Coherent Reports Robust Q2, Driven by Datacom Strength and Margin Expansion

Analyst(s): Olivier Blanchard
Publication Date: February 7, 2025

Coherent reported strong revenue growth in Q2 FY 2025, driven by AI data center demand, telecom recovery, and resilience in industrial markets. The company achieved margin expansion through pricing optimization, cost reductions, and operational efficiencies. Coherent also advanced its next-generation transceiver roadmap and continued strategic portfolio optimization efforts.

What is Covered in this Article:

• Coherent’s Q2 FY 2025 financial results
• Record networking revenue driven by AI data center demand
• Continued telecom recovery with strong transceiver momentum
• Industrial market trends, including OLED and semiconductor strength
• Strategic portfolio optimization and divestitures

The News: Coherent Corp. (NASDAQ: COHR) reported a 27% year-on-year (YoY) rise in revenue to $1.4 billion (4.4% above consensus). The Networking segment drove growth, with revenue up 56% YoY, fueled by strong AI data center demand and a telecom market rebound. The Lasers segment rose 6% YoY, while the Materials segment declined 4% YoY due to automotive market weakness. Non-GAAP gross margin expanded to 38.2%, reflecting a 363 basis point (bps) increase YoY, supported by pricing optimization and cost reductions. Non-GAAP operating income grew by 74% YoY to $265 million, and the corresponding margin reached 18.5%, compared to 13.5% in Q2 FY 2024. Non-GAAP diluted earnings per share (EPS) surged to $0.95 (+37% above consensus), more than tripling YoY.

“During 2Q, we made solid progress towards our goal of achieving a durable company-wide gross margin of over 40%,” said Jim Anderson, CEO of Coherent. “While we continue to invest in strategic R&D to fuel the long-term growth of the company, we remain focused on driving greater operational leverage and efficiency across the company.”

Coherent Reports Robust Q2, Driven by Datacom Strength and Margin Expansion

Analyst Take: Coherent delivered record-breaking revenue and profitability in Q3 FY 2025, fueled by strong AI-related datacom transceiver demand, continued growth in telecom, and resilience in industrial end markets. While telecom posted its second consecutive quarter of expansion, industrial markets were more of a mixed bag, with automotive sector softness offset by gains in OLED display manufacturing and semiconductor capital equipment. Nonetheless, with next-generation transceivers gaining traction and strategic portfolio adjustments underway, Coherent is well-positioned for long-term margin expansion and sustained revenue growth.

AI Demand and Datacom Growth Drive Record Revenue

Coherent’s Datacom revenue surged 79% YoY and 4% sequentially, reaching an all-time high. This growth was primarily driven by rising demand from AI data centers, particularly from new customers adopting 800G transceivers, and continued strength in 400G and lower-speed solutions. The company remains on schedule to ramp sales of its 1.6T transceivers in 2025, following successful customer sampling in 2024.

Indium phosphide production has tripled YoY, supporting increased output for electro-absorption modulators (EML) and continuous wave (CW) lasers, both essential for next-generation networking. Meanwhile, Coherent is already advancing the development of 3.2T transceivers and next-generation optical components, further solidifying its position in high-speed networking.

Telecom Market Recovery Gains Momentum

Telecom revenue rose 16% sequentially and 11% YoY, marking its second consecutive quarter of growth. The primary driver of that growth continues to be data center interconnect demand. Traditional transport networks, meanwhile, are also showing early signs of stabilization.

The company is also seeing strong momentum in its 100G, 400G, and 800G ZR/ZR+ Coherent transceivers, with further scaling expected in the coming quarters. Management, which had previously taken a cautious stance, is now expressing measured optimism, suggesting that the telecom market may be climbing out of its low point. Coherent expects sequential telecom revenue growth to continue into Q3, reinforcing confidence in a sustained market recovery.

Industrial Markets Remain a Mixed Bag

Coherent’s Lasers segment grew 6% YoY and 8% sequentially, thanks to a demand uplift for excimer lasers used in OLED display manufacturing. Increased adoption of OLED technology in larger-format devices such as laptops and tablets also supported sequential growth in display capital equipment sales. The semiconductor capital equipment sector saw improved order volumes, contributing to quarterly growth.

However, performance in Materials remained underwhelming, delivering a 4% YoY decline and only 3% sequential growth, primarily because of softness in the automotive sector continuing to drag on results. But despite near-term uncertainty, Coherent remains confident that industrial markets will stabilize over the long term, paving the way for future recovery.

Gross Margin Expansion Remains a Strategic Priority

Non-GAAP gross margin climbed to 38.2%, reflecting a 146-basis-point sequential increase and a 363-basis-point YoY improvement. The expansion was driven by pricing optimization, manufacturing cost reductions, and improved yields, which helped offset headwinds from an unfavorable product mix.

Datacom manufacturing yield improvements continued for the second straight quarter, supporting broader margin gains. Coherent remains committed to its long-term gross margin target of over 40%, with further efficiencies expected from silicon photonics integration and increased production scale in high-performance optical components.

Strategic Portfolio Optimization Advances with Divestitures

As part of its ongoing portfolio optimization efforts, Coherent has been exiting non-core businesses to enhance profitability and streamline operations: The company recently sold its Newton Aycliffe facility and is now exploring strategic alternatives for its lithium-sulfur battery platform. Additionally, Coherent is evaluating divestiture options for its advanced lithium-ion battery recycling technology, a move that aligns with its broader strategy of focusing on high-margin, high-growth markets such as optical networking and industrial lasers.

Management emphasized that additional portfolio adjustments should be coming in the coming quarters, with more details set to be unveiled at the Investor Day in May 2025.

Guidance and Outlook: Strong AI Tailwinds, Focus on Execution

For Q3 FY 2025, Coherent projects revenue between $1.39 billion and $1.48 billion, with non-GAAP gross margin guidance ranging from 37% to 39% and EPS expected between $0.75 and $0.95. AI-driven networking demand and telecom recovery are expected to support sequential growth, though industrial market conditions remain uncertain.

The company remains focused on executing its margin expansion strategies, scaling next-generation transceivers, and optimizing its business portfolio to sustain long-term profitability. However, competitive dynamics in optical networking and pricing pressures will be key factors to watch in the coming quarters.

Coherent’s strategic execution in AI-driven datacom, telecom recovery, and industrial market resilience positions it well for the future, even as short-term challenges persist.

Daniel Newman and his co-host of The Six Five Webcast, Patrick Moorhead of Moor Insights and Strategy discusses Coherent’s earnings in their latest episode. Check it out here and be sure to subscribe to The Six Five Webcast so you never miss an episode.

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Read the full press release on the Coherent website.

Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.

Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.

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