Driven by demand for AI data centers, Coherent's Q1 revenue increased by 17% year-on-year, exceeding expectations, with optical product orders hitting a record high

Laser and optical component manufacturer Coherent demonstrated strong performance in the first quarter of this fiscal year, with revenue and earnings per share exceeding market expectations. The surge in demand for AI data center business drove the company's optical network product orders to a record level, and management is actively expanding capacity to meet the continuously growing customer demand.

On November 6, Coherent announced earnings per share of $1.16 for the quarter ending September 2025, surpassing the Wall Street average expectation of $1.04. This marks the company's fourth consecutive quarter of exceeding market profit expectations.

The company's revenue for the quarter reached $1.58 billion, a year-on-year increase of 17%, also exceeding the market expectation of $1.54 billion. Excluding aerospace and defense business, the year-on-year revenue growth reached 19%. This performance exceeded expectations mainly due to strong demand in AI data centers and communications, but the company's management acknowledged that supply constraints of indium phosphide lasers limited their ability to fully meet market demand.

Financial report highlights:

• Revenue: $1.58 billion, a quarter-on-quarter increase of 3%, a year-on-year increase of 17%. Excluding aerospace and defense revenue, the adjusted revenue growth: quarter-on-quarter increase of 6%, year-on-year increase of 19%.

• Non-GAAP gross margin: 38.7%, an increase of 70 basis points quarter-on-quarter, an increase of 200 basis points year-on-year.

• Non-GAAP operating expenses: $304 million, down from $307 million in the previous quarter.

• Non-GAAP operating profit margin: 19.5%, up from 18% in the previous quarter.

• Non-GAAP earnings per share: $1.16, compared to $1 in the previous quarter, an increase of $0.67 year-on-year.

• Debt reduction: $400 million repaid, reducing the debt leverage ratio to 1.7 times.

• Revenue expectation for Q2 2026: between $1.56 billion and $1.7 billion.

• Non-GAAP gross margin expectation for Q2 2026: 38% to 40%.

• Earnings per share expectation for Q2 2026: under non-GAAP standards, earnings per share are expected to be between $1.10 and $1.30.

Benefiting from strong financial performance, Coherent's pre-market shares rose over 15%. The company's stock price has increased over 33% this year, far exceeding the 15.1% increase of the S&P 500 index during the same period.

Significant Improvement in Profit Margin

Coherent's non-GAAP gross margin reached 38.7% in the first fiscal quarter, an increase of 70 basis points quarter-on-quarter and 200 basis points year-on-year. Chief Financial Officer Sherri Luther stated that the improvement in profit margin is mainly due to pricing optimization, cost reduction, and yield enhancement.

The company's non-GAAP operating profit margin increased from 18% in the previous quarter to 19.5%, while operating expenses decreased from $307 million in the previous quarter to $304 million. Net profit reached $226.3 million CEO James Anderson emphasized that the company focuses on the value provided by its products in pricing, especially in areas of exclusive supply. This strategy, combined with cost control and yield improvement, supports the company's goal of achieving a long-term gross margin of over 42%.

Capacity Expansion to Address Supply Bottlenecks

In response to strong demand in the AI data center business, Coherent is actively expanding its indium phosphide laser capacity. Anderson stated that the company plans to double its indium phosphide capacity within the next 12 months, simultaneously increasing capacity at its production bases in Sherman, Texas, and Jarfalla, Sweden.

The company is building the world's first 6-inch indium phosphide production line, which is expected to significantly enhance production efficiency and reduce costs. Anderson revealed that the initial yield of the 6-inch production line is higher than that of the existing 3-inch production line.

The company recorded a record order volume in its data center business this quarter, with order durations longer than ever before, providing good visibility for future planning. Strong orders include 800G and 1.6T transceiver products, as well as data center interconnect and traditional telecommunications sectors. As customer demand forecasts extend to 2028, the company plans to continue expanding capacity in 12 months.

Here are the highlights from the conference call:

• Gross Margin Improvement: Non-GAAP gross margin increased by 200 basis points year-over-year, reflecting the success of cost reduction and pricing optimization measures.
• Unprecedented AI Demand: Demand for optical network products (especially for AI data centers) is unprecedented, with record bookings.
• Capacity Expansion Upgrade: Expanding production capacity, including the construction of the world's first 6-inch indium phosphide production line, expected to significantly improve production efficiency and reduce costs.
• Debt Structure Optimization: Successfully reduced the debt leverage ratio from 2.4 times a year ago to 1.7 times through strategic divestitures and debt refinancing.
• Indium Phosphide Supply Constraints: Growth in the data center business in the first quarter was constrained by the supply of indium phosphide lasers, affecting the company's ability to fully meet market demand.
• Ongoing Supply Chain Bottlenecks: Despite strong demand, the company faces ongoing supply chain constraints, particularly insufficient capacity for indium phosphide lasers.
• Macroeconomic Uncertainty: The macroeconomic environment and ongoing tariff and regulatory uncertainties pose risks to the company's near-term demand in the industrial sector.
• Restructuring Efforts Ongoing: The company is still streamlining its product portfolio and physical footprint, indicating that ongoing restructuring efforts are still in progress.
• Short-term Capacity Limitation Concerns: Indium phosphide laser supply constraints are expected to persist, which may limit the company's ability to fully capitalize on strong market demand in the short term.

Here is the full Q&A session from the conference call:

Samik Chatterjee - JP Morgan - Analyst

Jim, I would like to start by discussing demand. You mentioned that you have seen strong demand, with order volumes reaching record levels in some cases. Could you elaborate on this, such as how broad the coverage of this demand is? What demand drivers have you learned from customers? And how extensive is this demand across your communications product portfolio? I have a follow-up question as well.

James Anderson - Coherent Corp - President, CEO, Director:

Sure. Thank you, Samik. Yes, I would say the coverage of this demand is very broad. The demand in both the data center and communications sectors is very strong. Looking back at our first fiscal quarter, the order volume indeed set a record for that quarter.

Moreover, these orders not only cover the recent quarter but also include longer-term orders than we typically see. In some cases, orders are even scheduled for a year out, right? So we see this as a very good sign. Customers placing orders in advance allows us to better understand market dynamics, enabling effective product mix and capacity planning. As I mentioned, the overall order strength in the data center business is robust, particularly for products at 800Gbps and higher specifications.

We are seeing a rapid adoption of the 160 series transceivers, so orders in this area are also very strong. Additionally, in the communications business, orders for data center interconnect (DCI) are also very strong. This refers to our ZR/ZR+ product line. At the same time, we are pleased to see that orders in the traditional telecom sector are equally strong.

Particularly in the communications sector, we have achieved sequential growth for five consecutive quarters, with an 11% sequential increase last quarter and a 55% year-over-year increase, which is outstanding. Not only in the data center interconnect space, but the traditional telecom sector has also seen five consecutive quarters of growth. We expect the communications business segment to maintain sequential growth in this quarter and for the remainder of this fiscal year.

Samik Chatterjee - JP Morgan - Analyst:

Got it, got it. Indium phosphide capacity, I mean, this has been your focus this quarter. You outlined plans to double capacity over the next 12 months. But could you please elaborate for investors on what key milestones to watch for in this regard?

How do you view the development roadmap beyond the next 12 months? From the perspective of the EML portfolio, what will be the ratio of internal to external supply?

James Anderson - Coherent Corp - President and CEO

Certainly. Thank you, Samik. First, I want to thank the Coherent team for their outstanding work in bringing the 6-inch indium phosphide production line online. When I first joined the company, I asked them to significantly accelerate the timeline. I want to take this opportunity to thank the team for their excellent work.

We began production of the 6-inch indium phosphide in September at our facility in Sherman, Texas, and we are very pleased with the capacity ramp-up. As I mentioned in my prepared remarks, one important milestone we achieved is that the initial yield of the 6-inch production line is actually higher than that of our 3-inch indium phosphide production line Please remember that the 3-inch production line is a very mature full production line.

Therefore, this is a very positive milestone and a positive signal for the yield of the 6-inch production line. For this reason, we have decided to double down on the capacity ramp-up of the 6-inch process and initiate the capacity ramp-up of the 6-inch process at our other indium phosphide plant located in Yellivara, Sweden. Currently, we are advancing the capacity ramp-up in parallel at both plants. It is this parallel advancement that enables us to achieve our goal of doubling capacity in about a year.

I believe that during this process, we will certainly set some milestones—we will also share our progress at any time. However, after the next 12 months, we expect to continue expanding capacity to achieve our 12-month goals.

The demand we are currently seeing from customers is very strong. Some major customers have even announced their demand forecasts through 2028. Given that we are seeing demand signals not only for next year but also for 2027 and 2028, our plan is to continue expanding indium phosphide capacity after the next 12 months. Of course, within the next 12 months, we will share more thoughts on the speed and pace of this growth. JP Morgan analyst

Samik Chatterjee: Understood. Let me quickly ask one more question. You expect the data communication business to grow by 10% quarter-over-quarter. I would like to know how you view the supply-demand gap? If supply were more flexible, or if there were more supply to address these constraints, what would that number be?

James Anderson: Yes. Looking back at the last quarter, the data center business grew approximately 4% quarter-over-quarter. This was certainly constrained by the supply of indium phosphide lasers. What we saw was that the unfulfilled orders from the first quarter carried over into the second quarter. So these backlogged orders are now in the second quarter, and we are processing these orders in the second quarter. But aside from that, as I mentioned earlier, we have also received record orders, mainly for 800G and 1.60GHz transceivers. Therefore, demand continues to grow.

Entering this quarter, a very positive piece of news is that we are seeing the supply of indium phosphide, both internal and external, grow quarter-over-quarter compared to the last quarter. We expect that both internal and external supply will continue to grow from this quarter to the third fiscal quarter. Therefore, we see a steady increase in indium phosphide capacity. This is thanks to external capacity expansion, especially internal capacity expansion.

Simon Leopold from Raymond James:

I would like to follow up on your previous discussion about OCS optical switches. At the ECOC exhibition, OCS attracted widespread attention, and your remarks tonight also seemed very optimistic. What I would like to further understand is, for example, by 2026, one of your peers has already outlined a development path to achieve quarterly revenue of $100 million. How do you view the development prospects of OCS at that time? How do you see your company's trajectory and position in the OCS market?

James Anderson - Coherent Corp - President, CEO, Director:

Yes, thank you, Simon. First of all, we are very satisfied with our position in the market, which is certainly primarily due to our technology. We take great pride in our technological differentiation advantage. Our OCS system, based on non-mechanical liquid crystal technology, has exceptional reliability, which our customers also recognize.

I believe we continue to see development opportunities in the OCS field, with a potential market size far exceeding our initial expectations. Not only is the number of customers interested in this technology greater than we anticipated, but the application areas they are considering for this technology are also much broader. As I mentioned in my prepared remarks, we have currently delivered systems to seven different customers. Looking back at the last quarter, both our revenue and backlog have increased. We expect revenue and backlog to continue to grow this quarter.

However, I believe the more meaningful revenue contributions will come in the next calendar year—we may see steady revenue growth throughout the year. Therefore, the focus of revenue growth will certainly be in the second half. But we are very optimistic about our current progress, backlog, and future revenue growth prospects. After entering the next calendar year, we will share more details about the speed and pace of future revenue growth.

Simon Leopold - Raymond James - Analyst

You talked a lot about the progress made in indium phosphide. I recently received some questions from investors, and some of the questions left me puzzled; perhaps you can help clarify. There is a notion that indium phosphide is primarily used for producing photodiodes and does not help in the production of lasers. However, your outlook and comments on 800G and 1.6G lasers indicate that you are producing more lasers, including continuous wave lasers and electromagnetic pulse lasers. Can you explain why there is such a misunderstanding, or did I misunderstand? Could you clarify this issue?

James Anderson - Coherent Corp - President, CEO, Director:

Okay, thank you, Simon. I will try to clarify. I am not sure where the confusion comes from, but I just want to reiterate what I prepared in advance. As I mentioned, we are currently increasing capacity at two factories, one located in Sherman, Texas, and the other in Ytterby, Sweden. At these two sites, we are gradually increasing the production of three different products based on indium phosphide, right?

Including EML lasers, CW lasers, and photodiodes. As you know, Simon, these three products are key components of our transceivers. Therefore, we are gradually increasing the production of these three devices at these two sites. — George Not, Wolfe Research. George Not — Wolfe Research LLC — Analyst:

I am very curious, your remarks about production layout and real estate layout are very interesting, and I am glad to see them. I want to know how many opportunities are left? I know you are expanding capacity in Penang, and you mentioned that we are looking at other initiatives in production, such as in the industrial laser sector? Is there still room for real estate consolidation? It would be great if you could elaborate more on that.

— James Anderson:

Okay, thank you, George. So, I would definitely say that we have a lot of activities going on in that area. It's interesting because on one hand, we are increasing capacity and expanding; on the other hand, we are also working on consolidating and scaling down operations in certain areas. So, we—both of these activities are happening in parallel. If we first talk about consolidation—if we look back over the last five quarters since the beginning of fiscal year 2025, we have sold or exited 23 sites. I think that is a huge progress. We are very pleased with that, but we certainly have more work to do. I think both Sherri and I are focused on ensuring that we maximize our return on investment and improve the efficiency and productivity of all our physical locations.

Therefore, we both believe there are significant consolidation opportunities. We will continue to exit and scale down any sites that we deem unnecessary or underutilized. So, there is definitely more work to be done in this area, stay tuned. In terms of capacity enhancement, especially in the data center and communications sectors, we will definitely be increasing capacity. We have briefly discussed the capacity of indium phosphide before, but when it comes to module capacity, that is, the capacity of transceiver modules,

we are expanding the capacity of our existing factory in Penang, Malaysia (i.e., our main factory), and at the same time, we are also expanding the capacity of the recently opened transceiver factory, which has now started producing transceivers. We will expand and accelerate the capacity of the Penang factory. Additionally, we are also increasing the capacity of transceiver modules at our factory in Vietnam.

So, the great thing is that our factory in Vietnam is already in place and has been producing transceiver components. We now have enough capacity and space to increase transceiver production based on component production, which we are also very excited about. All of this capacity expansion is happening simultaneously. This is actually to meet the strong demand for data center communications in the future, which comes not only from the orders we currently see but also from the forecasts we have received.

George Notter - Wolfe Research LLC - Analyst:

Understood. Does the company have any manufacturing initiatives in the industrial sector?

James Anderson - Coherent Corp - President, CEO, Director:

Yes. We have done some consolidation and divested 23 sales points. Some of these involve the data center and communications sectors, but more involve the industrial sector. Therefore, I think we still see opportunities for consolidation in the data center, communications, and industrial sectors

At the same time, we are also investing in and expanding some facilities in the industrial sector. The key is to ensure that the facility layout is optimized to maximize productivity and efficiency.

Brian Curtis - Jefferies Group - Analyst:

I want to go back to the proposal from the data center head for a 10% increase. Is there a way to consider how much capacity is constrained within that? Besides EML, what other factors might be limited?

James Anderson - Coherent Corp - President, CEO, Director:

No, Brian, I would say that the main bottleneck we encountered last quarter, as I mentioned earlier, was indium phosphide capacity, particularly the capacity for EML lasers. As I mentioned before, whether it’s external supply or internal supply, this has limited our performance this quarter compared to the previous quarter significantly. I would say that even in this quarter, we are still somewhat constrained by capacity, but we expect the supply of indium phosphide lasers to increase again from this quarter to the next, and with the additional capacity we are gaining, especially the internal capacity improvements mentioned earlier, the supply will continue to improve over the next year.

Brian Curtis - Jefferies - Analyst:

In fact, I might be able to expand on this. I’m very interested in your plans to double capacity, but the delivery and certification of lasers take time. So, is there a way to consider the timing? Is there a difference in the timing of revenue recognition for EML lasers and CW lasers throughout the fiscal year?

James Anderson - Coherent Corp - President, CEO, Director:

Yes, I think there isn’t much difference in the time to go into production and complete full certification between EML and CW. By the way, you mentioned recognized revenue. To clarify, all of our EML and CW are for internal use, right? So we are not selling indium phosphide on the open market. The reason is that all of our capacity is 100% dedicated to meeting our own transceiver needs. I just want to make sure I clarified that.

But regarding transceivers, what I want to say is that once the lasers or photodiodes are certified in-house, it is quite normal to expand capacity on parallel production lines or existing production lines, right? No special certification is needed, or at least the process is very simple, right? So I think now we are producing multiple products in several factories.

You see, as we expand capacity over the next year, this capacity will become very valuable. Of course, our customers are also very actively helping us ensure that all qualified products can be put into production as soon as possible.

Thomas O'Malley - Barclays Services - Analyst:

The first question is more short-term. You mentioned that Datacom's stock price increased by 10% month-over-month in December. Can you help us analyze what the drivers of the orders in September were? I remember you mentioned that Datacom might be one of the main factors driving the stock price increase But what are the highlights in the telecommunications business? Or, how are these two business segments performing in the December quarter? What is your view on the telecommunications business?

James Anderson - Coherent Corp - President, CEO, Director:

Yes. Perhaps I can first review the situation from last quarter. Last quarter, the data center business grew 4% quarter-over-quarter and 23% year-over-year. The communications business (including telecommunications and data center infrastructure) grew 11% quarter-over-quarter and 55% year-over-year. We expect that in the current quarter (December quarter), the quarter-over-quarter growth of the data center business will accelerate from 4% last quarter to around 10%.

The communications business also grew quarter-over-quarter, but I expect the growth rate to be slightly lower than last quarter, with a single-digit quarter-over-quarter increase. Finally, to provide a more comprehensive overview of our industrial business, we expect the industrial business to remain stable this quarter, perhaps with slight growth. Blayne

Curtis - Jefferies - Analyst:

Very helpful. Now, there’s a longer-term question, as well as a few more specific ones. Can we link the output of the 6-inch production line to the improvement in gross margin? It sounds like there has been quite rapid progress in capacity expansion in the first half of the year. I remember you mentioned earlier that the first batch of users will start adopting modular designs by the end of 2025.

But with this progress, just as you observe changes in gross margin, do you think the pace of gross margin improvement will accelerate? Can we relate the output to your expected gross margin growth?

James Anderson - Coherent Corp - President, CEO, Director:

Yes. Perhaps I can start with some qualitative insights, and then Sherri can add anything. Considering that we only started production last quarter, this quarter is actually our first full production quarter. We only began production mid-last quarter. The actual impact on gross margin this quarter is very small.

However, as we enter the next calendar year, we will start to see the benefits of the 6-inch production line reflected in our gross margin. As you expect, as we gradually increase output, the impact on gross margin will become more significant over time—throughout the calendar year, so you can expect that this impact will become more apparent as each quarter progresses. Sherri, do you have anything to add? Sherri

Luther - Coherent Corp - Chief Financial Officer and Finance Director

Yes, I would like to add that when you look at these products—such as indium phosphide thin films, which cost less than half of 3-inch films, this will benefit gross margin improvement in the long run. This is actually about examining the cost structure, right? It is optimizing the cost structure, and the 6-inch indium phosphide thin film is one example.

Other examples include new products, such as 1.6-inch films. As we increase our capacity, this will benefit gross margin improvement. All these factors contribute to improving gross margin over time James Anderson - Coherent Corp - President, CEO, Director:

So we are certainly very focused on the 6-inch film. I want to summarize that the 6-inch film is one of the favorable factors for improving gross margins, but to achieve the 42% gross margin target set by Sherri, our company is also focusing on many other aspects.

In terms of the industrial business, there are also some other areas worth paying attention to, although growth is relatively stable. Currently, we do not see significant growth in the industrial business. We are certainly focused on improving the gross margin of that business, so we expect the company's gross margin in that area to continue to improve.

Papa Sylla - Citigroup:

Congratulations on achieving such strong performance. Jim, I hope you can elaborate on your expectations for the $1.60 revenue growth in the December quarter. I know you are quite flexible between EML, [OFC], and even VCSEL. But in terms of percentage or qualitatively, which of these three do you think has the greater demand? How will this difference change by 2026?

James Anderson:

Okay, thank you for your question. As I mentioned in my prepared remarks, the sequential growth in the data center business is largely driven by the $1.6 million in revenue. Then, within that, the early wave or first wave of 1.6 revenue is actually a combination of various factors - we expect a combination of silicon photonics (obviously using CW lasers) and EML-based 1.60 transceivers.

Therefore, the initial stage of the ramp-up of the first wave of 1.6GHz photomultiplier tubes - or the ramp-up of 1.6GHz photomultiplier tube capacity - will be primarily driven by silicon photonics and EML technology. After that, we believe that VCSEL-based 1.6GHz photomultiplier tube transceivers will begin to gain traction - these transceivers utilize the 200GHz VCSEL technology we showcased earlier this year at OFC (Optical Fiber Communication Conference). We expect this technology to begin production in mid-2026 and start generating revenue in the second half of 2026. So, the early ramp-up of capacity or the first phase of the ramp-up is undoubtedly driven by EML and silicon photonics technology.

Papa Sylla - Citigroup Infrastructure Investment - Analyst:

Got it. Very clear. Jim, my follow-up question is, how are you considering the allocation of indium phosphide capacity between EML, CW, and photodiodes? What I want to ask is, how far in advance do we need to make this decision? What factors need to be considered in making this decision? Is the main priority to meet the strongest demand, or will profitability also be considered?

James Anderson - Coherent Corp - President, CEO, Director:

Yes, that's a great question. First, I want to talk about the trade-offs between EML and CW. From our perspective, I don't think there is a significant trade-off in profitability between the two. In fact, the factors that determine our EML and CW product mix are entirely dependent on customer demand, right? If customers prefer silicon photonics-based transceivers, then we will allocate more capacity to CW lasers; if customers prefer EML, then we will allocate more capacity to EML. I think, generally speaking, we can make these choices at least six months in advance, or even four months in advance.

So I think we need to plan capacity for EML and CW four to six months ahead. The advantage of indium phosphide devices is their interchangeability. We can use the devices for either EML or CW. As for photodiodes, they are simply the receivers for the lasers, right? So we just need to build the number of photodiodes required to receive the laser signals.

The calculation is very simple. This is how we approach capacity planning. Ultimately, it really depends on customer demand for the combination of EML and silicon transceivers. We have both. Therefore, we are happy to provide any version that our customers need for their applications. — Bank of America Michael Mani Operator. Michael Mani

Bank of America Merrill Lynch - Analyst Michael:

Looking ahead to the next year, how confident are you in your ability to expand your share in the 160G to 800G version market? Can you talk about the promotion of the 1.6G version from the perspective of customer breadth? Is this promotion concentrated among a few customers, or do you expect a more balanced promotion process next year?

James Anderson - Coherent Corp - President, CEO, Director:

Okay, thank you, Michael. Perhaps I can answer the second question first and then return to the first question. Regarding the second question, we see the promotion of the 1.6G version happening concurrently across multiple customers. That is to say, we have multiple customers using the 1.6G version, and we expect multiple customers to promote it simultaneously. I would also like to add that some customers are accelerating the promotion of the 1.6G version.

We think this is all good news, right? We believe this is positive. We are very proud of our existing 1.6GHz transceiver product line. Just a reminder, at the OFC conference earlier this year, we were the only company to showcase a 1.6GHz transceiver using three different technologies (silicon photonics, EML, and VCSEL). So I think we have an excellent product line, a good customer base, and the 1.6GHz market is accelerating, and we believe we are well-prepared for it.

Therefore, regarding the first part of your question, yes, we are very optimistic about the development prospects of the 1.6GHz market. I think as we move into 2026, we expect the 800Gbps market to continue to grow year-on-year, and we see very strong demand for 800Gbps in the market In addition, we expect the 1.6GHz market to grow rapidly at a very healthy pace. Michael

Mani - Bofa Merrill Lynch Asset Holdings Inc - Analyst:

Great. My follow-up question is, I would like to understand your progress on portfolio optimization, particularly in terms of pricing. It seems that some progress has been made over the past few quarters, but how many pricing advantages do you think are still available in the core data communication or industrial sectors?

More specifically, how do you view the pricing of transceivers? Or can you talk about the market environment in this regard?

James Anderson - Coherent Corp - President, CEO, Director:

Regarding transceivers, I might be able to answer the last part of the question, but for the relationship between pricing and gross margin, I will ask Sherri to discuss that.

As for the pricing of transceivers, I believe the price dynamics are generally in line with expectations. Therefore, I don't think there are any surprises in terms of pricing. Of course, in a market with overall supply constraints, this is undoubtedly a positive dynamic pricing strategy. As for the first part of your question regarding pricing optimization and its relationship with gross margin, I will ask Sherri to answer that. Sherri

Luther - Coherent Corp - Chief Financial Officer and Finance Head:

Okay, thank you, Michael. From the perspective of pricing optimization, I am pleased to see that gross margins improved this quarter, increasing by 70 basis points quarter-over-quarter (200 basis points year-over-year), partly due to pricing optimization. We have seen the benefits of pricing optimization in our industrial business, data centers, and communication sectors. Therefore, we generally believe that the benefits from pricing optimization mainly come from the industrial business.

However, we also see benefits in the data center and communication sectors. The core of our pricing strategy is to price based on the value provided by the product. In the industrial power business, in many cases, we are the sole supplier of these products. Therefore, our customers place great importance on the value that the product brings to them and how we help them achieve differentiation. This is one of the key factors for our performance improvement this quarter.

On the other hand, to provide a more comprehensive explanation of gross margin, we have also seen improvements from cost reductions—this aspect has shown significant benefits. If you recall, we have been discussing the issue of improving yield over the past few quarters, and we will continue to focus on this. We have seen these benefits in the data center and communication sectors as well as in the reduction of product input costs. Therefore, these are the two key factors we are focusing on, aiming to achieve a long-term target of over 42%. I am very satisfied with these results.

Meta Marshall - Morgan Stanley - Analyst

I have a few questions. Sherri, last quarter you mentioned the adverse impact of foreign exchange fluctuations on gross margin. Given that some of those currencies are still strengthening, I would like to understand if there are any other adverse factors affecting gross margin this quarter?

Secondly, I noticed that you are increasing the capacity of ZR, but how are you considering combining the current scale of demand we see with existing capacity? Will ZR be integrated into the existing capacity? Or how are you increasing capacity?

Sherri Luther - Coherent Corp - Chief Financial Officer and Finance Director:

Yes. Meta, regarding your first question about foreign exchange and its impact on gross margin, did we encounter any adverse factors this quarter? There were no substantial adverse factors, certainly not more severe than last quarter, and there were no significant adverse factors worth noting this quarter. James

Anderson - Coherent Corp - President, Chief Executive Officer, and Director:

Regarding the second question about scale demand, yes, I believe the current demand is very strong. Clearly, this is primarily due to optical connectivity between data centers. We see AI workloads spanning multiple data centers, which drives the expansion of high-speed optical networks between data centers. Our ZR/ZR+ product portfolio aligns very well with this application. Therefore, we are seeing very strong demand. We have ZR+ transceivers at 100G, 400G, and 800G. We are doing our utmost to increase the capacity of these transceivers. Additionally, we

are participating in the market in another way, as we are ZR/ZR+ module suppliers while also selling various components needed for DCI equipment and applications. I want to emphasize again that the demand for these components is currently very strong, and we are also increasing the capacity of all components used for DCI applications and any related telecom applications. For example, the demand for the pump lasers we produce is currently very strong. Ruben Roy from Stifel ( Equity Analyst) asked: “Jim, regarding the comments on OCS, perhaps you could add that you are shipping to seven different customers, reflecting the diversification of your customer base. In

applications, you mentioned expanding into a broader range of applications. How do you evaluate the achievements made today? I think the industry has been discussing redundancy, and the application of OCS in redundancy, which could even potentially replace packet switches.”

Should we view these as initial applications? Or are you starting to see other areas of application that can be expanded today? What are the technical advantages of using non-mechanical systems and some of the new applications you are discussing?

James Anderson - Coherent Corp - President, Chief Executive Officer, Director:

Yes, thank you, Ruben. Good question. No, I think in terms of backlog and initial production ramp-up, the initial adoption is as you summarized, primarily focused on redundancy applications or spine switch applications, as well as the traditional applications of OCS we have seen in the past. But I think, in the long run, we are surprised that if we move beyond short-term demand and engage with a broader customer base, we find that customers are discussing and exploring other applications with us—some customers are even discussing using OCS switches in vertically integrated networks, right? In the vertical expansion network, the fiber optic connection is now fiber optic, and it includes an OCS switch.

On the other hand, customers are also discussing the use of OCS switches in data center interconnect (DCI) networks. Therefore, during our communication with customers, we were surprised to find that the potential applications they are exploring are indeed becoming increasingly broad. I think it will take some time to realize this, but we believe it is a good sign that the market size may be much larger than we initially anticipated. Ruben

Roy - Stifel, Nicolaus & Company Inc - Equity Analyst:

Okay. There's another question. I hope Sherri can answer it. Sherri, if I missed anything, please forgive me. With the divestiture of the aerospace and defense business and the reduction in leverage (which is great), can you provide some updates on the debt or capital allocation on the balance sheet?

Sherri Luther - Coherent Corp - Chief Financial Officer and Finance Director:

Yes. Ruben, I’m pleased that we were able to reduce our debt leverage to 1.7 times this quarter, thanks to the $400 million debt repayment from the sale of the A&D business you mentioned. I’m very satisfied with this. Additionally, we also mentioned the Munich division (product division), and we announced that we will use the proceeds from the sale to repay debt. This transaction is expected to be completed later.

So once we complete these, we will also realize corresponding benefits. Of course, reducing debt is a priority. But I think the current top priority remains—and still is—ensuring that we are making long-term investments in the business, whether from a research and development perspective or a capital expenditure perspective, to ensure that we are truly driving—investing in long-term growth. So this is the top priority. Of course, we will continue to focus on reducing debt, but it is a second priority that follows closely.

Karl Ackman, BNP Paribas Asset Management:

I have another question. Jim, you mentioned that the order volume for data communication transceiver modules has reached a record high, so how about the situation with telecom transceiver components? When discussing this, could you quantify the visibility of customer orders, perhaps on a quarterly basis, as you and your peers are working to increase the capacity of transceivers and receivers to meet customer demand?

James Anderson - Coherent Corp - President, Chief Executive Officer, Director:

Thank you, Karl. Yes, we have indeed seen a record high in the order volume for transceivers. I’m glad you asked about the components for our numerous communication applications (including data centers and telecommunications), as the situation is the same, with order volumes also reaching record highs. I mean, the order volumes in both the data center and telecommunications sectors are truly remarkable. Regarding your second question about supply visibility, we see that these orders include both normal orders looking at near-term demand and some customers placing orders a year or even longer in advance. I think this is mainly because they are experiencing strong growth in both demand and supply needs, so they want to book in advance to ensure sufficient supply Another very positive trend we are forecasting is that, as I mentioned earlier in the conference call, some of our major clients are now providing us with very clear forecast information, not just for next year or the year after, but as far out as 2028. In other words, these major clients are providing us with forecast information for up to three years, which is very helpful for our business. Ladies and gentlemen, the time for today's conference call has come to an end, and now I will hand the floor back to Mr. Jim Anderson, the CEO of Coherent Corp., for his concluding remarks