Bernstein: Coherent’s data-center business beats expectations; growth leverage concentrated in fiscal 2028

Where did first-quarter growth come from?

Coherent reported revenue of 2.37 billion dollars in the first quarter of fiscal 2027, in line with Bernstein’s estimate and above the market consensus of 2.32 billion dollars; earnings per share were 2.09 dollars, above the firm’s estimate of 2.05 dollars and the consensus of 2.02 dollars.
Data-center and communications revenue reached 1.95 billion dollars, 4% above Bernstein’s estimate. Industrial revenue was 419 million dollars, respectively 16% and 8% below the firm’s estimate and market consensus. The two businesses showed a clear divergence in performance.
The non-GAAP gross margin was 40.6%, below Bernstein’s estimate of 41.0%; the operating margin was 23.2%, above the firm’s estimate of 20.3%.

The company expects second-quarter fiscal 2027 revenue of 2.55 billion to 2.75 billion dollars and earnings per share of 2.28 to 2.48 dollars. The respective midpoints are about 2% and 4% above Bernstein’s previous forecasts.
The company issued its first guidance for revenue growth of 60% in fiscal 2027, equivalent to about 11.3 billion dollars, above Bernstein’s previous estimate of 10.8 billion dollars and the market consensus of 10.7 billion dollars. The firm believes new product launches, inventory build-up and customer wins could bring further growth.
Bernstein raised its full-year revenue forecast to about 11.5 billion dollars and its earnings-per-share forecast from 9.51 dollars to 11.12 dollars. Its model assumes revenue reaches 3 billion dollars in the third fiscal quarter, followed by sequential growth of 13% in the fourth fiscal quarter.

The company expects to achieve a quarterly gross margin of 45% for the first time before the end of calendar year 2028. Starting from the 41% midpoint of next quarter’s guidance and assuming the target is reached in the fourth calendar quarter of 2028, the average improvement needed each quarter would be about 0.5 percentage points, faster than the improvement of about 0.4 percentage points each in the first-quarter actual result and second-quarter guidance. Bernstein believes product-mix changes and the ramp-up of its in-house indium phosphide (InP) capacity could support this target.
Free cash flow was negative 868 million dollars in the first quarter, below Bernstein’s forecast of negative 617 million dollars and the market consensus of positive 286 million dollars. The firm expects it to turn positive in the second half of fiscal 2027, but its model still shows full-year free cash flow of negative 742 million dollars.
Management said long-term agreements will provide upfront payments before capital-expenditure needs arise; Bernstein therefore believes funding needs are relatively limited and that additional needs can be met through debt.

Coherent disclosed that a chip with 100 Tbps of optical input/output capability corresponds to about 15 thousand dollars in product value. Based on NVIDIA’s Rubin Ultra design shown at OCP, Bernstein estimates that the optical bandwidth of an eight-rack system is about 7.7 times that of the previous design. Extrapolating linearly based on value per unit of bandwidth, each system represents about 2.4 million dollars in potential Coherent products.
Combining this with the team’s estimate of R300 shipments, Bernstein calculates that the corresponding opportunities are about 4.2 billion dollars in 2027 and 16.2 billion dollars in 2028. These are potential opportunities calculated from the optical-interconnect value per system and shipment volumes; actual value will also depend on product share and pricing.
The estimate assumes that price per unit of bandwidth remains unchanged, whereas that price has typically declined over time. The company expects to double its InP capacity by the end of 2027; Bernstein believes demand growth could support supply and demand, although capacity expansion by other suppliers and alternative technologies could still affect the landscape.

The company expects its first quarter with revenue of 4 billion dollars in fiscal 2028, and disclosed a five-year long-term agreement worth 20 billion dollars starting in early 2028. Bernstein believes the agreement helps strengthen confidence in the capacity ramp-up, but its historical effectiveness in protecting against cyclical risk has been inconsistent.
Bernstein maintained its Outperform rating and 350-dollar price target, while noting that key growth drivers—including quarterly revenue of 4 billion dollars, a gross margin of 45% and scaled internal optical interconnects within systems—mostly fall around the end of 2027 or in 2028, leaving few catalysts before the March March OFC conference.