Coherent Corp. (COHR) Q1 2027 earnings review
Coherent raises its sales plan, but factory spending burns cash
Coherent's artificial intelligence optical business is growing even faster as new laser capacity comes online, though building those factories and inventory is consuming heavy cash. Sales from businesses it owned a year ago rose 56% to $2.37 billion, and chief executive Jim Anderson issued a full-year outlook for underlying sales to grow more than 60%. By our math, that plan leaves reported revenue growing at least 64% in the second half.
| Sales from businesses owned a year ago | +56% $2.37B reported (+50% from a year ago) |
|---|---|
| Profit per share, excluding one-offs | $2.09 +80% from a year ago |
| Free cash flow (by our math) | -$868M -$58M a year ago |
| Full-year underlying revenue outlook | >60% growth New target; first $4B quarter in FY28 |
⚖️ Verdict: 🟢 Bullish
The story got better because the photonics maker finished doubling its internal indium phosphide wafer capacity a quarter early and locked in a five-year, $20 billion agreement for its new PhotonLink platform. Finance chief Sherri Luther also raised the long-term gross margin goal above 45% before calendar 2028 ends. The bad news: free cash flow reached minus $868 million by our math as inventory and capital spending climbed, forcing the company to borrow $773 million on its credit lines.
The question now is whether massive upfront spending on factories and inventory will turn into self-funding cash flow before datacenter customers slow their orders. Either long-term contracts and 45% margins pay back the build rapidly, or any pause in customer spending leaves Coherent carrying $3.3 billion of inventory and higher debt. Operating cash flow and inventory growth over the next two quarters will tell.
🐂 Bull Case
Early Wafer Ramp Unlocks 60% Growth Plan
Coherent makes optical transceivers and lasers that connect servers inside artificial intelligence datacenters. Sales have been limited by how fast it can make indium phosphide (InP) wafers, the base material for its lasers. In the first quarter, the photonics maker stated that "Internal InP output capacity doubled YoY one quarter early; on track to more than double again by CY27-end".
- Datacenter & Communications sales: $1.95 billion, up 79% from a year ago and 21% from last quarter
- Datacenter sub-segment sales: up 85% from a year ago, beating management's 80% floor
- Communications sub-segment sales: up 84% from a year ago and 34% from last quarter
Because laser production feeds transceiver shipments two to three months later, finishing the wafer expansion early allowed chief executive Jim Anderson to raise the full-year outlook. "We expect fiscal 2027 pro forma revenue growth to exceed 60%," Anderson said, and he added a target for a $4 billion quarter in fiscal 2028.
What to watch: second-quarter revenue against the $2.55 billion to $2.75 billion plan. Reaching the top half would show the doubled wafer output is turning into transceiver shipments without factory bottlenecks.
New $20 Billion Deal Extends Demand Visibility
Investors have debated whether customers will slow their optical orders once current datacenter builds finish or when chipmakers move to co-packaged optics (CPO), which puts optical links directly inside the switch package. In September, the company launched PhotonLink, an integrated optics platform built for CPO and near-packaged optics, and signed "a PhotonLink™ agreement valued at ~$20B over five years; with revenue beginning to ramp in early CY2028".
Alongside that multi-year contract, newer product lines are already adding to sales. Scale-across products, which link separate datacenters together, passed $200 million in quarterly revenue, roughly quadrupling from a year ago, and management plans for that figure to roughly double again by the end of calendar 2027. PhotonLink revenue is set to pass $100 million in the March 2027 quarter and $250 million per quarter before calendar 2027 ends.
What to watch: PhotonLink revenue in the March 2027 quarter. Clearing the $100 million mark on schedule would prove that integrated optics adds to Coherent's sales rather than replacing its older pluggable products.
Pricing Optimization Lifts Margin Target Above 45%
Higher wafer output and tight industry supply are lifting profitability across the business. Gross margin excluding one-offs rose 1.8 percentage points from a year ago to 40.6%, while operating margin excluding one-offs climbed 3.7 percentage points to 23.2% because selling, general and administrative costs (overhead and sales pay) fell by 2.1 percentage points of revenue to 7.8%.
Finance chief Sherri Luther said the margin gain was "driven by pricing optimization and cost improvements", and she finally put a timeline on the company's long-term goal. "We expect to achieve our first quarter with non-GAAP gross margin above 45% before the end of calendar 2028," Luther said, replacing an older undated target of 42.5%.
What to watch: second-quarter gross margin excluding one-offs against the 40% to 42% outlook. A reading above the 41% middle of the range would confirm that higher prices and six-inch wafer yields are outpacing new factory depreciation.
🐻 Bear Case
Factory Spending and Inventory Burned $868 Million
While Luther highlighted operating leverage and a 80% jump in profit per share excluding one-offs to $2.09, cash moved the other way. Operating cash flow turned negative at minus $92.7 million, compared with positive $46.0 million a year ago, because inventories rose by $760.4 million in a single quarter.
- Free cash flow: minus $868.2 million by our math, after minus $1.02 billion for all of fiscal 2026
- Capital expenditures: $775.5 million, or 32.7% of revenue by our math, up from $103.9 million a year ago
- Inventories: $3.34 billion, up 29.5% from last quarter and up 104.7% from a year ago by our math
- Credit facility borrowings: $773.4 million drawn during the quarter to fund the build
The photonics group is buying equipment and stocking components ahead of its multi-year sales ramp, so it had to borrow $773.4 million and cash in $625.0 million of short-term investments to pay the bills. If customer orders ever pause, that $3.34 billion inventory pile and heavy factory spending will leave the balance sheet carrying extra debt.
What to watch: operating cash flow and inventory growth in the second quarter. If inventory keeps growing faster than the 11.8% planned sales increase, Coherent will have to borrow more to fund working capital.
Industrial Sales Stagnated Before a Planned Rebound
Outside datacenters, Coherent's industrial business sells lasers and optics for factory tools, chipmaking equipment and display manufacturing. Reported segment revenue fell 14.8% from a year ago and 2.8% from last quarter to $418.6 million, though after stripping out the sold Aerospace & Defense and Munich businesses, underlying sales were flat against both periods.
Management said in its presentation that "Strong semiconductor capital equipment bookings support an expected return to growth in Q2 FY27", and noted that it is shipping prototypes of its Thermadite chip-cooling material this quarter. Until those orders turn into billed revenue, the company relies on Datacenter & Communications for 82% of its total sales, up from 69% a year ago.
What to watch: Industrial segment revenue in the second quarter. A sequential drop below $418.6 million would show that chipmaking tool orders are taking longer to ship and leave the $3.1 billion of goodwill in the lasers unit with thin cushion.
Risks this quarter didn't answer
Four standing concerns from the annual report got no new numbers in the first-quarter release and presentation, so they remain open until the quarterly filing or call transcript arrives.
- Customer concentration: two buyers accounted for 20% and 12% of fiscal 2026 sales; the quarterly filing will show whether the $20 billion PhotonLink agreement increases reliance on a single buyer.
- Supplier purchase commitments: stood at $11.8 billion at year-end, or 2.7 times annual cost of goods sold; the quarterly filing will show if new long-term sales contracts required even larger supply lock-ins.
- Upfront customer funding vs contract liabilities: management has cited customer-funded factory builds, yet contract liabilities were only $63 million at year-end; the filing's balance-sheet notes will show where any prepayments sit.
- Lasers goodwill cushion: fair value was only 8% above carrying value on $3.1 billion of goodwill in April 2026; a delayed industrial recovery would test that cushion.
💲 Other KPIs
Total debt rose 24.2% from last quarter, or $778.4 million by our math, reversing a year of debt paydowns that had brought borrowings down from $3.69 billion in June 2025 to $3.22 billion in June 2026. The company drew $773.4 million from credit facilities to help pay for $775.5 million of factory equipment.
Money owed by customers for delivered products climbed 19.4% from last quarter by our math, slightly outpacing the 15.9% sequential rise in revenue. Over the past four quarters, accounts receivable have grown 56.2% from $1.03 billion, broadly tracking the expansion in datacenter shipments.
The diluted share count edged down 0.1% from last quarter after climbing 5.9% from a year ago by our math. Last year's increase came from converting preferred stock and issuing 7.8 million shares to Nvidia in March 2026, while this quarter the company paid $128.6 million in cash to cover employee share-tax withholdings.
🔮 Guidance
New. The middle of the range ($2.65 billion) calls for 57.2% reported growth from a year ago and 11.8% from this quarter by our math. Coherent has beaten its revenue outlook midpoint for eight straight quarters, by an average of 3.0% over the last four; if the pattern holds, Q2 revenue would reach about $2.73 billion by our math.
Raised. Management kept its target for a $3 billion quarter by year-end and added a full-year outlook for underlying sales to grow more than 60%, plus a first $4 billion quarter in fiscal 2028. By our math, clearing 60% for the year alongside the Q2 plan leaves at least 63.9% reported growth for the second half.
New. The 41.0% middle of the range sits 0.4 percentage points above Q1's 40.6% result and 2.0 points above a year ago, as six-inch wafer cost savings and pricing continue.
Raised. Management lifted its gross margin goal by at least 2.5 percentage points and gave it a deadline before the end of calendar 2028, citing pricing power and factory cost improvements.
New. Planned research and overhead spending rises 6.9% at the $440 million midpoint from Q1's $411.6 million, which is slower than the 11.8% planned revenue increase and leaves implied operating margin at 24.4% by our math.
New. Matches the 19.0% full-year normalized rate applied in Q1 and across all four quarters of fiscal 2026.
New. At the $2.38 middle of the range, profit per share grows 84.5% from a year ago and 13.9% from Q1 by our math. The company has beaten its profit-per-share midpoint in five straight quarters, by an average of 5.8% over the last four; if the pattern holds, Q2 would land near $2.52 by our math.
❓ Key Questions
Who signed the $20 billion PhotonLink agreement?
Two customers already represented 20% and 12% of sales in fiscal 2026. Investors need to know whether this five-year contract adds a new large buyer or increases reliance on an existing one, and what minimum purchase penalties apply.
When will free cash flow turn positive again?
Coherent burned $868.2 million of free cash flow in Q1 by our math after burning $1.02 billion in fiscal 2026, and borrowed $773.4 million on credit lines. Management has not said when factory spending and inventory builds will peak.
Why did inventories jump by $760 million this quarter?
Inventories rose 29.5% in three months to $3.34 billion, nearly twice the 15.9% sequential pace of sales. Management did not say how much of that stock is raw wafers for the six-inch ramp versus finished transceivers waiting to ship.
How do PhotonLink margins compare with pluggable transceivers?
PhotonLink is set to exceed $100 million of revenue in the March 2027 quarter and $250 million per quarter before calendar 2027 ends. Management raised its gross margin goal above 45% but did not say whether integrated optics carries higher or lower margins than current products.