Why is the gap with expectations concentrated in the December quarter?

  • Coherent will report its September-quarter results after the market closes on 4 November. Citi expects revenue of approximately 2.313 billion dollars and earnings per share of 2.00 dollars, broadly in line with company guidance; market expectations are 2.304 billion dollars and 1.98 dollars, respectively.
  • Citi expects December-quarter revenue to rise 13% sequentially to 2.621 billion dollars, with earnings per share of 2.30 dollars; market expectations for the same period are 2.533 billion dollars and 2.20 dollars, respectively. The bank sees the continued ramp in optical modules from rapid 1.6T adoption as the main driver of the expected beat.
  • Citi expects data center and communications revenue to grow 16% sequentially in the September quarter and maintain a similar growth rate in the December quarter.

How does the 1.6T ramp change full-year revenue?

  • Citi’s model assumes Coherent has a little over a tenth of the AI optical module market, with average selling prices of 100, 400 and 800 dollars for 400G, 800G and 1.6T products, respectively. On that basis, it forecasts fiscal 2027 AI optical module revenue of 5.868 billion dollars, up 108% year over year.
  • In the model, 1.6T and 3.2T products are expected to contribute 3.648 billion dollars, accounting for most AI optical module revenue. Citi believes rapid growth in this business is key to 83% revenue growth in data center and communications in fiscal 2027.
  • Over the longer term, Citi believes rising demand for AI accelerators, an increase in the number of AI optical modules used per accelerator, and a greater share of higher-margin products such as co-packaged optics (CPO) and optical circuit switching (OCS) could support the company’s growth through fiscal 2028 and above market expectations.

Why is profit improving more slowly despite higher revenue forecasts?

  • Citi expects non-GAAP gross margin in the December quarter to rise 0.2 percentage points sequentially to 40.7%, owing to factors including a higher mix of high-speed optical modules, the ramp-up of 6-inch wafer fab capacity, and improvements in yields, pricing and costs.
  • The bank raised its revenue forecasts for fiscal 2027 and 2028 by 3% each, to 10.9 billion dollars and 14.6 billion dollars, respectively. It raised its fiscal 2027 earnings per share forecast by 3% to 9.87 dollars, but left its fiscal 2028 forecast broadly unchanged at 16.12 dollars, as a lower gross margin forecast offset the revenue upgrade.
  • Citi lowered its fiscal 2028 non-GAAP gross margin forecast from 42.6% to 42.4%. Expansion of 6-inch indium phosphide capacity and wafer fab yields will affect the long-term gross margin target; investors have also recently renewed their focus on whether yields are reaching the required level.

What conditions does sustained growth depend on?

  • Optical module demand remains strong, but investors are increasingly focused on excess capacity: Chinese manufacturers are rapidly expanding capacity, especially for 100G electro-absorption modulated lasers (EMLs). Changes in supply and demand will affect Citi’s assessment of the continued ramp.
  • On the earnings call, Citi is focused on OCS customer and sales progress, as well as management’s confidence in the adoption timeline for scale-in opportunities in 2029–2030; some investors believe adoption could come later.
  • Citi maintains its buy rating and 420-dollar price target, calculated using its fiscal 2028 earnings per share forecast of approximately 16 dollars and a forward price-to-earnings multiple of 30, with discounting. The valuation is at a 10% discount to the average forward price-to-earnings multiple of AI optics peers, reflecting Coherent’s lower share of AI revenue and lower three-year compound earnings per share growth rate.