Coherent Beats Expectations on AI Data Center Demand, Stock Falls Anyway
Coherent reported first-quarter revenue of $1.81 billion, up 20.5% year over year and above analyst estimates of $1.78 billion. The materials and photonics company also raised guidance for the second quarter to $1.98 billion at the midpoint, 3.4% higher than Wall Street expected. Yet the stock dropped after the announcement, suggesting investors worry the company cannot execute on its expansion plans.
The company's adjusted earnings per share came in at $1.41, slightly above the $1.39 estimate. Operating margin expanded to 11.1% from 4.8% in the same quarter last year.
Where the Growth Came From
AI data center and communications customers drove the results. The Datacenter & Communications segment accounted for 75% of revenue, fueled by adoption of high-speed optical transceivers, including 800-gigabit and 1.6-terabit products.
CEO Jim Anderson said the company saw a "step function increase in our order book," resulting in record backlog. He attributed momentum to accelerating customer demand for optical components that route data through AI infrastructure.
Coherent resolved manufacturing bottlenecks in optical circuit switch production, allowing faster scaling of output. The company also began shipping from its Sherman, Texas facility, which produces indium phosphide wafers-a key material for advanced optical components.
The Capacity Play
Coherent's strategy hinges on doubling indium phosphide capacity this year. The company shifted to 6-inch indium phosphide wafers, which increased output efficiency and reduced production costs. Further expansion is planned in Zurich.
Multiple customers signed long-term supply agreements that include upfront investments to fund capacity expansion and demand guarantees. These deals cover both hyperscale cloud providers and systems manufacturers, locking in visibility for future quarters.
The company also expanded its product portfolio beyond core data center offerings. New materials for data center cooling, thermoelectric generation for waste heat recovery, and multi-rail communications systems represent potential future revenue streams.
What Management Expects Next
Anderson expects rapid adoption of new transceiver generations and co-packaged optics to drive revenue growth over the next year. A supply agreement and equity investment from NVIDIA provides additional demand certainty for co-packaged optical solutions.
Doubling indium phosphide wafer capacity should lower unit costs and expand gross margins. Management views 6-inch wafer production as a long-term competitive advantage.
The company flagged risks: industry-wide shortages of indium phosphide and the complexity of expanding capacity across multiple sites could slow progress. Management also highlighted the challenge of allocating capacity to maximize profit dollars as customer priorities shift.
What Investors Are Watching
Key metrics to track include the pace of indium phosphide capacity expansion and its impact on revenue and gross margin, initial revenue from new product launches in co-packaged optics and multi-rail systems, and execution of recently signed long-term customer agreements.
The rollout of thermal management and power efficiency solutions will also signal whether the company can diversify beyond optical components.
Coherent stock closed at $325.39, down from $344.76 before earnings. The decline reflects investor skepticism about whether the company can ramp production fast enough to meet demand without squeezing margins.
For management professionals overseeing operations or capacity planning, AI for Operations resources can help evaluate how data-driven approaches might improve production scaling decisions. Those focused on strategy may find AI for Management frameworks useful for assessing long-term capacity and demand alignment.
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