in the data center and communications business. So I'm really pleased with that progress.

We've also seen pricing optimization benefits. That has significantly increased quarter-on-quarter and certainly year-over-year. And that's been not only in the industrial business, but that was actually quite sizable in our Datacenter & Communications business. So I'm really pleased with the progress we've made so far. We're going to continue to drive to get to our target and super focused on doing that, but I'm quite pleased with the progress so far, and we're early stages is the way that I would look at it.

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 in internal to Coherent that we're pacing our production capacity expansion. And so we were able to sort of dramatically improve the amount of internal components that we were producing. And so that really unlocked an acceleration in our production capacity.

And so over the last month or 2, 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.

I actually wanted to ask about scale across just becoming a big talking point, you called it out in the comm business. Maybe if 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?

Yes. Thanks, Blayne. Yes, we're seeing just tremendous growth in the scale across part of the business. This falls within our Communications segment, which I mentioned in the prepared remarks. So scale across or DCI, also within that communications segment is traditional telecom. But the fastest growth that we're seeing is in that scale across piece of the business.

In the most recent quarter, we saw a 16% sequential growth and 60% year-over-year. And here, again, similar to data center, just the demand is exceptional. The visibility is exceptional. We have LTAs that are in place with customers in that segment. And we're seeing -- it's really broad-based across almost every product we have in that segment and broad across customers as well.

And just to give you a sense of the products in that segment would cover components like pump lasers, it would cover modules like ZR/ZR+ transceivers, which would be the 100-gig, 400-gig and 800-gig ramping ZR/ZR+. It covers line cards and amplifiers and then full systems as well.

And so yes, this -- we expect this area just given the demand we see in front of us and the visibility of this to be a very strong growth area for us moving forward. And then a new system that we think is going to continue to accelerate our growth rate here is multi-rail. And so our multi-rail technology, which we highlighted at OFC, this helps provide a huge capacity increase within the same power and physical area of the prior solution.

So it's a tremendous benefit to the customer. And we have a number of very differentiated component technology pieces that go into that system that really position us very well. And we're selling full systems, and we expect that revenue to start in the first half of calendar '27. And so just another growth factor layering on top. So very strong growth in this area, and we expect that to continue given the strong growth that we see ahead of us.

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 inches being the biggest driver. I'm assuming the 6-inch volumes that you mentioned your shipping and 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 -- is 1.8T, is that a gross margin uplift as well?

Yes. So when I mentioned in the prior quarter, the 6-inch, I mentioned that as it was one of the contributing factors. There were actually a number of other contributing factors to gross margin expansion in the prior quarter. And in our guide for the current quarter, it's going to be similar. 6-inch is a contributor, but there's other factors as well. There's pricing and other cost structure improvements that we made.

And yes, I would say we're still pretty early in the 6-inch ramp. The -- if you think about 6-inch -- so we shipped our first transceivers last quarter that included devices from our 6-inch and that was just the initial production that we started. That will ramp significantly over the coming quarters.

So I think it's much more of the 6-inch benefit is ahead of us. The -- if you think about the total doubling of capacity, in fact that all of that doubling of capacity is 6-inch. By the end of this year, next quarter, half of our capacity will be 6-inch. So I think that benefit from 6 inches more ahead of us.

And then on the 1.6T question, yes, we definitely see that as beneficial to gross margin. We expect -- just like we've always seen in prior transitions of speed of data rates at the beginning of the life cycle of new data rate, generally, the gross margins are 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 transaction. But you mentioned there's a number of other deals that you guys have brought in. Anything you could tell us in terms of how big those deals are, what kind of duration are we talking about are they funding your capital expansion? 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 3 parts. You asked about kind of a CapEx commitment. Again, 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 kind of represents sort of skin in the game from the customer, which we view as really positive. And then there's -- of course, there's a supply commitment from us.

But the third element is there's always some sort of demand, minimal -- at least minimal demand commitment from the customer to make sure that, that capacity is going to get utilized. So those are kind of 3 parts of the LTA. Almost every LTA has those 3 parts in it. And so I would say good progress last quarter in additional LTAs, and we anticipate more LTAs to come and significant in size.

Anything about the genre of customer here? Is this cloud providers? Is this systems manufacturers? Anything else you could take.

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 hiring over the next couple of years. What's the mix of these agreements between lasers, ELS modules, which you highlighted [indiscernible] and the various other components that you could sell into a CPO solution like fiber touch units. How does that vary by customer? Like what are the puts and takes there as based on the deal?

Yes, it kind of -- it can depend by customer, but it's important to keep in mind that we have a very broad portfolio of CPO technology that we can bring to the customers I think that's a real advantage for us. And we -- at OFC, we laid out all the different types of technology that we can bring to a CPO solution.

Lasers, the high-power CW lasers is certainly one important component, but it's not the only -- we can also bring 200-gig and in the future, 400-gig VCSELs as well. There's some applications where VCSELs are sort of a better laser technology for like near package optics. But beyond that, if you look at the external laser source, we can provide that module. But within that, almost all those key optical ingredients we have in-house as well, not just the laser but the isolators, the thermoelectric coolers.

So all of the ingredients that go in that, which customers view as a big strength because we're not dependent on others for those technologies. And then the actual fiber attach unit, so this is the -- what connects the switch chip or the XPU to the face plate or to the external laser source module, we can provide that entire assembly as well because we have the lens arrays, we have the polarization maintaining fiber.

So we have all the ingredients for the CPO solution. And I would say most customers are leveraging if not all of that portfolio, certainly a good portion of that portfolio.

Great. And for my follow-up, I just wanted to ask about the 2 incremental opportunities you highlighted for '27, right multi-rail and thermal management products. So you said revenue timing for first half, I think, for multi-rail in second half for the thermal products. But what are the milestones between now and then from a customer perspective. But when we get a better sense of how large those rents can be -- and how -- 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'd 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 could 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. I mean we sized the market for multi-rail at least $2 billion over the coming years, and it could be larger than that.

And the technology that we have is very differentiated. With multi-rail, it's really all about the underlying technology and without going into a bunch of the technical details because we covered this at OFC, but there's a number of key components that go into that multi-rail that are unique to us or we have unique differentiation that position us really well. So we feel really good about the competitive positioning on multi-rail.

And then the second part of your question, definitely thanks for asking about the thermal solutions. We're very excited about this. This is us taking our industrial technology, some of our materials technology that we apply to the industrial market and repurposing this for data center. An example is our thermodite technology.

[indiscernible] is a material that it's a proprietary material that only coherent provides. And if you look at thermodite, 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 solutions, a thermodite or other type of material that we can provide can provide heat transfer that's either 2x better than copper, sometimes up to 5x better than a copper solution.

So this is a massive improvement for customers because what that means is we use one of those thermal solutions that have 2 to 5x better thermal properties, it allows the, say, the XPU, the GPU to run at a much higher frequency or utilization rate because it can be cooled much more effectively. So it's almost like getting sort of more tokens out of the same CPU or GPU.

And so it's a big win for our customers. We're really excited about that, very strong customer engagements there. And again, just kind of moving through the normal engineering milestones, but we would expect revenue in the second half of next year.

By the way, the other one that I would mention which is really a great technology as our thermoelectric generators, where we're harvesting waste heat from the -- again, the CPU or GPU harvesting the waste heat and converting that back into electrical energy which is pumped back into the data center. So 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 like a transceiver perspective. Obviously, you were, I guess, to had one [indiscernible] of transceivers, but also a buyer of lasers and electrical component as well. And at least kind of yesterday or over the past couple of days, we have been hearing kind of some laser pricing increases, particularly for EMLs. So I'm curious if you are seeing that on one front, but also are you able, if that's the case, and a transcable pass through those costs, are you -- do you have enough levers in general at the [indiscernible] level to also increase pricing given the demand supply imbalance?

Yes. Let me start with the price and come back to the cost. On price, yes, I would call pricing very healthy dynamics around pricing. Because of the supply versus demand, I think pricing has been very good, right? And 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 higher than 800-gig, et cetera. And so I would say the pricing dynamics are very healthy.

And then on the cost side, remember that most of the components that go into our transceivers are internally sourced. And so that buffers us from an increases provide some level of buffer against increases in pricing in externally sourced. Now we do use some externally sourced components. We do that for strategic reasons.

But yes, we view it as we've been successful at either passing along those external component price, higher prices or offsetting that with our own internal production as well. So we've -- the combination of pricing and cost has been -- we've seen higher gross margins. I think Sherri shared in her prepared remarks, specifically in data center and communications, we've seen the gross margin improvement we've seen primarily coming from that component of our business.

Got it. That's very helpful. And then in terms of my follow-up, it seems it is very clear that the demand you are saying 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 [indiscernible] 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 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 -- between EML and SiPho is really determined by kind of the customer applications. We work with the customer on which one of those 2 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 NPL 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.

Yes. Kind of the discussion around CPO and certainly seemingly accelerated since the beginning of the year through OFC and then 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 side 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, that my understanding is some of those things have higher margin structures than maybe other indium phosphide solving 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?

Yes. Thanks, Ruben. On the CPO, certainly, now that the NVIDIA partnership is public. They're -- clearly, they're probably our lead customer on CPO. And -- but we do expect other customers to follow as well. And we're engaged with multiple different customers. It's actually a pretty wide set of customers, and we expect to have CPO solutions across multiple customers. But definitely NVIDIA would be kind of the lead customer for us.

And then on the second question on multi-rail, yes, definitely higher gross margin structure in that part of the business. You're absolutely right that there's some specific components that go into multi-rail solutions that are quite high margin, that also rely on indium phosphide capacity. In general, the way we look at capacity allocation is we allocate Indian phosphate capacity to whatever drives the most -- the highest margin dollars. So whatever drives the maximum amount of margin dollars for the company, that's where we allocate the capacity.

We take the next question from the line of Sean O'Loughlin from TD Cowen.

And 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 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 to 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, 2 to 3 months later before we see the transceivers then shift 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 the -- 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...

Yes, there's nothing unique about the devices on 6-inch versus 3-inch in terms of qualification. They 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.

Got it. That's helpful. And then maybe related to the CW EML question, and I know I just -- I was not listening. I know you're going to say it's sort of agnostic and you go where the customer goes. But if you could maybe comment on the 400-gig silicon photonics that you demonstrated at OFC and maybe some of the other industry commentary that maybe questioning the viability of silicon photonics and CW lasers at 3.2T. That would be helpful.

Yes. Thanks, Sean. Yes, as you mentioned at OFC, we demonstrated 400-gig silicon photonics that would enable 3.2T, that -- we demonstrated that, but it could be used in either a transceiver or could be used in CPO. So we demonstrated just the capability to do that. the form factor may be CPO or transceiver or both. But we would -- but we believe we have a path to 3.2T or 400- gig per lane silicon photonics based on that demonstration. And we're certainly -- we certainly expect to have both solutions based on 400-gig differential EMLs, which we already have but 400-gig silicon photonics as well. And by the way, we're we have 200 gig VCSELs that we're working on, but we also have 400 gig VCSELs that are in development as well. Those are a little urther out, but we're certainly working on that as well. So we think we've got a really robust road map of multiple different laser technologies to support the future road map for our customers.

Thank you. 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.

Ladies and gentlemen, you may disconnect your lines at this time. Thank you for your participation.

Good morning, good afternoon, I should say. Thanks for bearing with us, and welcome to Coherent's 2026 OFC Technology Innovation Briefing. I want to thank all of you here in the room with us as well as all of you listening online. We greatly appreciate the interest.

Before we begin, I've got to refer you to the customary forward-looking disclosure statements on Slide 2 in the presentation deck. It will be posted to our website in the Investor Relations section of our website later today. Full presentation, all of the disclosures today are covered by those disclosures. Any forward-looking statements are covered by the disclosures. They apply to any and all forward-looking statements that may be made.

Now for the agenda. CEO, Jim Anderson, will provide an overview of our Data Center Communications segment. Jim will be followed by Julie Eng, our CTO. Julie is going to discuss scale out and scale up. Julie will be followed by Dr. Beck Mason, EVP of Semiconductor Devices. He'll discuss lasers and indium phosphide capacity. And he'll be followed by Dr. Sanjai Parthasarathi, our Chief Marketing Officer, who will discuss scale across. That will take about 60 minutes. We're going to follow that up with a Q&A session that will be about 30 minutes long. Finally, Jim is going to provide some closing remarks.

And last but not least, I welcome any feedback from any of you following the event. Regardless if I could be of any help at any point in the future, feedback or otherwise, it would be my pleasure.

Without further ado, I want to welcome Jim to the stage.

All right. Thank you, everybody. Thanks for being with us here today. Really appreciate you being here, especially here in person. I know there's a lot of things going on at OFC, a lot of demands on your time. So thanks for spending time with me and the rest of the team. And then also thanks for everybody that's joining us online as well. So we're here in Los Angeles at OFC. I was walking the floor this morning, and this has got to be a record OFC in terms of size and number of people. I mean each OFC just keeps getting bigger and bigger. And I think it's I think it's really a testament to how important photonics optics continues to become across so many different applications. So Coherent always has a big presence at OFC. We've got a lot of products and technology that we're demonstrating here at OFC and happy to give you an overview of that today. By the way, the beginning of OFC, the first keynote kickoff this morning was by our own CTO, our illustrious CTO, Julie Eng, and she was nice enough to carve -- she's famous now. So she's nice enough to carve a little bit of time out for us for our event here. So, anyway, thanks again for being with us here today.

So I think there's probably never been a better time to be in the photonics industry than right now. The photonics industry, optics, the innovation that we're bringing is touching so many different applications across so many different markets, data center, communications, industrial applications. So, today, we're going to focus on data center. but it's incredible to see the reach that photonics is having across so many different industries. So, in data center, which, again, that's the focus of today's discussion, if you look at data center today across the scale-out and scale across networks already 100% optical, 100% optical networking and growing at an incredibly rapid rate as we continue to add compute capacity across the network. But what we're really excited about is kind of the next frontier of bringing optics to scale up part of the network and to help drive future data center innovation with photonics.

Now the reason that we're now starting to see photonics migrate into the scale-up network is the same reason that photonics took over scale-out and scale across. And the reason is that you take any length of distance in the data center whether it's 3 meters or 3 kilometers. And if you crank up the data rate and if you crank up the total amount of bandwidth, eventually, you hit a point where photonics is the most power-efficient, fastest way to transmit that data across that length of distance. And so now what we're starting to see is to continue to drive data center architecture now adoption of photonics and scale up. And so that's great for the photonics optics industry. That's a massive TAM expansion for the industry, but really good for Coherent as well.

So, when we look at Coherent, again, I don't think Coherent has ever been in a stronger, better position than we are today. And we're going to talk about today, the opportunity in front of us, kind of think about it in two parts. So part one, we'll talk about all of the existing engines of growth that are driving our growth today. And if you look out through the coming years, that's about a $50 billion market opportunity, probably a little bit more than that. And that covers just for a few examples, that covers pluggable transceivers. So we'll talk about our ramp of 1.6T. We'll also talk about the road map to 3.2, 6.4 and beyond. We'll talk about DCI transceivers, transport and transmission and then all the different optical components that go into those products. So certainly talk about our existing growth engines.

But what I'm really excited to talk about today and what you'll hear from the team as well is the new growth engines. What's driving, we believe, an inflection in our growth rate moving forward and acceleration of that growth moving forward. And there's four in particular that we want to talk to you about today. If you look in aggregate across these four new growth engines, collectively, those add over $20 billion of incremental market opportunity over the coming years. And these are not things that are way out in time. These are things that are starting to ramp over the next few coming quarters. And that's why we're really excited about that. So, number one, we'll certainly talk about optical circuit switch, OCS, really excited about that. The market is much larger than we thought a year ago at OFC. The number of usage models, the number of usage cases has grown considerably. And we are on a very fast ramp of ramping our manufacturing capacity to meet the demand that we're seeing in front of us. And that's already ramping today. So that's ramping each quarter throughout this year and into next year.

The second big growth area for us is CPO and NPO. And I've asked Julie to spend a good amount of her time talking about CPO and NPO today for both scale up and scale up, or both scale up and scale out. That is a huge incremental TAM for the optical industry and especially for Coherent. And this is near term. We'll start to see first revenue from CPO in the second half of this calendar year. And then it will -- the ramp will start in scale out. But towards the end of 2027, we expect to start to see the ramp of scale up as well.

The next area we want to talk to you about is multi-rail. This is a new product category. We've got tremendous excitement from customers in this product category. And again, this is near-term revenue. This will start to ramp in the first half of '27.

And then the fourth thing that we want to talk to you about today in terms of new growth engines is thermal solutions. Now this is something we haven't talked a lot about to date. But given that it's starting to ramp next year, we want to start to talk to you more about this. This is us using proprietary materials technology that Coherent has developed for industrial applications and repurposing that for data center applications. And not just thermal cooling, but also harvesting heat from the data center and recycling that into electricity. And so we'll talk about that as well. So we're really excited about the new growth areas. We think that as these come on and they layer on top of each other, that provides us with an inflection and acceleration of our growth rate over the coming quarters. And in aggregate, if you look at all these in aggregate, in aggregate, these are all a tailwind to our gross margin and our business model. So that's what we'll talk about over the course of today.

I do want to take a few minutes here at the beginning to talk about the partnership with NVIDIA that we announced a couple of weeks ago. We've had a long history with NVIDIA. Over 20 years, NVIDIA has been a customer of ours, but this is a step function expansion in that partnership, and we're really excited about it. I was at GTC yesterday at Jensen's keynote where he talked about CPO in both scale out and scale up. And so great to hear them already talking about that. This partnership is entirely incremental to what we're doing with NVIDIA today, and it's all around CPO for both scale out and scale up. The supply portion of this agreement, the development and supply portion is a multibillion dollar multiple product opportunity, and it spans out through the end of this decade. And the different products that go into this partnership with NVIDIA, not just the laser, but the other products as well, we'll talk about through the course of today. And we're happy to answer any questions about this partnership when we get to the Q&A as well, but really exciting for us.

So you hear from me all the time. You hear from me at least once a quarter, probably more often than that. So since today is more geared around products and technology, I want you to hear from the experts in the products and technology. And so we've got three sections that we'll go through. Number one, our CTO, Julie will talk us through scale out and scale up both the existing growth engines as well as the new growth engines. So she'll talk about pluggable transceivers and the road map there. I've asked her to spend an extra amount of time on CPO and NPO given the huge growth there, and she'll talk about OCS and thermal.

And then the second section will be led by Beck Mason. Beck leads our Semiconductor Products group, and I've asked him to do a bit of a deep dive into our laser portfolio and our indium phosphide capacity. This is an area that we get a lot of questions from investors, a lot of interest in this area. So he'll talk about all of the different laser technology that we have, the EML, the CW and the VCSEL lasers, how those are used in both pluggables as well as CPO, NPO. But I've also asked him to spend some time on our indium phosphide capacity because we're ramping that very fast. We're doubling that this year, and he's going to share with you our expectations of capacity expansion next year as well.

And then finally, Sanjai will wrap up with scale across. I'll talk about DCI transceivers, transport transmission, but also that new multi-rail technology system that starts to ramp early next calendar year.

So if anybody needs a photonics doctor today, we've got you covered. We've got three doctors of photonics in the house today. So before I hand it off to the three doctors, I just want to reiterate, thanks for being with us here today. We're at an inflection point in an acceleration of our growth. It's really that combination of the expanded use of photonics in the data center, the broad range of technology that we're bringing to our customers, you'll definitely see that today. And then the manufacturing expertise and the scale of manufacturing as well.

So, with that, I'll hand it off to Dr. #1, our CTO, Julie Eng.

Hi. Good afternoon, everybody. Nice to see a lot of familiar faces. But for those of you if I haven't met, so I'm Julie Eng, I'm CTO of the company. I've been with the company over 20 years. I've been in optics my entire career. And I want to echo what Jim said is it's a very exciting time to be in optics. I mean if you think about it, the AI data center is basically a massively distributed supercomputer. And when you do parallel processing, the performance of the system depends a lot more on interconnects, and we are the interconnect. So optics is now becoming a key architectural element in the architecture of the AI data center. And I think things like our partnership with NVIDIA show how that our customers see that as well. And also, I feel very happy and confident, not just about the market. So the market and the opportunity are great, but I feel very confident about our road map and our depth and breadth of technology.

So yes, let's talk about the data center, starting first, defining our terms, the domains inside of the data center. So the scale-up domain is the networking together of multiple XPUs or processors, accelerators to act like a single compute node. And the scale-out domain is the networking together of those nodes to form that distributed supercomputer that is the AI data center.

So talking first about the scale up or scale out. That's a heterogeneous environment. And what I mean by that is you might have equipment from different people that have to plug and play. The distances can be very different, 10 meters to the rollover or 10 kilometers up through the ceiling and across a Costco size warehouse data center. Flexibility is very important in this portion of the network. And this portion of the network is optical today, and it's also served by pluggable transceivers.

The scale up is very different. This is a closed system. And what I mean by this is it's owned by the person who networks inside the rack or a small cluster of racks, and they don't have to operate with anything else interoperate. It's copper today. The distances are less than 10 meters. And because it's in the rack, density, cost and power consumption are very important. And as we see this domain transition toward optical, it's a great fit for co-packaged optics. And of course, for us, since it's 100% copper today, this is a SAM expansion.

So in the flexible portion of the network where flexibility is prioritized to scale out, you see pluggable transceivers because they offer flexibility. There's a robust road map that we as an industry, agree on of increasing bandwidth density, and I'll talk a little more about that. There's a standardized multi-vendor ecosystem, which gives security of supply. They're easily serviceable because they plug in through the front face plate of the switch. And they defer the architectural commitment. And what I mean by that is once you deploy the switch on the floor because the optics plug into the switch, the data center operators can decide after the fact, whether they want that switch to go 30 meters and use VCSEL-based transceivers or 500 meters and use silicon photonics-based transceivers or 10 kilometers and use silicon indium phosphide-based transceivers, and they can make that decision literally after the rack is on the floor and they can change their mind after the fact if they want to. So that's a lot of flexibility that's very valued by our customers.

But on the other hand, co-packaged optics for us is a SAM expansion. And so what is co-packaged optics? So co-packaged optics is really just like an LPO transceiver that's made smaller and it sits right around the switcher XPU like that picture on the bottom there. And so why would you do that? The main reason you do that is because you don't have to drive the electrical traces to the front of the box, and that reduces power consumption. And then since you're not pushing all the optics through the front of the box, that helps you increase base plate density. So -- but you give up something for that. Now everything is inside the box and you lost that great flexibility that I just talked about. And so it's a trade-off where you need bandwidth, higher bandwidth density and power and better power consumption compared to -- if it's more important to you than flexibility, then you would do that. And so that's a really good fit for that scale-up portion of the network.

So let's just talk about what is CPO really. And really, CPO, I call it an architectural repartitioning of the optical transceiver. So there's a picture of one of our transceivers up there. And what you can see is that all the elements, first, you see that column under pluggable transceivers are the green checks. So that green check is everything you need, the significant optical components that you need inside the pluggable transceiver. Now those green checkmarks also happen to be our capability. And what that means is every critical optical component that's in a pluggable transceiver, we design and manufacture. Now the CPO I'm showing at the bottom, that's actually a rack unit that would plug into a rack and where those white little pluggable things are, that's the front of the rack. And so we're looking at it from the top down. And what you see is there's the switcher XPU. And then like, say, the modulators, detectors, laser drivers, transimpedance amplifiers go in those little orange boxes all around the switcher XPU. And then in some architectures, you plug the laser in through the front. You might be familiar with the ELS term, and those are those white elements there. When you look at what's in CPO, you look all the way over to the right. And all those check boxes are what's in CPO and all those check boxes are actually things we have internally. And I'll show you a little bit more about that.

So we have a strong road map for pluggable transceivers. We're continuing to ramp 800G. We have a broad portfolio of 1.6T. We have a full suite of transceivers, including all of the types of lasers as well as TRO, FRO and LRO. And here at the show floor, if you haven't been there yet, we're showing three different versions of 1.6T around three different DSP vendors. And I'll talk to you a little bit more about 3.2 and 6.4 on the next slide.

So in order to increase bandwidth density of pluggable transceivers, we do two things. The first is we increase the data rate of every line. And the second is we try to fit more lanes inside the box. So, on the left-hand side, you'll see what we are doing for the industry to go up to the next speed node to drive the bandwidth density of pluggable transceivers. And we're showing on the show floor a 400G full-length demo with an indium phosphide EML. That's our own EML designed and manufactured in-house. And we're also showing it with our own 400G photodiode also designed and manufactured in-house. On the bottom, what you see is a 400GI with silicon photonics. So this we have our own CW laser, our designed silicon photonics fab in a silicon fab. And that's actually the first time that anyone has shown a 400GI with silicon photonics.

So we got what's called a post-deadline paper, which sounds like we just missed the deadline, but it's actually the late-breaking news of the conference. And so that will show on Thursday afternoon. So that's like a very proud moment to have a post-deadline paper and that 400G silicon photonics is one. And on the right-hand side is what we do to increase density. So you might have heard of this new form factor. It's called XPO. So today, our OSFPs are 8 lanes of 100 gig or 200 gig. The XPO actually jumps to 64 and partly does that by integrating water cooling into the module. This was announced by Arista and ourselves and a bunch of other partners supporting this form factor. And the reason you would use -- it's literally just the next generation of pluggable form factor. And the reason you would do this is it enables what we've shown at the conference is it enables essentially collapsing something that used to take four rack units, you can now collapse down to one rack unit. So it's just higher bandwidth density. But the insides of the transceiver are roughly the same as they were before. And these can support because it's got 64 lanes of 200 gig, it can support up to 12.8 terabits per second. And then we are also driving an innovation at the OIF, which is a standards body called the high-density form factor, which does the same thing, but ups the data rate to 400G, which is 25.6 terabits per second. So what you can see is there's a long robust road map pluggable transceivers, and we're a leader in that area. And we're also showing the XPO live in our booth as well.

And so I often get the question, well, first, actually, I'm sure your eyes are going to go to the SAM. So let me talk about the SAM. We are upping our SAM for CPO. Our new SAM for CPO, our estimate is $15 billion by 2030. And I often get the question, what can you make for co-packaged optics. And so I've tried to make it really explicit here. So I'm showing you that same rack unit that would plug into a big rack. This is the top-down view and in the front are those ELS external laser sources. So we could sell a silicon photonics PIC. We design silicon photonics PICs. We use them in our transceiver. You can use them in CPO. We package the silicon photonics PIC and/or VCSEL actually, you could package into something called that little CPO or NPO module or sometimes people call it an optical engine that would be all the orange things around. And so that's something we sell into CPO and NPO.

The external laser source, which I'm sure you've all heard of, that has our CW laser in it, which Beck will talk about. We also, I think you make -- design and manufacture a significant fraction of the world's isolator. So the isolator protects the laser from back reflection, which would otherwise hamper its performance. And we also design and manufacture thermoelectric coolers, which keep the laser at a constant temperature. So either -- we could sell at any of those levels, the external laser source, CW laser, isolator, thermal electric cooler.

And then on the other side, you need to get the light from that external laser source to the silicon photonics PIC. And that takes a lot of passive optics. And that's something maybe we haven't talked about quite as much externally. They're usually inside of our transceivers. But in this case, what you see is you can use this small passive. It's very precisely manufactured and designed passive actually called the prism microlens array. It takes the light from the fiber and shoots down into the silicon photonics. And it also requires something called polarization maintaining fiber, which we also design and manufacture internally. And when you put those together in a fiber -- something called a fiber attach unit, and we design and manufacture those internally as well. So you can see the broad array of products that we can make for CPO.

And so I want to show you our -- what we're showing at OFC. This is what we're showing at OFC this year related to CPO and NPO. And one comment I should make is NPO just means it's not on the package. So it's still inside the box, very close to the switcher XPU, and that's what NPO is. What we're showing this -- I think we have the broad -- well, we definitely have the broadest and deepest portfolio of CPO technologies, and I'll show you how here. So on the floor, we're showing a 6.4 terabit per second silicon photonics-based socketed CPO. So another kind of moving forward on CPO is looking at sockets. And the advantage of a socket is that it makes it more easily serviceable. It means you could have different types of CPO that would all fit in the same location. There's a downside. It takes space and there's some maybe signal integrity trade-offs there. But there's a lot of interest in socketed CPO. And so we, together with others, founded a socketed CPO MSA. It's called Open CPX. We just announced it last week. And so this little -- this is a silicon photonics-based socketed CPO demo. It's 6.4 terabits per second, and it fits about on the size of the top of my thumb. So if you think about that for a second, you've probably seen an OSFP and it's the equivalent of four OSFPs, but now I'm putting it on my thumb with the exception of the external laser source. So super proud of that, very excited about that.

With that, we are showing also the demo is with our own fiber attach unit, which has our own microlens array and our own polarization maintaining fiber. And we're showing that with our ELS, which is our indium phosphide CW laser, our isolator and our tech. So it's end-to-end coherent solution. Then we're also showing VCSEL-based CPO and NPO. And the VCSEL actually is an interesting potential for silicon photonics because the power is very, very low. The energy efficiency is good. So when you look at a VCSEL-based solution, it has a path to what we call 1 picojoule per bit and maybe that doesn't mean that much to you. It's basically between 4x and 5x lower power than the silicon photonics solution. But it doesn't go as far. It's shorter reach, but there's a lot of short-reach distances inside the data center. And in the VCSEL-based solution, you usually have the laser in it. And so there's some pluses and minuses of that. But I do think that these will coexist in CPO/NPO just as they have in pluggable transceivers. And so I'm showing there in the picture, our 2D datacom array of VCSELs. So VCSELs are usually made in a 1-dimensional array, but now Beck's team is making them in a 2-dimensional array. And then next to that is a little NPO, near packaged optics that's VCSEL-based that you can also see on the show floor. And you can see how small it is next to that penny.

And then finally, we're showing, I believe we're the first to ever show CPO based on indium phosphide. And so this is four lanes of 400G indium phosphide mach-zehnder modulators integrated with semiconductor optical amplifiers. And that's important because semiconductor optical amplifiers are very helpful in closing the 400G link budget. And down there, you see our 400Gi. And so again, I think the depth and breadth of our CPO and NPO is unmatched actually in the industry. So I'm very proud of that. And I think that for reasons like this is why you see such a strong partnership with NVIDIA and people who are working to be the leaders in CPO and NPO deployment.

Okay. Changing gears now, staying inside the data center, but talking about optical circuit switch. So we are also increasing our SAM for the optical circuit switch from $2 billion to $4 billion. We -- Jim alluded to, we feel like maybe we undercalled it last year at this time. And I'll tell you why I think we undercalled it is that the use cases are actually broader than what -- let's call it -- I can say -- speak for myself than what I thought last year. And the customer base is broader. And I think the customer adoption is faster than we thought.

So let me try to walk through those pieces. So what really is the use case for optical circuit switch. When you think about it, I think the primary use case, there might be like a lot of subuses of it, but the primary use case is our customers can send a software command and then reconnect how all the fibers are connected inside anything that's touching the OCS, how all those fibers are reconnected. And so one example that might matter to our customers is suppose they're doing like a huge training model one month, right? And they want all the fibers connected in a certain way because they're going to use almost all their GPUs for that one training model. And then two months later, let's say, they want to do a whole bunch of small training models.

They might want the fibers connected all differently. And so what they can do is send a software command and the fibers get connected differently. And that's very important because XPUs are so expensive, too. So being able to almost on a job level, optimize the topology for the workflow for the maximum utilization of those expensive GPUs is very, very valuable. And I think as our customers started to realize this and think of all the different ways they can use it, that's how we're seeing the use cases expand. And one example, some of our customers have talked about having a hot swap rack. And if something happens in one rack, they literally use the OCS to fail over to the other rack to keep their uptime and not lose where they are in their training. And we are actually seeing customer interest in scale up scale out the spine and scale across. So all different kind of locations and use cases. And as Jim mentioned on our last earnings call, we've shipped to over 10 people -- 10 customers, and we are shipping into production deployments. And there, on the left, you see the 320x320 OCS system. And just as a reminder, we do all of that software ourselves in-house, and we have a very skilled software design team that our customers are often complementing us on how good our software is actually.

Okay. And then just a reminder that our technology, we believe, is differentiated. We're using the liquid crystal technology. So MEMS is kind of like a moving mirror. It can either move up and down or tilt to move the beams around. And anything that moves, usually, you don't want something that moves inside the data center, if you can help it. In addition, the liquid crystal, it takes less than 10 volts to -- so in the liquid crystal, we're just turning molecules. So that's a lot easier. And then to turn those molecules, is only 10 volts, whereas a MEMS system can sometimes be 100 volts, 200 volts. And also, our customers have spoken publicly about how high-voltage components fail more often than low-voltage components. So we believe we have differentiated reliability, which I think our customers would agree with us on. And we're seeing strong sequential growth. We're ramping capacity to meet our growing demand. As Jim has mentioned on the earnings call, we're shipping 64x64 and 320x320 into multiple customers. And we have a 512x512 in development, and I think you will be able to see that on the show floor.

And finally, I just wanted to end up with our thermal management. So these thermal materials, they're in our Industrial segment. But because in this case, we're using them toward the data center, we have decided to present this to you today, and this is the first time we're putting a SAM on this. And we're putting $2 billion by 2030. And let me tell you what it is. So these are very specialized thermal materials that today we sell into semi-cap equipment, for example, and other applications. And what's -- they're finding a new home in the data center. And why is that? The reason that is, is these accelerators, XPUs, GPUs, they run it like a kilowatt -- and getting the heat out of them is very important to their reliability and their performance. And so a couple of the materials that we have are very valuable for that. So we have Thermadite, which is our patented our own name, and it's our own proprietary material. It's actually a diamond silicon carbide ceramic. So since it's a ceramic, you can like fire it, you can machine it. We literally use our own industrial lasers to machine it. So -- and that helps with the heat away, efficiency of heat transfer double that of copper. In addition, we're seeing interest in silicon carbide substrates because that can get the heat away about twice as fast as silicon actually.

And then finally, as Jim mentioned, we have some ways in which thermoelectric coolers that we use to keep a constant temperature in the laser can actually be used in reverse to take the waste temperature delta of your waste heat and turn it into energy actually, which for energy reclamation in the data center. So these very, very interesting thermal materials, we have a lot of customer engagement because it's just very valuable to our customers to be able to improve the reliability and the performance of the XPUs. So with that, that's the data center for today.

Thanks for your time, and I hope you see the excitement that I feel and the breadth and depth of our strong road map. And let me hand it off to my colleague, Beck, who will talk to you about lasers and indium phosphide capacity.

Thank you, Julie. So, good afternoon. My name is Beck Mason, and I lead the semiconductor device business group at Coherent. I'll give you a little overview today on some of our laser technology, the breadth of our technology in semiconductor photonics and also talk about what we're doing to scale up indium phosphide capacity. I've been in the semiconductor photonics business for a little over 27 years. I started my career as a device researcher at Bell Labs. And I can honestly say that there is no more exciting time in this field than right now. The pace of volume growth is unprecedented and the pace of technology evolution is faster than it's ever been before. So it's both exciting and challenging for us.

So Coherent is a very broad and deep technology leader in semiconductor photonics. We have arguably one of the broadest portfolios of devices of any company in the world. We make very high-speed indium phosphide-based EML and DML lasers, and we have solutions that go up to 400 gigabits per second. And we've been shown to be a leader with the first company in the world to demonstrate differential EML technology, and I'll talk a little bit about that later, but it's important because it enhances overall link integrity for data center transceivers.

We also have very high-volume indium phosphide CW lasers. These are the devices that are used to power silicon photonic transceivers today that we sell across our data center customers. And we have even higher power versions of those that we're developing and engaging with customers on, which deliver 400 milliwatts per laser. And these are the critical components that are enabling the external laser sources for CPO growth.

Finally, we're also a VCSEL manufacturer, and we're one of the leading VCSEL manufacturers in the world. We have extensive gallium arsenide wafer fab capability. And we've developed VCSEL solutions at scale from hundreds of gigabits per second to 200 gigabits per second and then in aggregate capacities in array-based solutions into the terabits per second. And I'll show a little bit more on that technology today as well. To date, we've shipped over 1 billion VCSEL devices to the field in communications and over 0.5 billion indium phosphide devices. And if we count the non-comm semiconductors we make, it's well over 3 billion units.

So indium phosphide, I think most people have heard how important indium phosphide is to scaling of data centers and specifically AI data centers. So currently, we are running four separate indium phosphide wafer fabs. Our first fab in Fremont, California is where we've developed our high-power CW laser and high-speed photodetector technology. That's a 3-inch fab, and it's a fab where we've got more than 20 years of experience delivering devices into the data center market.

Our next fab in Sherman, Texas is the first fab where we've deployed 6-inch indium phosphide production. It is the most advanced indium phosphide fab in the world. It's a very large facility with capability to scale to meet the huge growth in demand we're seeing. It's the first place where 6-inch indium phosphide has been put into production, and we are making multiple different product platforms in that fab. It's also a very high-volume gallium arsenide fab for us where we make our 3D sensing products.

The next fab is in Jarfalla, Sweden, which is just north of Stockholm. This is also a fab we've had for more than 20 years. It's the home of our advanced EML technology. It's also where we make our most complicated photonic integrated circuits that are used in the scale across applications. And it's the second fab where we've installed our 6-inch production capability and are ramping our capacity significantly. And then finally, because of the unprecedented growth we've seen, we are adding a fourth fab to our indium phosphide group, and that's our wafer fab in Zurich, Switzerland. This is also a fab with a very long history. It's a very high-volume 6-inch gallium arsenide fab today, and we are adding a substantial amount of 6-inch indium phosphide capacity into that location as well to scale it up.

Overall, as I said, we're seeing unprecedented demand for indium phosphide devices, and we're seeing it across the full range of our products from many of our customers. And we're in the process of locking up long-term strategic agreements with these customers to guarantee that they will have the capacity they need as they scale and for us to guarantee that we will have secure supply to deliver to. So we are focused really in Coherent on having the most advanced technology possible in our fabs. And we've done that by going to the largest wafer size. Going to 6-inch indium phosphide doesn't only help us with scale. It lets us deploy the most advanced semiconductor process equipment in the world into those lines. That gives us higher yield, better throughput, lower labor costs, a whole bunch of benefits. In fact, we're currently running three main categories of devices on 6-inch indium phosphide, EMLs, high-power CW lasers and high-speed photodetectors. And all three of those categories, we're seeing higher yield and better throughput efficiency on our 6-inch lines than we've been able to achieve even on our very mature 3-inch production lines.

As I said, we're ramping capacity in Texas and in Sweden and now adding the capacity in Switzerland. And we fully expect that we will double our total capacity by the end of this year, and we're planning to double again or more by the end of next year, and we're going to keep increasing after that. So the scale of growth for us is very rapid and very fast, and we wouldn't be able to do it if we didn't have such an advanced platform to work on.

So I'm going to switch gears now a little bit and talk about innovation because innovation is a core platform of what we're doing. So we are today a technology leader in EML technologies, and EMLs are really important devices for data center transceivers. And if you want to know what an EML is, it's a very, very tiny laser that we fabricate a very, very fast modulator in front of. And that modulator is used to turn on and off that light and encode data at up to 400 billion bits of information a second. And then we aggregate multiple of these together in transceivers, and we can deliver aggregate data rates up to 6.4 terabits per second or beyond. So we have been in high-volume production on 100 and 200-gig EMLs for some time. We have, last year, demonstrated our 400-gig EML technology. We're demonstrating even more capability there today. And we continue to ramp and grow those platforms. We were also the first to introduce a new type of EML called a differential EML.

And the reason this is important is it provides much better signal integrity and much better modulation efficiency. And that matters because as you go up in data rate per wavelength or per device, you need to get more and more link budget to meet the requirements in the data center. And to do that on those higher capacity links, everybody wants to move to these differential ML technologies. So being a leader in that space has really driven a huge interest and a huge growth in the demand for our semiconductor devices in transceiver modules.

And another place where that's really important, Julie talked about OCS. So OCS deployment is growing in data centers. And the one downside of OCS is it does introduce additional link loss. And so it requires higher link margin in the transceivers. And that's another place that's driving the use of differentially ML technology.

So, in addition to very fast EMLs, we make very high-power CW lasers. And today, we do these in very high volume to support silicon photonic-based transceivers. And the really exciting point of this is the same technology platforms we used to develop the 100-milliwatt lasers that we use in our silicon photonic transceivers are now being used for our 400-milliwatt lasers for CPO applications. And CPO is growing very, very rapidly. Again, we're in full production on our high-power CW lasers, both on our 3-inch platforms and our 6-inch platform in Sherman, Texas. And we've got some very unique and differentiated IP in the space that's very defensible. So we have -- using more advanced semiconductor processing tools, we've been able to develop a laser with very, very high yield across the wafer, very low phase noise, which gives you better link integrity and very high power conversion efficiency even at those higher output powers that are required. And that's driving our customer engagement. So we have extremely strong customer engagements across multiple customers for this technology. And we've already secured very large multiyear orders that are going to guarantee our demand for several years to come in this space. So it's definitely a place where we've got tremendous customer pull and engagement.

So, finally, I want to switch to the third class of devices for data center, and these are our VCSELs. So we've been long a world leader in VCSEL technology. To date, we currently deliver 400 million VCSEL devices a year for data center and sensing applications. And our arrays for sensing applications actually contain hundreds of VCSELs per chip. So we know how to make very large arrays as well. Our VCSEL technology now, we're one of the first in the world to get to 200 gigabit per second capability. That's the highest data rates people are currently deploying. And we have unique technology that allows us to make single-mode VCSELs, which help us to extend the reach of those in fiber networks much beyond what's traditionally been able to be achieved.

The beauty of VCSELs is they lend themselves enormously well to large arrays. First of all, VCSELs are very low power and very efficient ways to transmit data. But they're also very convenient for making large arrays. And we make today 2-dimensional VCSEL arrays, both with conventional topside emitting and new backside emitting VCSEL designs. Backside emitting are very convenient because they enable you to flip chip the device for easier integration. But also we can integrate micro lenses on the back of those chips. And those integrated micro lenses greatly enhance their ability to package and integrate those solutions at very low cost. And our VCSEL technology is in high demand today. We obviously are in very high-volume production of VCSELs across data center transceiver applications, and we have a number of engagements with hyperscale customers working on VCSELs for CPO applications because of their very compact size and really good power efficiency in those applications.

So, lastly, all of these great technologies to transmit light over the fiber wouldn't be much good if we didn't have something on the other end to receive it. And so we have a broad array of internally developed photodetector technologies from 50 gig to 100 gig to 200 gig to 400 gig per lane capability in both indium phosphide and gallium arsenide. We make large arrays of photodiodes for more efficient packaging and data center transceivers. So you've got a multilane transceiver, you can use our quad array photodiodes in that application. And we make our photodiodes, again, in flip chip configurations with integrated backside lenses. And those integrated backside lenses, again, are to facilitate coupling of light into the detectors with very high efficiency, very robust high tolerance for those -- that coupling efficiency, and that drives low cost.

The key to this is Coherent has a full end-to-end capability of semiconductor photonics from the transmit to the receive side, from the highest performance EML technology through CW technology for silicon photonics down through VCSEL and short wave. And that deep technology stack gives us a huge advantage in time to market and innovation when we integrate those into our CPO and transceiver products in better cost and better supply chain resiliency. And I think that's a huge differentiator for us in the market.

Thank you very much for your time. I'm now going to pass it off to my colleague, Sanjai, who will speak about our scale across technology.

Wow, it's great to be here, and it's so nice to see so many familiar faces in the audience here. Sorry. Okay. So for those of you who don't know me, I've been with the company for over two decades. And prior to my appointment as the first CMO of the company in 2019, for 15 years, I ran what is now our communications business. I ran product marketing and product management or our scale across business. So you can imagine, I'm especially thrilled to talk about our innovation and scale across.

Data centers are power constrained. So this means that large AI workloads now have to be distributed amongst multiple data centers, and that drives a need for high bandwidth, low latency connections between the data centers or the scale across network. And in parallel, over the last, I would say, four, five years, optical networks have been -- are becoming increasingly disaggregated. So, from large monolithic systems, they're giving way to smaller, easy-to-deploy functional elements. And two such critical enablers of scale across are data center interconnect transceivers and transport equipment.

Now data center interconnect transceivers or DCI transceivers, they sit at the edge of a data center. They convert electrical signals to optical signals and then get them ready for transport. Transport is, as the name implies, are systems that take the signal and transport them, carry them from one data center to another. And the distances from these data centers between the data centers can be anywhere from tens of kilometers to thousands of kilometers.

So let me first start with our DCI transceiver. We have a deep vertical technology stack. Every photonic component in a DCI transceiver we make. And this ranges from indium phosphide tunable lasers, the same indium phosphide platform that Beck talked about to modulators to silicon photonics-based planar integrated circuits, indium phosphide-based planar integrated circuits, detectors, passive optics, thermoelectric coolers, we even make a few ICs. And we also take these components and package them into tiny subassemblies, such as the nano-ITLA, which is an integrated tunable laser assembly. And we also take the tunable laser and combine it with the receiver optics, and we make a product known as an IC-TROSA. So I'm super excited to announce that our new high-power narrow line width tunable laser is now ramping in production for both in-feed into our own DCI transceivers as well as packaged into a nano-ITLA for the merchant market. And I'm also thrilled to also announce that our IC-TROSA, an extended C-band IC-TROSA won an award yesterday at this very OFC. By extending beyond the C-Band, that enables our data center customers and hyperscale customers to drive more efficiencies from their fiber infrastructure.

We have an industry-leading road map in DCI. Let me start with 100G ZR. In the 100 ZR, we took all the complexity and all the smarts of coherent transmission and detection and compacted it into a tiny pluggable QSFP28 form factor. The reception from the customers has been fantastic. Today, we have over 40 revenue-generating customers for this product. And we continue to innovate in the platform. So we -- at this OFC, we announced the ramp-up of a BiDi product, okay? What is BiDi? It's bidirectional transmission. So it is a transceiver that allows you to transmit and receive on the same fiber. So that doubles the efficiency of the fiber infrastructure. And we also won an award at yesterday for a low latency version of the same product. And you can imagine how important latency is for DCI scale across networks. Moving on to 800G. We were the first to introduce a 800G pluggable transceiver into the market for core and transmission. And we quickly followed it with an L-band version. Again, going to the L-band enables our data center customers to double the efficiency of the fiber plant. And we've got 1.6T in development. We are also working on 3.2T.

Okay. Now moving to the transport equipment. Transport equipment serve many important functions, including multiplexing, demultiplexing, essentially taking multiple wavelengths of light and putting them on the same fiber, amplifying the signals, switching routing and then monitoring the health of the optical signal as well as monitoring the health of the underlying fiber infrastructure. For the past 20 years, improving efficiency has been the biggest mantra in transport equipment. And we are a pioneer and an innovation leader in transport. We have a long list of unique and industry-first innovations that we have brought to the market, starting with the merchant EDFA in the late '90s.

Let me -- there's too many on this list, but let me spend a couple of minutes on a couple of these products. The dual-chip pump completely changed amplification. By combining the functionality of two pumps in a single pump, you get significant power cost and space savings and it essentially a step function change in amplifier performance. With the embedded OTDR, we created a market. We created an entire new market segment for monitoring the health of the underlying fiber infrastructure. And my personal favorite is pluggable optical line systems, which we affectionately call poles, where we took an entire line system and collapsed it into a pluggable form factor.

And multi-rail is our latest in this long history of transport innovations. So what are multi-rail systems? Transport equipment are usually housed in enclosures like the one that you see in this photograph. We call them fiber huts or amplifier huts. This one looks like it's in a residential neighborhood. There is no around. And we do -- and you can see the power going into the hut. And some of these are temperature controlled. So there is additional power that you need for temperature stabilization of the devices there. And now with the demand and scale across our data center customers and hyperscalers are demanding multifold increase in transmission capacity. Now that, that creates a major challenge for this fiber hut. For example, if you want to go 4x more capacity through the existing infrastructure, today, the state-of-the-art current systems, you need 4x more equipment, 4x more power, 4x more space and of course, 4x more cost. And this is where our multi-rail comes in. It's truly groundbreaking innovation. What multi-rail does is it allows you to process 4x the traffic within the same space and with a sublinear scaling of power. It's truly a groundbreaking innovation.

Now how do we do it? Okay. Now I come back to what I said earlier, 4x, 4 rails in tiny 1 RMU or rack mount unit. So how do we do it? We've got to open up the hood of the multi-rail, and you'll find many award-winning innovations there, starting with array amplification. And the ray amplifier basically does the function of multiple amplifiers in the same space and again, with sublinear scaling of power. And how do we make an array amplifier with the dual-chip pump. In this particular case, it is a quad chip pump. So we have four chips in one package, uncooled 700 milliwatt per pump. So really, really innovative product there.

Then we also have a multiport dynamic gain equalizer. What is the dynamic gain equalizer? Well, when you transmit multiple wavelengths or DWDM signals on a fiber and you amplify them, when the signals get to the other side, some signals are amplified, some wavelengths are amplified more and others not so much. That's just the physics of erbium-doped fiber amplification. And you need a DGE to level those wavelengths. Otherwise, you're going to have issues on the detection side, on the reception side. So that is the DGE. And we have compacted multiple lanes of DGE into a tiny package. And then to monitor the signal and do fiber metrology, we have a multiport OCM and a multiport OTDR. The OTDR is an optical time domain reflectometer. It monitors the health of the fiber infrastructure. So lots of award-winning innovations. The platform itself has won multiple awards. And at this OFC yesterday, we picked up two more awards for our multiport -- for a multi-rail platform, the multiport DGE and the multiport OCM won awards as well.

So you can imagine the customer reaction for this product has been pretty fantastic. There's been a frenzy of design and activity with hyperscalers, with NEM customers all across the patch. And as Jim mentioned earlier, we are going to be shipping first revenues in early next year. We have an amazing demo of the multi-rail system at our booth. I'd highly encourage all of you to come and see it. I'll invite all of you to those demos. And there are also demos that Julie and Beck talked about, really, really cool demos at our booth. So please try and make it there.

And I think with that, I want to thank you for your attention, and I'm going to pass it back to Jim.

All right. Thank you, Sanjai. All right. I am also very excited about the multi-rail system. So we're going to open up for questions in just a minute. I'm just going to summarize real quick. So, look, we're at an inflection point of accelerated growth ahead of us. We talked about all the different new growth engines that we're bringing online over the coming quarters. But really, it's a combination of that continued progression and expansion of photonics across the data center, the tremendous breadth and depth of technology and products that we bring to our customers. And then along with that technology, the expertise and definitely the scale of manufacturing to be able to scale and hit the quantities that they need.

So, with that, we're going to open up for Q&A, and I think Paul is going to moderate our Q&A.

Thanks, Jim. While the guys are coming up on the stage, obviously, this is about -- if you could keep your questions focused on the topics in today's session. For those of you sticking around, we do have food and refreshments afterwards. And with that, I will open it up. Simon?

Yes, there's mics that are coming around.

Simon, Raymond James. So, a couple of weeks back, you did announce the agreement with -- purchase agreement and investment from NVIDIA. So you talked a bunch about the things they may be doing, but could you maybe connect the dots in terms of what's related to that commitment from NVIDIA, for example, you've got the investment, where is that CapEx may be going? What are you investing in? What are your priorities? -- what have you committed to delivering to them? What kind of visibility do you get from it?

Yes. Thanks for the question. So, first of all, on the cash piece of your question, so the $2 billion of investment from NVIDIA, we're going to use a good portion of that cash towards just capacity expansion, right? And just given the tremendous demand that -- and their forecast of demand through the rest of the decade, right, this partnership expands or goes through the rest of the decade. And a good portion of that will be indium phosphide, no surprise, indium phosphide capacity expansion, but also capacity expansion for the other products that we're bringing to them as part of this agreement. So -- the agreement covers multiple products.

A lot of those products that it covers -- actually, all of those products that it covers Julie covered in her section today. So if you go back to that slide that talks about all the different things that we can provide in CPO applications, that's kind of a super set of the things that we'll be supporting NVIDIA on. So we're really excited. It's a step function expansion in our partnership and that supply agreement runs out through the rest of the decade. So great -- yes, great partnership, and we're really excited about it.

Samik?

Maybe, Jim, starting with you, as much as yesterday's sessions were very focused on CPO and when it sort of goes inside the rack and outside the rack, you sort of dodge the question, it seems like in your panel. So any thoughts in terms of as we sort of go through this transition of copper to optics, when are you expecting broader adoption of scale up outside the rack? And then when does it sort of start to filter into inside the rack?

And then a second one, maybe for more Beck and Jim, you can chime in as well, the indium phosphide capacity ramp and the 6-inch transition. Maybe an update in terms of how that's going? And when you're saying doubling of capacity next 12 months and another doubling, how much of that is capacity addition versus the transition from 3-inch to 6-inch.

Okay. On the first part of the discussion on CPO, and Julie, you can jump in if you want. The way to think about it is the CPO covers both scale out and scale up, right, that we talked about today. The first CPO will start to ramp in scale-out, right? And we'll start to see the revenue from that towards the second half of this year, basically second half of calendar '26. And then scale-out will ramp into '27 and beyond. And then we see scale up starting to ramp in the second half of '27. So, about a year later, we'll start to see first revenue from the scale-up portion. And yes, no secret, obviously, NVIDIA is lead customer for us, but we are engaged with multiple other customers in CPO, both scale-out and scale-up opportunities. And we do expect adoption across multiple customers in -- again, in both domains, scale out and scale up.

And then the second question on indium phosphide, remind me. 6-inch. 6-inch. So the way to think about all of that capacity expansion that Beck showed, he showed that we're going to double it this year. We're going to double it again. That is almost all 6-inch capacity, right? So by the end of this year, as we double the capacity, and that's almost -- that incremental capacity is almost all 6-inch, we'll basically be at a 50-50 mix of 3-inch and 6-inch capacity. And then the expansion, again, the doubling again, all that incremental will almost all be 6-inch again. So 6-inch will just continue to become more and more of our capacity over time. And it's really capacity expansion. We're not so much converting lines as we are expanding 6-inch lines. And then as we get a chance, we'll convert 3-inch to 6-inch as well, right? But that capacity expansion is really mostly 6-inch driven.

I don't know, Beck, would you add anything to that?

The only thing I would like to say is the beauty of going to the larger wafer size is it's so much more efficient for us to add capacity. And I'll give you a simple example. We use a lot of these very specialized tools called epitaxial reactors that we buy from a company called Aixtron. And these tools grow the indium phosphide layers on the wafer, right? And when we go from 3-inch to 6-inch, we get 2.5x the capacity per run in the same kind of reactor configuration. So 6-inch is really efficient as we scale. And that kind of scaling goes across multiple tool sets in the fab. So it's a real -- it's really the only way that we can scale at the rate we're going to scale is by doing 6-inch.

Yes. And the other way to -- a simple way to think about it because you're getting 4x as many -- more than 4x as many devices out of a 6-inch versus a 3-inch. Every new 6-inch line we put in place is like us putting four 3-inch lines, right? So we're scaling at 4x the rate of if we were doing it on 3-inch lines, right?

Paul, I have the mic, is that right?

Yes, absolutely.

Ruben Roy from Stifel. Question for Julie. Julie, wondering if you can walk through the TAM improvement for the OCS from $2 billion to $4 billion. And just maybe walk through some of the use cases that are driving that TAM expansion. It seems to me, I could be wrong on this, but it seems like most of the OCS deployment today is spine switch replacement. Do you see that as being the primary use case as part of that TAM expansion in the near term? Or are there other use cases as part of that?

And then the second part of the question is you mentioned software being an important part of OCS deployment and Google is doing a lot of work there and they have been for a long time. How are you seeing other hyperscalers kind of address the software aspect of it? Is that something that you could add value with? Or are you going to leave it to the hyperscalers and other customers?

Great. Yes. So I think the OCS use case is the original use case, I can say, because we all know it's Google, they published a paper on it, so I can say it was really kind of spine switch replacement. But as I mentioned, I think as -- the use of OCS sort of coincided with the buildup of AI infrastructure, people have broadened out their thinking on OCS, which is part of what made us think, well, we see -- we actually see the demand also. So that gave us a good signal to increase the SAM. But when you look at it, it's really -- as I tried to say, it's any place you can almost think of it as a new capability in the data center rather than a flattening or a difference of a layer or a place -- it's not a replacement for an electrical switch because we're not switching packet.

But think of it as a new capability. And that new capability is at a software notice, I can reconnect all my GPUs are connected. And so if you think about that, you can use that any place. It's not just in the spine. And so that's why we're seeing people have interest in the scale up, the scale out, the scale across and the spine actually, I think, because in the end, it's about operating the data center efficiently to generate as much revenue off of the GPUs that you put in place actually. So I think that's really -- so that's part of the expansion.

And then to your other question about the software -- well, I don't know, digital -- on the software is, yes, so we have an excellent software team and the only time we talk to customers about software is for them to thank us for our great software team. And -- but we write the software that actually controls the OCS given commands from the customer's software. So our software gets integrated into their software. And then they control, obviously, their network and everything like that. And so -- but definitely, it adds value. If your software is good and it's easy to integrate, that adds value over someone -- something that isn't actually.

Meta Marshall, Morgan Stanley. I guess could you just expand on gating items to greater VCSEL adoption? Because I think we've -- obviously, indium phosphide, it can alleviate some of the bottlenecks that we have all came from a session where they were kind of saying that VCSELs would be a smaller portion of the market. So just how do you see getting over some of the hurdles that have prevented go?

Yes. Do you mean in CPO, NPO? Or do you mean in pluggable or both?

I guess.

Both.

Yes. I mean the CPO, I think it makes sense to scale up because of the short distance, and greater...

Yes. I think even -- so definitely in CPO/NPO, there'll be short distances. And I think Julie covered that really well. And we'll clearly see VCSEL adoption in NPO applications, and we're already engaged with customers there.

And then in pluggable, even in the pluggable use cases, there are shorter distance lengths that are -- that we see even in pluggable applications. And so we think there will be adoption of VCSEL-based 1.6T transceivers in some subset of the market, right? There won't be -- it won't go across all applications, but there will be shorter reach applications where we expect those 1.6 VCSEL-based transceivers to be adopted.

Gianmarco from Deutsche Bank. You're expanding indium phosphide capacity, but the raw Indian feedstock is roughly 70% sourced from Chinese zinc smelters, which are now subject to export permit requirements with multi-month processing times. I guess my question is, how much visibility do you have on Indian supply for the next 12 to 24 months? And are you actively diversifying sourcing away from China? Or do you hold strategic inventory buffer?

We actually have a very diversified supply chain for indium phosphide substrates. We have -- and I think I've shared this in the past, we have over five different substrate suppliers today, and we work with those suppliers, not just on the next -- you mentioned next 12 or 24 months. We don't work on just next 12 to 24 months. We work on the next like three to five years of capacity that we're going to need. So we have, in some cases, very long-term agreements in place. And that includes not just the substrates, but all the key inputs that go into that. So we believe that we have very good visibility into substrate supply. And so that capacity expansion that Beck showed is we have commitments from our suppliers to supply the necessary indium phosphide substrates to support that.

Next question.

Papa Sylla from Citi. I guess this question is more for Julie. You had a very helpful slide showing the SAM with different areas of CPO that you can provide. I guess I was hoping if you can maybe parse through within that $15 billion SAM, what is ELS, what is ultra-high power laser, what is PIC?

And tied to that, I know you have the capabilities of doing all of those. But if you can maybe help us understand which areas you are already #1 or #2 and which areas are you...

Yes. We believe -- maybe I'll kick it off and Julie can weigh in. So on the second part of your question, we believe we'll be a leading supplier in all of the things that Julie mentioned, right? We have line of sight and very clear demand from customers on each one of the things that Julie talked about. And I also want to stress again that there's no other supplier in the world that brings that entire portfolio of technology. And if you're going to go build a CPO or an NPO, a system based on CPO or NPO, you want to be working with a supplier that brings that whole portfolio of technology because otherwise, you as the customer are having to do the integration, trying to put together the supply chain.

If you go to Coherent, it's a one-stop shop of that supply chain. And that's a big advantage for us. And a lot of the very critical components, and this is important as well, are done in the right geography, are done in geographies that the customers want it. And that's obviously like indium phosphide, high-power CW lasers done in Texas, right? So very important that we don't just have the breadth, but we've got the manufacturing in the right place, and we've got duplicated manufacturing in a lot of cases, indium phosphide being another good example.

And in terms of the breakdown of the $15 billion, we don't have a breakdown today, but maybe at a later time, we will break that down into more granularity. But the external -- I would say the external laser source module is a significant part of that $15 billion. But then within that ELS is all the things you showed, the lasers, the -- a lot of times, there's focus on just the lasers, but there's a bunch of other components that go in there, the isolators, the thermal electric coolers, all the things that Julie showed today.

The other big portion of that $15 billion is in the fiber attach unit. So that's all of the fiber that goes from the front face plate to the switch chip or the XPU also goes back out to the ELS, right? That whole assembly is very complicated optical assembly, difficult to do, very few companies can do that well. And -- but Coherent since we've been doing that for decades, right, as part of transceivers and other optical systems that we manufacture, we know how to do that. And that's a very high-value piece of that $15 billion as well. And again, there's kind of key components underneath there that we're -- that we supply as well, like the PMLA that you talked about. And so yes, we feel like we've got a very, very good competitive position on that sort of totality of CPO and NPO technology.

This is [indiscernible] on for Karl Ackerman from BNP Paribas. I have two questions about. So, first, to see now you have expanded engagement on nano-ITLA. Can you just talk about your customer engagement, your breadth of customers with external customers or you are using it?

Yes. I believe we're using it both internally, but we also have external customers as well. Sanjai, do you want to just talk to the breadth of the external.

Yes, sure. So we have a lot of deep customer engagements, both with NEMs as well as hyperscalers. And so we -- the tunable laser itself, we use it as a chip for our DCI transceivers, but we also package it into a nano-ITLA to the merchant market. As you know, there is a merchant market for the nano-ITLA.

I was sitting in a meeting this morning where the customer was asking us to make more, right? So it's in high demand.

That's nice. And then about your multi-rail technology, that's an important technology there. Can you show the box? Are you going to the entire box or those boxes?

Yes, all of the above. We'll supply both the box as well as the key components into other suppliers. So we'll do both.

Jake?

[ Jake Silverman ] Bloomberg Intelligence. I wanted to ask about your materials segment that you called out today. You have capabilities across silicon carbide and a press release about two weeks ago on the Thermadite liquid cold plates, which you mentioned, I think. I'm curious how close you're engaged with some of your customers across the 2027 -- second half of 2027 later time lines. Is this you kind of intersecting where you think power density with the racks goes and the new materials that are needed for this? And should we expect to see a lot of additional announcements over the coming quarters that start to layer on top of that in 2027 and into 2028 as well?

Yes. We're -- and you should comment, too, but we're pretty excited about it. We're seeing -- there's engagement across multiple customers. It's a very compelling technology. And remember, there's kind of two categories. Category 1 is like using Thermadite, our proprietary technology to pull heat away from the switch chip or the XPU, et cetera, and it's much more effective than a copper cold plate to pulling heat away, which is then obviously, you can run your XPU or whatever faster, it's better reliability. But the other technology that's really cool is the thermal electric cooler kind of running backwards where it pulls waste heat and creates electricity that's funneled back into the data center.

If you think about that, that's pretty compelling to basically any data center owner because what's the primary constraint right now in data center? It's power delivery, right? So if I can take heat out and recycle it back into power, and that's just like free energy, right? And so that's very compelling to every data center owner. And even if it were just small percentages of recovery of heat, that's very significant. So I would say the customer engagement on both of those is really, really strong.

So anything you want to add?

Yes, just adding -- so yes, you can make the liquid cold plate, as Jim said, heat spreaders and because those materials we can form and then also silicon carbide wafers like as a thermal wafer. And in general, I think we are in a very special position that we have all these unique materials but we have all the context in the data center. So we're not just some materials company who knows nothing about data center knocking on the front door, right? So we're working with the customers, and they have to learn, right? This is a new tool in their toolbox. And so kind of they learn about the material, we go back and forth. And so it takes a little while, I think, to germinate, but kind of not so -- a totally different product, but not so different than the OCS that first, people have to get used to it. They have to think about it, then they figure out how they can utilize it. All of a sudden, they start coming up with a whole bunch of like a cascade of options.

So yes, we were at SEMI-THERM last week. That's a big thermal conference. We had a lot of engagements. We had talk, we had a booth. And so I think you will definitely see increasing announcements from us or demonstrations over time before we get to those points where we call that revenue and the SAM.

Jim, if I could go back to my sell-side and ask a follow-up to that. Hopefully, it was clear, but as an economic opportunity, the power challenge and the thermal challenges those both prominent?

Yes, for sure. I mean for data center operators, those are two of the biggest problems, right, is the data center is limited by the power delivered into it, right? So you're trying to generate as much -- as many tokens that you possibly can out of the total energy that you can deliver into that data center. And so this effectively would help you generate more AI tokens per data center by harvesting that heat and putting that energy back into -- so there's an immediate economic impact, right?

Yes, that's that one. And then the other one is like what we've shown with simulation and actually some measurements is that using the thermal materials, we can reduce the junction temperature of the XPU by between 5 and 10 degrees. And that can either, as Jim said, improve the reliability, but what actually I think our customers are going to do is they're going to run the clock speed faster and they're going to get more output. So the output of those is there -- that's the revenue stream, actually, right? So people are very powerfully motivated. It's really gone from thermal being like, oh, an aftereffect implementation thing to being like front and center in the architecture of the AI data center.

George Notter from Wolfe Research. Just expanding on the Thermadite discussion. I know it's been percolating inside the company for a lot of years, I think. And I guess I'm just curious what the milestones are to see traction towards customer engagement, customer revenue products, making real business out of this? Like what are the milestones you guys are looking for?

For me, the only milestone I ever care about is revenue. So the revenue milestone is we think based on the customer engagements that we have, and there's multiple of them that we start to generate revenue in the second half of next year. So second half of next calendar year. And to me, that's the key milestone is when does the revenue turn on. Now there's normal engineering milestones that we go through ahead of that, normal qualifications and pilots and things like that. But the most important milestone is that revenue milestone.

What's reasonable in terms of opportunity for you guys, revenue run rate?

So we set the TAM or SAM, I guess, at $2 billion. We always try to be a little bit conservative on the SAMs that are further out in time. I think it could easily be bigger than that. So if we were some portion of $2 billion, look, I think this could be certainly hundreds of millions dollar product line and could become a $1 billion product line for the company.

It's hard to see in the back of the room if anybody. I'm missing anybody, please shout out.

Is this last question?

Yes.

[ Cory Johnson from Epistrophy Capital Research ]. In this materials business, what are the barriers to entry to that? How the lab-grown diamond thing, for example, that seems to pop up in other places. What are the barriers to entry? And obviously, you've got some sales advantages as well.

Yes. In the materials -- that's a really good question. In the materials business, the barrier to entry is very high because it's like having a special recipe, right? And it's very difficult to reverse engineer that recipe. Like if you take Thermadite, proprietary material we've developed years and years ago. It's very difficult to reverse engineer that particular recipe. It's like reversing -- trying to -- it's like somebody handing you a cake and saying, hey, without recipe, reverse engineer and figure out how to bake a cake, right, if you've never been giving a recipe. That's what it's like. So it's very high barriers to entry.

So we feel like this is a very well-protected area for us and something that we have unique expertise in. I mean we were founded as a materials company, right? This is really deep heritage here. And really, what we're doing is we're taking an existing material from our industrial space and just repurposing it for a new application, right? That's what we're doing.

With that, I want to thank all of you. I want to thank all of you online. Again, for those of you here in the room, if you're hungry, you want food or drink and if you want to speak to Jim and the rest of the team, we have some time. Thank you.

All right. Thank you. Thanks, everybody.

Welcome, everybody. I will start with disclosures while everybody gets settled. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

For everybody in the room, I'm Meta Marshall. I cover networking here. I'm sure you've seen me around. We're delighted to have Coherent here with us today, Jim Anderson, CEO; Sherri Luther, CFO.

Obviously, big news yesterday with your NVIDIA announcement. So I just wanted to kind of kick it off to you guys to maybe just give a little bit of context for all the investors in the room, just kind of about that agreement.

Yes. Thank you, Meta, and thanks for having us. Definitely really excited about the announcement. So first of all, NVIDIA has been a great customer and a great partner of ours for over 2 decades through their Mellanox acquisition. And they really are a wonderful customer. We learn a lot from them. We think NVIDIA makes us a better company as we work with them. And so a great partner. And this new agreement is really a significant expansion in our partnership, and we're really excited about that. It's all around using photonics and optics to continue to innovate and advance data center architecture, especially around driving better power efficiency in data center architecture. And so we're certainly really excited about that.

It kind of has 2 main components. There's an equity portion where they're investing $2 billion in Coherent. So they're now an investor in Coherent. We love that. Having a 20-year customer as an investor is great. And then there's also an R&D and supply chain piece of the agreement where we've agreed to continue to innovate together on new technology. And then also, there's a supply chain agreement that's multiple -- multibillion dollar. It covers multiple different product lines. It stretches out quite a few years, and we're really excited about that as well. So that's something that's really significant for the company and a significant amount of revenue moving forward. So yes, really excited about it.

Okay. Lumentum, when they were here yesterday, said that they would kind of use part of those proceeds to maybe kind of purchase fabs or kind of expand fab capacity. Is there anything that you've kind of earmarked that we should be kind of paying attention to for them?

Yes. Maybe that's a good question for our CFO. I never saw the money. It went immediately to Sherri. Sherri keeps a tight leash on all of us.

Definitely, your first priority is expanding capacity for capital. That's the first priority. And frankly, that's the #1 priority from a capital allocation perspective that we have for our company anyway, leave aside the $2 billion infusion, but really focusing on increasing capacity. This agreement is for CPO solutions, so expanding capacity in our Sherman, Texas facility in particular. But that's the main focus on CapEx.

Okay. Got it. I'm sure we'll kind of -- or people might ask questions about it as we go throughout. But I want to just kind of start, we sat here a year ago, you just completed portfolio review after coming to the company in the second half of '24. Here we are a year later with the seeming mountain of demand. Just how do some of the decisions out of the portfolio review position you best for today? And how have you needed to change course?

Yes. I think -- so first of all, what was the purpose of the portfolio review? It was really to make sure that we've got all the investment concentrated and lined up on the areas of biggest growth and profit opportunity for the company long term. And so that had two parts. There were places in the company where we dramatically increased investment. And then there were places in the company where we shut down investment or where we sold off businesses, right? And so we did both of those in parallel.

And so places where we significantly increased investment where we thought we weren't investing enough were in data center communications, things like our OCS product, we dramatically ramped up investment in that. And then places where we thought these really aren't strategically aligned to where we want the company to be long term. They're really not going to move the needle for the company long term. In a lot of cases, they were lower gross margin than the company average. In a lot of cases, they were unprofitable. We either shut those product lines down or we sold them. We sold -- there were 2 product lines that we actually sold and divested.

And so a lot of that work has been done. But I think both Sherri and I have agreed that we'll continue to do this on an annual basis because I think it's a good practice to have -- to every year look at every product line and make sure that on behalf of investors that we're putting all the dollars of investment, whether that's CapEx or OpEx, that we're putting all the dollars in the best place for the company long term.

Got it. I mean, Sherri, are there any places where you felt like you needed to pivot during the year?

Nothing that I would really say it required a pivot. But what I would say is I'm really, really pleased that with the focus that we had on reducing debt. And so when we sold off some of the divestitures that we've done, we really used that money and focus that on paying down debt so that we can focus on investing for the long term of the company, not only the reallocation that Jim talked about in terms of R&D spend and capital investment, but just really incremental investments that we've needed to make in the business. And I think that's been really good.

Yes. That portfolio change allowed us to dramatically increase CapEx for -- as you said, for indium phosphide capacity, et cetera. So I think it was really healthy for the company.

Got it. I mean where do you look today? You have a lot of customers calling you. Where do you kind of prioritize incremental investment? And what projects or time lines versus the customers who say, I have $1 billion order today versus those who say, like, hey, I would like you to do this so that I can have $1 billion in 2 years.

Well, $1 billion today, we would have to prioritize. But yes, there's always -- it's always a balance and a trade-off, and I'm sure Sherri will want to give her thoughts on this as well. But the way we're looking at it is, first of all, we want to identify what are the biggest potential growth drivers for the company in the short term, but especially in the long term. We're always trying to build shareholder value for the long term for the company. And so if there's investments that we can make today that will drive tremendous growth for the company in the future, we're absolutely willing to do that. And we definitely are doing that today. So certainly, data center, tremendous area of growth. We still believe pluggable transceivers is a big area of growth for the company.

CPO is a tremendous opportunity for the company. We believe that in the data center, the remaining part of the network that's still electrical scale up will absolutely convert to optical over the coming years. It will happen in stages, but we'll see that conversion of electrical to optical to the point where we believe the end state is almost every connection in the data center is fully optical.

Now that will take time, and it will happen in steps, but it's -- physics is pushing that, right? The physics demands that we switch to optical. And so we're making the investments today to enable that. And so yes, I think that's really the way we think about the big areas of growth. There's other areas of growth in our industrial business, et cetera. But those are a couple of examples of bigger areas. Sherri, would you add?

I would just add on that, that given the strength of our balance sheet and the fact that our debt leverage is 1.7 in our last quarter, which is well below 2, the target that we put out at our Investor Day last year, we're very well positioned to make those incremental investments and prioritize for the long-term growth of our company. And so good strong cash generation, but with a strong balance sheet, we can easily make those CapEx investments and focus on the long-term growth.

And Jim, are you focused on -- there are some very big TAM with more competitors. There are -- like are you looking for areas where you can have the most share? Or are you looking for areas where you can kind of differentiate more when you think about that?

I think there's always a series of factors that you take into account, right? It's never a digital one or another, right? But certainly, we look at the size of the market opportunity and the ability and the competitive field, right, and our ability to compete.

We also look really carefully at gross margin dollars, right? We have had a big focus in the company of expanding our gross margin. And we made significant progress over the last 18-plus months. We've expanded gross margin by...

470 basis points to almost 500.

Almost 500 basis points, but we have more work to do, right? Our goal is to be over 42% gross margin. So gross margin and ability to get to those targets, that's a big factor as well. So there's definitely a number of different factors.

Got it. I mean then just on that, maybe back to this NVIDIA announcement, are there any like ways in which we should think about kind of the what the opportunity set is different for you versus Lumentum kind of as part of that agreement?

Well, I think Lumentum is a good partner. We like those guys. They're a customer of ours. They're a supplier of ours. But we do have a broader product line than they do. We're a bigger company. We have a broader product line. They're -- our agreement with -- I think you're asking about the NVIDIA agreement, it covers multiple product lines, one of which is the high-power CW laser that will be used for CPO. But there are other product lines that we have that are also included in that deal. So it covered multiple product lines all around CPO. So I think we have a pretty broad offering.

If you look in the photonics industry, and you just kind of look objectively at the technology portfolio, there's really no other company in the photonics industry with the breadth and depth of the technology portfolio that we have. But combined with the second thing, which is manufacturing scale, right? Our manufacturing scale is incredible, right? And you got to have both. You have to have both the technology, but the ability to ramp these things to very high levels of volume at very high levels of quality. And that's something that I think is pretty unique and sets us apart.

By the way, the other thing related to manufacturing is an incredibly strong U.S. manufacturing footprint, right? We were founded as a U.S. manufacturing company. We have over 20 U.S. manufacturing sites in 13 different states. And one of our most advanced facilities where we're ramping the world's most advanced indium phosphide production is Sherman, Texas, right? There's nobody else in the industry that's in production on 6-inch indium phosphide. We started production last year. So we're way ahead of the rest of the industry on 6-inch indium phosphide production. And so we're certainly -- we're a global manufacturing company, but we're certainly very focused on continuing to invest in our U.S. manufacturing footprint as well.

Got it. I mean EMLs indium phosphide capacity has been very tight, I think, is a generous term. How are you scaling capacity? How are you reducing the need for third-party EMLs? Just how are you judging what type of kind of indium phosphide laser to bring online?

Yes, it's a good question. And definitely, the industry is constrained on indium phosphide capacity right now. And indium phosphide used for EMLs, as you mentioned, CW lasers, both lower power and higher power CW lasers. It's also made for photo -- or it's also used for photodetectors as well. So there's a lot of products that are made on indium phosphide.

There's certainly -- we think the industry is constrained through this year, most likely constrained through next year. And I think given some of the demand that we're seeing for CPO-related technology and indium phosphide usage for CPO, it could be years that the industry is constrained on indium phosphide. So what are we doing about it? We're ramping our capacity as fast as we possibly can. We've already said that this year, we're doubling our capacity, right? So we're doubling our capacity. We're doing that with 6-inch indium phosphide.

The reason we're using 6-inch is because compared to a 3-inch wafer, you get 4x as many devices at half the cost structure, right? So it's -- we can ramp capacity much faster, and we can do it at half the cost structure. So this year, we'll double capacity. You can bet that we're going to continue to increase capacity beyond that. We haven't yet talked about our capacity plans beyond this year, but we will continue to ramp indium phosphide capacity. We see the demand -- when you take into account the growth in both pluggable transceivers as well as the CPO growth ahead of us, we feel very confident in the demand, and we're ramping capacity accordingly.

Got it. Early demand at 1.6T has very much been biased towards EMLs, but CW is expected to have kind of more share over time at 1.6T. Just how do you see kind of that transition playing out? Or how are you balancing kind of all of the needs given that you can do any of those? And do you see more of a role for VCSEL-based transceivers in the high-speed markets?

Yes. So at the beginning of the 1.6T ramp, which is we're early in that ramp right now, it's really -- it's a mix of EML and silicon photonics. For us, because we make both EML and silicon photonics-based transceivers, we have both for 1.6T. We don't really care that much. We're just building whatever our customer prefers. So if they have a preference for EML or silicon photonics, we just build whatever they have the preference for. And we expect there to be strong demand on both.

But the other transceiver that we're going to bring out is in the second half of this year, we're planning to bring out our 1.6T transceiver based on VCSEL technology. So that's based on gallium arsenide. And if we remember at last year's OFC, we were the only company in the industry that demonstrated 1.6T transceivers on all 3 types of laser technology, EML, CW and VCSEL. So we'll bring out that new VCSEL-based 1.6T transceiver we expect in the second half of this year. The reason that that's really good is because if indium phosphide is the constraint that runs on gallium arsenide technology. We have plenty of capacity on gallium arsenide. So that will help with some of the industry constraints around laser as well. Now it has different characteristics. That's usually better for short-reach applications, but I think it will help offload some of the demand that the industry has. So we're anxious to do -- to get that ramped into production.

Got it. Sherri, maybe back to you just in terms of -- you mentioned, I mean, a book-to-bill of over 4 in the quarter. Just how are you judging like I want this amount under LTA to make an investment, I'm willing to float this much. Just like how are you kind of looking at that calculus?

Yes. I think there's kind of 3 main elements when we look at LTAs that are kind of important. One is the commitment that we make for capacity or product, volume product for a customer. The second one is the commitment that they make to take that demand. And then there's a third part of it, which is kind of they've got skin in the game in terms of providing CapEx monies to us. In the case of NVIDIA, it was equity investment. But those are kind of the 3 main elements that when we look at an LTA.

And the NVIDIA agreement definitely fits the bill for those 3 things. But not all LTAs are that magnitude that they would be disclosed, and they certainly don't all have equity involved in them. But I think when you have those 3 elements, then it's a really good partnership where there's something for each party. And I think those arrangements have been -- we have multiple arrangements like that, that we have entered into, and those have been very, very good for us. And I think when you look at the amount of CapEx and the requirements in some of those LTAs, you evaluate that what are the needs as compared to what the customer is agreeing to. in there. So I think those have been very good for us. And I think that certainly, the NVIDIA agreement is an example of that.

Yes. And I think that, that announcement yesterday certainly will catalyze more customers to go and do long-term agreements, right? Some have already done -- put them in place. It will certainly catalyze more long-term agreements. And for us, we think that's a win-win for us and the customer. Why would we not want to secure demand further out in time? That's just better visibility. It gives us more confidence to invest the capital. And as Sherri said, a lot of times, there's a financial -- upfront financial commitment from the customer, which means skin in the game.

Got it. OCS, you mentioned it earlier. It's been a big topic of conversation over the last year, seeing growing interest there. Your approach has liquid crystal, which hasn't necessarily been used by kind of the one vendor who deploys OCS today. You've noted that you're working with 10-plus customer -- or 10 customers on OCS. Just where do you feel like customers are both with kind of liquid crystal as an approach and then just kind of with OCS in terms of moving from maybe lab trials to deployments?

Yes. In terms of those 10 customers, it's over 10 that we've engaged with. There's multiple customers. It's not just one, there's multiple customers that have already deployed that in real data center applications, right? So I don't think there's any hesitation towards using liquid crystal. In fact, it's kind of the opposite. It's a more reliable technology that's nonmechanical.

I think if you look at in a data center, if I have the choice between using a system that uses mechanical moving parts or using a system that doesn't, right, that's based on technology that has no moving parts, hey, you're always going to want to use the system that has no moving parts in the data center. It's going to be more reliable, right? Moving parts are not reliable. So better reliability, better long-term predictability, et cetera.

So I think the reality is right now, the market is very strong. The demand is very strong. We are right now just supply manufacturing capacity limited. The market is bigger than what we thought a year ago. We are trying to ramp our manufacturing capacity as fast as we possibly can. I'm actually not worried about demand at all. There's plenty of demand. I'm meeting with the team on a weekly basis. And all we're talking about is how do we ramp capacity faster, right? So -- but I think over the long term, what will play out is, yes, I believe that the better technology is one that's nonmechanical technology.

Okay. And then, I mean, just maybe back to that for a second, just in terms of understanding demand is strong, but how are you determining, okay, this person is doing trials, this person is doing real deployments. Like how -- there's precious resources that know enough. There's only one Julie.

Well, Julie is pretty amazing. Well, I think right now -- so all of -- like those 10-plus customers, they're all in different stages. Some are in production, deploying them in data centers. Others are on the other end of the spectrum. Some are just starting their evaluations, right? I think we have enough resources to support those customers right now with wherever they are in those stages, except for the fact that our manufacturing capacity is below demand, right? The biggest problem we have now is just let's -- the demand is incredibly strong. We just need to ramp our manufacturing capacity faster. So every single quarter, we've been increasing manufacturing capacity. And that's really what we're 100% focused on right now.

Okay. Maybe the announcement with NVIDIA is clearly around CPO for scale-up, which I think has been kind of largely an additive market to you guys. But there's also been the CPO discussion for a long time about scale-out and just whether it is cannibalistic eventually. I think you talked about on the call that there's going to be a role that is predominantly transceivers for a long time. But just how are you kind of messaging that path? Or how are you determining what that path is of kind of gradual CPO adoption and scale?

Well, I mean, ultimately, we'll just -- we'll build what our customers need, right? And -- but what I can tell you based on our customers' forecast, the long-term forecast, what they're telling us is that pluggable transceivers will remain the dominant format in scale-out, scale across, DCI, right, through the rest of this decade, right? We'll see pluggable transceivers, we believe, continue to grow through the rest of this decade.

Now we will see some adoption of CPO in the scale-out portion of the network. But we believe that, that will be relatively modest adoption. And that CPO is really the technology that enables the electrical network and scale up to be converted to optical, right? -- the biggest adoption of CPO will really be in the scale-up part of the network because that will really drive the conversion of all those electrical links to optical. So that's our view of the market. That's what we're seeing in terms of customer orders and our engagements with customers. But ultimately, we'll build -- we can -- obviously, we can build both CPO and transceivers, and we'll build both simultaneously, and we'll build whatever mix the customers want.

Okay. Finisar, maybe more traditionally or coherent hadn't always been known as having the biggest telco business. But you guys are doing quite a bit of business right now kind of on the scale across DCI side. You're participating in the ZR market. Just where is the DSP knowledge coming from in order to kind of produce the ZR? And just how do you feel like that opportunity is to take share on the telco side?

Very good. We've -- I mean, our telecom business, what we call communications business grew 44% year-over-year last quarter. So we're seeing very good growth. The fastest area of growth is DCI, as you mentioned. We're seeing very strong growth though in some of the more traditional transmission and transport markets as well. But in DCI, we feel very good about the growth that we're seeing. We have a full lineup of ZR/ZR+ transceivers at 800 gig, 1.6T, et cetera, right? So we feel very good about the future growth of that product line.

And then you asked about DSP. Yes. We -- actually, as part of the portfolio review process, we decided that we should outsource our DSPs, right? So we don't have in-house DSP. And that's the same thing that we do on our datacom transceivers is there's perfectly good, multiple good solutions in the marketplace. We have great suppliers for DSPs in data center. And so we're using external DSPs for our ZR/ZR+ products as well, right? And that allows us to focus on what our differentiation is, which is all the optical technology, right? We're experts in photonics, right? Anything that's photonic related, that we have a solution. We've got great technology. And so that's where we want to concentrate all of our R&D dollars.

Okay. I have questions about non-datacom, but I want to be mindful.

What? You mean other than data center?

Exactly. Exactly. So I'm going to open it up to questions and see if there's questions from the audience before I move on to other categories. All right. Perfect. So just -- we spent a lot of time talking about datacom. There's certainly a very large materials laser business that serves other markets. You just highlighted some of the Photonics West. These markets have been relatively flat now for a while. But just where do you see the opportunities emerging here considering it's still a very profitable business?

Yes. We love this business even though nobody ever asks us anything about it, right? So it's about 30% of our revenue. It's very profitable. It's a high gross margin business, very sticky customers. So we think this is a great business to be in. And it does grow slower than data center and communications, right? But we're -- and it's been relatively stable over the last few quarters. But we're starting to see growth pick up near term. That's really about semi cap.

A lot of our -- in industrial, what we make, a lot of it is like industrial lasers, so it's photonics, but in a bigger format, a bigger industrial laser. And semi cap uses -- semi cap equipment uses a lot of laser technology. So as you're seeing some of the semi cap vendors like ASML or KLA-Tencor or Applied Materials, you're seeing their -- them start seeing a pickup in demand. That gets reflected back on us as we're a supplier to some of those semi cap vendors. So we see that market start to pick up. So we expect our industrial business to start to grow over the coming quarters. The other really interesting -- and I hate mentioning this because we're taking it back to data center, but it's within our...

I gave you an out. I gave you an out.

Is in our industrial business, we've got some really amazing materials that actually -- that we've used for many years in things like semi cap equipment, but that actually have some pretty amazing applications in data center. So one of them is we make a technology -- it's a material called THERMADITE. It's a proprietary material, and it has amazing heat transfer characteristics. And so what we're engaged with a number of very large customers on is using our THERMADITE material as to replace copper heat exchanges in the data center. So think about instead of a copper heat sink, replacing that with THERMADITE and you're able to pull much, much more heat out at a much faster rate. And so that's something we're really excited about, and that could be a great application of that material and could have tremendous demand.

There's another technology in our industrial business, which is a thermoelectric material, which can pull the heat, take the waste heat out of the data center and convert it back into electricity. So imagine right now, all that heat that's being generated by the data center is just getting picked up the air conditioner, right? Instead, imagine being able to take part of that heat, reclaim it and put it back into electricity and funnel that electricity right back into the data center.

And even if you're able to do only a few percent of the heat and pull -- put that back into the electrical supply, I mean that's a massive win, right, especially when you think data centers today are primarily constrained by the power that goes into them. If we're able to reclaim some of that power, that's great. So that's another area that we're investigating within industrial. So there's a number of longer-term really good growth areas within the industrial business beyond just your typical markets as well.

Yes. Got it. Sherri, I want to spend a second with you. I could not find any person who had been able to get their convertible bondholders to forgo their dividend, which is something that you were able to do.

Sherri is just that good. Amazing CFO.

Yes. So just how are you thinking about capital allocation opportunities and just chances to optimize the balance sheet? You mentioned kind of getting leverage below kind of target levels.

Yes, yes. Well, I mean, first of all, I would say that the dividends and preferred shares you're referring to are from the investment that Bain had in the company, and they've been a great investor. We really like them. They've been a great relationship and a great partner with the company. So we really appreciate that. But in terms of capital allocation, the first priority, as we've talked about all this capacity expansion and CapEx that's required, that's the #1 priority because that drives the long-term growth of the company. If we don't make those investments, then we don't get the top line growth. Top line growth and all of that is very, very important to the company and to all of you, all of the investors, which is what we want to drive. And so making sure that, that's the top priority is number one.

We talked about the portfolio optimization, making sure that we were putting the money in the right highest ROI within the company. So that's part of that, too. But it's the #1 priority. And so how do we do that and make sure that we can do that effectively? It's making sure that the balance sheet is strong and clean. We refinanced our debt a quarter or so ago to get the lowest interest rate possible and so that we could best position ourselves to reduce the interest expense that's hitting the P&L but also reduce the debt -- the most costly debt that we've got.

And so our debt has -- the leverage ratio I mentioned earlier is 1.7x, which is down from over -- when I started the company, I think it was well over 3, maybe even higher than that, but it's come down quite significantly. And that's a reasonable place to be. The leverage ratio that we had put out at our Investor Day last year was below 2. So we're going to continue focusing on debt, but the #1 priority is really investing for long-term growth. And with a comfortable leverage ratio that we have, that makes it even easier to be able to do that and focus on it. So I'm really pleased with the progress that we've made there.

I mean there's been an intense focus, maybe sticking with you, Sherri, just on gross margins, particularly as just ways to take advantage of some of the tightness in this market. How do you think that investors should be kind of judging you guys in terms of gross margin progression, both in terms of portfolio makeup, but just in terms of kind of taking advantage of this market?

So I think -- I mean, we talked a minute ago about how we've improved the gross margin by almost 500 basis points since the end of FY '24. So that's good. It's not good enough. Our target is over 42%. Our last quarter was 38.7%. We're certainly guiding sequentially up in our current quarter. And so we're focused on a daily basis on gross margin.

I think when Jim joined the company, there was a complete change in the way that we're looking at managing the company in terms of gross margin. I think general managers had not really looked at gross margin before. They weren't really held -- that's what they told us anyway. They were not really held accountable to gross margin. And so boy, has that changed? They all know what they need to drive in terms of improving gross margin. And so that is a daily focus that we've really put in place.

And our strategy is primarily twofold. One is cost reduction, which is the entire company and making sure that everybody is driving yield improvements and reductions in product input costs and improvements in the manufacturing process, for example, in all those areas. And that's everywhere in the company. There is a focus on that.

The other part is pricing optimization, maybe a little bit to part of your question in terms of the market and opportunity. And certainly, where there's opportunity to price our products for the value they provide, that makes sense because our products help differentiate our customers. And so where we expect to get the larger magnitude of that is really in the industrial side of the business, mostly because those products are, in many cases, we're the only company that makes those products. But we have also been able to employ that in our communications business and also in our data center business. So it's a strategy that we have been very successful in to date.

When you think about the benefits of cost reductions and pricing optimization, those two items, the way to think about which has more of an impact or the quantification of that is that typically the cost reduction is about 2/3 of the benefit. And then pricing optimization is about 1/3 of the benefit that we see there. So we've got a ways to go in terms of grading us. We're not where we need to be. I'm not satisfied with our gross margin. But I am really pleased with that we've made good progress and that there's the focus on gross margin, and we've got a strategy to drive that improvement.

Okay. And then, Jim, maybe just last question for you. Do you guys feel like you have all of the pieces to execute on what you need? Are there are you constantly looking at M&A for ways to kind of further expand capacity? Just how are you thinking about kind of that organic, inorganic calculation?

Yes, definitely. We're always looking at scanning the landscape for is there anything that we can inorganically add to the company that would accelerate our plan, right? So we're -- clearly, we're making big investments on the organic business. If there's anything that we can add either technology or a product that accelerates our organic plan, absolutely, we're open to that. We spend a lot of time on that. We haven't found anything really compelling yet that we've needed to add. But certainly, we continue to scan for that and look for that. Absolutely.

Okay. All right. Well, Jim, Sherri, congratulations on the last year and everything going forward.

Thanks, Meta.

Thank you.

Thank you.

Greetings, and welcome to the Coherent Second 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 Jimmy Anderson, Coherent CEO; and Sherri Luther, Coherent CFO. During today's call, we will provide a financial and business review of the second quarter of fiscal 2026 and the business outlook for the third 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. We wish and caution you that such statements are predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs and 8-Ks.

These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in the projections or forward-looking statements. This call includes and constitutes the company's official guidance for the third quarter of fiscal 2026. If at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call.

Additionally, we'll refer to both GAAP and non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we provided 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, Jimmy Anderson.

Thank you, Paul, and thank you, everyone, for attending today's call. As world's leading innovator and provider of photonic technology and solutions, Coherent is at the center of an extraordinary expansion of optical networking infrastructure that's enabling tremendous growth in data traffic in the scale across, scale out and scale up networks of AI data centers.

As a result of the AI build-out, we saw strong revenue and profit growth in our December quarter. We also experienced another step function increase in our bookings, which we expect to increase again in our current quarter. Given the extraordinary strength and visibility of demand from our customers, combined with our continued rapid expansion and production capacity, we expect a period of sustained strong revenue growth over the coming quarters.

In particular, we expect continued strong sequential revenue growth in both our March and June quarters, and we expect our fiscal '27 revenue growth rate to exceed our fiscal '26 growth rate. The key growth drivers that we see over the coming quarters are growth in both 800 gig and 1.6T transceivers, growth from the ramps of new products such as OCS and CPO solutions and ongoing exceptionally strong demand in our products for DCI and scale across.

In addition, we are now seeing demand signals that indicate a pickup in the growth of our industrial business over the course of this calendar year, led by strong orders from our semi-cap equipment customers. Overall, we're excited about the growth outlook over the coming quarters. We are also focused on driving meaningful operating leverage and expect to continue to deliver EPS growth at a significantly faster than our expected revenue growth rate.

With that overview, let me provide some additional details on our recent quarter and what we expect moving forward. Turning to our Q2 operating results. Revenue increased by 9% sequentially and 22% year-over-year on a pro forma basis, which excludes revenue from our recently divested aerospace and defense business.

Non-GAAP gross margin expanded by 24 basis points sequentially and 77 basis points year-over-year. The combination of revenue growth and gross margin expansion drove non-GAAP EPS growth of 11% sequentially and 35% year-over-year. I'll now provide some highlights from our 2 operating segments.

In our Datacenter & Communications segment, which now accounts for over 70% of our revenue, we saw an acceleration of our sequential growth rate with Q2 revenue growing by 11% sequentially and by 34% year-over-year, driven by strong growth in both the Datacenter & Communications markets. In our data center business, we drove a substantial acceleration in our sequential growth rate with Q2 revenue growing 14% sequentially and 36% year-over-year.

The acceleration of sequential growth in Q2 was driven by very strong execution from our production teams. Given the exceptional demand and our rapidly expanding capacity, we expect double-digit sequential growth in data center, again, in both our March and June quarters. Given that this is our largest and fastest-growing business, I'd like to provide some additional details on both the demand and supply picture within our data center business.

Q2 data center revenue growth was driven by growth in both 800 gig and 1.6T transceivers. In Q2, we experienced another step function increase in our data center bookings with a book-to-bill ratio that exceeded 4x as customer demand continues to increase and customers place orders further out in time, which provides us with strong visibility for the coming quarters.

The strength of our product portfolio, combined with our vertical integration and our expanding U.S. manufacturing footprint, provide a clear competitive advantage with our customers. We expect revenue growth in the current quarter to be driven by a combination of growth in both 1.6T and 800 gig transceivers as well as growth in our OCS systems. We see strong demand for our 1.6T transceivers across multiple customers and continue to expect both 800 gig and 1.6T to grow significantly in calendar '26.

We expect 1.6T to ramp significantly over the coming quarters with the early phase of the ramp driven by our EML and Silicon Photonics-based transceivers followed by our 200-gig VCSEL-based 1.6T transceivers ramping in the second half of this calendar year. On the supply side to address the extraordinary growth in demand, we are investing in the rapid expansion of our production capacity. For example, we significantly increased our indium phosphide production capacity in Q2, and we are executing on track to our plan to double our internal indium phosphide production capacity by the fourth quarter of this calendar year.

As a reminder, our indium phosphide capacity expansion is driven by a ramp of 6-inch wafer production, a 6-inch wafer compared to a 3-inch wafer will produce more than 4x as many chips at less than half the cost. Our production team is doing an outstanding job ramping our 6-inch indium phosphide production, and I'd like to take the opportunity to thank our team for executing ahead of our plan in Q2. We are ramping production in parallel at 2 sites, Sherman, Texas and Jarfalla, Sweden. We are in production with 3 different types of key transceiver components on 6-inch indium phosphide EMLs, CW lasers and photodiodes. Our 6-inch yields continue to exceed the yields of our 3-inch production lines.

In addition, we have multiple 6-inch indium phosphide substrate suppliers, and we have secured committed substrate supply that supports our expected doubling of capacity by our December quarter. In short, we are very pleased with the ramp of the world's first 6-inch indium phosphide production lines and expect this production ramp to support significant revenue growth and margin expansion of our transceiver products over the coming quarters.

We also expect to continue to supplement our internal indium phosphide capacity with continued sourcing from external suppliers. For example, EML supply from our external suppliers increased sequentially in Q2, and we expect it to increase again in the current quarter and during this calendar year through continued long-term partnership with our key external suppliers.

We also continue to invest in the expansion of our transceiver module assembly capacity. We are expanding our production capacity in Malaysia, Vietnam and other locations. Overall, I'm very pleased with the continued expansion of our production capacity to meet the rapid growth in our demand. I'm equally excited regarding our progress on other key data center products and technologies. Specifically, I want to provide updates on our CPO and OCS products, which we expect to be significant contributors to our long-term growth and profitability.

Transceiver technology platforms continue to evolve, and we are well positioned as we continue to make progress on LPO, LRO, CPO, and MPO-related products and technologies with a growing number of engagements across a wide range of customers. In particular, we recently secured an exceptionally large purchase order from a market-leading AI data center customer for a CPO solution that includes our new high-power CW Laser that began sampling last year.

Beyond the outstanding performance of this solution, a key factor in the customer's decision to partner with Coherent was the fact that our high-power CW Laser is produced on our 6-inch indium phosphide line in our Sherman, Texas facility. We expect this significant design win to generate initial revenue towards the end of this calendar year with a more significant revenue contribution next calendar year and beyond.

We also have engagements across multiple other customers for both indium phosphide and 200-gig VCSEL-based solutions for CPO and MPO applications. In Q2, we also saw a strong progress for our Optical Circuit Switch platform based on our differentiated nonmechanical liquid crystal technology. OCS backlog grew sequentially in Q2, and we now have over 10 customer engagements. Shipments and backlog include both 64 by 64 and 320 by 320 system sizes with most of the backlog weighted toward the larger system size.

We expect OCS revenue to grow sequentially in the current quarter and the coming quarters as we ramp production capacity as fast as possible to meet the rapidly growing demand and the over $2 billion of expected addressable market opportunity for this platform over the coming years. In our communications market, Q2 revenue grew 9% sequentially and 44% year-over-year.

Growth continues to be driven by our products for data center interconnect and scale across as well as strong growth in traditional telecom applications. We expect our communications business to grow sequentially in the current quarter as well as our June quarter. The strength we are seeing in communications is broad-based in terms of both products and customers.

We continue to see extremely strong demand for our products addressing the data center interconnect market opportunity. These include our ZR/ZR+ Coherent transceiver products as well as lasers and other components that we sell to system OEMs. For example, we recently secured a significant multiyear design win with a leading DCI OEM, which utilizes Coherent's industry-first uncooled 3-pin micro-pump solution. We're also seeing strong demand in our traditional telecom business driven by ongoing market recovery and new product introductions, such as our new award-winning multi-rail technology platform. We are also experiencing very strong demand across our broader communications product portfolio, including pumps, amplifiers, line cards and systems.

Turning to our Industrial segment. Revenue grew 4% sequentially and was flat year-over-year on a pro forma basis, excluding revenue from the recently divested aerospace and defense business. Sequential growth in Q2 was driven by our industrial lasers and engineered materials product lines.

We expect the Industrial segment to be roughly flat sequentially in the current quarter on a pro forma basis. However, looking ahead, we expect improving demand. For example, we saw a significant increase in orders in Q2 from our semi-cap customers, which we expect to translate into sequential growth for our industrial business in our June quarter and the remainder of this calendar year.

At the recent Photonics West Conference, we highlighted a number of compelling long-term growth areas for our industrial product lines, including data center XPU cooling solutions based on our 300-millimeter silicon carbide and thermodyte technology, thermoelectric generators for improving data center energy efficiency through waste heat recovery, excimer laser annealing systems for Gen 8 OLED fabs, high-power lasers for direct fusion energy generation and excimer lasers for processing superconducting tape used in magnetic fusion applications. This wide range of differentiated solutions positions our industrial business for significant long-term growth.

Finally, I'd like to provide an update on our portfolio optimization initiative. Last week, we completed the sale of our product division based in Munich, Germany that makes tools for materials processing. The sale of this product division is expected to be immediately accretive to both gross margin and EPS. As a result of this sale and other operational streamlining initiatives, we exited 10 sites over the past quarter which brings the total number of sites that we've either sold or exited to 33 over the past roughly 6 quarters since we began this initiative. We plan to continue to streamline our footprint and exit additional underutilized and unnecessary sites over the coming quarters.

In summary, we delivered strong revenue and EPS growth in Q2 and expect both fiscal '26 and fiscal '27 to be strong growth years for Coherent given our exceptional demand from our customers and the rapid expansion of our production capacity. I'd like to thank my Coherent teammates for their strong execution and the incredible innovation that they are driving every day for our customers.

I'll now turn the call over to our CFO, Sherri Luther.

Thank you, Jim. In our second quarter, we continued to drive strong double-digit year-over-year revenue growth, gross margin expansion and strong profitability. Capital allocation continues to be an area of focus where we maintained our debt leverage ratio below 2x. I will now provide a summary of our Q2 results.

Second quarter revenue was a record $1.69 billion, up 7% sequentially from the first quarter and up 17% year-over-year, driven by growth in AI Datacenter & Communications demand. On a pro forma basis, excluding revenue from our Aerospace and Defense business, which we sold in Q1, Q2 revenue increased 9% sequentially and 22% year-over-year.

Our Q2 non-GAAP gross margin was 39%, a 24 basis point improvement compared to the prior quarter and a 77 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, efficiency gains from improved cycle times in the manufacturing process as well as yield improvements. Pricing optimization also continued to contribute meaningfully to our gross margin expansion.

Second quarter non-GAAP operating expenses were $321 million compared to $304 million in the prior quarter and $283 million in the year ago quarter. Operating expenses as a percentage of revenue declined to 19% as compared to 19.2% in the prior quarter and 19.7% in the year ago quarter. SG&A expense as a percentage of revenue declined to 9.6% in Q2 as compared to 9.8% in the prior quarter and 10.2% in the year ago quarter due to our continued progress on driving efficiencies and greater leverage in SG&A.

We have made significant progress on our ERP consolidation project, where we expect most of the company to be on a single ERP platform by the end of this fiscal year. In addition, we are executing on our low-cost region initiatives within our G&A functions that will continue to show benefits throughout this fiscal year and more meaningfully into our fiscal year 2027. The sequential and year-over-year increases in R&D were primarily in the Datacenter & Communications segment as we continue to focus on investments with the highest ROI that drive the future growth of the company.

Our second quarter non-GAAP operating margin was 19.9% compared to 19.5% in the prior quarter and 18.5% in the year ago quarter. Second quarter non-GAAP earnings per diluted share was $1.29 compared to $1.16 in the prior quarter and $0.95 in the year ago quarter. From a capital allocation perspective, we maintained our debt leverage ratio at 1.7x, down from 2.3x in the year ago quarter. Our capital expenditures in the second quarter were $154 million as compared to $104 million in the prior quarter and $106 million in the year ago quarter.

We are focused on supporting the exceptional customer demand in Datacenter & Communications. As a result, we are rapidly expanding our capacity and expect our capital expenditures to increase sequentially over the remainder of this fiscal year. We have made good progress in strengthening our balance sheet, including significantly reducing our debt leverage, refinancing our debt and improving our working capital.

With a strong balance sheet and focus on improving profitability, the company is well positioned to support the exceptional customer demand with investments to rapidly expand our production capacity. As Jim noted, at the end of last month, we closed the sale of our product division based in Munich, Germany that makes tools for materials processing. For reference, over the past 4 quarters, this business contributed average quarterly revenue of $25 million with a gross margin well below Coherent's corporate gross margin. The sale will reduce our employee headcount by approximately 425 employees. We expect to use the proceeds from the sale to reduce our interest expense by paying down debt, which will be immediately accretive to our gross margin and EPS.

I will now turn to our guidance for the third quarter of fiscal 2026. Our Q3 outlook includes $5 million of revenue from the period prior to the close of the sale of the Munich product division at the end of January. We expect revenue to be between $1.7 billion and $1.84 billion. We expect non-GAAP gross margin to be between 38.5% and 40.5%. We expect total operating expenses of between $320 million and $340 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 $1.28 and $1.48 on a non-GAAP basis.

In summary, I'm very pleased with the strong results in our second quarter. We remain focused on expanding profitability with disciplined execution against our long-term financial target model. We are excited about the significant growth trajectory ahead. This momentum reinforces our confidence in driving long-term growth and durable value creation for our shareholders. That concludes my formal comments. Operator, please open the call for Q&A.

[Operator Instructions] Our first question comes from Samik Chatterjee with JPMorgan.

Jim, I hope your leg is healing now. Hopefully, things are better on that front. Maybe for the first question, really just on demand. How would you characterize -- I mean, you gave some of the book-to-bill numbers that you're seeing, but how would you characterize the visibility there in terms of maybe duration? Like how long is the visibility in terms of demand that the customers are providing? And vis-a-vis how should we think about the capacity ramp for indium phosphide in particular? How are you planning that out, particularly how to think about contribution of 6-inch to that capacity ramp? And I have a follow-up.

Yes. Thanks, Samik. And yes, the leg is doing much better. Thank you for that. I appreciate that. On the demand question, yes, I would say, I would call the demand that we're seeing and the visibility extraordinary. If I just look at a couple of highlights from last quarter, if we look at our data center business, I was really pleased with the acceleration of our sequential growth rate, 14% sequential growth. And then we also saw, as I mentioned in the prepared remarks, over 4x book-to-bill ratio. So just seeing incredibly strong demand.

And we're seeing bookings go further out in time than we would have in the past, which is great for us for visibility. So number one, bookings being booked out through the rest of this calendar year. And most of the bookings we're getting now are into calendar '27. So most of our calendar '26 is booked out and calendar '27 is filling very, very quickly. That's important to us because it gives us just great visibility. And then we're also getting really good detailed long-term forecast from our big customers. A lot of times, those forecasts go out 2, 3 years. So we're getting forecasts that go out into calendar '28, which again is great for visibility.

And then the third thing I would mention with respect to visibility is a number of long-term supply agreements that we've either signed with customers or in the process of signing, where the LTA will provide a guarantee to our customers for a certain amount of supply and in exchange, they give us a guarantee on a certain amount of demand. And there's often some sort of financial commitment from our customers like investment for CapEx, et cetera.

So I would say all those things combined, the visibility of the business is the best it's ever been, which gives us just kind of great confidence in terms of the go-forward growth that we're seeing. On the second part of your question on indium phosphide capacity ramp, again, here, really pleased with the team's execution here on the 6-inch indium phosphide ramp. One of the key metrics that I look at in terms of how the progress -- how we're making progress is wafer starts. And remember, our goal that we mentioned last quarter was that we wanted to double indium phosphide capacity by the end of this calendar year. And if you look at the number of wafer starts that we're starting this quarter, we're basically at 80% of that target capacity already. So we're starting wafers at 80% of the goal of doubling capacity, which is really strong and frankly, ahead of schedule.

In fact, last quarter, we more than quadrupled the number of wafer starts from our September quarter to our December quarter. So I think that -- for me, that's a really good important leading indicator on how we're progressing on the indium phosphide ramp is that being at 80% of target in terms of initial wafer starts. Now that's the beginning of the production line, right? It does take a number of quarters before those wafer starts or a number of months before those wafer starts transition into products and ship to customers. And typical time from a wafer start to like a transceiver shipment is about 6 months. So -- but that's a great leading indicator on our indium phosphide ramp.

And we're already seeing the benefits this quarter from the initial production that started in our September quarter of last year. So I'm really pleased with that ramp. And again, the reason we're so focused on that is because 6-inch wafer versus a 3-inch wafer is more than 4x as many chips at less than half the cost. And so we're really pleased with that ramp. And then Samik, it sounded like you had a follow-up.

Yes. Just quick. OCS, I mean, clearly, demand is strong, but any way to quantify for us what the magnitude of the backlog from the 10 customers is? Or maybe in terms of like material impact to revenues, how should we be thinking about when does it get to maybe more than like $100 million revenue number in terms of timing? Should it be this fiscal year or next year? How to think about that?

Yes. Thanks, Samik. Yes, in terms of OCS, this is going to sound like a common theme. But here again, demand is very strong. We are very focused on the production ramp now. So backlog is good. It grew in the December quarter versus the September quarter. We expect revenue to ramp to grow this quarter and really the revenue to ramp throughout this calendar year and into next year. And we are just 100% focused on ramping capacity and production as fast as possible. The demand is very strong. We're engaged with over 10 customers. The size of the market has only grown since we assessed it about a year ago. And so tremendous opportunity, and we're ramping production as fast as possible.

And we'll probably give some more specific milestones in terms of revenue as we progress through the year, but it will certainly contribute to our revenue growth throughout this calendar year and certainly a contributor next year as well.

Our next question comes from Simon Leopold with Raymond James.

The first thing I wanted to ask about was you had highlighted some progress traction on the 1.6 terabite which is, I guess, I'd call it an emerging cycle. So maybe if you could put some milestones around this, help us understand when does that cross $100 million per quarter? And how does the competitive landscape stack up for that product? And then I've got a longer-term question I'll follow up with.

Yes. Thanks, Simon. So first of all, both 800 gig and 1.6T, we expect to continue to grow for this calendar year. We saw growth in both 800 gig and 1.6T last quarter. We expect both to grow again this quarter. 800 gig is the biggest portion of revenue still. We expect that to grow on a year-over-year basis this year. 1.6T is growing much faster, but it's growing off a smaller base than 800 gig. I would say the 1.6T ramp has accelerated. The demand from the customers has accelerated. We're ramping with multiple customers. I see that as really a key main growth driver for us throughout this year.

We don't typically break out revenue by data rates, but those two 800 gig and 1.6T will absolutely be key growth drivers for the company this year, this calendar year. And 1.6T will continue to ramp into the following calendar year as well. In fact, a lot of the orders that we're seeing right now are certainly for 800 gig, but a tremendous amount of orders on 1.6T. And so that's great -- that provides us great visibility in terms of the demand moving forward.

And then maybe just mention what I did on the prepared remarks, which is our initial ramp is driven by both EML-based transceivers for 1.6T as well as silicon photonics. But we expect VCSEL-based 1.6T transceivers to start to ramp in the second half of this year. So really pleased with the progress and the rate and pace and the growth we see ahead for 1.6T.

That's good. And then I heard also you've gotten a qualification on the co-packaged optics. And I'm going to ask about what happens next, which is thinking about the scale-up opportunities. Are we in a time frame yet where you're engaging customers for scale-up architectures? Maybe if you can give us some sense of how to think about that market opportunity, which I imagine may be years away, but I have to guess you're engaged in the engineering aspects already.

Yes, certainly. So that CPO purchase order that we received, and it was a massive purchase order, and that's for our a solution based on our high-power CW laser. We're really pleased with that. That is -- initially, that will be deployed in scale out, but we expect that to lead to scale-up deployments over time.

And I would say that there is very active engagement and design win progress on scale up, on CPO, all sorts of CPO-related solutions for scale-up across multiple customers. I would call that very active, deep engagements. On the size of the scale-up opportunity, I would say it's actually difficult to size. It is tremendous. Some of the forecasts that we've seen from our customers are very, very large, right? If you think about within the scale-up opportunity, all of that network today, the networks within the racks are electrical. And as those networks convert to optical over the coming years, the amount of optical content that we gain in the scale-up part of the network is just tremendous. And we're very well positioned -- there's a couple of different ways that we expect to supply customers in that space. We can certainly supply them at the component level by providing high-power CW lasers, detectors, fiber optical cable.

But we're also planning to supply those customers at a higher level as well. So for instance, external laser sources, the pluggable laser sources that would plug into the front panel, also CPO module assemblies, et cetera. So there's a variety of ways that will support that market. But we see that as a tremendous growth opportunity and scale up. And I wouldn't call it years out. I think it's sooner than that based on the plans that we're seeing from our customers.

Our next question comes from Ruben Roy with Stifel.

Jim, I'd like to keep the discussion going on CPO. And it's great to hear about the large order on the time line end of the year into next year. High level, how are you thinking about content in CPO relative to the strength you're seeing currently with 800 gig and the nascent 1.6 terabit module strength? Do you think that these will -- I think the consensus is that these technologies will coexist, but I'd love to get your thoughts on the content opportunity and the growth opportunities as you look out to 2027 as CPO ramps.

Yes. Thanks, Ruben. Yes, we really view it as it's additive. The way we think about it is pluggable transceivers will remain the dominant form factor and certainly in scale across and in the scale-out networks through at least the rest of this decade, right? So we see very strong growth in those pluggable formats in scale across and scale out over the coming years.

And what we see in CPO is CPO starting to get deployed initially in scale-out, and we're seeing that. That was the purchase order that we procured, et cetera. But we believe that CPO -- the big growth in CPO is actually driven by scale up. And that is a very tangible opportunity based on the customer engagements that we have. And that will -- we believe the scale-up CPO opportunity will dwarf the opportunity and scale out. It will be orders of magnitude larger. And so we view that as all incremental TAM for the optical industry in general and certainly for us as well since that network is 100% electrical today, all of that optical content and scale up is incremental TAM.

That's helpful. And a quick follow-up is you talked about 800 gig versus 1.6 terabit mix. And just wondering, I assume you're starting to see some demand for 200 gig and differential EMLs and that type of thing. As you think about later this year into next year and sort of the mix, what are the margin implications as you approach 40% gross margins here on the modules themselves?

Yes. The 1.6T gross margins, we expect to be higher. Generally, what we see as an industry is with each new data rate, the ASPs of each new data rate go up over the prior data rate. So we expect 1.6 -- we're seeing 1.6T ASPs that are higher than 800 gig. And then generally, especially at the beginning of the life cycle of the data rate, the gross margins are higher. So we expect 1.6T gross margins to be higher. And so it's -- we view 1.6T ramp as margin accretive for us.

And then certainly -- just one other point to also factor in that is as we ramp 6-inch indium phosphide capacity, which supports both 800 gig and 1.6T transceivers, that 6-inch capacity is a gross margin driver for us as well in our transceiver business.

Our next question comes from Thomas O'Malley with Barclays.

Jim, in the preamble, you talked about a book-to-bill ratio that exceeded 4x as customer demand continues to increase and customers are placing orders further out in time. Obviously, a lot of really good opportunities in the data center segment, but maybe you could spend some time talking about the components of that backlog. Where is the greatest area of strength? Obviously, you have the OCS side, on the module side, on the laser side. Maybe spend a little time just measuring out those vectors to give us a little bit of a feel for what's contributing to most of that strength given we're hearing from others in the industry a lot on specific numbers. I know you don't do that, but anything that you can to help us on that?

Yes. Thanks, Thomas. In terms of that book-to-bill last quarter, I would say the majority of that -- vast majority was driven by 800 gig and 1.6T transceiver bookings. It's a combination of growth that we expected from 800 gig, continued growth, even maybe stronger -- a little bit stronger than we had expected and then an acceleration in 1.6T. So both 800 gig and 1.6T bookings were incredibly strong. We expect that to continue into this quarter as well.

In addition to that, bookings for OCS contributed last quarter. And if I look at the current quarter and what we're expecting in bookings, we expect it to be another incredibly strong quarter in terms of bookings. And it's really a combination of those 4 things I mentioned, primarily 800 gig and 1.6T transceiver bookings. Over time, it starts to be more and more 1.6T bookings. And then I would say, CPO and OCS as well. So those are really the main drivers within the data center bucket of bookings.

The other place where we are seeing very strong bookings is in the communications business. So I would say the growth that we're seeing in DCI, data center interconnect products is very, very strong. That's growing faster than our overall growth rate in communications, but we continue to see strong demand beyond DCI in the kind of traditional telecom space as well. So that would be the other place where we're seeing strong bookings.

And then just as a follow-up, you talked about indium phosphide capacity doubling by year-end. Your competitor talked about 40% increases, which they're kind of blowing through in a short period of time. It seems like the industry is bringing a lot of supply online. Broadcom is talking about some additional capacity as well. Maybe talk about when you see the industry getting product that it needs? Are we still in a position where the industry is short? And just given the incremental capacity additions, when do you think you'll be at equilibrium in that business?

Yes, it's a great question. It seems like every quarter, we think we're going to catch up and then the demand keeps increasing. So I don't foresee the supply/demand getting back in balance this calendar year. I don't think it happens next calendar year. And if the forecast that we're seeing from customers for indium phosphide laser supply that they need for scale up, I think we could be in a very sustained long period of supply-demand imbalance on indium phosphide, which is exactly why we're super focused on ramping our 6-inch capacity as quickly as possible. That near-term goal is to double our capacity by the end of this year, but we're driving goals beyond that, that are very aggressive in terms of our continued ramp of indium phosphide capacity. And the demand that we're seeing from the customers absorbs all of that capacity and then some.

Our next question comes from Blayne Curtis with Jefferies.

Ezra Weener on for Blayne. Just the first one, obviously, component pricing is coming up for your externally sourced components. But at the same time, you guys are signing LTAs. Can you talk a little bit about pricing and how you're thinking about gross margins within that context?

Yes. In terms of input costs, I think you're talking about input costs to our pricing. Yes, we view it as -- we are seeing some higher pricing input costs with respect to externally sourced things like EMLs. But that is really offset by our internal indium phosphide ramp, right? So I would say the net is -- we're in a much better position over the coming quarters as we continue to rapidly expand our indium phosphide production capacity, and that's a gross margin benefit for us. So the net is positive for us. So we feel pretty good in terms of our position with respect to indium phosphide cost.

Another way to look at it is any time the kind of market price of indium phosphide goes up, it makes our internally sourced indium phosphide that much more valuable, right, in terms of a differential. And then I would say in terms of our own pricing, we continue to see the ability to continue to optimize pricing. I think Sherri mentioned in her prepared remarks that some of our gross margin improvement last quarter was based on pricing optimization. We continue to see opportunity to optimize pricing, especially in an environment where demand is very strong. And so we believe we're in a good pricing environment across all of our businesses. And maybe, Sherri, do you want to comment any more on the effects of gross margin? Or did that cover it?

Yes, sure. Just a couple of things I can add. When you look at the improvement that we saw both quarter-on-quarter and sequentially in gross margin, quarter-on-quarter and year-over-year, key elements of that were certainly cost reductions where we saw lower product input costs and the Datacenter & Communications part of our business was actually an area where we saw more of the magnitude of that benefit. We had lower product input costs for key elements, larger components of our BOM. So that was really good to see.

We also had improvements in the manufacturing process that enabled greater throughput and efficiency and yield improvements. And again, that was in the data center part of our business. So that was really good to see as well. And then on the pricing optimization side, we actually sequentially saw an even greater improvement in pricing optimization in a number of areas in our business.

So these are key elements of our gross margin expansion strategy that we've rolled out as part of our strategy at our Investor Day last year, and we're continuing to focus on that. Really pleased with the progress that we've made to date on that. And in fact, the other thing I'll add is that if you look at our 39% gross margin for this most recent quarter that we achieved and you compare that to where we -- our FY '24 gross margin, we've actually improved our gross margin by about 470 basis points through the elements of the strategy that I've described here. So I'm really pleased with the progress. We're still -- I would consider to be in our early stages as we continue to drive toward that greater than 42% target.

Got it. And then for the follow-up, I just wanted to ask about the 6-inch ramp and kind of the timing of that and also what the long term looks like. So how should we expect that to layer in? And longer term, do you expect the heavy majority of your capacity to be 6-inch? And can you talk a little bit about the advantage of that relative to peers?

Yes. On the second part of the question over the long term, yes, essentially all of the capacity that we're adding now is 6-inch. We're adding a little bit of 3-inch, but all of the -- but beyond that, the vast majority is 6-inch capacity, and that will continue. So over time, 6-inch capacity will just become more and more a bigger percentage. And if you think about us doubling capacity year-over-year, and almost all of that coming from 6-inch. The other way to think about it is by the end of this calendar year, about half of our capacity will be 6-inch, and it will grow from there in the following years.

And in terms of the ramp progress, as I shared, in terms of wafer starts, we're already at 80% of that goal to double our capacity this year. We have plans to significantly expand it beyond just doubling capacity in the following years. It's a little too early to talk about that. But as we get -- move throughout this year, I'll give some guideposts on future years and the expected continued ramp of indium phosphide.

And then I think you asked about cost structure advantage. Yes. So the basic cost structure advantage is a 6-inch wafer compared to a 3-inch wafer. You get over 4x as many product out of that wafer at less than half the cost. So it's a tremendous cost savings. And that's been a key factor in, I think, why our customers have been selecting us as well. So for instance, that very large high-power CW purchase order that we just received, a big reason for that was because that high-power CW laser will be manufactured on 6-inch indium phosphate and it will be made in Sherman, Texas, U.S.-based manufacturing.

So that's definitely something that's factoring into our customers' decisions on why to select Coherent is that advantage in 6-inch capacity and the location of it.

Our next question comes from Papa Sylla with Citigroup.

Congrats on the results. So Jim, I guess my first question is on indium phosphide capacity ramp as well. So any way you can update us at this point on the mix of your internally kind of developed indium phosphide transceivers. I believe previously, you reached 50% or so. Any color on where we are at this point? And perhaps ties to that as well, do you have any target in mind on longer term, what kind of mix you are looking at?

Yes. Thanks, Papa. What we said in the past to what we've shared is that, in the past, our amount of indium phosphide internal versus external supply is the majority of our indium phosphide, for instance, lasers are supplied from internal sources. And now if I look forward, I would expect, just given the rapid pace of our 6-inch production over the coming -- this year and following years, I think the percentage that's internally sourced will grow over time.

Now that said, we expect to continue to utilize external suppliers as well. We think there's good reasons for that with customers and with supply chain resiliency. And so we expect to continue to utilize external sources. But over time, the internal sources will become a bigger proportion of the supply.

Got it. That's helpful. And for my follow-up is kind of on OCS. It's very good to hear that your engagement is growing. I think it was 7 now kind of it went up to 10 now. So it would be helpful if you can remind us kind of the prior 7, what kind of workload was those 7 engagement or kind of projects related to? And also for the additional 3 as well? Any color on are those AI focused or what kind of workloads they are kind of related to?

Yes. Thanks, Papa. Yes, I'll talk in terms of applications that we're seeing in OCS. I think initially, we were seeing OCS adoption in -- where OCS has historically been used, for instance, in a spine part of the network or in a redundancy type of application. But as we've engaged with more customers and as we've engaged more deeply with existing customers, there's been sort of a broadening of the applications that we're seeing for OCS. So whereas maybe initially, most of the applications were in the scale-out portion of the network, we're certainly seeing now applications of OCS even in the DCI portion of the network.

And as we're deeply engaged with customers on their scale-up plans, so optical within scale up, we're now seeing customers talking about using OCS within scale-up networks as well. And so it's really been a broadening of not just customers but applications. And that's why when we assessed the size of this market a year ago, we assessed it at about -- I think it was about $2 billion by the end of this decade. That we likely undersized it. And if we reassess it now, it will be well above $2 billion. So we've seen customers and applications just continue to grow.

Our next question comes from George Notter with Wolfe Research.

I just wanted to come back and ask about your ability to manufacture all the stuff. Obviously, the demand is quite impressive right now. I think we hit the kind of indium phosphide discussion pretty well. But I'm just curious like transceiver supply in Malaysia, Vietnam. Obviously, you've got a big telecom business as well. I'd be curious on like what things look like in terms of utilization rates? Do you have enough capacity? Do you need to expand capacity? And then any sense that you'd look to use outsourcing as well?

Yes. Thanks, George. Yes. So we've been more focused on updating you on indium phosphide capacity because that's kind of been the constraint across the industry, and we've been constrained by that. But in parallel, we have certainly been building out capacity of, for instance, transceiver assembly and test. So I shared last quarter that within Malaysia, we opened a new facility within Malaysia, second facility in Penang, Malaysia. We also are now planning to build transceivers at our Vietnam facility. So Vietnam already makes a number of the components that go into our transceivers. We're now starting to build transceivers within Vietnam. So that's an expansion.

So we've been expanding assembly and test capacity. We're also expanding -- you mentioned about telecom for our DCI and telecom products, we're also rapidly expanding capacity for that as well. So yes, I would say really across the board, we're ramping capacity as quickly as possible. I feel like that's kind of my main job right now is ramping capacity. And so yes, given the strong demand that we're seeing, that's definitely a focus across the organization and across many different product lines.

And then I think you asked about outsourcing as well. Yes, we are very open to outsourcing, and we do use a number of different partners for outsourcing. And the way we always approach it is if something provides us -- if manufacturing something provides us a technical -- like a technology benefit that our customers care about or if it provides a cost structure benefit, then we'll do it in-house. But if it doesn't do -- provide either one of those 2 benefits, then yes, we will look to outsource. And there's a number of places where we've historically outsourced and things that we're looking at moving forward. So what we keep in-sourced is things that are technically beneficial to our products and cost structure advantage. Obvious example of that is 6-inch indium phosphide, where we're the world's only producer of 6-inch indium phosphide. So yes, we're certainly open to outsourcing, and we'll continue to look for opportunities to leverage outsourcing.

Our next question comes from Karl Ackerman with BNP Paribas Asset Management.

Jim, thanks for more detail on the growth magnitude into 2027. But could you speak to the investments you're making today to drive growth and whether OpEx growth could grow at perhaps half of sales growth? I asked because in March, I would have thought you'd see maybe less growth, more stability in OpEx from the sale of Materials Processing business. So if you could tie that together to, that would be helpful. And I have a follow-up, please.

Yes. Maybe I'll let Sherri talk about the OpEx growth, but maybe just a little bit of a preamble is from an OpEx standpoint, maybe from an R&D standpoint, our approach is we have a large number of businesses that have tremendous growth ahead of them. And we want to make sure we're maximizing that opportunity. And so if those businesses require R&D, we're certainly going to scale the R&D to maximize the opportunity. I think and we'll certainly scale at revenue, maybe a little bit less than revenue. But I think the big opportunity to drive operational leverage is in SG&A. And so maybe with that, I'll hand it off to Sherri to maybe provide some additional comments on that.

Sure, absolutely. Thanks for the question, Karl. So from an OpEx perspective, on the R&D front, as Jim said, I mean, we're focused on making those investments that drive the long-term growth of the company. And when you look at our year-over-year R&D growth, you see that it increased 16%. So we're definitely investing in R&D, and those areas are very heavily in Datacenter & Communications part of our business because that's where we're seeing the long-term growth. And so that's very important. But on the flip side of it, from an SG&A perspective, the target that we put out at our Investor Day for SG&A was 8% of revenue. And that is -- we've got a little ways to go. We've certainly made improvement. I'm really with the progress that we've made on that, where sequentially and year-over-year, we are -- have come down in terms of as a percentage of revenue and are driving towards that target.

And then on the R&D side of it, just to complete the picture, the target that we've given at our Investor Day was 10% of revenue. And so we're focused on making those investments. I think it's just a matter of how fast you can spend because certainly, the commitment is there, and we want to make sure that we make those investments. And so I'm pleased with the investments we've made to date, and that's the way that we're going to continue looking at this, right, investing in R&D, but at the same time, trying to get more efficiency and leverage out of SG&A. So that's how you can kind of think about it going forward.

Very helpful. And for my follow-up, at SPIE, you presented several new products across your industrial portfolio, and you spoke about improving orders today in semi cap. Are you seeing a marked recovery across your broader industrial business, excluding semi cap? Or is it too early to call out definitively yet?

Yes, good question. I would say across broader industrial, it's probably too early to call out a broad-based industrial recovery, but we're certainly seeing a very strong pickup in semi cap. So we saw strong orders in the prior quarter in our December quarter. And we expect those orders to start to generate sequential revenue growth for us in our June quarter and through the second half of this calendar year as well. Semi-cap is a big segment for us. And so a pickup in growth in orders there is meaningful for us.

Our next question comes from Ryan Koontz with Needham & Co.

I want to ask about the comms business. You highlighted multi-rail, which I assume is kind of -- would be driven by some of these scale across densifications. Jim, how are you thinking about kind of the timing and your content there for these multi-rail density upgrades on long-haul fiber?

Yes. Thanks for asking, Ryan. So first of all, we love this new multi-rail product. It provides a really great ability to upgrade for service providers, network operators to upgrade kind of within their existing footprint and get essentially a lot more traffic through an existing optical infrastructure. So really pleased with this product. We think it's very distinctive in the marketplace. And we would expect the ramp to start in kind of the second half of this year. We're seeing really good design wins and orders on this product and revenue contribution would start in the second half of this year.

And then I would say just more generally, that kind of DCI portion of our business and even just the traditional telecom, we've seen really good growth there. Last quarter, we saw a 9% sequential growth, but it was 44% year-over-year growth. We expect that segment of communications to be sequentially up in the March quarter and the June quarter just based on the strong demand that we're seeing. And here again, is another place where we've seen growing backlog. And we sell at multiple different kind of levels within that part of the market. We sell at the system level, as we were just talking about. We also sell at the module level with ZR/ZR+ Coherent transceivers. And then we'll sell components as well. So things like pump lasers and other products like that. And we're seeing strong demand across all those product categories.

Great. Just a follow-up if I could, maybe touching on the 3D sensing market, Jim, and transition to multi-junction. How are you thinking about that transition relative to that part of the business?

Yes. The 3D sensing, I would just reiterate what we said before that we won a significant new agreement with Apple that they announced as part of their American manufacturing program this past summer. And that revenue from that new partnership with Apple starts to kick in, in the second half of this calendar year. It's a great multiyear partnership. We're really happy with that. It's another example of a major customer leveraging our U.S. manufacturing footprint in Sherman, Texas. In the case of that business, that's 6-inch gallium arsenide that's been running in Sherman, Texas for quite a while. And so that 6-inch gallium arsenide VCSEL technology. And yes, big new partnership. We're really happy about that, and revenue should kick in here in the second half of this calendar year.

Operator, I think we have time for maybe one more question, operator.

Vivek Arya with Bank of America Securities.

This is Michael Mani on for Vivek Arya. To start, I just want to understand how much gross margin leverage is your 6-inch indium phosphide ramp driving for you right now? And as we look out over the next couple of quarters, like what is the expected gross margin improvement as you are able to double supply year-over-year? And just bigger picture, as we think about the 42% longer-term target for gross margins, where you stand today? Like what are the biggest contributors to getting there?

Yes. Maybe I'll start with the first part of the question on indium phosphide and Sherri can answer the second part sort of on broader gross margin drivers. But I would say this quarter, we're starting to see the benefits of the 6-inch production this quarter because remember, we started 6-inch production in the September quarter. And it usually takes roughly 6 months from the start of wafer production to when the products get put into a transceiver and actually ship to customers.

So we'll see a little bit of benefit this quarter, but that benefit will start to build over the coming quarters. And if you fast forward to instance for the end of this year, where half of our internal capacity is running on 6-inch, you can kind of think about it as that half of our internal 6-inch capacity is roughly half the cost of the other half, right? Because 6-inch is -- where the cost is roughly -- or the product is -- the product cost is roughly half of 3-inch. So that's kind of a rough way to think about the cost benefit. And Sherri, do you want to talk about some more general gross margin drivers?

Sure, sure. Michael, so when you look ahead to our gross margin, whether it's 39.5%, which is the midpoint of our guide for Q3 and certainly to our long-term target model of over 42%, the biggest contributors there are going to be certainly cost reductions. And that is a large bucket, which includes product and input costs, some of which I talked about earlier, and we certainly saw benefits during the quarter from product input cost reductions in our Datacenter & Communications business. But that also includes yield improvements that we continue to drive and that we -- every quarter, we're seeing benefits from yield improvements, and I'm really excited to continue to see that, there's always going to be opportunity for that. And so we're going to keep driving that as well as the lower product input costs.

And the other part is going to be pricing optimization as we continue to get the value for our products. And so we've continued to see sequential improvements in the magnitude of pricing optimization. So that's really good as well. Now the timing of these programs, it's going to differ. Some is going to be near term, some are going to be longer term, just depending on the various initiatives. So the magnitude of the benefit in any particular quarter will likely fluctuate just because of the nature of the projects. But the other benefit certainly will also be volume as we ship higher volume, that will benefit us as well. And then mix, there can always be headwinds from mix on a quarterly basis. So that's kind of the puts and takes within the gross margin line.

Great. Very helpful. And just my quick follow-up. As we are -- as the 1.6T ramp gets underway, understood that it's mainly EML and CW lasers leading the way right now. But between the 2, do you see a significant shift between silicon photonics and EML in terms of what that mix looks like for 1.6T, especially -- and as you look out over the next year with CPO seemingly getting bigger as an opportunity, does that make you rethink how much CW laser capacity you would need understanding there's plenty of flexibility to do both, but -- just curious on that shift.

Yes. On the first part on EML versus silicon photonics, since we have both products and we're ramping both products, it's really up to the customer on what mix they want, and it just kind of depends on the application. And so we just build whichever version is needed for the customer application. And there's not a big financial difference for us on either one of those. And we believe we're just -- we're very well positioned competitively on both an EML-based 1.6T transceiver and silicon photonics.

And then the second part of the question is we're certainly ramping the indium phosphide capacity for the transceiver demand that we're seeing, but we're also on top of that, ramping capacity to support the high-power CW laser demand that we've got ahead of us as well.

We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Jim Anderson for closing comments.

All right. Thanks, everyone, for joining today's call, and we're certainly on track for another outstanding year of revenue and profit growth for our fiscal '26 and very well positioned for an even stronger fiscal '27 given the exceptional demand we're seeing and our rapidly expanding production capacity. Once again, I want to thank all of my Coherent teammates for all their hard work and dedication. Operator, that concludes today's call.

You may disconnect your lines at this time. Thank you for your participation.

Greetings, and welcome to the Coherent First 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 first quarter of fiscal 2026 and and the business outlook for the second 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 today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements or predictions based on information that is currently available and that actual results may differ materially.

We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call includes and constitutes the company's official guidance for the second quarter of fiscal 2026. If at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call.

Additionally, we will refer to both GAAP and non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings release an 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 the world's leading innovator and provider of photonic technology and solutions. Photonics is critical to growing applications in AI data center networks, communications and a wide range of industrial applications. We're well positioned for long-term growth across all these applications and especially in AI data centers where we're experiencing unprecedented demand for our optical networking products. In particular, we expect continued strong sequential revenue growth throughout this fiscal year given the record level of orders we are receiving from our customers and the continued expansion of our production capacity.

In addition, we continue to streamline our portfolio and ensure that our investments are focused on the areas of greatest long-term growth and profitability for the company in order to drive sustained shareholder value creation.

Turning to our Q1 operating results. Revenue increased by 6% sequentially and 19% year-over-year on a pro forma basis, which excludes revenue from our recently divested aerospace and defense business a sale that enhanced our portfolio focus and accelerated deleveraging. Non-GAAP gross margin expanded by 70 basis points sequentially and 200 basis points year-over-year. The combination of revenue growth and gross margin expansion drove non-GAAP EPS growth of 16% sequentially and 73% year-over-year.

I'll now provide some highlights from our 2 operating segments. We'll begin with our Datacenter & Communications segment, which is our largest and fastest-growing business, Q1 revenue grew by 7% sequentially and by 26% year-over-year driven by growth in both our Datacenter & Communications markets. In our Datacenter business, Q1 revenue grew 4% sequentially and 23% year-over-year -- our data center growth in Q1 was constrained by the supply of indium phosphide lasers. However, we expect data center growth to accelerate to approximately 10% sequential growth in the current quarter followed by strong sequential growth through the balance of this fiscal year given very strong demand and improving supply.

I'd like to provide some additional color on both the demand and supply picture within our Datacenter business. First, we are experiencing an exceptionally strong level of demand. In our fiscal Q1, we received direct bookings that represent a step function increase in already strong customer demand. We are seeing strong demand for both our 800-gig and 1.6 transceivers with broad adoption of our 800 gig transceivers and accelerated adoption of our 1.60 transceivers. A significant portion of the sequential growth we expect in the current quarter is driven by 1.6 adoption.

As a reminder, earlier this year at OFC, we were the only company to demonstrate 3 different types of 160 transceivers based on 3 different types of laser sources, silicon photonics, EML and VCSEL. Our 1.60 transceivers based on silicon photonics and EML and are ramping first, and we expect 1.6 transceivers based on our 200-gig VCSELs to ramp next calendar year. We see strong demand for 1.6 transceivers across multiple customers and expect both 800-gig and 1.6 to grow significantly in calendar 2026. Our deep portfolio of optical networking technology, combined with our vertical integration and diversified supply chain, are key competitive advantages with our customers and uniquely position coherent in the industry.

On the supply side, given the strong demand growth we are seeing, we are continuing to expand our production capacity for transceiver modules and the key optical components used in those modules. For example, 1 of the key constraints across the industry is indium phosphide laser capacity. Over the course of Q1, we saw improving EML supply, and we expect both internal and external EML supply to improve significantly in the current quarter and throughout the balance of this fiscal year. In particular, we continue to expand our internal indium phosphide production capacity. We are aggressively ramping 6-inch capacity because a 6-inch wafer compared to a 3-inch wafer will produce more than 4x as many chips at less than half the cost. This will provide increasing benefit to our gross margin as we continue to ramp production.

Our 6-inch indium phosphide line in Sherman, Texas, which is a world's first 6-inch indium phosphide production line began production last quarter and continues to ramp well. I am very pleased to share that our initial 6-inch indium phosphide production yields are actually higher than our current 3-inch indium phosphide deals. This is an outstanding accomplishment by our production team and also a testament to the tremendous experience that we've gained over the past 5 years, producing almost 2 billion VCSEL devices on our 6-inch gallium arsenide technology.

Given the healthy yields we are seeing with 6-inch production, we began production of 6-inch indium phosphide at a second site in Jarfalla, Sweden, ramping at 2 sites in parallel will significantly accelerate our production capacity ramp. Additionally, we are in production on 3 different types of key transceiver components on 6-inch indium phosphide, EMLs, CW lasers and photodiodes. With the ramp of 6-inch production at 2 sites in parallel, we expect to roughly double our total internal production capacity of indium phosphide over the next year. We also expect to continue to supplement our internal indium phosphide capacity with sourcing from external suppliers. We expect our external supply of EMLs to increase sequentially this quarter and next calendar year through continued partnership with our key external suppliers.

In addition to critical laser production capacity, we are also expanding transceiver module assembly capacity. While we continue to expand production at our existing site in EP, Malaysia, we will now be expanding production capacity in parallel at a new transceiver production facility that we recently opened in Penang, Malaysia. In addition, we will be adding transceiver production capacity at our existing site in Vietnam, which already produces transceiver components. This additional production capacity allows us to continue to rapidly ramp module capacity to support the demand growth in front of us.

I'd like to pivot to some technology developments that we expect to further benefit our data center business over the long term. We continue to make progress on LPO, LRO, CPO and NPO related products and technologies with strong engagements across a wide range of customers. For example, we've shipped both LPO and LRO 800-gig and 1.60 transceivers customers. Also in September, we announced that we have commenced sampling of our 400-milliwatt CW lasers designed for CPO and silicon photonics applications. We expect to address a broad range of CPO form factors for both scale out and scale up data center applications with this new product. We also continue to see significant customer engagement around our 200-gig VCSEL-based solutions for NPO applications.

Multiple customer engagements on integrated optics applications reinforce our view that the incremental market opportunity for optical solutions in the CLL portion of the AI data center networks will be very compelling, and we believe coherent is well positioned to address these applications using both CW and VCSEL-based solutions. We continue to expect to see initial CPO deployments in calendar 2026, with growth continuing in the following years, while pluggable form factor continues to grow in the scale out portion of the network. Another area of new growth is our optical circuit switch platform, which continues to progress well with expanding customer engagement.

We believe this product line adds over $2 billion of addressable market opportunity over the coming years. Both the breadth of customers and the range of applications are wider than our initial expectations. The underlying technology in our OCS system is a nonmechanical field-proven liquid crystal technology which has been successfully deployed for many years in demanding telecom applications and has a significant competitive advantage over other solutions. To date, we've shipped systems to 7 customers and expect that number to continue to expand this quarter. Shipments have included both 64 by 64 and 320 by 320 system sizes.

Both revenue and backlog for OCS grew sequentially in our fiscal Q1 and and we expect it to grow again in the current quarter. Our current backlog includes both 64x64 and 320x320 systems with the majority of the backlog weighted toward the larger system size. Given the strong customer demand and backlog, we are aggressively ramping production for both small and large capacity systems, and we expect revenue to ramp throughout calendar 2026. Giiven the multiple growth vectors across pluggable transceivers, CPO and OCS, we are very excited about the opportunities ahead of our Datacenter business.

Turning to our communications market. In Q1, revenue grew 11% sequentially and 55% year-over-year. Growth was driven by products for data center interconnect but we also saw strong growth in traditional telecom applications. We expect our communications business to grow sequentially again in the current quarter and throughout the balance of this fiscal year. In hyperscale DCI, we continue to see strong growth in customer demand for our ZR-ZR-plusCRus-DCI-focused products. Our product lineup, which includes 100 gig, 400 gig and 800 gig ZRZirplus coherent transceivers is growing quickly, and we expect these products to continue to ramp throughout the course of this fiscal year. We also continue to see steady recovery in our telecom business. In addition to market recovery, we've introduced multiple new industry-leading telecom platforms for which we are seeing significant customer interest and expect strong future revenue contribution such as our new award-winning multi-rail technology platform.

This platform is a breakthrough solution that amplifies multiple fiber pairs while cooperating within the physical and electrical constraints of existing infrastructure. Customer engagement on this new platform is very strong, and we see this as 1 of many growth factors for our communications business in both the near and long term.

Turning now to our Industrial segment. Revenue grew 2% quarter-over-quarter and 4% year-over-year on a pro forma basis, excluding revenue from the recently divested aerospace and defense business. While we maintain a cautious outlook on near-term demand, given the macroeconomic backdrop and ongoing tariff and regulatory uncertainty, we were pleased to see growth in our first fiscal quarter and we expect the industrial business to be stable to slightly up sequentially in our current quarter on a pro forma basis. Within our Industrial segment, there are several key growth areas. For example, we expect ongoing strong demand in display capital equipment, driven by OLED screen adoption expanding to larger format devices like tablets and laptops. We also expect growth over the long term in our semi cap equipment market, given the industry-wide expansion in semiconductor production.

Another promising growth opportunity that I'd like to highlight is our advanced materials for thermal management and cooling. Traditionally, these materials are used in a wide range of applications in our industrial markets. However, the rapid expansion of AI data centers has created a significant growth opportunity -- we see potential widespread adoption of these materials to address the thermal and power challenges posed by ever larger AI data centers. For example, our proprietary Thermodyne material moves heat twice as effectively as copper which is a tremendous advantage in data center cooling applications. We're engaged with multiple hyperscaler customers on this new emerging application of our materials technology.

Lastly, I'd like to give an update on our portfolio optimization initiative. As a reminder, we are focused on streamlining our portfolio and concentrating our investments in the areas of greatest long-term growth and profitability. We are shifting investment from noncore areas in realigning our footprint to drive better asset composition and utilization efficiency across the organization. We completed the sale of our Aerospace and Defense business at the beginning of September. The proceeds of the sale were used to pay down debt and the sale is immediately accretive to both gross margin and EPS.

In addition, we recently announced the sale of our product division based in Munich, Germany that makes tools for materials processing and as part of our Industrial segment. We made the decision to sell this product division because it was not aligned to our long-term strategic focus areas, and it did not support our long-term financial goals. This transaction is expected to close in our fiscal Q3. The proceeds of this transaction will be used to reduce debt and the sale is expected to be immediately accretive, both gross margin and EPS.

In addition to streamlining the product portfolio, we are also continuing to streamline our physical footprint. Since the beginning of our last fiscal year, roughly 5 quarters ago, we have sold or exited 23 sites and we plan to continue to streamline our footprint and exit additional underutilized or unnecessary sites over the coming quarters. While I'm pleased with the progress we've made streamlining our portfolio, we still have more work to do. View portfolio optimization as an evergreen process, and we will continue to reevaluate our asset portfolio to streamline and focus on the areas of greatest profit growth and ensure we are optimizing our return on invested capital.

In summary, we delivered strong revenue and EPS growth in Q1 and are on track for strong sequential growth over the coming quarters, driven by exceptionally strong demand in our data center and communications segment, along with continued expansion in our production capacity. I want to thank the Coherent team for all their hard work and dedication.

I'll now turn the call over to our CFO, Sherri Luther.

Thank you, Jim. We are pleased with our first quarter 2026 results and execution. We continue to drive strong double-digit year-over-year revenue growth gross margin improvement and enhanced profitability. 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 will now provide a summary of our Q1 results. First quarter revenue was a record $1.58 billion, up 3% sequentially from the fourth quarter and up 17% year-over-year, driven by growth in AI data center and communications demand.

In our Q4 25 earnings call, we announced an agreement to sell our Aerospace and Defense business. As expected, this transaction closed in Q1 26. On a pro forma basis, excluding $33 million of aerospace and defense revenue for Q1, revenue increased 6% sequentially and 19% year-over-year. Our Q1 non-GAAP gross margin was 38.7%, a 70 basis point improvement compared to the prior quarter and a 200 basis point improvement as compared to the year ago quarter. 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%.

The sequential and year-over-year increases in gross margin were driven by cost reductions and product input costs as well as yield improvements primarily in our Datacenter & Communications segment. Pricing optimization contributed meaningfully in both the industrial segment and the data center and communications segment. First quarter non-GAAP operating expenses were $304 million compared to $307 million in the prior quarter and $278 million in the year ago quarter.

Operating expenses as a percentage of revenue declined to 19.2% as compared to 20.1% in the prior quarter and 20.6% in the year ago quarter. The reduction in operating expenses as a percentage of revenue is due to the continued focus on driving efficiencies and greater leverage in SG&A. We have made good progress on these initiatives with the benefits expected to kick in at various points in time. The year-over-year increases in R&D were primarily in the Datacenter & Communications segment as we continue to focus on investments with the highest ROI that drive the future growth of the company. The sequential decline in R&D was driven by the timing of these investments, which can fluctuate on a quarterly basis.

Our first quarter non-GAAP operating margin was 19.5% compared to 18% in the prior quarter and 16.1% in the year ago quarter. First quarter non-GAAP earnings per diluted share was $1.16 compared to $1 in the prior quarter and $0.67 in the year ago quarter. From a capital allocation perspective, we paid down $400 million in debt, significantly reducing our debt leverage ratio to 1.7x, down from 2.4x in the year ago quarter. As mentioned in our Q4 25 earnings call, we used the proceeds from the sale of the Aerospace and Defense business to make this debt payment.

We also completed the refinancing of our debt at the end of the first quarter reducing our interest rate by 60 basis points and doubling the amount of our revolving credit facility to $700 million. We will use the revolving credit facility to increase liquidity and provide greater flexibility. As Jim noted, we plan to use the proceeds from the sale of our product division in Munich, Germany to further reduce our interest expense by paying down additional debt, which will be immediately accretive to our gross margin and EPS. For reference, over the past 4 quarters, the business contributed average quarterly revenue of $25 million with a gross margin well below Coherent's corporate gross margin. The sale will reduce our employee headcount by approximately 425 employees.

I will now turn to our guidance for the second quarter of fiscal 2026. We expect revenue to be between $1.56 billion and $1.7 billion. We expect non-GAAP gross margin to be between 38% and 40%, we expect total operating expenses of between $300 million and $320 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 $1.10 and $1.30 on a non-GAAP basis. In summary, I'm very pleased with the solid progress we made in Q1. Looking ahead, we're seeing exceptionally strong demand in our Datacenter & Communications segment. To meet this robust momentum, we are ramping capacity and investing strategically in the business. We remain focused on disciplined execution against our long-term financial target model. These dynamics reinforce our confidence in driving long-term growth and durable value creation for our shareholders.

That concludes my formal comments. Operator, please open the call for Q&A.

[Operator Instructions] Our first question comes from Samik Chatterjee with JP Morgan Chase.

Jim, maybe if I can start on the demand side. You do mention the strong demand you're seeing as well as record orders in some cases. Maybe if you can flesh that out a bit more, like how broad-based is this and what are you seeing in terms of or hearing from customers in terms of demand drivers and how broad-based across the portfolio is the demand across your communications portfolio? And I have a follow-up.

Yes. Thanks, Samik. Yes, I would call it very broad-based. So very strong demand across both data center and communications. When I look back at our fiscal Q1, really saw a record level of bookings in that quarter. And bookings not just for near-term quarters, but bookings further out in time than we normally would see. So bookings leading out, in some cases, over a year over a year from now, right? So we see that as a very good sign. That's customers placing orders well ahead of time that gives us great visibility really allows us to really good mix planning and product mix and capacity planning.

But also, as I said, broad-based definitely saw strong orders for data center, strong orders, in particular, for 800 gig and ever. We're seeing the adoption of 160 transceivers accelerate, and so we're seeing certainly strong orders there. But also on the communications part of our business, very strong orders in DCI, the data center interconnect portion. This is our DRZRs product lineup of -- and then also really pleased to see strong orders in what I call kind of traditional telecom as well. And so particularly in the communications segment, -- we've seen now 5 quarters of sequential growth in that segment, really good grower last quarter of 11% sequential and 55% year-over-year, but we've seen now 5 sequential quarters of growth and not just but also in traditional telecom. And we're expecting that Communications segment to grow sequentially this quarter and through the balance of this fiscal year.

Got it. Got it. Indium phosphide capacity, I mean, that's been quite a talking point this quarter for you guys. You outlined you're doubling the capacity over the next 12 months. But maybe if you can just flesh out for investors, what are the milestones to watch on that front? And how to think about the road map beyond even a 12-month horizon? And where would that leave you from an EML mix perspective in relation to sort of internal versus external?

Sure. Thanks, Samik. So first of all, I just want to thank the coherent team for the outstanding job they've done in getting 6-inch indium phosphide up and running. This is something when I joined the company that I asked to significantly accelerate their time line. And I just want to take the opportunity to thank the team for the outstanding job they've done. We started production of 6-inch indium phosphide in the September quarter and started it at our Sherman, Texas facility and really pleased with that ramp. As I mentioned in the prepared remarks, one of the big milestones that we achieved is the initial yields of that 6-inch in are actually higher than our 3 indium phosphide lines.

And keep in mind that those 3-inch lines are very mature full production line. So that's a very positive milestone and a positive signal for us on yields of 6 inch. And that's exactly why we decided double down on the ramp of 6-inch and begin 6-inch ramp at a second facility, 1 of our second, our other indium phosphide facilities, which is in Jarfalla Sweden. And so now we're ramping at 2 sites in parallel. And so that's what really allows us to hit that 2x capacity goal about a year from now. And I think milestones along the way will certainly be -- we'll certainly share our progress along the way. But beyond the next 12 months, we expect to continue to expand capacity that 12-month goal.

The demand that we're seeing from our customers is, I would call it, extremely strong. And with some of our big customers, they're showing now their forecast out through calendar 2028. And given that demand signal that we're seeing not just for next calendar year, but now for '27 and '28, our plan is to continue to ramp indium phosphide capacity beyond the next 12 months as well. And certainly, we'll share more thoughts on the rate and pace of that ramp over the next 12 months.

Got it. And I'll just squeeze 1 quick 1 in. You're guiding datacom 10% quarter-over-quarter growth. Just wondering what of supply-demand gap that you see? What could that number be if you were sort of more flexible on supply or had more supply available rate to sort of the constraints on that front?

Yes. We were certainly -- when I look back at the prior quarter, data center grew about 4% sequentially. That was certainly constrained by indium phosphide laser supply and what we saw is the unmet backlog that we had in Q1 rolled into Q2. So that backlog is now in Q2, and we're servicing that in Q2. But on top of that, we had record bookings on top of that for, as I mentioned, 800 -- primarily 800-gig and 1.60 transceiver. And so the demand continues to grow. Now 1 of the really good things as we move into the current quarter is we're seeing indium phosphide supply, both internal and external grow sequentially from prior quarter to current quarter, and we're expecting both external and supply to grow again from this quarter into the -- into our fiscal Q3 as well. So we're seeing kind of steady good improvement in indium phosphide capacity. And again, that's a combination of external but especially internal capacity expansion as well.

Our next question comes from Simon Leopold with Raymond James.

I wanted to follow up on your discussion around the OCS optical circuit switches. There was quite a buzz at the ECOC show about this, and you certainly sounded upbeat tonight. I guess what I'm looking for a little bit more help is understanding how to think about maybe, let's call it, calendar 2026, where 1 of your peers also participating in the market has sort of laid out a trajectory to get to $100 million a quarter. How do you think about your trajectory and your place in the OCS market?

Yes. Thanks, Simon. So first of all, we feel really good about our place in the market starts with, of course, the technology. We feel really good about the technology differentiation that we have. We have a non-mechanic our OCS is based on a nonmechanical liquid crystal technology that has really superior reliability performance, and our customers recognize that. And I would say that we continue to see the opportunity around OCS, the total available market, continue to to be bigger than what we may have originally thought. Just the number of customers is broader than we thought that are interested in the technology, but also the number of applications that they're considering deploying it in.

And so as I mentioned in the prepared remarks, we've now shipped systems to 7 different customers. And we -- if I look at last quarter, both our revenue and our backlog grew last quarter. We expect revenue and backlog to grow again this quarter. But I think more meaningful revenue contribution will come in next calendar -- probably we'll see a steady ramp of revenue throughout calendar year. So it'd be certainly more weighted towards the second half of calendar year. But we feel really good about the progress, the backlog that we have and the revenue ramp in front of us. And well, as we get into next calendar year, I think we'll share more details about kind of the rate and pace of revenue that we see ahead of us.

And you talked a lot about the progress you've shown on the indium phosphide. I've been fielding investor questions that I find a bit puzzling, but maybe you could help us shake this out in that there's been sort of this narrative that the indium phosphide is producing photodiodes and hasn't helped you with laser production. But your outlook, your commentary on 800 gig, 1.6 certainly suggest that you're producing more lasers, both CW and EML, what -- can you explain maybe how people might have been confused or whether I'm confused. Can you give us some clarification on this debate?

Yes. Thanks, Simon. I'll try to unconfuse. I don't know where the confusion is coming from, but I'll just kind of reiterate what I said in the prepared remarks. So as I said, we're ramping production now in 2 sites, Sherman, Texas and Jarfalla, Sweden, and across those 2 sites, we're ramping production of 3 different types of products based on indium phosphide, right? So the EML lasers certainly CW lasers as well and then photodiodes. And all 3 of those are very critical, as you know, Simon, very critical components to our transceivers. And so really lines to be ramping production of all 3 of those devices across those 2 facilities.

Our next question comes from George Notter with Wolf Research.

I'm just curious on Interesting to hear your remarks on sort of the manufacturing moves and then the real estate footprint, really great to see that. I guess I'm just curious on how much more opportunity is there? I know you're standing up capacity, I think, in Penang, you said, are there more moves we go to make in manufacturing, perhaps in industrial lasers -- is there more real estate consolidation left? Any more you could say would be great.

Yes. Thanks, George. So I would say definitely, a lot of activity that we have going there. It's kind of interesting because it's on 1 hand, we're increasing capacity and expanding. And on the other hand, what we're trying to do is consolidate and reduce footprint certain areas. And so we're -- in both of those actives that are happening in parallel. So if I start with the consolidation -- if we look at over the last roughly 5 quarters since the beginning of our fiscal '25, we've either sold exited 23 sites. And I think that's great progress. We're really pleased with that, but we definitely have more work to do. I think both Sherri and I are focused on making sure we maximize return on invested capital and we're driving efficiency and productivity across our physical footprint.

And so we both believe there is significant opportunity to continue to consolidate. And so we'll continue to exit and downsize any site that we view as unnecessary or underutilized. And so definitely more work to do there, and I would say stay tuned on that. And then on the increase side, certainly, especially for Datacenter & Communications, we're certainly increasing capacity. We talked a little bit already about indium phosphide capacity, but if we talk about module capacity, so this is transceiver module capacity. We're expanding capacity at our existing facility, our primary facility in Malaysia, which is in EPO, Malaysia, but now in parallel, we're expanding capacity at a new transceiver facility that we've recently opened, which is already in production on transceivers.

We're going to be expanding and accelerating capacity at that Penang facility. And then what we're also doing is adding transceiver module capacity at our Vietnam site. So the great thing is our Vietnam site already exists, and it's already building components for transceivers, and we have capacity and room there to add now transceiver production in addition to component production and we're excited about that, too.

And so all of those capacity expansions were driving in parallel. And that's really to support the strong demand that we see ahead of us for both data center communications that based on the customer, not just ordering that we're seeing, but the forecast that we're getting.

Got it. Any manufacturing moves on the Industrial side of the business?

Yes. There are a number of the consolidations that done the 23 sites of sales exits. Those have some of those have been on data center and communications side, but many of those have been on the industrial side. And so I think we still see opportunity for consolidation on, I would say, both data center and comms and industrial. But there are places within the Industrial segment where we are investing and expanding in facilities as well. But it's all about trying to make sure that the footprint is optimal in terms of driving the maximum productivity and efficiency of the facility.

Our next question comes from Blayne Curtis with Jefferies.

I wanted to go back to the data center guy plus 10%. Is there a way to think about how much that is still capacity constrained? And is there anything beyond EMLs that is constrained in that?

No, Blayne, I would say the primary constraint we've hit for in last quarter is, as I said, it's indium phosphide capacity that specifically EMLs. That was what was constraining us significant improvement from prior quarter into current quarter, as I said, in terms of both external and internal supply I would say there's still -- we still are constrained to some degree even in the current quarter, but we also expect indium phosphide laser supply to increase again from current quarter into next quarter and really to continue to -- the supply to continue to improve throughout -- sequentially throughout the next calendar year given extra capacity that we secured, but especially the internal capacity ramp that I talked about earlier.

Actually maybe I'll follow up on that. I'm curious on your pity, but it takes time to get your lasers in and qualified. So is there a way to think about the timing? And is there any difference between EMLs and CW in terms of the timing of recognizing revenue from those lasers throughout the fiscal year?

Yes, I would say not a big difference between EML and CW on the timing to get into production and fully qualified. By the way, you mentioned recognized revenue, just to clarify, all of our EMLs and CWs are made for internal consumption, right? So we don't sell indium phosphide in the open market. The reason for that is it's -- all of our capacity is 100% consumed by our own transceiver needs. I just want to make sure I clarified that. But within transceiver, what I would say is that once a laser is qualified within or photodiode within a facility, expanding capacity on a parallel line or on an existing line is a pretty normal occurrence, right?

No special qualification required or at least the olfaction very straightforward, right? So I think now that we're in production across multiple products across multiple facilities. Look, that production capacity is going to be as we expanded over the course of the next year is going to be incredibly valuable. And certainly, our customers are very motivated to help make sure we get anything qualified into production as quick as possible.

Thank you. The next question comes from Tom O'Malley with Barclays.

First 1 is a little more short term. So you gave the sequential into December on Datacom, up 10%. And -- could you maybe help us understand what was the driver in the September order? I think you called out Datacom as maybe being a little bit more of a driver, but any color on the telecom side or the relative vectors of both into the December quarter? What are you seeing from the Telecom business?

Yes. And maybe I'll just recap the prior quarter first. So on the prior quarter, data center, we saw grow 4% sequentially, 23% year-over-year. Communications, which is Telecom and DCI in the prior quarter, it was 11% sequential growth and 55% year-over-year. And into the current into the December quarter, we expect the data center growth to accelerate from that 4% prior quarter to about 10% sequential growth in the current quarter. And then comms, again, up sequentially.

I would expect it to be a little bit less than what it was in the prior quarter. Comms would be up sequentially in the single digits. And then just to round it out and give you the full picture on the industrial part of our business, we expect that in the current quarter for that to be sequentially stable, maybe slightly up.

Helpful. And then just a longer-term question, just on the tight sort of a couple of questions on it here. But is there for us to tie production coming out of that 6-inch facility with margin improvement over the -- it sounds like things are accelerating pretty materially on the capacity extension side in the first half. I think you had previously kind of talked about first kind of guys moving into modules in late calendar year 2025. But as that kind of progress, like you look at what gross margins have done, you would imagine to accelerate it. Any way for us to link the production, the amount of production to how much gross margin expansion you see?

Yes. Maybe I'll kick it off and at least talk about qualitatively and then if Sherri wants to add anything to it. I think given that we just started production in the prior quarter, actually this quarter will be our first quarter -- our first full quarter of production. We started production last quarter kind of mid-quarter. The actual impact to gross margin in the current quarter is pretty minimal. But as we move into next calendar year, that's where we'll start to see the benefits of the 6-inch production moving into our gross margin.

And as you would expect, as we ramp production, the impact to gross margin is more meaningful as we move through the calendar -- throughout the calendar year and so you should expect it to be more meaningful as we move through each central quarter. And Sherri, would you -- is there anything you'd add to that?

Yes, I'd just add that when you look at these -- the intention phosphide and the fact that it's less than half the cost of 3-inch that will be beneficial to gross margin over time. And it's sort of looking at a cost structure, right? It's improving a cost structure, the 6-inch indium phosphide is. And other examples of that would be with new products, right, like 1.6. That's going to be beneficial to gross as well as we ramp capacity. Those types of things will help improve the gross margin over time.

So we're certainly focused on 6 inches. I guess I'd recap it by saying 6 inches 1 of the gross margin tailwinds, but there's certainly a wide range of other things we're focused on across the company to drive towards Sherri's 42% gross margin target that she gave us. There's a number of other I'd just highlight in the industrial business, although the growth is relatively stable. We're not seeing a tremendous amount of growth in the industrial business at this time. We're certainly focused on driving gross margin expansion within that business and so that's another area that we expect gross margin to continue to improve for the company.

Our next question comes from Papa Sylla with Citigroup.

Congrats on the very strong result. Jim, I was hoping you can double click a little bit on the uptake you expect in the December quarter coming from 1.60. I understand you are quite flexible between on for reasons cell in terms of kind of percentage or even qualitatively, where are you seeing perhaps the larger demand between those 3 and different that to change in 2026?

Yes. Thanks for the question. So -- yes, as I mentioned in the prepared remarks, the sequential growth in Datacenter, a good chunk of that is driven by $1.6 million revenue. And then within that, that early wave or first wave of 1.6 revenue, it's really a combination of -- we expect a combination of silicon photonics which uses obviously CW lasers, but also EML-based 1.60 transceivers. So the first adoption in that first wave of -- or the beginning of the ramp of 1.6, that will primarily be driven by a mix of silicon photonics and EML.

And then later, we'll start to see, we believe, adoption of VCSEL-based 1.60 transceivers -- so those use our 200-gig VCSEL technology, which we demonstrated at , I believe, OFC earlier this year. We would expect that to begin to go into production in I would say mid-calendar 2026, so it'll start to generate revenue in kind of the second half of calendar '26. So definitely, the early ramp or the first part of the ramp is driven by a combination of EML and silicon photonics.

Got it. That's very clear. And for my follow-up, Jim, I'm curious on how you are thinking about allocation of your India phosphide capacity between EML, CW and photodiode. I guess how far ahead do you need to make that decision and perhaps what are the factors that go into that decision is the priority mainly kind of feeding where demand is strongest or is there a profitability angle as well?

Yes. It's a good question. Let me talk about the trade-off between, first of all, InMail and CW. I would say there's no -- from our perspective, there's no significant profitability trade-off between those 2 really that drives the mix of our production mix of EML versus CW is purely the demand from our customers, right? So if it's more silicon photonics-based transceivers, then that we'll allocate more capacity to CW lasers if it's more EML will allocate to -- and I think in general, we can make those choices certainly 6 months ahead of time, even -- we can even make those choices even 4 months ahead of time.

So I would say somewhere to the kind of 4 to 6 months ahead of time, we have to do the capacity planning between EML and CW. And the good thing about the indium phosphide capacity is it's fungible. We can move the capacity to either mail or CW. And then for photodiode, that's just the receiver for the laser, right? So we just build the number of photodiodes that are needed to receive the laser signal. So that's a pretty straightforward calculation right. So that's kind of how we do the capacity planning. Ultimately, it's really driven by the mix that our customers want in terms of EML versus silicon transceivers. And we have both. So we're happy to support the customers in whichever version that they need for their application.

The next question comes from Michael Mani many with Bank of America.

This is Michael Mani on [indiscernible]. As you look out over the next year, what's your confidence level in your ability to expand your share in 160 over 800 gig? And could you also talk about the 1.6 ramp from a customer breadth perspective? Is this a ramp that's very concentrated with a few customers? Or are you seeing more of a balanced ramp into next year?

Yes. Thanks, Michael. Maybe I'll ask -- answer the second part first and come back to the first part of the question. On the second part of the question, we're seeing 1.60 across ramp across multiple customers. So we have multiple customers that are engaged in 1.60, and we expect to ramp with multiple in parallel. And I would say that the other color I would add is that a number of customers are accelerating their time and their ramp on 1.60.

And we view that all as a good thing, right? We view that as positive. We have really proud of the lineup of 1.6 transceivers that we have and just as a reminder, at OFC earlier this year, we were the 1 company that demonstrated 1.60 transceivers using 3 different technologies, silicon photonics, EML and Vice -- so I think we have a great product lineup. We have good customer position. We've seen acceleration of 160, and we feel we're certainly well positioned for that.

So I guess, to the first part of your question, yes, we feel really well positioned on 1.60. I think as we enter the calendar 2026, we expect both -- on a year-over-year basis, we expect 800 gig will still grow on a year-over-year basis. We're seeing very strong demand on 800 gig. But on top of that, we expect 1.6 to ramp at a very healthy pace.

Great. And for my follow-up, I just wanted to ask about your progress on portfolio optimization and specifically pricing -- so it seems like there's been amount of progress there in the last couple of quarters, but how much left is there in terms of these pricing tailwinds you can recognize whether it's from the core datacom side or industrial? And maybe more specifically as well, just what are you seeing from a pricing perspective for transceivers? Or just if you could talk about that environment?

Maybe I'll answer the last part of the question on transceivers, but I'll let Sherri also comment on pricing as it relates to gross margin. I would say on pricing of transceivers, pricing dynamic very much as we would expect. So I don't think we're seeing anything unexpected with respect to pricing. And then, of course, in a more supply-constrained market in general, that's certainly always a positive dynamic pricing. And then kind of in the first part of your question, just sort of pricing optimization in general and how it relates to gross margin, I'll ask Sherri to answer that part.

Sure. Thanks, Michael. So from a pricing optimization perspective, I was really pleased to see that during the quarter, part of the improvement in gross margin, the 70 basis points improvement sequentially in the 200 basis points year-over-year Part of that was due to pricing optimization. Pricing optimization in our -- where we saw benefits in the industrial side of our business as well as in the data center and communications part of our business. So pricing is an area where -- we tend to expect that the greater magnitude would come from the industrial part of our business.

But we do see benefits as well in the data center and communications part of our business. And pricing is really pricing our products for the value they provide. And in the industrial power business, that's the part of our business where, in many cases, we are the only provider of those products. And so our customers are certainly value the products provide to them and how we help them differentiate. So that's 1 key part of the improvement that we saw during the quarter. The other part, just to round out the commentary on the gross margin.

We also saw improvements from cost reduction -- and so that was an area where we saw benefits in yield, which, if you recall, for the past so many quarters, we've been talking about yield improvements. We continue to focus on that. We saw those benefits in Datacenter & Communications part of our business as well as lower product input costs. So those are 2 main levers that we're really focused on to drive to our long-term target model of over 42%. So I was really pleased to see those results.

Our next question comes from Meta Marshall with Morgan Stanley Investment Management.

A couple of questions. Sherry, last quarter, you called out kind of FX headwinds to gross margins. And just given some of those currencies have remained stronger, just wanted to kind of get some context of whether there was additional kind of headwinds this quarter on gross margins? And then second, noted that you guys are ramping the ZR kind of capacity, but just how you guys are thinking about kind of intersecting some of the scale across demand that we're seeing, whether that will kind of -- the ZR will layer into that? Or just how you guys are kind of ramping capacity there?

Yes. Sumit, on the first part of your question regarding FX and the impacts to gross margin, did we have any headwinds during the quarter. Nothing material, certainly no incremental headwinds in terms of a negative impact from the prior quarter, but nothing significant during the quarter to note that.

And on the second part of the question on the scale across demand, yes, I would characterize this demand is exceptionally strong. And obviously, that's driven by -- these are the optical connections between the data centers where we're seeing these AI workloads that are spanning multiple data centers, and that's driving for an expansion and high-speed optical networking between these data centers. And our portfolio of products, our RZRs portfolio products are just a really great match for this application. So we're seeing very good demand there. and we have 100 gig, 400 gig and 800 gig ZR plus transceivers. So we're certainly ramping capacity as quickly as we can on those transceivers.

The other way we participate in that market, though, is we're a module vendor for ZRZArPlus, but we also sell components all sorts of DCI equipment and applications. And I would say there, again, the demand on the components right now is extremely strong, and we are also ramping capacity for all of the components that go into DCI applications and any related telecom application. So we're seeing just as one example, the pump lasers that we produce -- we're seeing just very strong demand on those pump lasers.

Our next question comes from Ruben Roy with Stifel.

Jim, maybe a follow-up on the OCS commentary. With the shipments to 7 different customers rigs to the diversification of customers there. In terms of applications, you talked about sort of getting -- you're talking through engagements on a broader number of applications. How would you characterize kind of the wins that you have today? Are those I think the industry has been talking about redundancy, the use of the OCS for redundancy and maybe even packet switch replacement. Should we think about those as being sort of the initial applications or are you starting to see a broadening today of some of the other applications that you can address?

And are there technical advantages of using nonmechanical and some of these new applications that you guys are talking?

Yes. Thanks, Ruben. Great question. No, I would say that the initial adoption in terms of like the backlog and initial production ramp adoption is very much the way you summarized it in redundancy applications or spine switch applications and more of what we've seen historically as traditional applications for OCS. I think further out, though, what we've been surprised about is if you look beyond just kind of the near-term demand as we've engaged with a broader set of customers is there's applications beyond that, that customers are talking about and engaging with [indiscernible].

All the way from some customers who are talking about even using an OCS switch in a scale-up network, right, a scale-up network where the optical -- where the connections are now optical and there's an OCS switch within that. And then on the other end of the spectrum, customers talking about using OCS switch even within DCI networks.

So we've been surprised as we've engaged with customers by the real broadening of potential applications that they're exploring. And I would say that's a little further out in time, but we view that as a great indicator that the TAM may be significantly larger than what we first thought.

Perfect. And really quick question. I hope for Sherri. And apologies if I missed this, Sherry, but with the aerospace and defense divestiture and the leverage coming down below too, which is great to see. Is there an update on the way you're thinking about debt on the balance sheet or capital allocation?

Yes. So Ruben, I'm really pleased that we were able to reduce our debt leverage down to 1.7x for the quarter after the $400 million debt paydown that you referenced from sale of the A&D business. So I'm really pleased with that. And then we also mentioned that with the Munich division, product division that we announced that we would take the proceeds from the sale of that to pay off debt as well. That's expected to close a little bit later.

And so once we do that, we'll take the proceeds from that as well. So certainly, debt reduction is a priority. But I would say the #1 priority now is -- continues to be making that we're investing for the long term in the business. from an R&D perspective, from a CapEx perspective and making sure that we're really driving -- investing for the long-term growth. So that's the #1 priority. And then certainly debt reduction, we'll continue to focus on that but the close second priority.

Our next question comes from Karl Ackerman with BNP Paribas Asset Management.

Just one from me. Jim, you spoke of record transceiver module bookings in datacom, but what about transceiver components for telecom? And as you address that, can you quantify the level of order visibility with your customers, maybe in terms of quarters as you and your peers seek to add both later and transceiver capacity and fulfill customer demand.

Thanks, Karl. Yes, we definitely saw a very strong record bookings on transceivers. But yes, I'm glad you asked about for components going into a number of our communications applications, DCI and telecom, I would say same story, record level of bookings there, too. I mean just tremendous bookings across both data center and communications. And on the second part of your question around visibility. So what we're seeing is in those bookings is the normal bookings of looking out in kind of the near term, but we're also seeing customers on top of that book further out in time where they're ordering -- they're putting orders in place in a year plus in advance.

I think that's really about -- they're seeing such strong increases in their demand and their supply needs that they want to get those bookings in place to get the supply coverage. And then the other very good trend from our projective is, as I mentioned earlier in the call, our -- a number of our large customers now giving us very good forecast visibility, not just next year or the following year, but out into 2028. So very large customers providing us with visibility 3 years out, which is which is very, very helpful for our business.

Ladies and gentlemen, as we have come to the conclusion of the allotted time for today's call. I will now turn the floor back to Coherent's CEO, Mr. Jim Anderson, for closing comments.

Yes. First, thanks, everybody, for being on the call today. I feel we're off to a very strong start for our fiscal year with almost 20% pro forma revenue growth and over 70% EPS growth in Q1 on a year-over-year basis, off to a really strong start. And again, we expect this fiscal year to be a really strong growth year for the company. I'd like to -- once again, I just want to thank all of my coherent teammates for all of their great hard work, their dedication. Thank you very much. And thanks, everyone, for your support. Operator, that concludes our call.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Good morning, ladies and gentlemen, for this short press release announcement about this acquisition of the business unit, Tools for Material Processing, from the company Coherent Inc.

And with that, I would go to the next slide. I think for any dial-ins for the teleconference or to ask questions, just take a moment or take a picture of the 3 numbers. Perfect. I think disclaimer, just take a few seconds to read it. You know how it works. Okay. Perfect. So we have signed tonight an agreement to acquire, in our eyes, a well-established global leader in laser technology. The company headquarters is located in Munich as well as manufacturing and engineering. It counts around 400 people, I would say, round about 300 or 280 of them in Germany. Company is present in 15 countries all around the globe. We have a quite wide global customer base with above 600 customers. But it's very important to say as well, they work very strongly with key accounts, with big key accounts, so returning customers. They do round about USD 100 million business. So please consider that I'm talking about U.S. dollars because we are making everything in the transaction and so on in U.S. dollars.

Important to say that Rofin is a very strong brand from the past. So we always see the Coherent but what we were interested in is really this Rofin business and I will explain later on why it is important. One remark on the sales, please. The fiscal year of these guys are from July to June. So this USD 100 million is just from the past year. With that, we can go to the to the next slide. What is this company doing? They are -- or what is the, let's say, the strategic rationale behind, is we are expanding into adjacent application, right? They do systems for cutting, welding and marking, which might look a little bit different. But at the end, it's more or less the same technology we are using at Bystronic.

So especially one example, they cut stents, right, in very low number of millimeters and we cut tubes with a range up to 350 millimeter but at the end, it's a tube cutting with laser, with a 3D technology, with a CAD-to-CAM software and so on. They have even dedicated system. It's not a big portion out of the business, very small business with manual welders but they have a huge business as well with laser subsystems, which is a very important one. I might remind that when they call about subsystems, you could even think about spare parts of Bystronic because a cutting head, a laser cutting head is for Rofin or for this acquisition laser subsystem, whether this is a scanner or whether this is a surface treatment or whatever.

With that, we go to the next slide. I think for us, again, the attractiveness is to enter in new markets. Bystronic is not participating nor in the medical device nor in the semiconductor market. We do believe that it is -- these are 2 very attractive markets. Medical devices here in cutting, stents, catheters, hypotubes, right? These are all tube cutting, marking, implants, dental aligners and with welding, as example, guidewires, right? Semiconductor, especially in the surface treatment, or surface processing for the wafer marking, wafer dicing, wafer planarization and some others. We are, of course, even in general manufacturing, here, especially marking -- by the way, we are already using -- we learned this during the process, laser marking subsystems from Coherent for some of our Bystronic products. I mean, cutting, you can cut shoes, watch industry and so on.

I would say, very interesting as well in this general manufacturing is welding. And this is very much related to automotive but only for batteries for electric vehicles. So battery welding is a quite good and stable market where we still see some growth opportunity as well. Then cleaning with the laser scanners or even called ablation process, you can clean or change surface like de-isolation, foil cutting, which is again used in the battery -- lithium-ion battery manufacturing. With that we go to the next slide, please. So it's a very attractive growth market. We have identified independently, I have to say, a total addressable market of USD 4.2 billion. Market growth, the CAGR from 2024 to 2030 shows a CAGR from 4% to 5%. Indeed, we see a moderate growth rate in Europe but a very strong growth rate in America and in Taiwan, where we have a quite good presence.

So what are our market shares? They might look small with 3% to 4% but I can tell you there's only one competitor having a double-digit number. And I would say round about 50% of these companies are headquartered in Europe. So I think that with that, Bystronic will be a key player in the medical devices because everybody is round about 3% -- at this 3% to 4% market share. I think that together, we can definitively increase this market share. We go to the next slide. Yes. I mean, the strategic fit and rationale. I think I talked to a lot of you. It was always our goal to find adjacent business, right? And it fits perfectly with Bystronic. We can leverage our know-how of laser technology in different fields. Again, we talked in the past always only about cutting. Now we're talking about marking, surface treatment, welding, which is very important for us even to further develop our core products, which we have in Bystronic. I do see that complementing economic cycles.

If I should say what is the weakness or the trait of Bystronic, I would say, single market, single company. So I do believe that the strong diversification will help to strengthen our business and to create the necessary resilience for the future to not be only connected to one cycle, right? What is strong at this company as well is they work very much with larger OEM customers. So they have companies like Stryker, huge key accounts business, which you can plan for the future. It's really something very, very positive. And then, of course, different end markets. I think this is the key for us to make the -- or let's say, the main driver to make this decision to enter new attractive growth markets. Of course, even semiconductor had a difficult time over the last few years. We see that it's picking up again. I do believe that this will further grow.

And then as you know, Bystronic is strong in sheet metal and in sheet metal and in sheet metal. So -- but there are other materials like polymers, like glass, ceramic, silicon and organic materials and you name it, where Bystronic just doesn't have the capabilities and the know-how to enter. And this gives us a huge potential to even think about to further enter in new additional markets, which we don't know today with our technology and our capability. With that, we are already coming to the -- next slide, why we do believe that this is a good fit. And honestly, we are asking ourself always, are we the better owner? Yes, we are. We write down that we have a similar DNA. I can tell you, I'm sitting now here in this company, having the town halls and so on. I can tell you we have exactly the same DNA. We are a machine builder.

Coherent is a great, fantastic company but they have a different focus. They want to have growth rate year-over-year by 100%. This is not possible in the machine business, right? We are down to earth from the size of the company, from the understanding how to leverage the market, how to build machines, how long it takes to develop a machine, I think we just have exactly the same DNA. And if you see these machines, I can tell you, we believe that at Bystronic, we could build this machine by tomorrow in one of our entities but vice versa as well. So what is really important for us, it's really to extend Bystronic's reach to other attractive growth markets. And by the combination of the know-hows of these 2 companies, I'm quite sure we can even find new markets we don't even know today.

As I mentioned before, Rofin is a strong brand. We are going to use it, right? That's why we are going to name the business Bystronic Rofin. You will see it even later on. We will offer a variety of applications and not only for metal, as I mentioned before but for all types of material. We have a very similar history. And yes, we are both a global player with decades of experience, good market access, strong brand and we have very low-hanging fruits when it comes to synergies like in procurement. We have identified 80% of the material Coherent or new Bystronic Rofin is buying are the same like Bystronic buys as well. And you can imagine by the buying power, we just have different discount levels and we can leverage this savings from day 1.

Further, I firmly believe that we can benefit from each other when it comes to 3D. And in all R&D, when I'm talking about 3D, as you know, we are very much focusing on tube, which are macro tubes, if you want. There, we are missing some of the skills in-house of 3D cutting of tubes, and this company has it, right? Of course, again, we are talking about different sizes but at the end, technology is the same. So I see huge benefits from the R&D side as well.

Next, so how the integration will work out like? So we will establish a new GmbH here in Gilching, close to Munich. It will be named Bystronic Rofin GmbH. It will become a own business unit reporting directly to me. Why? Because at the end, it is a partially carve-out, especially outside of Germany. I want to make sure that the business runs stable and before we start to do crazy things. It is a high potential company. That's why I want just to make sure that we keep the drive. And the production remains in Munich and sales and service operates continuously as usual all over the world. We just had the town hall this morning here in Gilching. And with the Asians online, we will have town halls in the afternoon, with the Americas just to ensure that everything keeps ongoing. So yes, we don't see any risk on this one.

Of course, we'll integrate support functions such as the usual ones, HR, IT, finance, legal, tax and so on, you name it. That's for sure, something where we have some synergies, leverage as well. We are present in all the countries, this Bystronic Rofin unit is. So I think we can cover most of them. We will bring them to our IT system, to our SAP system but I think we can even support when it comes to our central functions and leverage here even some synergies as well. So I think on R&D, I already talked about and the closing is expected within the next few months. We have some regulatory things to fix but we have even some very clear closing conditions, which we want to have fulfilled. And yes, I think within the next few months, we will be able to close it.

So with that, I think we're already coming to the end. If we go to the next slide, we are already on the Q&A and I'm happy to answer your questions.

[Operator Instructions] The first question comes from Sauter Torsten from Kepler Cheuvreux.

I hope you can hear me well. I have actually 2 questions. Firstly, I would like to understand a little bit the production footprint of Rofin, the target. Is it just one consolidated site? And how does that compare to competitors, right? I mean, considering tariffs, for example? And maybe would that open up future plans for relocating some of the production and opening something in other locations where Bystronic is present? And then if I may, my follow-up would be, I was surprised to see a relatively low market share in a growing world market for Rofin. Could you elaborate a little bit about the competitive field? Why is the market so atomized? Who are the main competitors? And what are the USPs that you see in Rofin to succeed here?

Okay. Thank you, Torsten. Two very long questions. I try to cover everything. So let me start. I mean, we consolidated and this happened over the last few months, the manufacturing footprint to Munich. So basically, today, the products, they are all coming out of Munich. It is different when it comes to service. So we have even spares all round the world. So basically, the service is locally. But when it comes to the new machine supply, it is out of Munich as per today. And of course, you already brought it to the point. It's not only because of the tariffs but it's even because of delivery times and so on. Bystronic has the right footprint to just produce wherever it is necessary, right? I mean we want to grow with this business. It's clear that as we are doing a localization in the U.S. right now for the Bystronic business, especially because of the tariffs, this would be a possibility for this Rofin product as well.

And as I told you, we are not manufacturing. It is an assembly. This is purely assembly, of course, with a lot of engineered parts. So with that said, we can easily localize whenever it's necessary. We have already some plans even for new products, which we see for the Asian market, which we don't see for the U.S. market, which today, it would be very difficult to sell it out of Germany just for the price competitiveness. But if we could produce it in China for China, we could do it. So these are all opportunities we have. And we have already identified some of the products. We have even identified some products which have been phased out over the last few years, which might be an opportunity to enter in some lower entry market. So here, I see a huge advantage by bringing these 2 companies together in the future. That's when it comes to manufacturing. I hope this was good for the first question or an answer to the first question.

The second one, it's a very good one because we try to understand it as well. I can tell you and I think I already told it to most of you that I made an active search, Rofin, this business unit was the biggest company I found on the market, which we would have a chance to buy. All the others were quite smaller, right? The biggest competitor with the biggest market share, you can -- you will already know it. It's TRUMPF having the double digits, right, in market shares in this fields. And then all the others you know AMADA is there with a 2%, 3%. We will be there with a 2%, 3%. And now it comes. If you take out the ASML business of TRUMPF, I think they would drop to 2% to 3% as well. So I cannot tell you why they are not bigger companies. I don't know whether there's not the right focus. We will definitely put the right focus on it.

The next question comes from Remo Rosenau from Helvetische Bank.

Yes. So Coherent is the seller. Could you tell us a little bit the history of the company? I mean, at some point, Coherent did buy it, I guess. How long was it in possession of Coherent? And why did they want to sell it now? Is there a profitability issue? Is it a turnaround case? Or what was kind of the motivation behind the selling?

That's a fantastic question, even the way you raise it because there is a history. There's really a history. I know Rofin personally quite long. I think when I started as a software engineer in 2004, my first laser I had to install and start up was a Rofin laser. So Rofin as a company, Rofin-Sinar, I would say, was one of the leading laser source producer in the world, if not the leader before TRUMPF, especially on the CO2 laser. So they were quite big and I think it was a much bigger acquisition at that time. And Coherent is a part manufacturer. Coherent is interested in laser source producing, in chip producing, in resonator production and so on and so on and so on. So they acquired Rofin. And in this Rofin group, there was a kind of a Rofin machine tool pumping. And this Rofin machine tool is exactly this company which we are buying now, right?

But they bought Rofin as a group. They focused on the parts business on this very profitable business. And honestly, they did not really take care about this machine business unit, how they call it today, right? And as you have maybe heard, so it was 2016, Coherent acquired Rofin and 2 or 3 years ago, II-VI, a company II-VI acquired Coherent but they renamed II-VI, which is a much bigger company to Coherent. So it's a very long story. And last year, a new CEO joined, I would love to have his salary. You should check it up. He just put the focus now on AI. Okay. So whatever has a growth rate between 50% and 60%, they will keep and they refocus only on this one.

And I can tell you, Coherent in this new setup is growing year-over-year, I think, by 65%, 67% and machine business is not on their focus. So simple it is. And that's why I think we made a great deal at the end. Of course, I mean, there are some challenges as usual, when you buy a company and when you have some carve-out topics. But long story short, we as Bystronic, and that's why I was emphasizing so much on the DNA, we as Bystronic, we are the much better owner. Just straightforward.

Okay. But is the company profitable?

Yes, so.

Okay. And I mean, barely or nicely.

Nicely.

Okay. And then about this carve-out, I mean, we've seen carve-outs with other companies. And then usually, you have -- you get some corporate services from the old owner for a certain time but then you have to do them yourself. And then quite often, suddenly, a lot of costs came out. How is the deal here?

It's clear. I mean, at the end, we have an equity deal. It's clear what it comes over. You're right. We have some TSAs, this so-called transfer service agreement. We will have some costs. I'm not allowed to disclose details about the deal. But again, we have a very nice agreement so that we can really mitigate huge costs. On the other hand, you know how it is, the first year will be impacted a little bit by higher costs because we have to implement our ERP system. We have to bring them to our IT system. I mean, even on the finance, the accounting side. But trust me, we prepared everything in detail. So the whole integration plan is already done. I know that it's early by signing but I wanted to be sure to understand what will be the impact. And when it comes to the profitability, coming back to what you said, of course, it will be impacted the first year or the first fiscal year due to the changes. But this is something we took in consideration. It's in there.

I think we even have a kind of a risk margin for things we don't know today. But in overall, we plan already to be profitable in the first year. That's definitely the target, although we have additional costs. So from that point of view, yes, I think we are well prepared and we have the right people supporting. And last but not least, we have a fantastic relationship with Coherent. Please remind that we are a customer of Coherent as well. So parts of our machines and even key parts of our Bystronic machines are produced by Coherent. And with that said, I think with the TSAs we have in place, which we agreed this night, we are quite safe and we were even able to find agreements, which will be a kind of a parachute in case we will have higher costs. So I think, yes, we have quite a good setup and well prepared.

Okay. Now in order for us to judge if this was a great deal, we should have some indications about the price, right? So what could you -- could you give us any hints in that respect?

Now, I do apologize. We agreed with the seller side to not disclose details. It's not from us. It's really from Coherent side. We have to respect this. And I'm sure it will be more transparency later on. I shouldn't say it but I mean, you know our liquidity quite well. So at the closing date, you will see a peak. It would be nice if you get money but it will not be the case. So you will see a change in cash.

Okay. And what is actually the geographic sales split of this company?

The geographic sales split, I would say, Europe and U.S. making 80% -- 70% to 80% and the rest in Asia, especially in Southeast Asia. We have nearly -- and so we did not take in consideration China business so far for our plan. There is a little bit but we really focused on our addressable market where we have, in our eyes, very competitive position.

Okay. But for the U.S. business, there might be a tax issue -- a tariff issue now, right, because the assembly is...

I mean we have a lot of U.S.-based customers. But often they don't have the production in the U.S. So the big companies that are sitting in the U.S., they buy the equipment but the equipment is shipped to countries where it will be installed and where they produce, right? So you might get lots of orders in the -- from the U.S. but path of destination is Mexico or is Costa Rica, where they are going to set up this production facility on one hand. Second, please don't forget that it's coming out of Europe. Let's put it in brackets, it's only 15%. And I can tell you and I see it from the Bystronic business, 15%, it's already digested by the market by price increases. So...

The next question comes from [indiscernible] from AWP.

[ Les Hughes from AWP ]. I was wondering in terms of the synergies, you mentioned the support functions. Could that also mean that you have to change something with the employees of either your company or the one you're taking over?

No. I mean, in terms of synergies, it's rather we are -- I mean, we are further optimizing in the whole Bystronic Group. I do believe that we have still some strong synergies, which we are still not using. We have a shared service center in Poland, which is very automated, which could take over many, many transactions, right? So we will definitively optimize the whole setup. The good thing is, since it is a kind of a carve-out, there is a kind of a selection process already, right? So it's -- we really cut out of clearance what we need, right? And where we see yes, the advantages for us, right? I mean we are not going to cut out the whole IT organization of Coherent, right? We need 1 or 2 person doing the daily business but the whole support, full support is coming, of course, from the group. The same with our HR. You will need a business partner in the big entities but we are not going to take over the whole HR infrastructure, right? So we will be very lean from the beginning. Let's put it this way and use all what we have already in the group. But even in the group, I still see potential, just to make it very clear.

Okay. Perfect. And maybe you were mentioning also that you are still interested in potentially some other M&As. Do you already have maybe a market or any sort of like idea what that could be or what area?

Yes. I mean, honestly, we are working in 2 directions. The one direction is exactly this one, adjacent business, right, where we wanted to have new markets, which are not correlating to the market we are in today. So in this market, we can further expand. I'm quite sure. I do believe that we can organically grow now this new markets in health care, semiconductors but even in the EV world, right? It's a slowdown now. But I'm convinced it's coming back. So in this direction, we have further targets. As I told you, they were all smaller than this one. So I think we did the right decision to focus on the largest one, which was for sale or which was, let's say, available. But this is one direction to further continue to grow in this market, right, because once in this market in the semiconductor, now we are in the laser but you could do more.

And the second strategic direction, it's, of course, still in our home turf. I mean, if you compare Bystronic to a true in the machine tool business for sheet metals, we have the smallest product portfolio of everybody. We could even further think about market penetration like in North America. I'm definitively not going to build up a new production but we could imagine to make a market penetration but do some acquisition in the regions. So I have these 2 pillars and we will strictly follow these 2 pillars, home turf and adjacent business. We don't want to have too many diversification. The goal would be to build 2 strong legs for the beginning.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Domenico Iacovelli for any closing remarks.

Perfect. Thank you very much for the questions. I just have one add-on because I got some calls this morning, just as a information. We do 35% -- this company is doing 35% of the revenues in service. I think this is a strong asset as well. And in overall, if we look at the market, the strongest market is health care, they are in with round about 45%. Okay. That's all from my side. Thank you very much even for the very good questions. And yes, looking forward to the next press conference. Thank you very much. Bye-bye.