J.P. Morgan: Long-term agreement improves Coherent’s growth visibility, while gross-margin upgrade still depends on product-mix improvement

What drove growth in the first quarter?

For F1Q27 through September, Coherent revenue was $2.37 billion, up 56% year over year on a pro forma basis; this was above the market consensus of $2.315 billion but slightly below JPMorgan’s estimate of $2.39 billion. Data center and communications revenue was $1.952 billion; the data center and communications businesses grew 85% and 84% year over year, respectively. Industrial revenue was $419 million, below the consensus of $453 million.
Gross margin was 40.6%, in line with consensus; operating margin was 23.2%, above consensus of 23.0%. Adjusted EPS was $2.09, above consensus of $2.02 and JPMorgan’s estimate of $2.08. The midpoint of the company’s F2Q27 revenue guidance was $2.65 billion, above consensus of $2.554 billion and JPMorgan’s estimate of $2.567 billion; the midpoint of EPS guidance was $2.38, also above both, at $2.24 and $2.30, respectively.

The PhotonLink platform added a five-year long-term agreement for approximately $20 billion in revenue, starting in early 2028, and separate from the Nvidia-related agreement. The new program is for NPO deployments, based on 400-milliwatt continuous-wave lasers, and also covers other PhotonLink products; the agreement improves the visibility of future revenue from the new platform.
Management expects PhotonLink to begin contributing a small amount of revenue in the quarter starting December 2026, to reach more than $100 million per quarter in the quarter starting March 2027, and to exceed $250 million per quarter by the end of 2027. CPO/NPO volume shipments are scheduled for the second half of 2027.
Another growth driver is scale-across/DCI: F1Q27 revenue was already above $200 million, and management expects it to rise to more than $400 million per quarter by the end of 2027. Supporting factors include the multi-rail ramp-up beginning in the quarter starting March 2027.

Management reaffirmed its target of reaching $3 billion in quarterly revenue for the first time in FY27, and added guidance for pro forma revenue growth of more than 60% in FY27. The quarterly revenue target for FY28 is to reach $4 billion for the first time. In-house indium phosphide (InP) capacity doubled year over year in F1Q27, one quarter ahead of plan; management expects it to more than double again by the end of 2027. The company’s 6-inch Zurich production line is scheduled to begin operating in the first half of 2027.
The gross-margin target was raised to more than 45% by the end of 2028, above the long-term target of more than 42% set about 18 months earlier. But as of F1Q27, the use of in-house InP lasers had not yet boosted gross margin, and the mix of in-house and externally sourced transceivers had barely changed over the past year. The targeted improvement depends on a higher share of in-house lasers and ramping higher-margin next-generation products.

JPMorgan believes mature technologies in the optical industry face annual price-reduction pressure. Customers for optical transport systems may also increase competition through vertical integration in the future, putting downward pressure on component suppliers’ pricing. In addition, integration following the company’s recent acquisitions could affect earnings expectations.
JPMorgan raised its long-term earnings forecasts by an average of more than 10%, while maintaining its Overweight rating and a December 2027 price target of $385. The target is based on updated calendar-year 2028 EPS and a price-to-earnings ratio of about 20 times. The firm assigns a valuation above long-term levels and the historical average for optical peers, on the view that the company will benefit from AI data-center investment.